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, 1997
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. $ 10,588,000
The aggregate market value of the Common Stock held by non-affiliates
on March 16, 1998, was approximately $29,649,000. As of March 16, 1998, there
were 2,680,426 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, 1997 - Part II
- --------------------------------------------------------------------------------
<PAGE>
10-KSB CROSS REFERENCE INDEX
Part I Page
Item 1 Description of Business 2
Item 2 Description of Property 13
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 13
Part II
Item 5 Market for Common Equity and Related Stockholder 14
Matters
Item 6 Management's Discussion and Analysis of Financial 14
Position and Operations
Item 7 Financial Statements 14
Item 8 Changes In and Disagreements with Accountants on None
Accounting and Financial Disclosure
Part III
Item 9 Directors and Executive Officers 14
Item 10 Executive Compensation 15
Item 11 Security Ownership of Certain Beneficial Owners 18
and Management
Item 12 Certain Relationships and Related Transactions 19
Part IV
Item 13 Exhibits and Reports on Form 8-K 20
PART I
This Annual Report on Form 10-KSB contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements should be read with the cautionary statements and
important factors included in this Form 10-KSB. (See Item 6. - Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Forward-Looking Statements.) Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished.
Item 1. 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.
CBI is the sponsor for a group organizing a new national bank in
Florence, South Carolina. Management expects that the new bank will open for
operations in mid-1998. Florence National Bank (in organization) will provide
commercial banking services very similar in nature to those provided by
Orangeburg National Bank and Sumter National Bank. (The organization of Florence
National Bank is discussed more fully under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Florence
National Bank (in organization)" in the Annual Report to Shareholders for the
year ended December 31, 1997. The information under such caption is incorporated
herein by reference.)
2
<PAGE>
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
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 $148 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, 1997, 1996 and 1995.
3
<PAGE>
<TABLE>
<CAPTION>
Orangeburg, S. C. Comparative Bank Deposits
June 1997 June 1996 June 1995
----------------------- --------------------- ----------------------- --------
% change
from 1995
Bank Deposit $ % market Deposit $ % market Deposit $ % market to 1997
(Dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
First National $ 148 30.1% $ 141 28.9% $ 123 25.7% 20.4%
Bank
First Union 63 12.8% 68 13.9% 70 14.6% -9.8%
National Bank
NationsBank 100 20.3% 104 21.4% 106 22.3% -6.5%
BB&T 90 18.3% 92 18.8% 100 21.0% -10.4%
Others 5 1.0% 5 1.0% 5 1.1% -5.7%
(estimate)
Orangeburg National Bank 86 17.5% 78 16.0% 73 15.3% 17.5%
-------- ----- ----- ----- ------- ----- -----
Total deposits $ 490 100.0% $ 488 100.0% $ 477 100.0% 2.8%
======== ===== ===== ===== ======= ===== =====
</TABLE>
Source: 1997 Branches of South Carolina, Sheshunoff Information Services and the
Federal Deposit Insurance Corp. 1997 Data Book
The financial institution with the largest deposit base in Sumter
County is SAFE (Shaw Air Force Employees) Federal Credit Union with deposits of
$202 million. It should be noted, however, the SAFE does not provide deposit
information by branches and the total represented herein includes deposits in
adjacent counties. 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, 1997, 1996, and 1995. (As of June 30, 1996, Sumter
National Bank had been in business for twenty days.)
<TABLE>
<CAPTION>
Sumter, S. C. Comparative Bank Deposits
June 1997 June 1996 June 1995
---------------------- ------------------------ ---------------------- % change
from 1995
Bank Deposit $ % market Deposit $ % market Deposit $ % market to 1997
(Dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BB&T 96 13.2% 96 13.7% 96 14.3% 0.2%
First Union NB - 0.0% 23 3.3% 20 3.0% -100.0%
National Bk of 171 23.4% 167 23.9% 172 25.6% -0.2%
SC
NationsBank 73 10.0% 78 11.2% 70 10.4% 4.0%
Sumter NB 22 3.0% 2 0.3% - 0.0%
First Citizens 17 2.4% - 0.0% - 0.0%
Bank and Trust
Wachovia Bk 147 20.1% 139 19.9% 131 19.6% 12.0%
of SC
SAFE FCU 202 27.7% 192 27.4% 179 26.7% 12.8%
Sumter City CU (estimate) 2 0.3% 2 0.3% 2 0.3% -9.1%
-------- ----- ----- ----- ---- ----- ----
Total deposits $ 730 100.0% $ 699 100.0% $670 100.0% 9.0%
======== ===== ===== ===== ==== ===== ====
</TABLE>
Source: 1997 Branches of South Carolina, Sheshunoff Information Services and the
Federal Deposit Insurance Corp. 1997 Data Book
4
<PAGE>
CBI expects to open its Florence bank by mid-year 1988, pending
various regulatory approvals. The following table shows the growth and change in
bank deposits in Florence County, South Carolina, over the five year period from
1991 to 1996.
