SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December File Number 000-22054
31, 1996
COMMUNITY BANKSHARES, INC.
(Exact Name of Small Business Issuer in its Charter)
South Carolina 57-0966962
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
791 Broughton St., Orangeburg, South Carolina 29115
(Address of Principal Executive Office, Zip Code)
Issuer's Telephone Number, Including Area Code: (803) 535-1060
Securities Registered Pursuant to Section 12(b) of the Act: Common Stock,
No Par Value
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) has filed all the reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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 [_]
Check here if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenue for the most recent fiscal year. $ 7,765,000
The aggregate market value of the Common Stock held by non-affiliates
on February 24, 1997, was approximately $10,735,000. As of February 24, 1997,
there were 1,313,238 shares of the Registrant's Common Stock, no par value,
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 Annual Report to the Stockholders for the year ended Dec.
31, 1996 - Part II
(2) Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Shareholders - Part III Transitional Small Business Disclosure Format.
Yes __ No X
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10-KSB CROSS REFERENCE INDEX
Part I Page
Item 1 Description of Business 72
Item 2 Description of Property 83
Item 3 Legal Proceedings 83
Item 4 Submission of Matters to a Vote of Security Holders None
Part II
Item 5 Market for Common Equity and Related Stockholder 12
Matters
Item 6 Management's Discussion and Analysis of Financial 13
Position and Operations
Item 7 Financial Statements 39
Item 8 Changes In and Disagreements with Accountants on None
Accounting and Financial Disclosure
Part III
Item 9 Directors and Executive Officers *
Item 10 Executive Compensation *
Item 11 Security Ownership of Certain Beneficial Owners *
and Management
Item 12 Certain Relationships and Related Transactions *
Part IV
Item 13 Exhibits and Reports on Form 8-K 86
* Incorporated by reference to the Registrant's Proxy Statement for the 1997
Annual Meeting of Shareholders
PART I
Item 1. Description of Business
Form of organization
Community Bankshares, Inc. (CBI) is a South Carolina corporation and a
bank holding company. CBI commenced operations on July 1, 1993, upon
effectiveness of the acquisition of the Orangeburg National Bank as a wholly
owned subsidiary. In June 1996 CBI acquired all the stock of Sumter National
Bank, which is also a wholly owned subsidiary.
Orangeburg National Bank (the Orangeburg bank) is a national bank,
chartered in 1987, operating from two offices located in Orangeburg, South
Carolina.
Sumter National Bank (the Sumter bank) is a national bank, chartered
in 1996, operating from one office located in Sumter, South Carolina.
Business of banking
The Banks offer a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. Deposits are insured up to applicable
limits by the Federal Deposit Insurance Corporation. Most of the Banks' deposits
are attracted from individuals and small businesses.
The Banks offer secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial and consumer
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purposes. Consumer loans include: car loans, home equity improvement loans
secured by first and second mortgages, personal expenditure loans, education
loans, and the like. Commercial loans include short term unsecured loans, short
and intermediate term real estate mortgage loans, loans secured by listed
stocks, loans secured by equipment, inventory, accounts receivable, and the
like. The Banks do not and will not discriminate against any applicant for
credit on the basis of race, color, creed, sex, age, marital status, familial
status, handicap, or derivation of income from public assistance programs.
Other services offered by the Banks include safe deposit boxes, night
depository service, VISA and Master Card charge cards (through a correspondent),
tax deposits, sale of U.S. Treasury bonds, notes and bills and other U. S.
government securities (through a correspondent), and twenty-four hour automated
teller service. Each of the banks has an ATM and they are both part of the Honor
and Cirrus networks.
Competition
The market for financial institutions in Orangeburg and Sumter is
highly competitive. Banks generally compete with other financial institutions
through the banking services and products 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. Both
banks encounter strong competition from most of the financial institutions in
their market areas. The market area for the Orangeburg bank generally
encompasses an area extending nine miles around the city of Orangeburg. The
market area for the Sumter bank generally encompasses the county of Sumter. In
the conduct of certain 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 restrictions 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 and trust
services, that the Banks do not provide. The Banks believe, however, that their
relatively small size permits them to offer more personalized services than many
of their competitors. The Banks attempt to compensate for their lower lending
limits by participating larger loans with other institutions, often with each
other.
Most of the other financial institutions in the Orangeburg and Sumter
areas are branch offices of large, regional banks. The financial institution
with the largest deposit base in Orangeburg County is First National Bank with
deposits of $144 million. The following chart illustrates the relative position
of the banks and other financial institutions in the marketplace in terms of
their deposits as of June 30, 1996, 1995 and 1994.
Orangeburg, S. C. Comparative Bank Deposits
<TABLE>
<CAPTION>
June 1996 June 1995 June 1994
----------------------- --------------------- -----------------------
% change
from 1994
Bank Deposit $ % market Deposit $ % market Deposit $ % market to 1996
(Dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
First National Bank $ 141 28.9% $ 123 25.7% $ 119 25.3% 18.4%
First Union National Bank 68 13.9% 70 14.6% 70 14.8% -3.0%
NationsBank 104 21.4% 106 22.3% 104 22.1% 0.0%
BB&T 92 18.8% 100 21.0% 104 22.1% -11.9%
Others 5 1.0% 5 1.1% 6 1.2% -10.7%
Orangeburg National Bank 78 16.0% 73 15.3% 69 14.6% 13.2%
-------- ----- ----- ----- ------- ----- -----
Total deposits $ 488 100.0% $ 477 100.0% $ 472 100.0% 3.4%
======== ===== ===== ===== ======= ===== =====
</TABLE>
Source: 1997 Branches of South Carolina, Sheshunoff Information Services
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The financial institution with the largest deposit base in Sumter
County is SAFE (Shaw Air Force Employees) Federal Credit Union with deposits of
$192 million. The following chart illustrates the relative position of the banks
and other financial institutions in the marketplace in terms of their deposits
as of June 30, 1996, 1995 and 1994. (As of June 30, 1996, Sumter National Bank
had been in business for twenty days.)
Sumter, S. C. Comparative Bank Deposits
<TABLE>
<CAPTION>
June 1996 June 1995 June 1994
---------------------- ------------------------ ----------------------
% change
from 1994
Bank Deposit $ % market Deposit $ % market Deposit $ % market to 1996
(Dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BB&T $ 96 13.7% $ 96 14.3% $ 105 16.1% -8.8%
First Union NB 23 3.3% 20 3.0% 22 3.4% 5.0%
National Bk of SC 167 23.9% 172 25.6% 164 25.3% 1.8%
NationsBank 78 11.2% 70 10.4% 68 10.5% 15.1%
Sumter NB 2 0.3% - 0.0% - 0.0%
Wachovia Bk of SC 139 19.9% 131 19.6% 117 18.1% 18.5%
SAFE FCU 192 27.4% 179 26.7% 171 26.3% 12.2%
Sumter City CU 2 0.3% 2 0.3% 2 0.3% 14.3%
------- ----- ------ ----- ------ ----- ----
Total deposits $ 699 100.0% $ 670 100.0% $ 649 100.0% 7.7%
======= ===== ====== ===== ====== ===== ====
</TABLE>
Source: 1997 Branches of South Carolina, Sheshunoff Information Services
Dependence on Major Customers
The Banks do not consider themselves dependent on any single customer
or small group of customers, either in the deposit or lending areas.
Effect of Government Regulation
General
CBI and the Banks are extensively regulated under federal and state
law. To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws
may have a material effect on the business and prospects of CBI. The operations
of CBI may be affected by possible legislative and regulatory changes and by the
monetary policies of the United States.
CBI. As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), CBI is subject to regulation and
supervision by the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). Under the BHCA CBI's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity that the Federal Reserve determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. The BHCA
prohibits CBI from acquiring direct or indirect control of more than 5% of any
class of outstanding voting stock, or substantially all of the assets of any
bank, or merging or consolidating with another bank holding company without
prior approval of the Federal Reserve.
Additionally, the BHCA prohibits CBI from engaging in or from
acquiring ownership or control of more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking or
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managing or controlling banks as to be properly incident thereto. The BHCA
generally does not place territorial restrictions on the activities of such
nonbanking-related entities.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution becomes in danger of defaulting or in
default under its obligations to repay deposits. For example, under current
federal law, to reduce the likelihood of receivership of an insured depository
institution subsidiary, a bank holding company is required to guarantee the
compliance of any insured depository institution subsidiary that may become
"undercapitalized" within 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 that 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 in order to have the restoration plan approved.
Under a policy of the Federal Reserve with respect to bank holding company
operations, 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. The Federal Reserve also has the authority under the BHCA to require a
bank holding company to terminate any activity or 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 or stability of any subsidiary depository institution
of the bank holding company. Further, federal law grants federal bank regulatory
authorities additional discretion to require a bank holding company to divest
itself of any bank or nonbank subsidiary if the agency determines that
divestiture may aid the depository institution's financial condition.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act (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 (SAIF) or the Bank Insurance Fund
(BIF) 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 Bank.
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 priority of payment.
Under the National Bank Act, if the capital stock of a national bank
is impaired by losses or otherwise, the 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, to sell the stock of such shareholder to make good the deficiency.
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As a bank holding company registered under the South Carolina Bank
Holding Company Act, CBI also is subject to regulation by the State Board of
Financial Institutions (the "State Board"). Consequently, CBI must receive the
approval of the State Board prior to engaging in certain acquisitions of banking
institutions or assets. CBI must also file with the State Board periodic reports
with respect to its financial condition and operations, management, and
intercompany relationships between CBI and its subsidiaries.
Dividends. The holders of CBI common stock are entitled to receive
dividends when and if declared by the Board of Directors out of funds legally
available therefor. CBI is a legal entity separate and distinct from the Banks
and depends for its revenues primarily on the payment of dividends from the
Banks. Current federal law would prohibit, except under certain circumstances
and with prior regulatory approval, an insured depository institution, such as
the Banks, from paying dividends or making any other capital distribution if,
after making the payment or distribution, the institution would be considered
"undercapitalized," as that term is defined in applicable regulations.
The Banks. The Banks are both nationally chartered banking
associations subject to supervision by the Office of the Comptroller of the
Currency (the "OCC"). National banks are subject to various statutory
requirements and rules and regulations promulgated and enforced primarily by the
OCC and the FDIC. These statues, rules and regulations relate to insurance of
deposits, required reserves, allowable investments, loans, mergers,
consolidations, issuance of securities, payment of dividends, establishment of
branches and other aspects of the business of the Banks. The FDIC has broad
authority to prohibit the Banks from engaging in what it determines to be unsafe
or unsound banking practices. The Banks also are subject to various other state
and federal laws and regulations, including state usury laws, laws relating to
fiduciaries, consumer credit and equal credit and fair credit reporting laws.
Capital Adequacy. National banks are required to comply with the OCC's
risk-based capital guidelines. Under the guidelines, the minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities,
such as standby letters of credit) was 8%. At least half of the total capital is
required to be "Tier I capital," principally consisting of common shareholders'
equity, non cumulative perpetual preferred stock, and minority interests in the
equity accounts of consolidated subsidiaries, less certain goodwill items. The
remainder ("Tier II capital") may consist of a limited amount of subordinated
debt, certain hybrid capital instruments and other debt securities, cumulative
perpetual preferred stock, long term preferred stock, convertible preferred
stock, and a limited amount of the general loan loss allowance. In addition to
the risk-based capital ratio, the OCC has adopted a minimum level for the ratio
of Tier 1 capital to average total assets ("Tier 1 Leverage Ratio") under which
a national bank must maintain a minimum level of tier 1 capital to average total
consolidated assets of at least 3% in the case of a national bank which has the
highest regulatory examination rating and is not contemplating growth or
significant expansion. All other national banks are expected to maintain a ratio
of at least 1% to 2% above the stated minimum.
The Orangeburg bank had a Tier I Capital to risk weighted assets ratio
in excess of 13% as of December 31, 1996. The Sumter bank had a Tier I Capital
to risk weighted assets ratio in excess of 28% as of December 31, 1996.
Failure to meet capital guidelines could subject the Banks to a
variety of enforcement remedies, including the termination of deposit insurance
by the FDIC and a prohibition on the taking of brokered deposits.
Bank regulators frequently indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
See "Federal Deposit Insurance Improvement Act of 1991" for a discussion of
certain proposed regulations relating to risk-based capital requirements.
Management of the Bank is unable to predict whether and when higher capital
requirements would be imposed and, if so, at what levels and on what schedule.
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Dividends
If a national bank's surplus fund equals the amount of its capital
stock, the directors may declare quarterly, semiannual 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. Prior
approval of the OCC for the payment of dividends if the total of all dividends
declared by the board of directors of such bank in any year will exceed the
total of (i) such bank's retained net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two years, less any required
transfers to surplus.
In 1990, the OCC issued a regulation that redefines certain of the
terms and methods of calculation used in these two dividend restrictions. The
rule, among other things, changes the methodology of calculating net profits to
be more consistent with generally accepted accounting principles, with the
result 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
levels of net profits available for the payment of dividends. The Bank does not
believe that the regulation will have a material effect on its ability to pay
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 applicable
regulatory authority, 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), such authority
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.
The Banks' dividends are paid to the Corporation. From those dividends
the Board of Directors of the Corporation may elect to pay dividends to the
shareholders of the Corporation. Accordingly, any restriction on the ability of
the Banks to pay dividends will indirectly restrict the ability of the
Corporation to pay dividends.
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each federal banking agency 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 risk of nontraditional activities, as
well as reflect the actual performance and expected risk of loss on multifamily
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 a joint rule amending the risk-based capital
guidelines to take account of concentration of credit risk and the risk of
non-traditional activities. The rule amends each agency's risk-based capital
standards by explicitly identifying concentration of credit risk and the risk
arising from other sources, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy.
CBI does not believe that these rules and proposed policy statement
will have a material impact on the capital requirements of the Banks or CBI.
Insurance
As FDIC-insured institutions, the Banks are subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by FDIC-insured institutions shall be as specified in a schedule
required to be issued by the FDIC that specifies, at semiannual intervals,
target reserve ratios designed to increase the FDIC insurance fund's reserve
ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC
may determine in accordance with the statute) in 15 years. Further, the FDIC is
authorized to impose one or more special assessments in any amount deemed
necessary to enable repayment of amounts borrowed by the FDIC from the United
State Department of the Treasury.
Effective December 11, 1996, the FDIC implemented a risk-based
assessment schedule, that requires 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 adopted to
implement the prompt corrective action provisions of FDICIA (see "Other Safety
and Soundness Regulations"), and whether such institution is considered by its
supervisory agency to be financially sound or to have supervisory concerns. As a
result of the current provisions of federal law, the assessment rates on
deposits could increase over the next 15 years over present levels. Based on the
current financial condition and capital levels of the Banks, CBI does not expect
that the current FDIC risk-based assessment schedule will have a material
adverse effect on the Banks' earnings. The Banks' risk-based insurance
assessments currently are set at 0.00% for the first half of 1997.
Other Safety and Soundness Regulations
Prompt Corrective Action. Current law provides the federal banking
agencies with broad powers to take prompt corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized", "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Under uniform regulations defining such capital
levels issued by each of the federal banking agencies, a bank is considered
"well capitalized" if it has (i) a total risk-based capital ratio of 10% or
greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a
leverage ratio of 5% or greater, and (iv) is not subject to any order or written
directive to meet and maintain a specific capital level for any capital measure.
An "adequately capitalized " bank is defined as one that has (i) a total
risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of a bank with a composite CAMEL rating of 1). A bank is
considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio
of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4%, or
(iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a
composite CAMEL rating of 1); (B) "significantly undercapitalized" if the bank
has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier 1
risk-based capital ratio of less than 3%, or (iii) a leverage ratio of less than
3%; and (C) "critically undercapitalized" if the bank has a ratio of tangible
equity to total assets equal to or less than 2%. The Banks currently meet the
definition of well capitalized.
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Brokered Deposits. Current federal law also regulates the acceptance
of brokered deposits by insured depository institutions to permit only a "well
capitalized" depository institution to accept brokered deposits without prior
regulatory approval. Under FDIC regulations, "well capitalized" insured
depository institutions may accept brokered deposits without restriction,
"adequately capitalized" insured depository institutions may accept brokered
deposits with a waiver from the FDIC (subject to certain restrictions on
payments of interest rates) while "undercapitalized" insured depository
institutions may not accept brokered deposits. The regulations provide that the
definitions of "well capitalized," "adequately capitalized" and "under
capitalized" are the same as the definitions adopted by the agencies to
implement the prompt corrective action provisions of FDICIA (as described in the
previous paragraph). CBI does not believe that these regulations will have a
material adverse effect on its current operations.