<TABLE>
<CAPTION>
NAME DEPOSITS AT % OF DEPOSITS AT % OF
6/30/96 MARKET 6/30/91 MARKET
------- ------ ------- ------
<S> <C> <C> <C> <C>
Wachovia Bank, NA .................................. $ 240,470 20.14 $ 220,706 21.59
Branch Banking & Trust ............................. 164,214 13.75 122,534 11.99
Company of SC
Peoples FS&LA of SC ................................ 127,275 10.66 126,277 12.35
First Union National Bank .......................... 118,730 9.94 80,336 7.86
NationsBank NA ..................................... 91,752 7.68 122,567 12.00
Pee Dee State Bank ................................. 83,872 7.02 57,305 5.61
National Bank of SC ................................ 73,602 6.16 46,584 4.56
Citizens Bank ...................................... 58,293 4.88 50,250 4.92
Investors Savings Bank of SC ....................... 50,040 4.19 37,639 3.68
Other (17+ institutions) ........................... 185,681 15.58 157,853 15.44
---------- ------ ---------- ------
Total .............................................. $1,193,929 100.00 $1,022,051 100.00
========== ====== ========== ======
</TABLE>
*amounts in millions
Source: Sheshunoff - The Branches of South Carolina, 1997
Overall deposits in the county have increased by approximately $172
million, or 16.8%, over the five year period. In the last year Pee Dee State
Bank and Investors Savings Bank have both been acquired by larger financial
institutions. Management is optimistic that the Florence community will be
extremely receptive to a locally managed community bank.
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
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of CBI and the Banks.
Regulation of Bank Holding Companies
General
As a bank holding company registered under the Bank Holding Company
Act ("BHCA"), CBI is subject to the regulations of 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 which 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 the outstanding voting stock or
substantially all of the assets of any bank or from 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 non-banking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto.
5
<PAGE>
CBI is also registered under the bank holding company laws of South
Carolina. Accordingly, CBI is subject to regulation and supervision by the State
Board. A registered South Carolina bank holding company must provide the State
Board with information with respect to the financial condition, operations,
management and inter-company relationships of the holding company and its
subsidiaries. The State Board also may require such other information as is
necessary to keep itself informed about whether the provisions of South Carolina
law and the regulations and orders issued thereunder by the State Board have
been complied with, and the State Board may examine any bank holding company and
its subsidiaries.
Under the South Carolina Bank Holding Company Act (the "SCBHCA"), it
is unlawful without the prior approval of the State Board for any South Carolina
bank holding company (i) to acquire direct or indirect ownership or control of
more than 5% of the voting shares of any bank or any other bank holding company,
(ii) to acquire all or substantially all of the assets of a bank or any other
bank holding company, or (iii) to merge or consolidate with any other bank
holding company.
Obligations of Holding Company to its Subsidiary Banks
Under the policy of the Federal Reserve, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("1991 Banking Law"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the Bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund ("SAIF") or the
Bank Insurance Fund ("BIF") of the FDIC as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the SAIF or the BIF or both.
The FDIC's claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the 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 a priority of payment.
6
<PAGE>
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 notice, to sell the stock of such shareholder to make good the
deficiency.
Capital Adequacy Guidelines for Bank Holding Companies and National Banks
The Federal Reserve has adopted capital adequacy guidelines for
holding companies and banks that are members of the Federal Reserve System
subject to its regulation. For bank holding companies with less than $150
million in consolidated assets, such as CBI, the guidelines are applied on a
bank-only basis.