Other FDICIA Regulations. To facilitate the early identification of
problems, FDICIA required the federal banking agencies to review and, under
certain circumstances, prescribe more stringent accounting and reporting
requirements than those required by generally accepted accounting principles.
The OCC has proposed regulations implementing those provisions. The rule, among
other things, requires that management report on the institution's
responsibility for establishing and maintaining an internal control structure
and procedures for financial reporting and compliance with designated laws and
regulations concerning safety and soundness.
FDICIA required each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions (such as the Banks) and depository institution holding
companies (such as CBI), including operational and managerial standards, asset
quality, earnings and stock valuation standards, as well as compensation
standards (but not dollar levels of compensation). On September 23, 1994, the
Riegle Community Development and Regulatory Improvement Act of 1994 amended the
1991 Banking Law to authorize the agencies to establish safety and soundness
standards by regulation or by guideline. Accordingly, the federal banking
agencies have issued Interagency Guidelines Establishing Standards for Safety
and Soundness, which set forth general operational and managerial standards in
the areas of internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. The 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. CBI does not expect the Guidelines to materially
change current operations of Orangeburg National Bank or Sumter National Bank.
Community Reinvestment Act
The Banks are subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA requires that financial institutions have
an affirmative and ongoing obligation to meet the credit needs of their local
communities, including low and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. The Orangeburg bank received a satisfactory rating in its
most recent evaluation. Because it has only recently opened, the Sumter bank has
not yet been evaluated.
The federal banking agencies, including the OCC, have issued a joint
rule that changes the method of evaluating an institution's CRA performance. The
new rule evaluates institutions based on their actual performance (rather than
efforts) in meeting community credit needs. Subject to certain exceptions, the
OCC assesses the CRA performance of a bank by applying lending, investment and
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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 the community 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 are 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 CBI, 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.
Transactions Between CBI, Its Subsidiaries and Affiliates
The Banks are subject to certain restrictions on extensions of credit
to executive officers, directors, principal stockholders or any related interest
of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unaffiliated persons; and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
Aggregate limitations on extensions of credit also may apply. The Banks are also
subject to certain lending limits and restrictions on overdrafts to such
persons.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or its non bank subsidiary, on investments in their
securities and on the use of their securities as collateral for loans to any
borrower. Such restrictions may limit CBI's ability to obtain funds from its
bank subsidiaries for its cash needs, including funds for acquisitions, interest
and operating expenses.
In addition, under the BHCA and certain regulations of the Federal
Reserve, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. For example, a
subsidiary may not generally require a customer to obtain other services from
any other subsidiary or the holding company parent, and may not require the
customer to promise not to obtain other services from a competitor, as a
condition to an extension of credit to the customer.
Interstate Banking
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
10
<PAGE>
statute) may acquire other banks or bank holding companies having offices in
South Carolina upon the approval of the South Carolina State Board of Financial
Institutions and assuming compliance with certain other conditions, including
that the effect of the transaction not lessen competition and that the laws of
the state in which the out-of-state bank holding company filing the applications
has its principal place of business permit South Carolina bank holding companies
to acquire banks and bank holding companies in that state. Although such
legislation may increase takeover activity in South Carolina, CBI does not
believe that such legislation will have a material impact on its competitive
position. However, no assurance of such fact may be given.
Congress has enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, which will increase the ability of bank holding
companies and banks to operate across state lines. Under the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, the existing
restrictions on interstate acquisitions of banks by bank holding companies will
be repealed one year following enactment, such that CBI and any other bank
holding company located in South Carolina would be able to acquire a bank
located in any other state, and a bank holding company located outside South
Carolina could acquire any South Carolina-based bank, in either case subject to
certain deposit percentage and other restrictions. The legislation also provides
that, unless an individual state elects beforehand either (i) to accelerate the
effective date or (ii) to prohibit out-of-state banks from operating interstate
branches within its territory, on or after June 1, 1997, adequately capitalized
and managed bank holding companies will be able to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank would be permitted only
if it is expressly 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. CBI believes that this legislation may result
in increased takeover activity of South Carolina financial institutions by
out-of-state financial institutions. However, CBI does not presently anticipate
that such legislation will have a material impact on its operations or future
plans.
Change in Bank Control
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve, require that, depending on the particular
circumstances, either Federal Reserve approval must be obtained or notice must
be furnished to the Federal Reserve and not disapproved prior to any person or
company acquiring control of a bank holding company, such as CBI subject to
certain exemptions for certain transactions. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to exist
if a person acquires 10% or more but less than 25% of any class of voting
securities and either the company has registered securities under Section 12 of
the Exchange Act (which CBI has done with respect to its common stock) or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
Approval of Senior Officers. Banks and their holding companies which
have undergone a change in control within the past two years or which have been
deemed by their primary federal bank regulator to be troubled institutions must
give their primary federal bank regulator or the Federal Reserve, respectively,
30 days prior notice of the appointment of senior executive officer or director.
Within the 30 day period, their primary federal bank regulator or the Federal
Reserve, as the case may be, may approve or disapprove any such appointment.
Neither CBI nor the Orangeburg bank currently meet the criteria which trigger
this additional approval. As a newly chartered bank, the Sumter bank is subject
to this requirement.
Other 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' loan operations are also subject to certain federal
11
<PAGE>
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 it serves, including investing its 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.
Monetary Policy
The Banks are directly affected by government monetary policy and by
regulatory measures affecting the banking industry in general. Of primary
importance is the Federal Reserve Board, whose actions directly affect the money
supply and, in general, affect the Banks' lending abilities by increasing or
decreasing the cost and availability of funds to banks. The Federal Reserve
System regulates the availability of bank credit in order to combat recession
and curb inflationary pressures in the economy by open market operations in
United States government securities, changes in the discount rate on member bank
borrowings, changes in reserve requirements against bank deposits and
limitations on interest rates which banks may pay on time and savings deposits.
Deregulation of interest rates paid by banks on deposits and the types
of deposits that may be offered by banks has eliminated minimum balance
requirements and rate ceilings on various types of time deposit accounts. The
effect of these specific actions and, in general, the deregulation of deposit
interest rates have increased banks' costs of funds and made them more sensitive
to fluctuations in money market rates.
In view of changing conditions in the national economy and money
markets, as well as the effect of actions by monetary and fiscal authorities, no
prediction can be made as to possible future changes in interest rates, deposit
levels, loan demand or the business and earnings of the Banks.
Employees
At December 31, 1996, the Corporation employed 54 full time equivalent
employees and 5 part-time employees. Management believes that its employee
relations are excellent.
Item 2. Description of Property
The Corporation's Orangeburg bank owns land located at 1820 Columbia
Road NE, in Orangeburg, South Carolina. The Orangeburg bank maintains its main
office at this address. The total investment in this real estate was $245,000.
The Bank operates from a one story building of approximately 7,000 square feet.
The Bank's investment in the building is $532,000.
The Orangeburg bank also owns a branch facility at the corner of
Broughton and Glover Streets in Orangeburg. The Bank's investment in the land is
$120,000. The Bank's investment in the building plus its improvements and
renovations is approximately $135,000. The Corporation's offices are also
headquartered at this location.
12
<PAGE>
The foregoing properties are owned in fee simple by the Orangeburg
bank. Management believes that insurance coverage on the foregoing properties is
adequate.
The Corporation's Sumter bank owns land located at 683 Bultman Drive,
in Sumter, South Carolina. The Sumter bank maintains its main office at this
address. The total investment in this real estate was $317,000. The Bank
operates from a one story building of approximately 6,500 square feet. The
Bank's investment in the building is $606,000.
The foregoing property is owned in fee simple by the Sumter bank.
Management believes that insurance coverage on the foregoing properties is
adequate.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the security holders during
the fourth quarter of 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information set forth under the caption "Market for the
Corporation's Common Stock and Related Security Holder Matters" in the Annual
Report to Shareholders for the year ended December 31, 1996 (the "1996 Annual
Report") is incorporated herein by reference.
The Corporation has not sold any of its securities other than pursuant
to an offering registered under the Securities Act of 1933 during the period
covered by this report.
Item 6. Management's Discussion and Analysis of Financial Position and Results
of Operations
The information set forth under the caption "Management's Discussion
and Analysis of Financial Position and Results of Operations" in the 1996 Annual
Report is incorporated herein by reference.
Item 7. Financial Statements
The information set forth under the caption "Financial Statements" in
the 1996 Annual Report is incorporated herein by reference.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with or changes in accountants.
PART III
Item 9. Directors and Executive Officers
The information set forth under the caption "Directors and Executive
Officers" in the Proxy Statement to be used in conjunction with the 1997 Annual
13
<PAGE>
Meeting of Shareholders (the "Proxy Statement"), which will be filed within 120
days of the Corporation's fiscal year end, is incorporated herein by reference.
Item 10. Executive Compensation
The information set forth under the caption "Executive Compensation"
in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
Item 13. Exhibits and Reports on Form 8-K
Exhibit No.(from Description
item 601 of SB)
(3) Articles of Incorporation and By-laws, as amended
(incorporated by reference to exhibits filed in the
Registrant's Form 10-KSB filed March 30, 1995).
(4) Stock certificate (incorporated by reference to exhibits
filed in the Registrant's Registration Statement on Form
S-2, filed September 11, 1995, Commission File No.
33-96746).
(10) Form of Unqualified Stock Options
(13) Portions of the Annual Report to Shareholders for the Year
Ended December 31, 1996
(21) Subsidiaries of the registrant (incorporated by reference to
exhibits filed in the Registrant's Registration Statement on
Form S-2, filed September 11, 1995, Commission File No.
33-96746).
(23) Consent of J. W. Hunt and Company, LLP
(27) Financial data schedule
14
<PAGE>
Reports on Form 8-K. None.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATED: March 17, 1997
By: s/Hugo S. Sims, Jr.
Hugo S. Sims, Jr.,
Chief Executive Officer and Chairman of the Board of Directors
By s/William W. Traynham, Jr.
William W. Traynham, Jr.
President, Chief Financial Officer, and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
s/E. J. Ayers, Jr. March 17, 1997
E. J. Ayers, Jr., Director
s/ Alvis J. Bynum March 17, 1997
Alvis J. Bynum, Director
s/ Martha Rose C. Carson March 17, 1997
Martha Rose C. Carson, Director
s/ Anna O. Dantzler March 17, 1997
Anna O. Dantzler, Director
s/J. M. Guthrie March 17, 1997
J. M. Guthrie, Director
s/William H. Nock March 17, 1997
William H. Nock, Director
s/ Phil P. Leventis March 17, 1997
Phil P. Leventis, Director
s/ Samuel F. Reid, Jr. March 17, 1997
Samuel F. Reid, Jr., Director
s/ J. Otto Warren, Jr. March 17, 1997
J. Otto Warren, Jr., Director
s/ Michael A. Wolfe, II March 17, 1997
Michael A. Wolfe, II, Director
s/ Russell S. Wolfe, II March 17, 1997
Russell S. Wolfe, II, Director
15
<PAGE>
EXHIBIT INDEX
Exhibit No.(from Description
item 601 of SB)
(3) Articles of Incorporation and By-laws, as Previously
amended (incorporated by reference to Filed
exhibits filed in the Registrant's Form
10-KSB filed March 30, 1995).
(4) Stock certificate (incorporated by reference Previously
to exhibits filed in the Registrant's Filed
Registration Statement on Form S-2,
filed September 11,1995, Commission
File No. 33-96746).
(10) Form of Unqualified Stock Options Attached
(13) Portions of the Annual Report to Shareholders Attached
for the Year Ended December 31, 1996
(21) Subsidiaries of the registrant (incorporated Previously
by reference to exhibits filed in the Filed
Registrant's Registration Statement on Form
S-2, filed September 11, 1995, Commission
File No. 33-96746).
(23) Consent of J. W. Hunt and Company, LLP Attached
(27) Financial data schedule Attached
16
Exhibit 10
STATE OF SOUTH CAROLINA )
) NONQUALIFIED STOCK OPTION
COUNTY OF ORANGEBURG ) AGREEMENT
This Agreement dated as of the ____ day of ____________, ____ (the
"grant date") by Community Bankshares, Inc. (the "Corporation"), the holding
company of Orangeburg National Bank (the "Bank") with its principal office in
Orangeburg, South Carolina and ______________ ("optionee");
WITNESSETH:
WHEREAS, the optionee is a key employee of the Bank and/or the
Corporation; and
WHEREAS, in order to encourage the optionee to remain an employee of
the Bank and/or the Corporation, the Corporation has authorized the granting of
options for the purchase of shares of the Corporation to provide such optionee
with a means to acquire or increase his or her proprietary interest in the
Corporation;
NOW, THEREFORE in consideration of the premises and of the covenants
and agreements herein set forth, the parties hereby mutually covenant and agree
as follows:
1. Subject to the terms and conditions of this agreement, the
Corporation grants to the optionee the option to purchase from the Corporation
___ shares of the Corporation's common stock (hereinafter such shares of stock
are referred to as the "optioned shares" and the option to purchase the optioned
shares is referred to as the "option").
2. The price to be paid for the optioned shares shall be $________ per
share.
3. Subject to the terms and conditions of this Agreement, the option
may be exercised by the optionee while in the employ of the Corporation but only
during the period beginning on the date of this Agreement and ending _________,
________ .
4. The option may be exercised only by written notice, delivered or
mailed by postpaid registered or certified mail, addressed to the Secretary of
the Corporation at his office in Orangeburg, South Carolina. Such notice shall
be accompanied by payment of the entire option price of the optioned shares
being purchased in cash or its equivalent.
17
<PAGE>
Upon receipt of the payment of the entire purchase price of the
optioned shares so purchased, certificates for such optioned shares shall be
issued to the optionee with such restrictions noted thereon as may be required
by law or otherwise appropriate. The optioned shares so purchased shall be fully
paid and non assessable.
5. (a) If the optionee ceases to be an employee of the Corporation or
the Bank for any reason other than death or disability, then the option shall
terminate three months after the date the optionee's employment ends.
(b) If the optionee ceases to be an employee of the Corporation or
the Bank by reason of death or disability within the meaning of Section 105(d)
(4) of the Internal Revenue Code of 1986, as amended, the option may be
exercised, to the extent otherwise exercisable at the date of optionee's death
or disability, within twelve months after the date of death or disability and
not thereafter.
6. The optionee shall not be deemed for any purposes to be a
stockholder of the Corporation with respect to any shares which may be acquired
hereunder except to the extent that the option shall have been exercised with
respect thereto and a stock certificate issued therefor.
7. The option herein granted shall not be transferable by the optionee
otherwise than by will or by the laws of descent and distribution, and may be
exercised during the life of the optionee only by the optionee.
8. The optionee agrees for himself and his heirs, legatees, and legal
representatives, with respect to all shares of stock acquired pursuant to the
terms and conditions of this Agreement (or any shares of stock issued pursuant
to a stock dividend or stock split thereon or any securities issued in lieu
thereof or in substitution or exchange therefor) that he and his heirs,
legatees, and legal representatives will not sell or otherwise dispose of such
shares except pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), or except in a transaction
which, in the opinion of counsel for the Corporation is exempt from registration
under the Act.
18
<PAGE>
9. The existence of the option herein granted shall not affect in any
way the right or power of the Corporation or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations, or other
changes in the Corporation's capital structure or its business, or any merger or
consolidation of the Corporation, or any issuance of bonds, debentures,
preferred, or prior preference stock ahead of or affecting the stock or the
rights thereof, or dissolution or liquidation of the Corporation, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
10. As a condition of the granting of the option, the optionee agrees
for himself and his legal representatives, that any dispute or disagreement
which may arise under or as a result of or pursuant to this Agreement shall be
determined by the Board of Directors in its sole discretion, and any
interpretation by the Board of Directors of the terms of this Agreement shall be
final, binding and conclusive.
IN WITNESS WHEREOF, the Corporation has caused this instrument to be
executed by its duly authorized officers and its corporation seal hereunto
affixed, and the optionee has hereunto affixed his hands and seal as of the day
and year first above written.
COMMUNITY BANKSHARES, INC.
OPTIONEE:
19
PORTIONS OF 1996 ANNUAL REPORT TO SHAREHOLDERS
(Information set forth on page 3 of the Registrant's 1996 Annual
Report to Shareholders.)
Financial Highlights for Community Bankshares, Inc.
The following is a summary of the consolidated financial position and
results of operations of the Corporation for the years ended December 31, 1992,
through December 31, 1996.
Community Bankshares, Inc.
Consolidated Financial Highlights
<TABLE>
<CAPTION>
For the year ended December 31, 1996 1995 1994 1993 1992
- ------------------------------- ---- ---- ---- ---- ----
Financial Condition (All amounts in thousands of dollars, except per share data.)
<S> <C> <C> <C> <C> <C>
Investment securities .......................... $ 25,787 $24,669 $23,405 $17,249 $17,221
Net loans receivable .......................... 67,953 51,617 47,938 41,685 41,685
Total assets ................................... 105,461 83,897 77,158 66,728 59,574
Total deposits ................................. 89,851 72,550 67,669 58,735 52,395
Long-term obligations .......................... 1,130 700 - - -
Stockholders' equity ........................... $ 12,104 $ 7,346 $ 6,387 $ 5,988 $ 5,468
Earnings Summary
Interest income ................................ $ 7,261 $ 6,327 $ 5,162 $ 4,511 $ 4,467
Interest expense ............................... 3,279 2,965 2,136 1,820 2,126
-------- ------- ------- ------- -------
Net interest income ............................ 3,982 3,362 3,026 2,691 2,341
Provision for loan losses ...................... 227 160 125 160 200
Other operating income ......................... 503 431 364 299 248
Other operating expenses ....................... 3,097 2,179 2,111 1,828 1,509
-------- ------- ------- ------- -------
Net income before taxes ........................ 1,161 1,454 1,154 1,002 880
Income taxes ................................... 411 517 400 345 297
-------- ------- ------- ------- -------
Net income after tax ........................... $ 750 $ 937 $ 754 $ 657 $ 583
======== ======= ======= ======= =======
Per share data (adjusted for stock split
on Jan. 1, 1995)
Net income $ 0.61 $ 1.09 $ 0.88 $ 0.77 $ 0.69
Dividends $ 0.29 $ 0.28 $ 0.25 $ 0.22 $ 0.16
</TABLE>
20
<PAGE>
(Information set forth on pages 12-13 of the 1996 Annual Report to
Shareholders.)
Market for the Corporation's Common Stock and Related Security Holder Matters
The Corporation's shares of Common Stock are traded on the American
Stock Exchange (the AMEX) under the ticker symbol SCB.
The following table summarizes the range of high and low prices for
the Corporation's Common Stock of which management has knowledge for each
quarterly period over the last two years.
Sales Price of the Corporation's Common Stock
Quarter ended Low High
Mar. 31, 1995 $10.00 $10.00
June 30, 1995 $10.00 $10.00
Sept. 30, 1995 $10.00 $10.00
Dec. 31, 1995 $10.00 $10.00
Mar. 31, 1996 $10.00 $10.00
June 30, 1996 $10.00 $10.00
Sept. 30, 1996 $10.00 $12.00
Dec. 31, 1996 $11.75 $12.25
Between December 1995 and May 1996 the Corporation sold 450,000 shares of its no
par common stock at $10.00 per share. This sale was in conjunction with the
capitalization of the new Sumter bank. On November 20, 1996, CBI was listed on
the AMEX. From that date to year end the corporation had a stock sales volume of
14,900 shares. (Stock prices shown prior to listing on the AMEX are based on a
limited number of shares traded of which management had knowledge.)
There were 1,174 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 1996.
During 1996 the Corporation authorized and paid two cash dividends
totaling 29 cents per share. The total cost to the Corporation of these payments
was approximately $318,000, 42% of after tax profits. During 1995 the
Corporation paid two cash dividends totaling 28 cents per share. The cost to the
Corporation of those payments was $242,000, about 26% of after tax profits. The
Board of Directors decided to maintain its dividend strategy because, in its
opinion, the decline in earnings for 1996 was the temporary result of the
investment in the new bank in Sumter. The dividend policy of the Corporation is
subject to the discretion of the Board of Directors and depends upon a number of
factors, including earnings, financial condition, cash needs and general
business conditions, as well as applicable regulatory considerations. Subject to
ongoing review of these circumstances, the Board expects to maintain a
reasonable, safe, and sound dividend payment policy.
The current source of dividends to be paid by the Corporation is
dividends of its banking subsidiary, Orangeburg National Bank. Accordingly, the
payment of dividends by the Corporation is indirectly subject to the same laws
and regulations that govern the payment of dividends by national banking
associations. Pursuant to 12 U.S.C. Section 56, no national bank may pay
dividends from its capital. All dividends must be paid out of net profits then
on hand, after deduction of losses and bad debts. The payment of dividends out
of net profits is further limited by 12 U.S.C. Section 60(a). This section
prohibits a bank from declaring a dividend on its shares of common stock until
the surplus fund equals the amount of capital stock. 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. Pursuant to 12 U.S.C.
Section 60(b), the approval of the Comptroller of the Currency is required if
21
<PAGE>
the total of all dividends declared by the Bank in any calendar year will exceed
the total of its retained net profits of that year combined with its net profits
of the two preceding years, less any required transfers to surplus or a fund for
the retirement of any preferred stock. Additionally, pursuant to 12 U.S.C.
Section 1818(b), the Comptroller of the Currency may prohibit the payment of
dividends that would constitute an unsafe and unsound banking practice.
(Information set forth on pages 13-37 of the 1996 Annual
Report to Shareholders.)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion is intended to assist in understanding the
consolidated financial condition and results of operations of Community
Bankshares, Inc. (CBI or the Corporation) for the years ended December 31, 1996
and 1995. This commentary should be reviewed in conjunction with the audited
consolidated financial statements and notes contained elsewhere in this report.
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.
Business of the Corporation and the Banks
Community Bankshares, Inc. is a bank holding company. It was
incorporated on November 30, 1992, and commenced operations July 1, 1993, by
acquiring Orangeburg National Bank. CBI owns two banking subsidiaries:
Orangeburg National Bank and Sumter National Bank. CBI provides item and data
processing and other technical services for its two banking subsidiaries. The
consolidated financial report for 1996 represents the operations of the holding
company and its two banks. (Parent only and bank only financial statements are
presented in the footnotes to the consolidated financial statements.)
Orangeburg National Bank is a national banking association that
commenced operations in November 1987. It operates two offices in Orangeburg,
South Carolina. The bank provides commercial banking services to the Orangeburg
community. Its primary customer markets are consumers and small businesses.
Sumter National Bank is a national banking association that commenced
operations in June 1996. It operates one office in Sumter, South Carolina. The
bank provides commercial banking services to the Sumter community. Its primary
customer markets are also consumers and small businesses.
1996 compared to 1995
Earnings Performance
The Corporation's net income was $750,000, or $.61 per share, in 1996.
This compares to $937,000, or $1.09 per share, in 1995, a decrease of $187,000,
or 20%.
22
<PAGE>
Management views this reduction in earnings as the expected and
temporary result of a major investment in a new marketplace.
Distribution of Assets and Liabilities
The Corporation manages its balance sheet in a conservative manner.
The following table shows the percentage relationships of significant components
of average balance sheets for the years ended December 31, 1996 and 1995.
Balance Sheet Categories as a Percent of Average Total Assets as of December 31,
<TABLE>
<CAPTION>
Assets 1996 1995
- ------ ---- ----
<S> <C> <C>
Interest bearing deposits ...................... 0.72% 0.54%
Investment securities taxable .................. 28.20% 27.74%
Investment securities--tax exempt .............. 0.44% 0.12%
Federal funds sold ............................. 3.21% 3.98%
Loans, net of unearned income .................. 60.58% 61.64%
------ ------
Total interest earning assets .................. 93.15% 94.02%
Cash and due from banks ........................ 3.78% 3.73%
Allowance for loan losses ...................... -0.79% -0.80%
Premises and equipment ......................... 2.47% 1.73%
Other assets ................................... 1.39% 1.32%
------ ------
Total assets ....................................... 100.00% 100.00%
====== ======
Liabilities and Stockholders' Equity
Interest bearing deposits
Savings ........................................ 14.78% 17.74%
Interest bearing transaction accounts ......... 9.36% 7.62%
Time deposits .................................. 48.89% 49.30%
------ ------
Total interest bearing deposits ................ 73.03% 74.66%
Short term borrowings .......................... 2.48% 4.53%
FHLB advances .................................. 1.20% 0.33%
------ ------
Total interest bearing liabilities ............. 76.72% 79.52%
Noninterest bearing demand deposits ............ 11.02% 11.46%
Other liabilities .............................. 0.70% 0.74%
Stockholders' equity ........................... 11.57% 8.28%
------ ------
Total liabilities and stockholders' equity ......... 100.00% 100.00%
====== ======
</TABLE>
The following table presents the average balance sheets, the average
yield and the interest earned on earning assets, and the average rate and the
interest paid on interest bearing liabilities for the years ended December 31,
1996 and 1995.
23
<PAGE>
<TABLE>
<CAPTION>
................................... ..........................................
Years ended December 31, 1996 1995
................................... .........................................
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balance Expense (1) Rates (1) Balance Expense (1) Rates (1)
Assets ------- ----------- --------- ------- ----------- ---------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits ................. $ 687 $ 38 5.53% $ 448 $ 26 5.75%
Investment securities taxable ............. 26,914 1,599 5.94% 22,822 1,306 5.72%
Investment securities--tax exempt ......... 417 17 6.35% 95 4 5.65%
Federal funds sold ........................ 3,067 163 5.32% 3,276 191 5.84%
Loans receivable (2) ...................... 57,805 5,444 9.42% 50,724 4,800 9.46%
------- ------ ---- ------- ------ ----
Total interest earning assets ............. 88,890 7,261 8.17% 77,365 6,327 8.18%
Cash and due from banks ................... 3,606 3,069
Allowance for loan losses ................. (757) (662)
Premises and equipment .................... 2,360 1,425
Other assets .............................. 1,328 1,086
------- -------
Total assets $95,427 $82,283
======= =======
Liabilities and shareholders' equity
Interest bearing deposits
Savings ................................... $14,106 $ 392 2.78% $14,601 $ 443 3.03%
Interest bearing transaction accounts ..... 8,936 183 2.05% 6,273 149 2.38%
Time deposits ............................. 46,646 2,536 5.44% 40,559 2,177 5.37%
------- ------ ---- ------- ------ ----
Total interest bearing deposits ........... 69,688 3,111 4.46% 61,433 2,769 4.51%
Short term borrowings ..................... 2,369 92 3.89% 3,724 177 4.76%
FHLB advances ............................. 1,149 76 6.64% 276 19 6.97%
------- ------ ---- ------- ------ ----
Total interest bearing liabilities ........ 73,206 3,279 4.48% 65,433 2,965 4.53%
Noninterest bearing demand deposits ....... 10,516 9,431
Other liabilities ......................... 667 606
Shareholders' equity ...................... 11,038 6,813
------- -------
Total liabilities and shareholders' equity $95,427 $82,283
======= =======
Interest rate spread (3)...................... 3.69% 3.65%
Net interest income and net yield on
earning assets (4)............................ $3,982 4.48% $3,362 4.35%
====== ==== ====== ====
</TABLE>
Notes
1. Computed on a fully taxable equivalent basis using a federal tax rate of
34%.
2. Nonaccruing loan balances are included in the average loan balances and
income from such loans is recognized on a cash basis.
3. Total interest earning assets yield less total interest bearing liabilities
rate.
4. Net yield equals net interest income divided by total interest earning
assets.
24
<PAGE>
Interest Income and Interest Expense
The Corporation's interest income increased in 1996 from 1995. In 1996
the Corporation earned $7,261,000 in total interest income, up from the prior
year's $6,327,000. This represented a $934,000 or a 14.8% increase. This growth
was mostly the result of increased volume in the loan and investment portfolios.
Interest bearing deposits in other banks contributed $38,000 to
interest income in 1996, up from $26,000 the prior year, an increase of $12,000
or 46.2%. In 1996 the Corporation had an average of $687,000 invested in
interest bearing deposits, up from the prior year's $448,000, an increase of
$239,000 or 53.3%. The average yield on these deposits during 1996 was 5.53%,
down .22% from the prior year's yield of 5.75%.
Investments contributed $1,599,000 to interest income in 1996, up from
$1,306,000 the prior year, an increase of $293,000 or 22.4%. The investment
portfolio averaged $26.9 million in 1996, up from the prior year's $22.8
million, an increase of $4.1 million or 17.9%. The Corporation's investment
portfolio consists primarily of short- term U. S. government and agency debt
issues. The average yield on investments during 1996 was 5.94%, up .22% from
5.72% in 1995.
The Corporation's tax exempt securities portfolio earned $17,000
during 1996, up from $4,000 in 1995, an increase of $13,000 or 325%. The
portfolio averaged $417,000 in 1996, up from $95,000 in 1995, an increase of
$322,000 or 339%. The average yield was 6.35%, compared to 5.65% the prior year,
on a fully taxable equivalent basis.
Federal funds sold represent temporary surplus funds that one bank
lends to another. These funds are a source of day to day operating liquidity.
Federal funds sold contributed $163,000 to interest income in 1996, down from
$191,000 in the prior year, a decrease of $28,000 or 14.7%. The Corporation had
an average of $3.1 million in federal funds during 1996, down from the prior
year's $3.3 million, a decrease of 6.4%. The average yield on federal funds
during 1996 was 5.32%, down from 5.84% in 1995.
The Corporation's major source of interest income is the loan
portfolio, which contributed $5,444,000 to interest income in 1996, up from
$4,800,000 in the prior year, an increase of $644,000 or 13.4%. The average loan
portfolio for 1996 was $57.8 million, compared to the prior year's $50.7
million, an increase of $7.1 million or 14%. The average yield on loans during
1996 was 9.42%, down from 9.46% in 1995.
The Corporation had average earning assets in 1996 of $88.9 million
which earned a yield of 8.17%. In 1995 the Corporation had average earning
assets of $77.4 million which earned a yield of 8.18%.
On the liability side of the balance sheet, the Corporation's savings
deposits consist of savings and money market accounts. Total savings accounts
averaged $14.1 million in 1996, down from $14.6 million in the prior year, a
decrease of $.5 million or 3.4%. The cost of these funds decreased to 2.78% in
1996 from 3.03% in the prior year. In 1996 this category of deposits represented
14.8% of the Corporation's liabilities and equity, down from 17.7% in 1995. The
decrease was attributable primarily to savings customers moving into time
deposits in search of higher rates.
Interest bearing transaction accounts are the lead checking accounts
that the banks offer customers. This overall category was $8.9 million in 1996,
up from $6.3 million in 1995, an increase of $2.6 million or 41.2%. The average
cost of these funds was 2.05% in 1996, compared to 2.38% in the prior year.
Time deposits are the largest category of deposits, totaling $46.6
million in 1996, up from $40.6 million in the prior year, an increase of $6.1
million or 15%. Much of this increase was attributable to the movement of
deposits from regular savings accounts. The cost of time deposits increased to
5.44% from 5.37%.
25
<PAGE>
The Orangeburg bank has several commercial customers for which it
offers daily repurchase agreements. These accounts are not deposits; they are
considered other obligations. Balances in these accounts are subject to wide
fluctuation with the customers' cash flows, but they constitute a relatively
small portion of the balance sheet. The average balance for 1996 was $2.4
million, down from $3.7 million in the prior year, a decrease of $1.3 million
or 35.1%. The cost of these funds decreased to 3.89% from 4.76%.
Orangeburg National Bank is a member of and has the ability to borrow
from the Federal Home Loan Bank (the FHLB). The bank had an average $1.1 million
outstanding balance during 1996 at an average cost of 6.64%. This compares to
$276,000 outstanding in 1995 at an average cost of 6.97%. The increase is a
result of the bank's on-going asset liability management. These loans are
secured by a blanket lien on the bank's one to four family residential mortgage
loan portfolio and the bank's stock in the FHLB..
The Corporation had total interest bearing liabilities in 1996 of
$73.2 million costing an average of 4.48%, compared with interest bearing
liabilities in 1995 of $65.4 million that cost an average of 4.53%.
Interest Income and Interest Expense-Sumter National Bank
Sumter National Bank opened for business on June 10, 1996. By December
31, 1996, the bank's earning assets had grown to $10.8 million, total assets
were $13.7 million, and deposits were $8.5 million.
The average earnings assets for 1996 for the new bank were $4.4
million (4.9% of consolidated earning assets). These earning assets generated
$337,000 in interest income for the year (4.6% of consolidated interest income).
Total interest bearing liabilities for 1996 for the new bank were $3.2
million (4.4% of consolidated interest bearing liabilities). These liabilities
generated $143,000 in interest expense for the year (4.4% of consolidated
interest income).