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) is 8%. At least half of the total capital is required
to be "Tier 1 capital," principally consisting of common shareholders' equity,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier 2
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a minimum level for the
ratio of Tier 1 capital to average total assets (the "Tier 1 Leverage Ratio"),
under which a bank holding company must maintain a minimum level of Tier 1
capital to average total consolidated assets of at least 3% in the case of a
bank holding company which has the highest regulatory examination rating and is
not contemplating significant growth or expansion. All other bank holding
companies are expected to maintain a Tier 1 Leverage Ratio of at least 1% to 2%
above the stated minimum. The Federal Reserve's guidelines also require bank
holding companies to maintain minimum ratios of primary capital to total assets
and total capital to total assets of 5.5% and 6.0 percent, respectively. Primary
capital is defined as common stock, perpetual preferred stock, surplus,
undivided profits, contingency and other capital reserves, mandatory convertible
debt, allowance for possible loan and lease losses, minority interests in equity
of consolidated subsidiaries and perpetual debt instruments, all subject to
various limitations.
The table below summarizes CBI's capital position at December 31, 1997
and 1996.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C> <C>
Tier 1 capital to average total assets 9.6% 11.5%
Tier 1 capital to risk weighted assets 14.1% 17.5%
Total capital to risk weighted assets 15.3% 18.7%
</TABLE>
Orangeburg National Bank and Sumter National Bank are, and Florence
National Bank will be, subject to similar capital requirements adopted by the
OCC. At December 31, 1997, Orangeburg National Bank had a Tier 1 Leverage Ratio
of 8.2% and Sumter National Bank had a Tier 1 Leverage Ratio of 9.9%.
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 continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
However, the management of CBI is unable to predict whether and when higher
capital requirements would be imposed and, if so, at what levels and on what
schedule.
7
<PAGE>
Recent Regulations and Proposals Relating to Capital Adequacy
The 1991 Banking Law required each federal banking agency, including
the Federal Reserve, to revise its risk-based capital standards to ensure that
those standards take adequate account of interest rate risk, concentration of
credit risk and the risks of non-traditional activities, as well as reflect the
actual performance and expected risk of loss on multi-family mortgages. The
Federal Reserve, the FDIC and the OCC have issued a joint rule amending the
capital standards to specify that the banking agencies will include in their
evaluations of a bank's capital adequacy an assessment of the exposure to
declines in the economic value of the bank's capital due to changes in interest
rates. The agencies have also issued a joint policy statement that provides
bankers guidance on sound practices for managing interest rate risk. The policy
statement identifies the key elements of sound interest rate risk management and
describes prudent principles and practices for each element, emphasizing the
importance of adequate oversight by a bank's board of directors and senior
management and of a comprehensive risk management process. The policy statement
also outlines the critical factors that will affect the agencies' evaluation of
a bank's interest rate risk when making a determination of capital adequacy. In
adopting the policy statement, the agencies have asserted their intention to
continue to place significant emphasis on the level of a bank's interest rate
risk exposure and the quality of its risk management process when evaluating a
bank's capital adequacy.
The Federal Reserve, the FDIC, the OCC and the Office of Thrift
Supervision (the "OTS") have also issued joint rules amending the risk-based
capital guidelines to take into account concentration of credit risk and the
risk of non-traditional activities, and to incorporate a measure for exposure to
market risk. The rule relating to concentration of credit risk and risk of
non-traditional activities amends each agency's risk-based-capital standards by
explicitly identifying concentration of credit risk and the risk arising from
activities that have not customarily been part of the banking business but have
been conducted as a result of developing technology and changes in financial
markets, as well as an institution's ability to manage these risks, as important
factors to be taken into account by the agency in assessing an institution's
overall capital adequacy. The rule relating to market risk amends each agency's
risk-based-capital standards to incorporate measures for market risk to cover
all positions located in a banking institution's trading account, foreign
exchange and commodity positions. The effect of the market risk rules is that
any bank or bank holding company regulated by the Federal Reserve, the FDIC, the
OCC or the OTS that has significant exposure to market risk must measure that
risk using its own internal value-at-risk model and also hold a commensurate
amount of capital. "Market risk" means the risk of loss resulting from movements
in market prices. "Value-at-risk" is an estimate of potential changes in
portfolio value based on a statistical confidence interval of changes in market
prices that occur during some time intervals. The effective date of the market
risk rules is January 1, 1997, and compliance with the rules was mandatory
January 1, 1998.
CBI is still assessing the impact these rules and proposed policy
statement would have on the capital requirements of the Banks or CBI, but does
not expect the impact to be material.
Payment of Dividends
CBI is a legal entity separate and distinct from the Banks. Most of
the revenues of CBI are expected to result from dividends paid to CBI by the
Banks. There are statutory and regulatory requirements applicable to the payment
of dividends by subsidiary banks as well as by CBI to its shareholders.
Each national banking association is required by federal law to obtain
the 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 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 addition, national banks can only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined by regulation). In 1990, the OCC issued a
8
<PAGE>
regulation that redefines certain of the terms and methods of calculation used
in these two dividend restrictions. The rule, among other things, changed the
methodology of calculating net profits to be more consistent with GAAP 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
level of net profits available for the payment of dividends. The regulation has
not thus far had a material effect on the ability of Orangeburg National Bank to
pay dividends to CBI.
The payment of dividends by CBI and 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 Banks, 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.
Certain Transactions by CBI with its Affiliates
There are various legal restrictions on the extent to which bank
holding companies and their nonbank subsidiaries can borrow or otherwise obtain
credit from their bank subsidiaries. An insured bank and its subsidiaries are
limited in engaging in "covered transactions" with their nonbank affiliates to
the following amounts: (i) in the case of any such affiliate, the aggregate
amount of covered transactions of the insured bank and its subsidiaries will not
exceed 10% of the capital stock and surplus of the insured bank, and (ii) in the
case of all affiliates, the aggregate amount of covered transactions of the
insured bank and its subsidiaries will not exceed 20% of the capital stock and
surplus of the bank. "Covered transactions" are defined by statute to include a
loan or extension of credit, as well as a purchase of securities issued by an
affiliate, a purchase of assets (unless otherwise exempted by the Federal
Reserve), the acceptance of securities issued by the affiliate as collateral for
a loan and the issuance of a guarantee, acceptance, or letter of credit on
behalf of an affiliate. Further, 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.
FDIC Insurance Assessments
Because Orangeburg National Bank's and Sumter National Bank's deposits
are, and Florence National Bank's deposits will be, insured by the BIF, the
Banks are subject to insurance assessments imposed by the FDIC. Under current
law, the insurance assessment to be paid by BIF-insured institutions is as
specified in a schedule issued by the FDIC that specifies, at semiannual
intervals, target reserve ratios designated to maintain the FDIC insurance
funds' reserve ratios to 1.25% of estimated insured deposits (or such higher
ratio as the FDIC may determine in accordance with the statute). Further, the
FDIC is authorized to impose one or more special assessments in any amount
deemed necessary to enable repayment of amounts borrowed by the FDIC from the
United States Department of the Treasury ("Treasury Department"). The FDIC has
implemented a risk-based assessment schedule, imposing assessments ranging from
0.00% to 0.27% of an institution's average assessment base. The actual
assessment to be paid by each BIF member 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 the
1991 Banking Law (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.
The FDIC may increase or decrease the assessment rates semiannually up
to a maximum increase or decrease of 5 basis points, as deemed necessary to
maintain the BIF reserve ratio at $1.25 per $100 of insured deposits.
9
<PAGE>
The Deposit Insurance Funds Act of 1996 (the "Funds Act") authorized
the FICO to levy assessments on BIF- and SAIF-assessable deposits, and
stipulated that the BIF rate must equal one-fifth the SAIF rate through year-end
1999, or until the insurance funds are merged, whichever occurs first.
Thereafter, BIF and SAIF payers will be assessed pro rata for FICO. The FICO
assessment is based on deposit balances and will be adjusted quarterly to
reflect changes in the assessment bases of the respective funds based on
quarterly Call Report and Thrift Financial Report submissions.