Volume and Rate Variance Analysis
The table "Volume and Rate Variance Analysis" provides a summary of
changes in net interest income resulting from changes in volume and changes in
rate (The changes in volume are the difference between the current and prior
year's balances times the prior year's rate. The changes in rate are the
difference between the current and prior year's rate times the prior year's
balance.)
As reflected in the table, the increase in 1996 net interest income of
$621,000 is due almost entirely to changes in volume. Almost all of the $935,000
increase in interest income was from volume growth in earning assets. Likewise,
most of the increase in interest expense was due to volume increases for time
deposits. During 1995 there was a similar pattern, with most of the increase in
net interest income coming from changes in volume.
Six interest rate increases from February 1994 to February 1995
resulted in the prime lending rate increasing from 6% to 9%. These increases
were followed by three rate cuts, taking the prime down to 8.25% in February
1996, where it has remained. Management expects that interest rates will move
within a relatively narrow band during 1997, with some small interest rate
changes possible. Inflation is expected to remain low. The Corporation is not
aware of any other immediately identifiable factors that would cause short-term
interest rates to increase sharply in the near term. Therefore, as in 1996,
improvements in net interest income during 1997 are more likely to be the result
of changes in volume and the mix of earning assets and interest bearing
liabilities than changes in rates.
26
<PAGE>
Volume and Rate Variance Analysis
<TABLE>
<CAPTION>
1996 compared to 1995 1995 compared to 1994
------------------------------ ------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest earning assets (Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits .......................... $ 13 $ (1) $ 12 $ 5 $ 5 $ 10
Investment securities taxable ...................... 240 53 293 31 174 205
Investment securities--tax exempt .................. 13 - 13 (34) 8 (26)
Federal funds sold ................................. (12) (16) (28) 87 31 118
Net loans receivable ............................... 668 (23) 645 531 326 857
---- ----- ----- ----- ------ ---
Total interest income .............................. 922 13 935 620 544 $1,164
Interest bearing liabilities
Savings ............................................ (15) (35) (50) (158) 20 (138)
Interest bearing transaction accounts .............. 57 (23) 34 (7) 33 26
Time deposits ...................................... 330 28 358 412 424 836
---- ----- ----- ----- ------ ------
Total interest bearing deposits .................... 372 (30) 342 247 477 724
---- ----- ----- ----- ------ ------
Short term borrowings .............................. (56) (29) (85) 59 26 85
FHLB advances ...................................... 58 (1) 57 19 - 19
---- ----- ----- ----- ------ ------
Total interest expense ............................. 374 (60) 314 325 503 828
---- ----- ----- ----- ------ ------
Net interest income $548 $ 73 $ 621 $ 295 $ 41 $ 336
==== ===== ===== ===== ====== ======
</TABLE>
(1) The rate volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage of
rate or volume variance to the sum of the two absolute variances, except in
categories having balances in only one period. In such cases, the entire
variance is attributed to volume differences.
(2) Computed on a fully taxable equivalent basis using a federal income tax rate
of 34%.
Interest Rate Sensitivity
Interest rate sensitivity management is concerned with the management
of both the timing and the magnitude of the repricing characteristics of
interest earning assets and interest bearing liabilities. This is an important
part of asset/liability management. The objectives of interest rate sensitivity
management are to ensure the adequacy of net interest income and to control the
risks to net interest income associated with movements in interest rates. The
table "Interest Sensitivity Analysis" indicates that, on a cumulative basis
through twelve months, rate sensitive liabilities exceeded rate sensitive
assets, resulting in a liability sensitive position at the end of 1996 of $26.8
million.
When interest sensitive assets exceed interest sensitive liabilities
for a specific repricing "horizon," a positive interest sensitivity gap results.
The gap is negative when interest sensitive liabilities exceed interest
sensitive assets, as was the case at the end of 1996, with respect to the one
year "horizon." For a corporation with a negative gap, falling interest rates
would be expected to have a positive effect on the net interest income and
rising rates would be expected to have the opposite effect, because,
theoretically, as rates increase more deposits will reprice than loans or
investments, thus driving up interest costs and decreasing net interest income.
27
<PAGE>
The following table summarizes the Corporation's interest sensitivity
position as of December 31, 1996.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
Within 3 4-12 1-5 Over 5
months months years years Total
------ ------ ----- ----- -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets
Interest bearing deposits ................... $ 331 $ 100 $ - $ - $ 431
Taxable investment securities ............... 3,347 2,422 18,300 717 24,786
Tax exempt investment securities ............ - - 414 - 414
Federal funds sold .......................... 1,300 - - - 1,300
Net loans receivable ........................ 31,963 3,350 23,164 10,216 68,693
------- -------- ------- ------- -------
Total interest earning assets ............... 36,941 5,872 41,878 10,933 95,624
------- -------- ------- ------- -------
Interest bearing liabilities
Savings ..................................... 9,418 - - - 9,418
Interest bearing transaction accounts ....... 17,054 - - - 17,054
Time deposits < $100M ....................... 13,063 16,231 7,109 - 36,403
Time deposits > $100M ....................... 5,078 7,019 1,543 - 13,640
Short term borrowings ....................... 1,744 - - - 1,744
FHLB advances ............................... - 70 280 780 1,130
------- -------- ------- ------- -------
Total interest bearing liabilities .......... $ 46,357 $ 23,320 $ 8,932 $ 780 $79,389
-------- -------- ------- ------- -------
Interest sensitivity gap .................... $ (9,416) $(17,448) $32,946 $10,153 $ 16,235
Cumulative gap .............................. (9,416) (26,864) 6,082 16,235
RSA/RSL ..................................... 80% 25%
Cumulative RSA/RSL .......................... 80% 61%
</TABLE>
RSA- rate sensitive assets; RSL- rate sensitive liabilities
The above table reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amortizing fixed rate loans are reflected at the scheduled maturity date.
Variable rate amortizing loans are reflected at the earliest date at which they
may be repriced contractually. Deposits in other banks and debt securities are
reflected at each instrument's ultimate maturity date. Overnight federal funds
sold are reflected as instantly repriceable. Interest bearing liabilities with
no contractual maturity, such as savings deposits and interest bearing
transaction accounts, are reflected in the earliest repricing period possible.
Fixed rate time deposits are reflected at the earlier of their next repricing or
maturity dates.
The Corporation's banks have established Asset/Liability Management
Committees. It is the responsibility of these committees to establish parameters
for various interest risk measures, to set strategies to control interest rate
risk within those parameters, to maintain adequate and stable net interest
income, and to direct the implementation of tactics to facilitate achieving its
objectives. During 1996, emphasis was directed toward controlling the rate of
increase in funding costs. This was done by aggressive monitoring of deposit
rates and restructuring of some deposit products.
28
<PAGE>
Management is aware of its negative gap position and is emphasizing
variable rate loans in 1997. Management also will explore variable rate
investments. If successful, these efforts will help to reduce the negative gap
position and reduce interest rate risk. The Corporation also realizes, however,
that these efforts may be constrained by customer demands during the upcoming
year.
Investment Portfolio
Investment securities constituted $26.9 million (28.20%) of the
Corporation's average assets in 1996 and $22.8 million (27.74%) in 1995.
The following tables summarize the book and market values of
investment securities held by the Corporation at the dates indicated, and the
maturities and weighted average yields of the securities at December 31, 1996.
<TABLE>
<CAPTION>
1996 1995
Amortized cost Fair Value Amortized cost Fair Value
-------------- ---------- -------------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Securities held to maturity
U. S. Government and agencies ................ $ 14,613 $ 14,612 $ 15,287 $ 15,296
State and local governments .................. 414 417 323 324
--------- --------- --------- --------
Total ................................... $ 15,027 $ 15,029 $ 15,610 $ 15,620
========= ========= ========= ========
Securities available for sale
U. S. Government and agencies ................ $ 10,174 $ 10,174 $ 8,651 $ 8,688
Federal Reserve stock ........................ 336 336 139 139
Federal Home Loan Bank stock ................. 251 251 232 232
--------- --------- --------- --------
Total ................................... $ 10,761 $ 10,761 $ 9,022 $ 9,059
========= ========= ========= ========
</TABLE>
29
<PAGE>
Investment Portfolio Maturities And Yields
<TABLE>
<CAPTION>
After five years
After one year but but within ten
Within one year within five years years Over ten years Total
--------------- ------------------ ---------------- ---------------- ---------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity
U. S. Treasury securities $1,390 5.48% $ 1,594 6.41% $ - 0.00% $ - 0.00% $ 2,984 6.07%
Federal agency obligations 900 5.92% 10,729 6.07% - 0.00% - 0.00% 11,629 6.06%
State and local governments - 0.00% 414 6.27% - 0.00% - 0.00% 414 6.27%
------ ---- ------- ---- ------ ---- ------- ---- ------- ----
Total held to maturity $2,290 5.65% $12,737 6.12% $ - 0.00% $ - 0.00% $15,027 6.05%
------ ---- ------- ---- ------ ---- ------- ---- ------- ----
Securities available for sale
U. S. Treasury securities $1,979 5.88% $ - 0.00% $ - 0.00% $ - 0.00% 1,979 7.55%
Federal agency obligations 1,000 5.15% 7,196 5.17% - 0.00% - 0.00% 8,196 5.73%
Equities - 0.00% - 0.00% - 0.00% $ 586 6.78% 586 6.52%
------ ---- ------- ---- ------ ---- ------- ---- ------- ----
Total available for sale $2,979 5.63% $ 7,196 5.17% $ - 0.00% $ 586 6.78% $10,761 6.10%
------ ---- ------- ---- ------ ---- ------- ---- ------- ----
Total for portfolio $5,269 5.64% $19,933 5.78% $ - 0.00% $ 586 6.78% $25,788 6.07%
====== ==== ======= ==== ====== ==== ======= ==== ======= ====
</TABLE>
Yields on tax exempt obligations have been computed on a tax
equivalent basis using the maximum federal tax rate of 34%.
As of December 31, 1996, the held to maturity portfolio included gross
unrealized securities gains of $2,741 and no gross unrealized losses. As of
December 31, 1995, the held to maturity portfolio included gross unrealized
securities gains of $70,147 and gross unrealized losses of $60,965. The ratios
of market value to book value, as of December 31, 1996 and 1995, were 1.00 and
1.00, respectively.
As of December 31, 1996, the available for sale portfolio included
gross unrealized securities gains of $14,556 and gross unrealized losses of
$14,491. The amortized cost of the portfolio was $10,761,000. The fair value of
the portfolio was $10,761,000. As of December 31, 1995, the available for sale
portfolio included gross unrealized securities gains of $49,689 and gross
unrealized losses of $13,333.
The taxable portfolio's total income was $1,599,000 for 1996, compared
to $1,306,000 the prior year, an increase of $293,000 or 22.4%. The average
yield in 1996 was 5.94%, compared to 5.72% in 1995.
The Corporation also had tax exempt income of $17,000 for 1996,
compared to $4,000 the prior year, an increase of $13,000 or 325%. The average
tax equivalent yield on the tax exempt portfolio was 6.35% for 1996, compared to
5.65% in 1995.
Loan Portfolio
The average size of the loan portfolio in 1996 was $57.8 million,
compared to $50.7 million the prior year, which represents average growth of
$7.1 million or 14%.
At December 31, 1996, the loan portfolio was $68.8 million, compared
to $52.3 million the prior year, an increase of $16.5 million, or 31.5%. Of the
increase, $8.9 million (54%) was attributable to new loans on the books of the
Sumter bank.
Management believes the loan portfolio is adequately diversified.
There are no foreign loans and few agricultural loans. The Orangeburg bank
ordinarily originates mortgage loans for sale to others, but does not service
such loans. However, certain older mortgage loans and selected new loans with
acceptable rates are owned and serviced by the Orangeburg bank. Real estate
loans are primarily 1 to 4 family residential loans. There were no significant
30
<PAGE>
concentrations in any particular individuals or industry or group of related
individuals or industries at the end of 1996. The table, "Loan Portfolio
Composition," indicates the amounts of loans outstanding according to the type
of loan at the dates indicated.
Lending Risks
Because extending credit involves a certain degree of risk, management
has established loan and credit policies designed to control both the types and
amounts of risks 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 and collection procedures, and nonaccrual and charge-off guidelines.
The Corporation also conducts internal loan reviews to monitor on an ongoing
basis the quality of its portfolio.
The Corporation has a geographic concentration of loans within its
home communities of Orangeburg and Sumter, South Carolina, because its primary
business is community banking.
The Corporation's customer base is predominantly consumers and small
businesses. As a result, the loan portfolio is comprised primarily of consumer
and real estate loans, and, to a lesser extent, small to medium size commercial
loans.
Loan Portfolio Composition
The following table shows the composition of the loan portfolio for
the years ended December 31, 1996 and 1995.
Loan category 1996 1995
- ------------- ---- ----
(Dollar amounts in thousands)
Commercial, financial and agricultural $16,520 $12,408
Real estate - construction 5,611 3,449
Real estate - mortgage 35,553 28,029
Installment loans to individuals 11,021 8,361
Obligations of political subdivisions 124 77
------- -------
Total loans - gross $68,829 $52,324
======= =======
Commercial, financial, and agricultural loans, primarily representing
loans made to small businesses, increased by $4.1 million or 33% during 1996.
These loans may be made on either a secured or an unsecured basis. When taken,
security consists of liens on inventories, receivables, equipment, and furniture
and fixtures. Unsecured business loans are generally short-term with emphasis on
repayment strengths and low debt to worth ratios.
Real estate loans consist of construction and loan secured by
mortgage. Because the Corporation's subsidiaries are community banks, real
estate loans comprise the bulk of the loan portfolio, 60% in 1996. Construction
loans increased $2.2 million or 63% in 1996. Mortgage loans increased $7.5
million or 27% in 1996.
The Corporation generally does not compete with 15 and 30 year fixed
secondary market mortgage interest rates, so it elected to pursue the
origination of mortgage loans that could be easily sold into the secondary
mortgage market. These loans are generally pre-qualified with the underwriters
to avoid problems in the sale of the loans. In 1996 and 1995 the Corporation
sold $4.1 million and $2.9 million, respectively, in such loans. These loans are
sold at par so no gain or loss is recognized at the time of sale. However, fee
income is generated by the origination and sale of these loans. The Corporation
also makes mortgage loans for its own account. Such loans are usually for a
shorter term than loans made to sell and usually have a variable interest rate
rather than a fixed rate of interest.
31
<PAGE>
Installment loans to individuals increased $2.7 million or 32% in
1996.
Most of the increases in loan volume are the result of new and
increased volumes of loan demand in Orangeburg and the opening of the new bank
in Sumter.
Interest income from the loan portfolio was $5,444,000 in 1996,
compared to $4,800,000 in 1995, an increase of $644,000 or 13.4%. The average
yield on the portfolio was 9.42% in 1996, compared to 9.46% in 1995.
Secured versus Unsecured Loans
The Corporation does not aggressively seek to make unsecured loans,
since these loans may be somewhat more risky than collateralized loans. There
are, however, occasions when it is in the business interests of the Corporation
to provide short-term, unsecured loans to selected customers. In 1996 the
Corporation had $4.4 million in unsecured loans or 6.4% of its loan portfolio.
In 1995 the Corporation had $3 million in unsecured loans, or 5.8% of its loan
portfolio. Charge-offs on unsecured loans were not disproportionate to their
share of the total loan portfolio in 1996.
Loan Participations
Periodically, the Corporation's banking subsidiaries enter into sales
or purchases of loan participations with other financial institutions. The banks
generally only sell participations in loans that would cause the bank to exceed
its lending limitation to a single customer. As the banks' lending limits
increase they may buy back such loan participations. Such loans are usually
commercial in nature, subject to the banks' standard underwriting requirements,
and all risks associated with the portion of the loan sold flow to the
purchaser.
At the end of 1996 Orangeburg National Bank had sold $233,000 (all to
Sumter National Bank) in participations and purchased $580,000 ($315,000 from
Sumter National Bank) in such participations. At the end of 1995 the Orangeburg
bank had not sold any such participations and had purchased $291,000 in such
participations.
At the end of 1996 Sumter National Bank had sold $315,000 (all to
Orangeburg National Bank) in participations and purchased $233,000 (all from
Orangeburg National Bank) in such participations.
32
<PAGE>
Maturity Distribution of Loans
The following table sets forth the maturity distribution of the
Corporation's loans, by type, as of December 31, 1996, as well as the type of
interest on loans due after one year.