Regulation of the Banks
Orangeburg National Bank and Sumter National Bank are, and Florence
National Bank will be, also subject to examination by the OCC bank examiners. In
addition, Orangeburg National Bank and Sumter National Bank are, and Florence
National Bank will be, subject to various other state and federal laws and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit and laws relating to branch banking. Orangeburg National Bank's and
Sumter National Bank's loan operations also are, and Florence National Bank's
loan operations will be, subject to certain federal consumer credit laws and
regulations promulgated thereunder, including, but not limited to: the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to
provide certain information concerning their mortgage lending; the Equal Credit
Opportunity Act and the Fair Housing Act, prohibiting discrimination on the
basis of certain prohibited factors in extending credit; the Fair Credit
Reporting Act, governing the use and provision of information to credit
reporting agencies; the Bank Secrecy Act, dealing with, among other things, the
reporting of certain currency transactions; and the Fair Debt Collection Act,
governing the manner in which consumer debts may be collected by collection
agencies. The deposit operations of Orangeburg National Bank and Sumter National
Bank also are, and the deposit operations of Florence National Bank will be,
subject to the Truth in Savings Act, requiring certain disclosures about rates
paid on savings accounts; the Expedited Funds Availability Act, which deals with
disclosure of the availability of funds deposited in accounts and the collection
and return of checks by banks; the Right to Financial Privacy Act, which imposes
a duty to maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, 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.
Orangeburg National Bank and Sumter National Bank are also, and
Florence National Bank will be, subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Subject to certain exceptions, the OCC assesses the CRA performance of
a bank by applying lending, investment and service tests. The lending test
evaluates a bank's record of helping to meet the credit needs of its assessment
area through its lending activities by considering a bank's home mortgage, small
business, small farm, community development, and consumer lending. The
investment test evaluates a bank's record of helping to meet the credit needs of
its assessment area through qualified investments that benefit its assessment
area or a broader statewide or regional area that includes the bank's assessment
area. The service test evaluates a bank's record of helping to meet the credit
needs of its assessment area by analyzing both the availability and
effectiveness of a bank's systems for delivering retail banking services and the
extent and innovativeness of its community development services. The OCC assigns
a rating to a bank of "outstanding," satisfactory," "needs to improve," or
"substantial noncompliance" based on the bank's performance under the lending,
investment and service tests. To evaluate compliance with the tests, subject to
certain exceptions, banks will be required to collect and report to the OCC
extensive demographic and loan data.
10
<PAGE>
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.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law 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. 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 that has a composite CAMEL rating of 1 and is not experiencing or
anticipating significant growth). A bank is considered (A) "undercapitalized" if
it has (i) a total risk-based capital ratio of less than 8%, or (ii) a Tier 2
risk-based capital ratio of less that 4%, and (iii) a leverage ratio of less
than 4% (or 3% in the case of a bank that has a composite CAMEL rating of 1 and
is not experiencing or anticipating significant growth); (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%.
A bank that is "undercapitalized" becomes subject to provisions of the
FDIA restricting payment of capital distributions and management fees; requiring
OCC to monitor the condition of the bank; requiring submission by the bank of a
capital restoration plan; restricting the growth of the bank's assets and
requiring prior approval of certain expansion proposals. A bank that is
"significantly undercapitalized" is also subject to restrictions on compensation
paid to senior management of the bank, and a bank that is "critically
undercapitalized" is further subject to restrictions on the activities of the
bank and restrictions on payments of subordinated debt of the bank. The purpose
of these provisions is to require banks with less than adequate capital to act
quickly to restore their capital and to have the OCC move promptly to take over
banks that are unwilling or unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions of the 1991 Banking Law (described in the previous paragraph).
11
<PAGE>
Operational and Managerial Standards. 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. 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
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
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 has increased takeover activity in South Carolina, CBI does not
believe that such legislation has had, or will have a material impact on its
competitive position. However, no assurance of such fact may be given.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 has increased the ability of bank holding companies and banks to operate
across state lines. Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, the former restrictions on interstate acquisitions of
banks by bank holding companies have been repealed such that 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 can acquire any South Carolina-based bank, in either case subject to
certain deposit percentage and other restrictions. The legislation also provides
that, unless an individual state elects beforehand either (i) to accelerate the
effective date or (ii) to prohibit out-of-state banks from operating interstate
branches within its territory, on or after June 1, 1997, adequately capitalized
and managed bank holding companies will be able to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank would be permitted only
if it is expressly 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 will
result in additional acquisitions 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.
Legislative Proposals
The Treasury Department has issued a proposal to consolidate the
federal bank regulatory agencies. Under this proposal, most of the supervisory
and regulatory oversight authority of the FDIC, the OCC, the OTS and the Federal
Reserve would be transferred to a new independent federal banking agency. The
FDIC would continue to have oversight over the deposit insurance funds and the
Federal Reserve would continue to carry out monetary and fiscal policy, discount
window operations and payments system functions. The Treasury Department is
expected to seek to introduce a bill in Congress providing for such
consolidation in the near future. However, the plan already is opposed by the
Federal Reserve, which has proposed a competing consolidation plan that would
preserve its regulatory oversight authority. Due to the preliminary nature of
the proposal and opposition by industry groups and others, CBI cannot determine
at this time the effect of any regulatory consolidation.
12
<PAGE>
Other proposed legislation which could significantly affect the
business of banking has been introduced or may be introduced in Congress from
time to time. CBI cannot predict the future course of such legislative proposals
or their impact on CBI should they be adopted.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of CBI are subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on CBI cannot be predicted.
Employees
At December 31, 1997, the Corporation employed 55 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.
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.
The Corporation is leasing approximately 1.7 acres of land located at
2009 Hoffmeyer Road in Florence, South Carolina. This land will be the site of
the main office for Florence National Bank. The discussion of the lease in Note
17 to the consolidated financial statements set forth in Exhibit 13 to this
report is incorporated by reference herein. The Corporation is building a one
story building of approximately 7,500 share feet on the Hoffmeyer Road site,
which it estimates will cost $659,000.
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 1997.
13
<PAGE>
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, 1997 (the "1997 Annual
Report") is incorporated herein by reference.
The Corporation sold 8,200 restricted common shares to the original
organizers of Florence National Bank (in organization) pursuant to an agreement
between CBI and such organizers during the period covered by this report. There
were no underwriters involved in this transaction. The restricted shares
generated a total offering price of $100,450. Issuance of these shares was
exempt from the registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) thereof.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the 1997
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
The information set forth under the caption "Consolidated Financial
Statements" in the 1997 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' Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The table below sets forth the age, business experience for the past five
years, and term in office for each of the directors and executive officers of
the Company. Each of the directors of the Company, except Messrs. Bynum,
Leventis and Nock, is also a director of Orangeburg National Bank. Messrs.
Bynum, Leventis and Nock are also directors of Sumter National Bank.
<TABLE>
<CAPTION>
Director Business experience
Name, Address (and age) Since during the past 5 years
- ----------------------- -------- -----------------------
Current directors whose terms expire in 1998
<S> <C> <C>
Anna O. Dantzler (58) 1994* Retired since 1989; former customer service
Orangeburg, S.C. representative for Orangeburg National Bank
William H. Nock (52) 1996 President and Chief Executive Officer, Sumter
Sumter, S.C. National Bank since June 1996; Senior Vice President,
Finance, Carolina First Bank, April 1995 -July 1995;
President and Chief Executive Officer, Aiken County
National Bank, 1992 - April 1995
Samuel F. Reid, Jr. (48) 1994* Attorney, Horger, Barnwell & Reid
Orangeburg, S.C.
William W. Traynham (42) 1992* President of the Company
Orangeburg, S.C.
14
<PAGE>
Current Directors Whose Terms Expire in 2000
E. J. Ayers, Jr. (65) 1987* President, C. M. Dukes Oil Co., oil distributor
Orangeburg, S.C. and auto parts supplier; farmer
Alvis J. Bynum (60) 1996 President, Cities Supply Co., waterwork supplies
Sumter, S.C. distributor
Hugo S. Sims, Jr. (76) 1987* Chairman of the Board of Directors and Chief
Orangeburg, S.C Executive Officer of the Company
J. Otto Warren, Jr. (70) 1987* President, Warren and Griffin Lumber Co., Inc.
Orangeburg, S.C. and Home Builder's Supply Co., Inc., builders'
supply and lumber manufacturer
Current Directors Whose Terms Expire in 1999
Martha Rose C. Carson (62) 1987* President, Marty Rae, Inc., apparel and
Orangeburg, S.C. furniture retailers
J. M. Guthrie (70) 1987* President, Superior Motors, Inc., car dealership; Orangeburg, S.C.
Chairman of the Board of Directors of Orangeburg
National Bank since March 1998.