After one After five
year but years but
Within one within five within ten
year years years Total
---- ----- ----- -----
(Dollar amounts in thousands)
Commercial $ 22,002 $ 4,494 $ 1,380 $ 27,876
Real Estate 9,782 8,135 5,892 23,809
Installment 6,079 8,954 2,111 17,144
----------- ---------- ------------ ----------
Total $ 37,863 $ 21,583 $ 9,383 $ 68,829
=========== ========== ============ ==========
Sensitivity of loans to changes in interest rates-Loans due after one year
Predetermined interest rate $ 27,131
Floating interest rate 3,834
-----------
Total $ 30,965
===========
Non-performing Loans; Other Problem Assets
Nonaccrual and Past Due Loans
The following table presents information about the Corporation's
nonaccrual and past due loans, other real estate owned, and impaired loans at
December 31, 1996 and 1995.
1996 1995
---- ----
(Dollar amounts in thousands)
Nonaccrual loans $ 431 $ 348
Accruing loans 90 days or more past due 93 76
------ ------
Total $ 524 $ 424
====== ======
Total as a % of outstanding loans 0.76% 0.81%
====== ======
Other Real Estate Owned $ - $ -
====== ======
Impaired Loans (included in non accrual) $ 120 $ 108
====== ======
The Corporation had $431,000 in nonaccrual loans at the end of 1996,
compared to $348,000 at the end of 1995. Gross interest income that would have
been recorded for the year ended December 31, 1996, if these loans had been
performing in accordance with their original terms approximated $36,000. No
interest was included in income for the year on these loans.
The Corporation had no restructured loans in 1996 or 1995.
A loan is generally placed on nonaccrual status when principal or
interest is 90 days past due or when serious doubt exists as to collectibility.
Management reviews the status of each nonaccrual loan, information about the
borrower, and the value of any collateral. If the estimated net realizable value
of collateral is sufficient to assure collection of principal and accrued
33
<PAGE>
interest, accrual may be resumed. If management believes that collection of a
significant amount of the principal is in serious doubt, the principal balance
is reduced to the estimated net realizable value of collateral by charge-off to
the allowance for loan losses. Accrued interest is charged against income.
Subsequent payments on such loans are credited to the outstanding principal
balance until such balance is recovered. Then, such payments are credited to the
allowance for loan losses as recoveries to the extent, if any, of any initial
write down to net realizable value. Finally, interest income on nonaccrual loans
is recognized when received. A nonaccrual loan is not returned to accrual status
unless principal and interest are current and the borrower has demonstrated the
ability to continue making payments as agreed.
Nonaccrual loans were not material in relation to the portfolio as a
whole in 1996. Management is aware of no trends, events or uncertainties which
would cause nonaccrual loans to change materially in 1997.
Statements of Financial Accounting Standards No. 114 and No. 118
Effective January 1, 1995, CBI adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for the Impairment of a
Loan," and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure." 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.
CBI does not apply FAS 114 to "large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment." These groups
include the Banks' consumer loan portfolio, overdraft protection loans,
residential mortgage loans, and home equity loans. The major category of loans
to which FAS 114 is applied are commercial loans.
CBI determines when loans become impaired through its normal loan
administration and review functions. Loans that are on the Banks' watch loan
report are potentially impaired loans. Management considers a loan to be
impaired when, based on current information and events, it is probable that the
Banks will be unable to collect all principal and interest amounts due according
to the contractual terms of the agreement.
The Banks classify impaired loans as non-accrual loans.
As a matter of general policy, the banks either commence foreclosure
proceedings or charge off an impaired loan within 90 days of placing a loan in
such status.
As of December 31, 1996, the Orangeburg bank had impaired loans of
$120,000. The average recorded investment in such loans for 1996 was $114,000.
The allowance for loan losses related to impaired loans was approximately
$22,000 for 1996, compared to $16,000 for 1995. Interest income of $0 was
recognized during 1996 and 1995 on impaired loans.
The amount of impaired loans at December 31, 1996, represented one
collateral dependent loan. The Orangeburg bank estimates that the fair market
value of the collateral, net of disposal costs, will not be materially different
than the balance of the loan less the related allowance.
The adoption of these accounting standards has not had a material
effect on the financial conditions and results of operations of CBI.
Potential Problem Loans
At December 31, 1996, the Corporation's internal loan review program
had identified $1,311,000 (1.9% of the portfolio) in commercial and industrial
loans, including the above mentioned past due loans, where information about
34
<PAGE>
credit problems of borrowers had caused management to have concerns about the
ability of the borrowers to comply with original repayment terms.
The amounts reflected above do not represent management's estimate of
the potential losses since a large proportion of these loans are secured by real
estate and other marketable collateral.
Other Real Estate
Other real estate, consisting of foreclosed properties, was $0 at year
end 1996 and year end 1995. Other real estate is initially recorded at the lower
of net loan balance or its estimated fair value, net of estimated disposal
costs. The estimate of fair value for foreclosed properties is determined by
appraisal at the time of acquisition.
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and general
economic conditions. In reviewing the adequacy of the provision for loan losses
during each period, the Corporation considers historical loan loss experience,
current economic conditions, loans outstanding, trends in non-performing and
delinquent loans, the quality of collateral securing problem loans, and the
results of its ongoing internal loan review process. Provisions for loan losses
totaled $227,000 and $160,000 in 1996 and 1995, respectively. Based on the
available information, the Corporation considers its 1996 provision for loan
losses adequate.
Net charge-offs in 1996 were $58,000 or 25.5% of the provision for
loan losses, compared to $69,000 or 43.1% of the provision for loan losses in
the prior year. See "Allowance for Loan Losses" for a discussion of the factors
management considers in its review of the adequacy of the allowance and
provision for loan losses.
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan
losses, which is a direct charge to expense. Losses on loans are charged against
the allowance in the period in which management determines that such loans
become uncollectable. Recoveries of previously charged off loans are credited to
the allowance. At December 31, 1996 and 1995, the allowance for loan losses was
1.27% and 1.35%, respectively, of total loans, and 167% and 167%, respectively,
of nonaccrual loans and accruing loans 90 days or more past due.
35
<PAGE>
Year ended December 31,
1996 1995
---- ----
(Dollar amounts in thousands)
Total loans outstanding at end of year ................. $ 68,829 $ 52,324
======== ========
Average amount of loans outstanding .................... $ 57,806 $ 50,724
======== ========
Allowance for loan losses at beginning of year ......... $ 707 616
-------- --------
Loan charge-offs
Real estate ............................................ - 15
Installment ............................................ 70 58
Credit cards and related plans ......................... 5 2
Commercial and other ................................... 11 9
-------- --------
Total charge-offs ...................................... 86 84
-------- --------
Recoveries
Real estate ............................................ 4 -
Installment ............................................ 23 13
Credit cards and related plans ......................... 1 2
Commercial and other ................................... - -
-------- --------
Total recoveries ....................................... 28 15
-------- --------
Net charge-offs ........................................ 58 69
-------- --------
Provision for loan losses .............................. 227 160
-------- --------
Allowance for loan losses at end of year ............... $ 876 707
======== ========
Ratios
Net charge-offs to average loans outstanding ........... 0.10% 0.14%
Net charge-offs to loans outstanding at end of year .... 0.08% 0.13%
Allowance for loan loss to average loans ............... 1.52% 1.39%
Allowance for loan loss to total loans at end year ..... 1.27% 1.35%
Net charge-offs to allowance for losses ................ 6.62% 9.76%
Net charge-off to provision for loan losses ............ 25.55% 43.13%
36
<PAGE>
Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 1997 will at least approximate the
1996 levels as such loans progress through the collection, foreclosure, and
repossession process. Management believes that the allowance for loan losses, as
of December 31, 1996, is sufficient to absorb the expected chargeoffs and
provide adequately for the inherent losses that remain in the loan portfolio.
Management will continue to closely monitor the levels of non-performing and
potential problem loans and address the weaknesses in these credits to enhance
the amount of ultimate collection or recovery of these assets. Should increases
in the overall level of non-performing and potential problem loans accelerate
from the current trend, management will adjust the methodology for determining
the allowance for loan losses to increase the provision and allowance for loan
losses. This would decrease net income.
The following table presents the allocation of the allowance for loan
losses, as of December 31, 1996 and 1995, compared with the percent of loans in
the applicable categories to total loans.
Allocation of Allowance
for Loan Losses
1996% of loans 1996% of loans
in each category in each category
1996 to total loans 1995 to total loans
---- -------------- ---- --------------
(Dollar amounts in thousands)
Commercial ........... $ 314 24% $ 253 24%
Real estate .......... 313 60% 171 60%
Installment .......... 188 16% 208 16%
Unallocated .......... 61 0% 75 0%
----- --- ------- ---
Total ........... $ 876 100% $ 707 100%
===== === ======= ===
The Corporation maintains an allowance for loan losses it believes
sufficient to cover estimated or reasonably expected losses. The allowance is
allocated to different segments of the portfolio, based on management's
expectations of risk in that segment of the portfolio. This allocation is an
estimate only and is not intended to restrict the Corporation's ability to
respond to losses. The Corporation charges losses from any segment of the
portfolio to the allowance, regardless of the allocation.
In reviewing the adequacy of the allowance for loan losses at the end
of each period, the Corporation considers historical loan loss experience,
current economic conditions, loans outstanding, trends in non-performing and
delinquent loans, and the quality of collateral securing problem loans. After
charging off all known losses, management considers the allowance adequate to
provide for estimated future losses inherent in the loan portfolio at December
31, 1996.
Premises and Equipment
Premises and equipment were $2,837,000 at December 31, 1996, compared
to $1,708,000 the prior year, an increase of $1,129,000 or 66%. Most of this
increase was associated with the construction and equipping of the Sumter
National Bank. Cost of land for the new bank totaled $317,000, the building
totaled $606,000, and equipment, furniture, and fixtures totaled $448,000, for a
grand total of $1,371,000.
Liquidity
Liquidity is the ability to meet current and future obligations
through liquidation or maturity of existing assets or the acquisition of
additional liabilities. Adequate liquidity is necessary to meet the requirements
of customers for loans and deposit withdrawals in a timely and economical
manner. The most manageable sources of liquidity are composed of liabilities,
37
<PAGE>
with the primary focus of liquidity management being the ability to attract
deposits within the Orangeburg National Bank and Sumter National Bank service
areas. Core deposits (total deposits less certificates of deposit of $100,000 or
more) provide a relatively stable funding base. Certificates of deposit of
$100,000 or more are generally more sensitive to changes in rates, so they must
be monitored carefully. Asset liquidity is provided by several sources,
including amounts due from banks, federal funds sold, and investments available
for sale.
The Corporation maintains an available for sale and a hold to maturity
investment portfolio. While investment securities purchased for these portfolios
are generally purchased with the intent to be held to maturity, such securities
are marketable and occasional sales may occur prior to maturity as part of the
process of asset/liability and liquidity management. Management deliberately
maintains a short-term maturity schedule for its investments so that there is a
continuing stream of maturing investments. The Corporation intends to maintain a
short-term investment portfolio in order to continue to be able to supply
liquidity to its loan portfolio and for customer withdrawals.
The Corporation has substantially more liabilities which mature in the
next 12 months than it has assets maturing in the same period. However, based on
its historical experience, and that of similar financial institutions, the
Corporation believes that it is unlikely that so many deposits would be
withdrawn, without being replaced by other deposits, that the Corporation would
be unable to meet its liquidity needs with the proceeds of maturing assets.
The Corporation also maintains several federal funds lines of credit
with correspondent banks, is able to borrow from the Federal Home Loan Bank, and
is also able to borrow from the Federal Reserve's discount window.
The Corporation has a demonstrated ability to attract deposits from
its market area. Deposits have grown from $52 million in 1992 to over $89
million in 1996. This stable growing base of deposits is the major source of
operating liquidity. During this same period, the Corporation's loan to deposit
ratio (net of public deposits), another indicator of liquidity, has gone from
71.4% to 75.4%.
The Corporation's long-term liquidity needs are expected to be
primarily affected by the maturing of long-term certificates of deposit. At
December 31, 1996, the Corporation had approximately $8.6 million and $0 in
certificates of deposit maturing in one to five years and over five years,
respectively. The Corporation's assets maturing in the same periods were $41.8
million and $10.9 million, respectively. With a substantially larger dollar
amount of assets maturing in both periods than liabilities, the Corporation
believes that it will not have any significant long-term liquidity problems.
In the opinion of management, the current and projected liquidity
position is adequate.
Average Deposits
The Corporation's average deposits in 1996 were $80.2 million,
compared to $70.9 million the prior year, an increase of $9.3 million or 13.1%.
Orangeburg National Bank's average deposits for 1996 increased to
$76.4 million from $70.9 million, an increase of $5.5 million or 7.8%. Of this
increase, about $4.2 million or 80% was in time deposits.
Sumter National Bank opened for business in June 1996. The average
deposits for 1996 were $3.8 million.
38
<PAGE>
The total average deposits for the Corporation for the years ended
December 31, 1996 and 1995, are summarized below:
<TABLE>
<CAPTION>
1996 1995
Average balance Average cost Average balance Average cost
--------------- ------------ --------------- ------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Noninterest bearing demand .......................... $10,516 $ 9,431
Interest bearing transaction accounts ............... 8,936 2.05% 6,273 2.38%
Savings-regular ..................................... 9,685 2.42% 11,387 2.94%
Savings- money market ............................... 4,421 3.56% 3,214 3.34%
Time deposits less than $100,000 .................... 32,598 5.39% 28,210 5.40%
Time deposits greater than $100,000 ................. 14,049 5.42% 12,349 5.29%
------- ------
Total average deposits .............................. $80,205 $70,864
======= =======
</TABLE>
At December 31, 1996, the Corporation had $13,640,000 in certificates
of deposit of $100,000 or more. Of those accounts, maturities were as indicated
on the accompanying table.
Maturity (Dollar amounts in thousands)
Less than three months $ 5,078
Over 3 through 6 months 3,580
Over 6 through 12 months 3,439
Over 1 year through 5 years 1,543
Over 5 years -
----------
Total $ 13,640
==========
Return on Equity and Assets
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 1996 and 1995.
1996 1995
---- ----
Return on assets (ROA) 0.79% 1.14%
Return on equity (ROE) 6.79% 13.75%
Dividend payout ratio (dividends/net income) 42.40% 25.83%
Equity as a percent of assets 11.57% 8.28%
As discussed elsewhere in this document, management believes the
decline in ROA and ROE is the temporary effect of the investment in the new
Sumter market.
39
<PAGE>
Short-term Borrowings
The following table summarizes the Corporation's short-term borrowings
and rates paid thereon for the years ended December 31, 1996 and 1995. These
borrowings consist of federal funds purchased and securities sold under
agreements to repurchase, which generally mature each business day.
1996 1995
---- ----
(Dollar amounts in thousands)
Short-term borrowings at year end $ 1,744 2,570
Rate at year end 3.75% 4.00%
Maximum amount outstanding at any month end $ 3,776 4,595
Average amount outstanding during year $ 2,138 3,627
Average rate paid during year 3.83% 4.89%
Notes Payable
In August 1995 the Corporation negotiated a $500,000 prime rate,
unsecured, line of credit from another financial institution. The purpose of
this line was to help finance the start up expenses associated with the
organization of Sumter National Bank. In February 1996 the Corporation
negotiated an additional $750,000 prime rate line of credit with the same
financial institution. The purpose of this line was to finance the construction
of Sumter National Bank. The line was secured with a mortgage on the building
and property. Both obligations were repaid in June 1996 from the proceeds of the
stock sale. The lines of credit are summarized below:
1996 1995
---- ----
(Dollar amounts in thousands)
Notes payable at year end ........................ $ - $ 240
Rate at year end ................................. 0.00% 8.50%
Maximum amount outstanding at any month end ...... $ 1,049 $ 240
Average amount outstanding during year ........... $ 196 $ 95
Average rate paid during year .................... 8.30% 8.70%
Federal Home Loan Bank Advances
CBI's banking subsidiary, Orangeburg National Bank, is a member of the
Federal Home Loan Bank and as such has access to long-term borrowing from the
Federal Home Loan Bank. The collateral for any such borrowings is a blanket lien
on the bank's one to four family residential loans and the bank's stock in the
FHLB. In August 1995 the bank borrowed $700,000 at 6.94%. Interest is payable
monthly, principal is payable in ten equal annual payments, and the note's
maturity is August 2005. In January 1996 the bank borrowed $500,000 at 6.21%.
Interest is payable monthly, principal is payable at maturity in January 2006.
1996 1995
---- ----
(Dollar amounts in thousands)
Short term borrowings at year end ................. $ 1,744 $ 2,570
Rate at year end .................................. 3.75% 4.00%
Maximum amount outstanding at any month end ....... $ 3,776 $ 4,595
Average amount outstanding during year ............ $ 2,138 $ 3,627
Average rate paid during year ..................... 3.83% 4.89%
40
<PAGE>
Capital Adequacy
The Federal Reserve and federal bank regulatory agencies have adopted
a risk based capital standard for assessing the capital adequacy of a bank
holding company or financial institution. The minimum required ratio is 8%.
Under the risk-based capital standard, capital is classified into two
tiers. Tier one (or core) capital, for the banks' purposes, consists of common
stockholders' equity minus any intangible assets. Tier two (or supplementary)
capital consists of the loan loss reserves (subject to certain limitations). A
bank's qualifying capital base for purposes of its risk-based capital ratio
consists of the sum of its tier one and tier two capital components, provided
that the maximum amount of tier two capital that may be treated as qualifying
capital is limited to 100% of tier one capital.
In applying the standard, certain off-balance-sheet exposures,
including standby letters of credit and loan commitments with original terms in
excess of one year, are converted to "credit equivalent amounts" by multiplying
the amount of the off-balance-sheet items by the appropriate conversion factor.
The resulting credit equivalent amounts, and all balance sheet assets, are then
assigned to one of four risk weights ranging from 0% to 100%. The total amount
of balance sheet assets and credit equivalent amounts of off-balance-sheet items
in each risk weight category is multiplied by the weight assigned to that
category and the products are then added together to calculate total
risk-weighted assets.
At December 31, 1996, the banks and the consolidated company had the
following capital ratios:
Orangeburg National Bank 1996 1995
- ------------------------ ---- ----
Tier 1 capital to average total assets 8.40% 8.37%
Tier 1 capital to risk weighted assets 13.40% 13.87%
Total capital to risk weighted assets 14.70% 15.13%
Sumter National Bank 1996
- -------------------- ----
Tier 1 capital to average total assets 24.60%
Tier 1 capital to risk weighted assets 28.90%
Total capital to risk weighted assets 29.80%
Community Bankshares Inc. 1996 1995
- ------------------------- ---- ----
Tier 1 capital to average total assets 11.50% 8.93%
Tier 1 capital to risk weighted assets 17.50% 14.44%
Total capital to risk weighted assets 18.70% 15.69%
The minimum capital requirement, effective December 31, 1994, is that a bank
maintain a total capital to risk weighted capital ratio of 8%. (For bank holding
companies with assets less than $150 million, capital requirements are required
to be met at the bank level only.)
The Corporation considers its current and projected capital position
to be adequate.
Shareholders' Equity
In December 1995 CBI began offering up to 450,000 shares of its no par
common stock at $10 per share. The primary purpose of the offering was to
capitalize Sumter National Bank. Proceeds were held in escrow pending receipt of
all regulatory approvals required for the Sumter bank to commence operations. At
December 31, 1995, CBI had received subscriptions for 9,800 shares or $98,000.
41
<PAGE>
From January 1, 1996, to May 15, 1996, CBI received subscriptions for 440,200
shares or $4,402,000. Total sales of 450,000 or $4.5 million were transferred
from stock subscriptions to common stock on June 10, 1996, the date that Sumter
National Bank began operation.
The Common Stock account of the Corporation was $9,065,000 at December
31, 1996, compared to $4,617,000 in the prior year. Changes to the common stock
account are summarized in the following table.
Changes in common stock account
Common stock, December 31, 1995 .............................. $ 4,617
Stock subscriptions received in 1995 ......................... 98
Stock subscriptions received in 1996 ......................... 4,402
Expenses of stock sale ....................................... (43)
Expenses of dividend reinvestment plan ....................... (9)
-------
Common stock, December 31, 1996 .............................. $ 9,065
=======
Dividend Reinvestment Plan
During the first quarter of 1997, CBI began offering a dividend
reinvestment plan to its shareholders in South Carolina, North Carolina,
Maryland, Missouri, and Colorado. The plan enables shareholders to voluntarily
reinvest their cash dividends in the common stock of the corporation. The plan
also provides an additional purchase option for each plan participant allowing
them to buy between $250 and $3,000 in additional stock each year. The plan is
administered by Registrar and Transfer Company.
Dividends
During 1996, CBI paid cash dividends to shareholders of 29 cents per
share, which totaled $318,000. This represented a dividend payout ratio
(dividends divided by net income) of 42%. The dividend payout ratio in 1995 was
26%. The Board of Directors decided to maintain the dividend level because, in
its opinion, the decline in earnings for 1996 was the temporary result of the
investment in the new bank in Sumter.
Noninterest income
Noninterest income increased to $504,000 in 1996 from $431,000 in
1995, a $73,000 or 16.9% increase.
Service charge income in 1996 was $376,000 compared to $324,000 in the
prior year, a $52,000 or 16% increase. Most of this increase resulted from
increased returned check fee income.
The other non-interest income categories showed little change.
Noninterest expense
Overall, non-interest expenses increased to $3,097,000 in 1996 from
$2,179,000 in 1995, an increase of $918,000 or 42.1%.
Personnel costs in 1996 were $1,875,000 compared to $1,246,000 the
prior year, an increase of $629,000 or 50.5%. About $362,000 (57.5%) of this
increase was accounted for by salaries connected with the new Sumter bank, where
42
<PAGE>
there are sixteen employees. An additional $70,000 (11.1%) of this increase is
related to the pre-opening and organizational phase of the new bank.
Premises and equipment expenses in 1996 were $368,000 compared to
$264,000 the prior year, a $104,000 or 39.4% increase. Approximately $65,000 of
this increase relates to the new bank.
Supplies expense was $92,000 in 1996, compared to $60,000 in the prior
year, an increase of $32,000 or 53.3%. Approximately $25,000 of this increase
relates to the new bank.
Director fees were $70,000 in 1996, compared to $58,000 in the prior
year, an increase of $12,000 or 20.7%. Orangeburg National Bank pays its outside
directors $600 per month. Sumter National Bank does not currently pay director
fees. CBI started paying its outside directors $200 per month in November 1995.
FDIC insurance costs were $5,000 in 1996, compared to $78,000 in 1995,
a decrease of $73,000 or 93.6%. This decline reflected reductions in deposit
insurance premiums set by the FDIC.
All other expenses were $686,000 in 1996, compared to $472,000 in the
prior year, an increase of $214,000 or 45.3%. Approximately $108,000 of this
increase relates to the operation of the new bank.
Income Taxes
The Corporation pays U. S. corporate income taxes and South Carolina
bank income taxes. The 1996 provision for income taxes was $411,000, compared to
$517,000 the prior year, a decrease of $106,000 or 20.5%. The Corporation's
effective average tax rate is 35.4 %. The decrease in income taxes parallels the
decrease in net income.
Inflation
The assets and liabilities of the Corporation are mostly monetary in
nature. Accordingly, the financial results and operations of the Corporation are
much more impacted by changes in interest rates than changes in inflation. There
is, however, a strong correlation between increasing inflation and increasing
interest rates.
The impact of inflation has been very moderate during 1996. Consumer
prices increased less than 3% for the year. Prospects appear good for continued
low inflation for the near future.
Although inflation does not normally impact a financial institution as
dramatically as it impacts businesses with large investments in plants and
inventories, it does have an effect. During periods of high inflation there are
usually corresponding increases in the money supply, and banks experience above
average growth in assets, loans, and deposits. General increases in the prices
of goods and services also result in increased operating expenses.
43
<PAGE>
(Information set forth on pages 39 through 67 of
the 1996 Annual Report to Shareholders)
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report ............................................. 45
Consolidated Balance Sheets, December 31, 1996 and 1995 .................. 46
Consolidated Statements of Income, Years Ended December 31,
1996, 1995 and 1994 ................................................... 47-48
Consolidated Statements of Changes in Shareholders' Equity, Years Ended
December 31, 1996, 1995 and 1994 ...................................... 49-50
Consolidated Statements of Cash Flows, Years Ended December 31,
1996, 1995 and 1994 ................................................... 51-52
Notes to Consolidated Financial Statements ............................... 53-71
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
Community Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Community
Bankshares, Inc., and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Community Bankshares,
Inc., and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
J. W. Hunt and Company, LLP
Columbia, South Carolina
January 31, 1997
45
<PAGE>
<TABLE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---- ----
<S> <C> <C>
Cash and due from banks ................................................. $ 5,348,467 $ 3,024,782
Federal funds sold ...................................................... 1,300,000 1,510,000
------------ -----------
Total cash and cash equivalents ........................ 6,648,467 4,534,782
Interest-bearing deposits in other banks ................................ 431,437 320,643
Securities held-to-maturity ............................................. 15,026,542 15,610,088
Securities available-for-sale ........................................... 10,760,854 9,058,549
Real estate loans held for sale ......................................... 295,450 -
Loans receivable ........................................................ 68,828,953 52,323,528
Less, allowance for loan losses ...................................... (875,860) (706,525)
------------ -----------
Net loans receivable .................................. 67,953,093 51,617,003
Premises and equipment - net ............................................ 2,837,115 1,708,247
Accrued interest receivable ............................................. 855,290 716,436
Deferred income taxes ................................................... 283,185 180,501
Other assets ............................................................ 369,631 150,316
------------ -------
Total assets .......................................... $105,461,064 $83,896,565
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand ............................................................... $ 13,337,223 $ 9,094,780
Interest-bearing transaction accounts ................................ 17,052,700 10,728,373
Savings .............................................................. 9,418,608 9,948,802
Certificates of deposit of $100,000 and over ......................... 13,639,689 12,838,000
Other time deposits .................................................. 36,403,025 29,940,257
------------ -----------
Total deposits ........................................ 89,851,245 72,550,212
Federal funds purchased and securities sold under
agreements to repurchase ............................................. 1,744,004 2,570,442
Note payable ............................................................ - 240,000
Other liabilities ....................................................... 631,749 490,179
Federal Home Loan Bank advances ......................................... 1,130,000 700,000
------------ -----------
Total liabilities ..................................... 93,356,998 76,550,833
------------ -----------
Shareholders' equity:
Common stock - no par value, authorized shares -
3,000,000, issued and outstanding,
1,313,238 shares in 1996 and
863,238 shares in 1995 ............................................ 9,064,504 4,616,970
Common stock subscribed - 9,800 shares in 1995 ....................... - 98,000
Retained earnings .................................................... 3,039,520 2,607,458
Unrealized gain on securities available-for-sale,
net of applicable deferred income taxes .............................. 42 23,304
------------ -----------
Total shareholders' equity ............................ 12,104,066 7,345,732
------------ -----------
Total liabilities and shareholders' equity ............ $105,461,064 $83,896,565
============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS
46
<PAGE>
<TABLE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 5,444,377 $ 4,800,348 $ 3,943,923
Deposits with other financial institutions 37,693 25,726 15,670
Investment securities interest and dividends:
Interest - U. S. Treasury and
U.S. Government Agencies 1,569,469 1,280,367 1,087,160
Interest - tax exempt securities 17,228 3,553 29,142
Dividends - Federal Reserve Bank
and Federal Home Loan Bank 29,647 25,588 14,464
----------- ------------ ------------
Total investment securities interest
and dividends 1,616,344 1,309,508 1,130,766
----------- ------------ ------------
Federal funds sold and securities
purchased under agreements to resell 163,064 191,328 72,015
----------- ------------ ------------
Total interest and dividend income 7,261,478 6,326,910 5,162,374
----------- ------------ ------------
Interest expense:
Deposits:
Interest-bearing transaction accounts 228,451 149,427 123,047
Savings 358,015 442,615 574,943
Certificates of deposit of $100,000 and over 756,742 637,636 450,165
Certificates of deposit of less than $100,000 1,778,225 1,538,924 895,834
----------- ------------ ------------
Total deposits 3,121,433 2,768,602 2,043,989
Federal funds purchased and securities sold
under agreements to repurchase 81,839 168,597 74,940
Note payable - 8,497 17,604
Federal Home Loan Bank advances 76,307 19,208 -
----------- ------------ ------------
Total interest expense 3,279,579 2,964,904 2,136,533
----------- ------------ ------------
Net interest income 3,981,899 3,362,006 3,025,841
Provision for loan losses 227,000 160,000 125,000
----------- ------------ ------------
Net interest income after provision
for loan losses 3,754,899 3,202,006 2,900,841
----------- ------------ ------------
Non-interest income:
Service charges on deposit accounts 376,887 324,481 263,452
Net realized gains on sales of investment
securities, available-for-sale - - 1,831
Deposit box rent 13,529 10,925 10,745
Bank card fees 8,659 9,343 9,525
Credit life insurance commissions 26,708 20,859 15,662
Other 77,875 65,215 62,793
----------- ------------ ------------
Total non-interest income 503,658 430,823 364,008
----------- ------------ ------------
Non-interest expenses:
Salaries and employee benefits 1,875,210 1,246,512 1,034,541
Premises and equipment 367,919 263,891 285,532
Supplies 92,448 59,799 42,220
Director fees 69,600 58,000 57,600
FDIC insurance 5,207 78,355 140,628
Other 686,966 472,419 550,495
----------- ------------ ------------
Total non-interest expenses 3,097,350 2,178,976 2,111,016
----------- ------------ ------------
Income before income taxes 1,161,207 1,453,853 1,153,833
Provision for income taxes 411,336 516,551 399,640
----------- ------------ ------------
Net income 749,871 937,302 754,193
=========== ============ ============
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
(Continued)
<S> <C> <C> <C>
Earnings per common share:
Weighted average shares outstanding 1,227,939 863,238 858,562
========== ======== ========
Net income per weighted average number
of shares outstanding $ .61 $ 1.09 $ 0.88
========== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS
48
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
UNREALIZED
GAIN (LOSS)
ON SECURITIES
AVAILABLE-FOR-
SALE, NET OF
APPLICABLE
............. COMMON STOCK ............ RETAINED DEFERRED
SHARES AMOUNT SUBSCRIBED EARNINGS INCOME TAXES TOTAL
------ ------ ---------- -------- ------------ -----
Balance,
<S> <C> <C> <C> <C> <C> <C>
January 1, 1994 362,989 $ 4,634,531 $ - $ 1,342,214 $ 11,714 $5,988,459
Paid to dissenters in
lieu of issuance of
60,000 shares and
satisfaction of related
contingent obligation - (936,600) - - - (939,600)
Sale of shares 58,600 914,699 - - - 914,699
Dissenter tender
rescinded 4,530 - - - - -
Additional shares
issued under stock
option plan 5,500 55,000 - - - 55,000
Net income - - - 754,193 - 754,193
Dividends paid at $.25
per share - - - (184,544) - (184,544)
Change in unrealized gain
(loss), net of applicable
deferred income taxes
on securities
available-for-sale - - - - (204,227) (204,227)
Stock split 2 for 1 431,619 - - - - -
------- ---------- ------- ------------- -------- ----------
Balance,
December 31, 1994 863,238 4,667,630 - 1,911,863 (192,513) 6,386,980
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
UNREALIZED
GAIN (LOSS)
ON SECURITIES
AVAILABLE-FOR-
SALE, NET OF
APPLICABLE
............. COMMON STOCK ............ RETAINED DEFERRED
SHARES AMOUNT SUBSCRIBED EARNINGS INCOME TAXES TOTAL
------ ------ ---------- -------- ------------ -----
(CONTINUED):
<S> <C> <C> <C> <C> <C> <C>
Common stock
subscribed ........................ - $ - $ 98,000 $ - $ - $ 98,000
Stock issuance
cost .............................. - (50,660) - - - (50,660)
Net income ........................... - - - 937,302 - 937,302
Dividends paid at $.28
per share ......................... - - - (241,707) - (241,707)
Change in unrealized gain
(loss), net of applicable
deferred income taxes
on securities
available-for-sale ................ - - - - 215,817 215,817
---------- ---------- -------- ---------- -------- -----------
Balance,
December 31, 1995 .................... 863,238 4,616,970 98,000 2,607,458 23,304 7,345,732
Sale of shares ....................... 450,000 4,500,000 (98,000) - - 4,402,000
Stock issuance cost .................. - (52,466) - - - (52,466)
Net income ........................... - - - 749,871 - 749,871
Dividends paid at $.29
per share ......................... - - - (317,809) - (317,809)
Change in unrealized gain
(loss), net of applicable
deferred income taxes
on securities
available-for-sale ................ - - - - (23,262) (23,262)
---------- ---------- --------- ---------- -------- -----------
Balance,
December 31, 1996 .................... 1,313,238 9,064,504 - 3,039,520 42 12,104,066
========== ========== ========= ========== ======== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
50
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 749,871 $ 937,302 $ 754,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................................... 221,899 138,740 144,350
Accretion of discounts and amortization of premiums -
investment securities - net ...................................... (39,664) (21,468) 31,863
Provision for loan losses ........................................... 227,000 160,000 125,000
Loss on sale of other real estate owned ............................. - 7,168 -
Deferred income taxes ............................................... (102,684) 83,630 (111,360)
Net investment securities gains ..................................... - - (1,831)
Proceeds from sales of real estate loans held for sale .............. 4,105,550 2,900,000 4,300,000
Originations of real estate loans held for sale ..................... (4,105,550) (2,900,000) (4,300,000)
(Increase) decrease in real estate loans held for sale .............. (295,450) 115,463 260,274
Changes in operating assets and liabilities:
Increase in accrued interest receivable ............................. (138,854) (119,378) (132,432)
(Increase) decrease in other assets ................................. (237,081) 72,309 (88,235)
Increase (decrease) in other liabilities ............................ 141,570 188,838 (68,298)
------------ ------------- -------------
Net cash provided by operating activities ............... 526,607 1,562,604 913,524
------------ ------------- -------------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
with banks .......................................................... (110,794) (120,643) 200,000
Purchases of securities held-to-maturity ............................... (9,174,653) (17,566,592) (25,832,574)
Purchases of securities available-for-sale ............................. (6,786,100) (2,645,215) (8,601,124)
Proceeds from sales of securities
available-for-sale .................................................. - - 995,781
Proceeds from maturities of securities
held-to-maturity .................................................... 9,786,291 16,144,624 22,830,076
Proceeds from maturities of securities
available-for-sale ................................................. 5,095,367 3,040,556 4,217,635
Proceeds from sale of other real estate owned .......................... - 92,832 107,955
Net increase in loans .................................................. (16,588,422) (3,838,620) (6,365,784)
Purchases of premises and equipment .................................... (1,330,931) (585,169) (21,648)
------------ ------------- -------------
Net cash used by investing activities ................... (19,109,242) (5,478,227) (12,469,683)
------------ ------------- -------------
</TABLE>
51
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Continued)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in demand, transaction
and savings deposit accounts ................................... $ 10,036,576 $(2,931,974) $ (9,655,539)
Net increase in time deposits ..................................... 7,264,457 7,813,587 18,588,977
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase ............. (826,438) (230,129) 1,165,571
Federal Home Loan Bank advances ................................... 430,000 700,000 -
Increase in note payable .......................................... 809,203 240,000 -
Repayment of note payable ......................................... (1,049,203) - -
Proceeds from issuance of common stock ............................ 4,402,000 - 914,699
Proceeds from common stock subscribed ............................. - 98,000 -
Stock issuance cost ............................................... (52,466) (50,660) -
Stock options exercised ........................................... - - 55,000
Dividends paid .................................................... (317,809) (241,707) (184,544)
Paid to dissenters in lieu of issuance of 60,000 shares ........... - - (936,600)
------------ ----------- ------------
Net cash provided by financing activities .......... 20,696,320 5,397,117 9,947,564
------------ --------- ------------
Net increase (decrease) in cash and cash equivalents ................. 2,113,685 1,481,494 (1,608,595)
Cash and cash equivalents at beginning of year ....................... 4,534,782 3,053,288 4,661,883
------------ --------- ------------
Cash and cash equivalents at end of year ............................. 6,648,467 4,534,782 3,053,288
============ ========= ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest payments on a cash basis (net of
$6,131 capitalized in 1996) ................................. $ 3,222,076 $ 2,867,683 $ 2,062,523
============ =========== ============
Cash payments for income taxes ................................. $ 516,000 $ 527,443 $ 526,112
============ =========== ============
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Non-cash transfers during the year for transfer of
loans receivable to other real estate owned ................. $ - $ - $ 119,493
============ =========== ============
Total increase (decrease) in unrealized gain (loss) on
securities available-for-sale, net of applicable
deferred income taxes .............................................. $ (23,262) $ 215,817 $ (204,227)
============ =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS
52
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - ORGANIZATION:
Community Bankshares, Inc. (the "Corporation"), was organized under the laws of
the State of South Carolina and was chartered as a business corporation November
30, 1992. Pursuant to the provisions of the Bank Holding Company Act, an
application was filed with and approved by the Board of Governors of the Federal
Reserve System for the Corporation to become a bank holding company by the
acquisition of Orangeburg National Bank (ONB). ONB provides general banking
services in the Orangeburg area of South Carolina.
During 1992, the Corporation filed a registration statement with the Securities
and Exchange Commission (the SEC) under the Securities Act of 1933 covering
issuance by the Corporation of its common shares in connection with a merger
agreement whereby all the outstanding shares of ONB would be exchanged for
shares of the Corporation. In accordance with the terms of the Merger Agreement,
ONB became a wholly-owned subsidiary of the Corporation in 1993. The Corporation
issued 362,989 shares of common stock in exchange for the outstanding common
stock of ONB on a one-for-one share basis. No shares of the Corporation's common
stock were issued to the holders of 64,530 shares who voted against the merger
and subsequently perfected their rights as dissenters. Such dissenters were paid
the appraised value of ONB stock by the Corporation, and the shares of the
Corporation that were not issued to dissenters were sold at an auction pursuant
to the provisions of the National Bank Act relating to dissenters' rights. A
portion of the shares sold at the auction were purchased by the Corporation and
subsequently sold by the Corporation in an exempt offering to residents of South
Carolina. Acquisition of ONB was recorded at historical cost in a manner similar
to a pooling of interest method.
In June 1996, Sumter National Bank (SNB) commenced operations in Sumter, South
Carolina, following approval by the Comptroller of the Currency and other
regulators. Upon completion of its organization, the common stock of SNB was
acquired by the Corporation. SNB provides general banking services in the Sumter
area of South Carolina.
The Banks operate as wholly-owned subsidiaries of the Corporation with separate
Boards of Directors and operating policies.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Community Bankshares, Inc. and
subsidiaries are in conformity with generally accepted accounting principles
followed within the banking industry. The significant accounting policies
followed are summarized below.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of Community Bankshares, Inc. and
subsidiaries include the accounts of the Corporation (the Parent Holding
Company) and its wholly-owned subsidiaries, the Banks. Significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
53
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ORGANIZATION, STOCK OFFERING AND PREOPENING COSTS:
Costs associated with the organization of SNB have been accounted for as
follows:
Organization costs were deferred and are amortized using the straight-line
method over five years upon commencement of operations.
Stock issuance costs were charged to common stock as incurred.
Preopening costs were expensed as incurred.
CASH AND CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows, the Corporation has
defined cash and cash equivalents as those amounts included in the balance
sheets under the caption, "Cash and due from banks" and "federal funds sold."
SECURITIES:
Securities that management has the ability and intent to hold to maturity are
classified as held-to-maturity and carried at cost, adjusted for amortization of
premium and accretion of discounts using methods approximating the interest
method. Other securities are classified as available-for-sale and are carried at
fair value. Unrealized gains and losses on securities available-for-sale are
recognized as direct increases or decreases, net of deferred income taxes, in
shareholders' equity until realized. Gains and losses on the sale of
available-for-sale securities are recognized using the specific identification
method.
No securities are being held for short-term resale; therefore, the Corporation
does not currently use a trading account classification.
REAL ESTATE LOANS HELD FOR SALE:
Real estate loans originated and intended for sale in the secondary market are
carried at the lower of cost or fair value determined on an aggregate basis.
Gains and losses, if any, on the sale of such loans are determined using the
specific identification method.
LOAN SALES:
The Corporation originates loans for sale generally without recourse to other
financial institutions under commitments or other arrangements in place prior to
loan origination. Sales are completed at or near the loan origination date. All
fees and other income from these activities are recognized in income when loan
sales are completed. At December 31, 1996, the Corporation had sold mortgage
loans on which recourse remained with the Corporation due to possible borrower
default and other general recourse provisions as follows:
PRINCIPAL
LOAN
BALANCE
SUBJECT TO
PRINCIPAL RECOURSE CRITERIA RECOURSE
A default occurs during the first four (4)installments due
and the default continues for a period of ninety (90) days $1,457,450
==========
54
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The repurchase price would include the outstanding principal loan balance and
accrued interest, any servicing release fee and other costs. Management does not
anticipate any unusual risk associated with this potential obligation.
LOANS RECEIVABLE:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
OTHER REAL ESTATE OWNED:
Real estate properties acquired through or in lieu of loan foreclosure are
recorded at fair value less estimated disposal costs. Fair value is determined
on the basis of the property being disposed of in the normal course of business
and not on a liquidation or distress basis. Subsequent write-downs of other real
estate owned are charged against current earnings.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation computed
principally on the straight-line method over the estimated useful lives of the
assets. Useful lives generally used in providing for depreciation are as
follows:
Building 40 years
Building components 5-30 years
Vault door, safe deposit boxes, night depository, etc. 40 years
Furniture, fixtures and equipment 5-25 years
MARKETING EXPENSES:
The Corporation expenses the costs of marketing as incurred. Marketing expenses
totaled approximately $86,000, $52,000 and $48,000 in 1996, 1995 and 1994,
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
55
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes. The provision (benefit) for income taxes of each
subsidiary is recorded as if each subsidiary filed a separate return.
OTHER OFF-BALANCE-SHEET INSTRUMENTS:
In the ordinary course of business the Corporation has entered into
off-balance-sheet financial instruments consisting of commitments to extend
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:
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and
short-term instruments approximate their fair value.
Securities available-for-sale and held-to-maturity. Fair values for
securities are based on quoted market prices. The market values of state
and local government securities are established with the assistance of an
independent pricing service. The values are based on data which often
reflect transactions of relatively small size and are not necessarily
indicative of the value of the securities when traded in large volumes.
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 values 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
borrowings under repurchase agreements, approximate their fair values. Fair
values of other short-term borrowings are estimated using discounted cash
flow analyses based on the Corporation's current incremental borrowing
rates for similar types of borrowing arrangements.
Long-term debt. The fair values of the Corporation's long-term debt are
estimated using discounted cash flow analyses based on the Corporation's
current incremental borrowing rates for similar types of borrowing
arrangements.
56
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
EARNINGS PER COMMON SHARE:
Earnings per common share are calculated on the basis of the weighted average
number of shares outstanding during the period. The weighted average number of
shares outstanding used in computing earnings per share does not include stock
options which have been granted but not exercised and common stock subscribed
since the dilution on earnings per common share is less than 3% for all periods
presented.
STOCK-BASED COMPENSATION:
The Corporation currently accounts for its stock-based compensation using the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25).
In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FASB
No. 123). Under the provisions of FASB No. 123, companies can elect to account
for stock-based compensation plans using a fair-value-based method or continue
measuring compensation expense for those plans using the intrinsic value method
prescribed in APB 25.
The Corporation elected to continue to account for stock-based compensation
using the intrinsic value method. FASB No. 123 did not have an impact on the
Corporation's results of operations or financial position.
DIVIDEND REINVESTMENT PLAN:
Under the Corporation's Dividend Reinvestment Plan, stockholders may reinvest
all or part of their cash dividends in shares of common stock and also purchase
additional shares of common stock.
OTHER:
Certain amounts in the statements have been restated to conform to the current
year's presentation and disclosure requirements.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
During the year ended December 31, 1996, the Banks were able to meet total
reserve requirements of the Federal Reserve with vault cash. The required
reserve balance was $404,000 at December 31, 1996.
At December 31, 1996, the Corporation had bank balances with correspondent banks
totaling approximately $94,000 which were fully insured by the FDIC.
NOTE 4 - INVESTMENT SECURITIES:
Debt and equity securities have been classified in the consolidated financial
statements according to management's intent.
57
<PAGE>
NOTE 4 - INVESTMENT SECURITIES (CONTINUED):
Securities held-to-maturity consist of the following:
<TABLE>
<CAPTION>
.......................... DECEMBER 31, 1996 .......................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies ............. $ 14,612,473 $ - $ - $14,612,473
State and local
governments .................. 414,069 2,741 - 416,810
------------ ------ ------- -----------
Total ............... 15,026,542 2,741 - 15,029,283
============ ====== ======= ===========
<CAPTION>
........................ DECEMBER 31, 1995 ......................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies .............. $15,287,206 $69,149 $(60,965) $15,295,390
State and local
governments ................... 322,882 998 - 323,880
----------- ------- ------- -----------
Total ................ 15,610,088 70,147 (60,965) 15,619,270
=========== ======= ======= ===========
</TABLE>
58
<PAGE>
NOTE 4 - INVESTMENT SECURITIES (CONTINUED):
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
.............................. DECEMBER 31, 1996 .........................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies .......................... $10,174,597 $14,556 $(14,491) $10,174,662
Federal Home Loan
Bank stock ................................ 250,600 - - 250,600
Federal Reserve
Bank stock ................................ 244,050 - - 244,050
Equity securities ............................ 91,542 - - 91,542
----------- ------- -------- -----------
Total ............................ 10,760,789 14,556 (14,491) 10,760,854
=========== ======= ======== ===========
<CAPTION>
.............................. DECEMBER 31, 1996 .........................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies ............................ $8,651,343 $49,689 $(13,333) $8,687,699
Federal Home Loan
Bank stock .................................. 231,800 - - 231,800
Federal Reserve
Bank stock .................................. 139,050 - - 139,050
---------- ------- -------- ---------
Total .............................. 9,022,193 49,689 (13,333) 9,058,549
========== ======= ======== =========
</TABLE>
59
<PAGE>
NOTE 4 - INVESTMENT SECURITIES: (CONTINUED)
The following is a summary of maturities of securities held-to-maturity and
available-for-sale as of December 31, 1996.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------
Amounts maturing in:
<S> <C> <C> <C> <C>
One year or less $ 2,291,998 $ 2,291,998 $ 2,971,951 $ 2,979,005
After one year through
five years 12,734,544 12,737,544 7,202,646 7,195,657
After five years through
ten years - - - -
After ten years - - 586,192 586,192
----------- ----------- ----------- -----------
Total 15,026,542 15,029,283 10,760,789 10,760,854
=========== =========== =========== ===========
</TABLE>
Investment securities with a carrying amount of approximately $10,665,000 at
December 31, 1996, were pledged. Of this amount, approximately $4,150,000 was
pledged to secure public deposits.
NOTE 5 - LOANS RECEIVABLE:
The following is a summary of loans by category at December 31, 1996 and 1995
(in thousands of dollars):
1996 1995
---- ----
Commercial, financial and agricultural $ 16,520 $12,408
Real estate - construction 5,611 3,449
Real estate - mortgage 35,553 28,029
Installment loans to individuals 11,021 8,361
Obligations of states and political subdivisions 124 77
-------- -------
Total loans - gross 68,829 52,324
======== =======
Gross proceeds on mortgage loans originated for resale was approximately $4.1
million, $2.9 million and $4.3 million for the years ended December 31, 1996,
1995 and 1994, respectively. The Bank sold all of these loans at par; therefore,
no gain or loss was recognized on the sales.
Loans outstanding to directors, executive officers, principal holders of equity
securities, or to any of their associates totaled $2,958,826 at December 31,
1996, and $2,606,183 at December 31, 1995. A total of $3,006,538 in loans were
made or added, while a total of $2,653,895 were repaid or deducted during 1996.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. Changes in the composition of the board of directors or the
group comprising executive officers result in additions to or deductions from
loans outstanding to directors, executive officers or principal holders of
equity securities.
60
<PAGE>
NOTE 5 - LOANS RECEIVABLE:(CONTINUED)
Changes in the allowance for loan losses for the years ended December 31, 1996,
1995 and 1994, were as follows:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 706,525 $ 615,561 $ 544,466
Charge-offs (85,860) (83,532) (121,086)
Recoveries 28,195 14,496 67,181
--------- ---------- ----------
Balance before provision
for loan losses 648,860 546,525 490,561
Provision for loan losses 227,000 160,000 125,000
--------- ---------- ----------
Balance at end of year 875,860 706,525 615,561
========= ========== ==========
Impairment of loans having recorded investments of $120,067 at December 31,
1996, and $108,152 at December 31, 1995, has been recognized in conformity with
FASB Statement 114, as amended by FASB Statement 118. The average recorded
investment in impaired loans during 1996 and 1995 was $113,755 and $92,038,
respectively. The total allowance for loan losses related to these loans was
$22,000 and $16,000 at December 31, 1996 and 1995, respectively. No interest
income was recognized on impaired loans during periods classified as such.
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1996 and 1995, consist of the following:
1996 1995
---- ----
Land $ 682,636 $ 681,340
Building and components 1,367,585 774,536
Furniture, fixtures and equipment 1,550,449 877,329
---------- ----------
Total 3,600,670 2,333,205
Less, accumulated depreciation 763,555 624,958
---------- ----------
Premises and equipment - net 2,837,115 1,708,247
========== ==========
Depreciation expense charged to operations was $202,063, $124,800, and $124,281,
for the years ended December 31, 1996, 1995 and 1994, respectively.
61
<PAGE>
NOTE 7 - DEPOSITS:
The aggregate amount of short-term jumbo CDs, each with a minimum denomination
of $100,000, was approximately $12,097,000 and $11,101,000 at December 31, 1996
and 1995, respectively.
At December 31, 1996, the scheduled maturities of CDs are as follows (in
thousands of dollars):
1997 $ 41,391
1998 3,319
--------
44,710
========
Deposits of directors and officers totaled approximately $1,907,000 at December
31, 1996.
NOTE 8 - OTHER BORROWED FUNDS:
Federal funds purchased and securities sold under agreements with customers to
repurchase generally mature within one day from the transaction date.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1996 1995
---- ----
Average balance during the year $2,137,720 $3,624,142
Average interest rate during the year 3.83% 4.89%
Maximum month-end balance during the year $3,776,000 $4,595,000
NOTE 9 - NOTES PAYABLE:
In August 1995, the Corporation negotiated a $500,000, prime rate, unsecured
line of credit with a bank. The purpose of this line of credit was to finance
some of the preopening costs associated with the organization of SNB. In
February 1996, the Corporation negotiated an additional $750,000 prime rate line
of credit with the same bank. The purpose of this line of credit was to help
finance the construction of the office facility for SNB. The line of credit was
collateralized by a mortgage on SNB's building and property. The lines of credit
were repaid in June 1996, and are summarized as follows:
1996 1995
---- ----
Interest rate at year-end - 8.50%
========== ===========
Maximum amount outstanding at any month-end $1,049,203 $ 240,000
========== ===========
Average amount outstanding during the year $ 195,667 $ 95,000
========== ===========
Weighted average interest rate during the year 8.25% 8.70%
========== ===========
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES:
ONB is a member of the Federal Home Loan Bank and as such, has access to
long-term borrowing. The collateral for any such borrowings is a blanket lien on
ONB's one to four family residential loans and the stock in the Federal Home
Loan Bank. Principal is payable in annual installments of $70,000 and interest
is payable monthly and the advances mature August 2005.
62
<PAGE>
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES (CONTINUED):
Borrowings during 1996 and 1995 are summarized as follows:
1996 1995
---- ----
Interest rate at year-end 6.73% 6.94%
========== ===========
Maximum amount outstanding at any month-end $1,300,000 $ 700,000
========== ===========
Average amount outstanding during the year $1,148,633 $ 276,000
========== ===========
Weighted average interest rate during the year 6.64% 6.88%
========== ===========
Principal reductions are as follows:
YEAR ENDED:
1997 $ 70,000
1998 70,000
1999 70,000
2000 70,000
2001 70,000
Thereafter 780,000
----------
Total 1,130,000
==========
NOTE 11 - STOCK OPTIONS:
The Corporation has granted 42,000 shares of common stock for issuance to key
employees as nonqualified stock options. The options expire in 2000 and the
exercise price per share is $7.80. All options are exercisable at December 31,
1996.
NOTE 12 - INCOME TAXES:
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The 1996, 1995 and 1994 provision for income taxes consists of the following:
1996 1995 1994
---- ---- ----
Currently payable:
Federal $ 459,591 $ 507,125 $ 472,102
South Carolina 54,429 46,343 38,898
Deferred income taxes (102,684) (36,917) (111,360)
---------- ----------- -----------
Total 411,336 516,551 399,640
========== =========== ===========
63
<PAGE>
NOTE 12 - INCOME TAXES (CONTINUED):
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense as indicated
in the following analysis:
1996 1995 1994
Income tax at statutory rate on income
before income taxes $ 394,811 $ 494,310 $ 392,303
Increase (decrease):
South Carolina bank tax, net of federal
tax benefit 25,837 43,179 25,673
Tax exempt interest (5,858) (2,554) (12,333)
Other (3,454) (18,384) (6,003)
---------- ---------- ---------
Provision for income taxes 411,336 516,551 399,640
========== ========== =========
Temporary differences which give rise to deferred tax assets and liabilities at
December 31, 1996 and 1995 follow:
1996 1995
---- ----
Allowance for loan losses $ 254,516 $ 218,856
Preopening costs 53,062 21,917
Other 26,389 441
---------- ----------
Total deferred tax assets 333,967 241,214
---------- ----------
Depreciation 40,160 37,850
Accretion 10,600 9,811
Unrecognized gain on securities available-for-sale 22 13,052
---------- ----------
Total deferred tax liabilities 50,782 60,713
---------- ----------
Total deferred taxes 283,185 180,501
========== ==========
NOTE 13 - EMPLOYEE BENEFIT PLAN:
Effective January 1, 1990, a defined contribution plan with an Internal Revenue
Code Section 401(K) provision was established. All employees who have completed
1,000 hours of service during a twelve-month period and have attained age 18
will participate as of the January 1, or July 1 closest to the date on which the
employee meets the eligibility requirements.
64
<PAGE>
NOTE 13 - EMPLOYEE BENEFIT PLAN (CONTINUED):
A participant may elect to make tax deferred contributions up to a maximum of
10% of eligible compensation. The Banks will make matching contributions on
behalf of each participant in the amount of 100% of the elective deferral, not
exceeding 3% of the participant's compensation. The Banks may also make
nonelective contributions determined at the discretion of the Board of
Directors. The Banks' contributions for the years ended December 31, 1996, 1995,
and 1994 totaled $90,348, $68,976, and $61,913, respectively.
NOTE 14 - FINANCIAL INSTRUMENTS:
The Banks 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 statement of
financial position. The contract or notional amounts of those instruments
reflect the extent of involvement the Banks have in particular classes of
financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. The Banks
control the credit risk through credit approvals, limits, and monitoring
procedures. Additionally collateral and guarantees may also be required.
Commitments to extend credit and standby letters of credit include exposure to
some credit loss in the event of nonperformance of the customer.
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 necessarily
represent future cash requirements. The Banks evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include personal
residences, accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. All letters of
credit are short-term guarantees. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Banks' policy for obtaining collateral, and the nature of such
collateral, is essentially the same as that involved in making commitments to
extend credit.
65
<PAGE>
NOTE 14 - FINANCIAL INSTRUMENTS (CONTINUED):
The estimated fair value of the Corporation's consolidated financial instruments
at December 31, 1996 and 1995, are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ..................... $ 6,648 $ 6,648 $ 4,535 $ 4,535
Interest-bearing deposits in
other banks ................................ 431 431 321 324
Investment securities ......................... 25,787 25,790 24,669 24,678
Loans receivable .............................. 67,953 68,329 51,617 51,760
Financial liabilities:
Deposits ...................................... 89,851 89,909 72,550 72,582
Federal funds purchased and
securities sold under agreement to
repurchase ................................. 1,744 1,744 2,570 2,570
Federal Home Loan Bank advances ............... 1,130 1,174 700 700
Note payable .................................. - - 240 240
Off-balance-sheet financial instruments:
Commitments to extend credit .................. 10,626 10,626 5,946 5,946
Standby letters of credit ..................... 355 355 193 193
</TABLE>
NOTE 15 - CONCENTRATION OF CREDIT RISK:
The Banks grant agribusiness, commercial, consumer and residential loans to
customers throughout the State of South Carolina. Although the Banks have
diversified loan portfolios, a substantial portion of their debtors' ability to
honor their contracts is dependent upon the economies of Orangeburg and Sumter
Counties, South Carolina 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 16 - CONTINGENCIES:
The Corporation is also subject at times to claims and lawsuits arising out of
the normal course of business. The Corporation does not anticipate any material
losses with respect to such existing or pending claims and lawsuits at December
31, 1996.
NOTE 17 - REGULATORY MATTERS:
The Banks, as national banks, are subject to the dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Banks may not,
without the prior approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current years' earnings (as defined) plus the
retained earnings (as defined) from the prior two years. The dividends, at
December 31, 1996, that the Banks could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $1,412,000.
66
<PAGE>
NOTE 17 - REGULATORY MATTERS (CONTINUED)
Under Federal Reserve regulation, the Banks also are limited as to the amount
they may loan to the Corporation unless such loans are collateralized by
specified obligations. The maximum amount available for transfer from the Banks
to the Corporation in the form of loans or advances approximated $2,157,000 at
December 31, 1996.
The Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly 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 I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1996, 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 I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Banks' categories.
67
<PAGE>
NOTE 17 - REGULATORY MATTERS (CONTINUED):
The Banks' actual capital amounts and ratios are also presented in the table (in
thousands of dollars).
<TABLE>
<CAPTION>
At December 31, 1996:
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED
ACTUAL ADEQUACY PURPOSES UNDER PROMPT
CORRECTIVE
ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
Tier I Capital (to
<S> <C> <C> <C> <C> <C> <C>
Average Assets):
Consolidated $12,078 11.5% $4,200 4.0% $5,250 5.0%
ONB 7,623 8.4% 3,640 4.0% 4,550 5.0%
SNB 3,133 24.6% 509 4.0% 636 5.0%
Tier I Capital (to
Risk Weighted
Assets):
Consolidated 12,078 17.5% 2,756 4.0% 4,134 6.0%
ONB 7,623 13.4% 2,271 4.0% 3,407 6.0%
SNB 3,133 28.9% 433 4.0% 650 6.0%
Total Capital (to
Risk Weighted
Assets):
Consolidated 12,886 18.7% 5,512 8.0% 6,891 10.0%
ONB 8,334 14.7% 4,543 8.0% 5,679 10.0%
SNB 3,230 29.8% 866 8.0% 1,084 10.0%
At December 31, 1995:
Tier I Capital (to
Average Assets):
Consolidated $7,346 8.9% $3,291 4.0% $4,114 5.0%
ONB 6,988 8.4% 3,339 4.0% 4,174 5.0%
Tier I Capital (to
Risk Weighted
Assets):
Consolidated 7,346 14.4% 2,035 4.0% 3,052 6.0%
ONB 6,988 13.9% 2,015 4.0% 3,022 6.0%
Total Capital (to
Risk Weighted
Assets):
Consolidated 7,982 15.7% 4,069 8.0% 5,087 10.0%
ONB 7,618 15.1% 4,030 8.0% 5,036 10.0%
</TABLE>
68
<PAGE>
NOTE 18 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only).
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
... DECEMBER 31 ...
1996 1995
---- ----
<S> <C> <C>
Balance Sheets:
Assets:
Cash $ 82,026 $ 210,608
Investment in banking subsidiaries 10,782,768 6,988,005
Securities held-to-maturity (fair value - $890,279 in 1996) 890,279 -
Premises and equipment (net of accumulated
depreciation of $140,721 in 1996 and $1,894 in 1995) 270,898 346,317
Due from banking subsidiaries 2,892 36,049
Other assets 120,125 71,101
----------- ----------
Total assets 12,148,988 7,652,080
=========== ==========
Liabilities and shareholders' equity:
Note payable $ - $ 240,000
Other liabilities 44,922 66,348
Shareholders' equity 12,104,024 7,322,428
Unrealized gain on securities available-for-sale,
net of applicable deferred income taxes 42 23,304
----------- ----------
Total liabilities and shareholders' equity 12,148,988 7,652,080
=========== ==========
<CAPTION>
..... YEAR ENDED DECEMBER 31 .....
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statements of Income:
Income:
Dividends from banking subsidiaries $ 503,500 $ 415,000 $ 328,500
Management fees 437,802 - -
Interest 69,206 - -
----------- ----------- ----------
Total 1,010,508 415,000 328,500
----------- ----------- ----------
</TABLE>
69
<PAGE>
NOTE 18 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY) (CONTINUED):
<TABLE>
<CAPTION>
..... YEAR ENDED DECEMBER 31 .....
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expenses:
Salaries and employee benefits $ 264,432 $ 45,413 $ -
Premises and equipment 85,664 1,120 516
Supplies 22,263 148 110
Director fees 19,200 2,800 -
Interest 11,098 8,497 17,604
Other general expenses 214,570 48,049 102,462
---------- --------- -----------
Total 617,227 106,027 120,692
---------- --------- -----------
Income before equity in undistributed
earnings of banking subsidiaries 393,281 308,973 207,808
Applicable income tax benefit 38,566 36,049 44,660
Equity in undistributed earnings of
banking subsidiaries 318,024 592,280 501,725
---------- --------- -----------
Net income 749,871 937,302 754,193
========== ========= ===========
Statements of Cash Flows:
Cash flows from operating activities:
Net income $ 749,871 $ 937,302 $ 754,193
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 55,722 13,783 516
(Increase) decrease in due from banking
subsidiaries 33,157 8,611 (44,660)
(Increase) decrease in other assets (65,317) (30,360) 18,624
Increase (decrease) in other liabilities (21,426) 61,348 (8,622)
Undistributed earnings of banking
subsidiaries (318,024) (592,280) (501,725)
---------- ---------- -----------
Net cash provided by operating
activities 433,983 398,404 218,326
---------- ---------- -----------
Cash flows from investing activities:
Investment in SNB (3,500,001) - -
Transfer of premises and equipment to SNB 444,398 - -
Purchase of premises and equipment (408,408) (346,663) -
Purchases of securities held-to-maturity (1,137,056) - -
Proceeds from maturities of securities
held-to-maturity 246,777 - -
----------- ---------- ----------
Net cash used by investing activities (4,354,290) (346,663) -
----------- ---------- ----------
</TABLE>
70
<PAGE>
NOTE 18 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY) (CONTINUED):
<TABLE>
<CAPTION>
..... YEAR ENDED DECEMBER 31 .....
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in note payable $ 809,203 $ 240,000 $ -
Repayment of note payable (1,049,203) - -
Common stock issued 4,402,000 - 914,699
Common stock subscribed - 98,000 -
Stock issuance cost (52,466) (50,660) -
Stock options exercised - - 55,000
Paid to dissenters in lieu of issuance
of 60,000 shares - - (936,600)
Cash dividends paid (317,809) (241,707) (184,544)
----------- ---------- --------------
Net cash used (provided) by financing
activities 3,791,725 45,633 (151,445)
----------- ---------- --------------
Net increase (decrease) in cash and cash equivalents (128,582) 97,374 66,881
Cash and cash equivalents at beginning of year 210,608 113,234 46,353
---------- ----------- --------------
Cash and cash equivalents at end of year 82,026 210,608 113,234
========== =========== ==============
Supplemental disclosures:
Total increase (decrease) in unrealized gain
(loss) on securities available-for-sale $ (23,262) $ 215,817 $ (204,227)
========== =========== ==============
</TABLE>
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
71
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Community Bankshares, Inc.
We consent to incorporation by reference into the registration statement No.
333-18461 on Form S-8 of Community Bankshares, Inc. of our report dated January
31, 1997, relating to the consolidated balance sheets of Community Bankshares,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996,
which report appears in the December 31, 1996, annual report on Form 10-KSB of
Community Bankshares, Inc.
J. W. Hunt and Company, LLP
Columbia, South Carolina
March 14, 1997
72
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1996, and the Consolidated Statement
of Income for the Year Ended December 31, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,648
<INT-BEARING-DEPOSITS> 431
<FED-FUNDS-SOLD> 1,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,761
<INVESTMENTS-CARRYING> 15,027
<INVESTMENTS-MARKET> 15,029
<LOANS> 68,829
<ALLOWANCE> 876
<TOTAL-ASSETS> 105,461
<DEPOSITS> 89,851
<SHORT-TERM> 1,744
<LIABILITIES-OTHER> 632
<LONG-TERM> 1,130
0
0
<COMMON> 9,065
<OTHER-SE> 3,040
<TOTAL-LIABILITIES-AND-EQUITY> 105,461
<INTEREST-LOAN> 5,444
<INTEREST-INVEST> 1,616
<INTEREST-OTHER> 201
<INTEREST-TOTAL> 7,261
<INTEREST-DEPOSIT> 3,121
<INTEREST-EXPENSE> 3,280
<INTEREST-INCOME-NET> 3,982
<LOAN-LOSSES> 227
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,097
<INCOME-PRETAX> 1,161
<INCOME-PRE-EXTRAORDINARY> 1,161
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 750
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
<YIELD-ACTUAL> 4.48
<LOANS-NON> 431
<LOANS-PAST> 93
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 524
<ALLOWANCE-OPEN> 707
<CHARGE-OFFS> 86
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 876
<ALLOWANCE-DOMESTIC> 876
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