Phil P. Leventis (51) 1996 President and Chief Executive Officer, Dixie
Sumter, S.C. Beverage Company, wholesale beer distributor; member of
the South Carolina State Senate; Chairman of the Board of
Directors of Sumter National Bank since June 1996
Michael A. Wolfe (40) 1992* President of Orangeburg National Bank; Chief
Orangeburg, S.C. Executive Officer of Orangeburg National Bank since June
1996
Russell S. Wolfe, II (79) 1987* Secretary, Lenaire F. Wolfe Co., heating and air
Orangeburg, S.C. conditioning; former Chairman of the Board of
Directors of Orangeburg National Bank
</TABLE>
- --------------------
* Includes service as Director of Orangeburg National Bank prior to formation of
the Company in 1992.
There are no family relationships among any of the directors and
executive officers of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
As required by Section 16(a) of the Securities Exchange Act of 1934,
the Company's directors, its executive officers and certain individuals are
required to report periodically their ownership of the Company's Common Stock
and any changes in ownership to the Securities and Exchange Commission. Based on
a review of Forms 3, 4 and 5 and written representations made to the Company, it
appears that all such reports for these persons were filed in a timely fashion
during 1997.
Item 10. Executive Compensation
The following table summarizes for the years ended December 31, 1997,
1996 and 1995 the executive compensation paid to the Chairman and Chief
Executive Officer of the Company and to executive officers of the Company or its
subsidiaries that received compensation greater than $100,000 in 1997.
15
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation
Compensation Awards
Number of Securities
Underlying All Other
Year Salary Options Compensation(2)
---- ------ ------- ---------------
<S> <C> <C> <C> <C>
Hugo S. Sims, Jr. 1997 $55,587 8,000 $ 5,003
Chairman and Chief 1996 40,939 - -
Executive Officer of 1995 33,939 - -
the Company(1)
William W. Traynham 1997 $113,632 8,000 10,227
President of the 1996 104,014 - 9,361
Company 1995 93,856 - 8,447
Michael A. Wolfe 1997 $111,948 8,000 10,075
President of 1996 104,583 - 9,412
Orangeburg National 1995 93,856 - 8,447
Bank
William H. Nock 1997 $101,644 8,000 3,049
President of Sumter 1996 96.154 - -
National Bank 1995 37,542 - -
</TABLE>
- ------------------
(1) Mr. Sims was appointed Chief Executive Officer in March 1992. He functions
in this capacity on a part time basis.
(2) This column is comprised of Company contributions to the 401(k) Plan to the
executive officers named in the table in each of 1997, 1996 and 1995.
The Company does not have employment contracts with any of its
executive officers. The Company does not presently pay bonuses to its executive
officers and offers no perquisites to its executive officers that are not
available to all employees.
The following table sets forth information about stock options held at
December 31, 1997 by the executive officers listed in the Summary Compensation
Table.
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1997 and 1997 Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Acquired Value Options 12/31/97 Options 12/31/97
Name on Exercise Realized Exercisable Unexercisable Exercisable* Unexercisable
- ---- ----------- -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
William W. Traynham - - 20,000 8,000 $197,000 $46,000
Michael A. Wolfe - - 20,000 8,000 $197,000 $46,000
Hugo S. Sims - - 0 8,000 $0 $46,000
William H. Nock - - 0 8,000 $0 $46,000
</TABLE>
*The fair value of the stock has been estimated at $13.75 per share, which was
the closing price of the stock on December 31, 1997. The exercise price of the
options is $3.90 per share and they expire in 2000.
16
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
- ---------------------------------------------------------------------------------------
Individual Grants
- ---------------------------------------------------------------------------------------
-----------------------------------
Number of % of Total Potential Realizable Value at
Securities Options Assumed Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation for 10-Year
Options Employees Price Expiration Option Term(2)
Name Granted(1) in 1997 (per share) Date -----------------------------------
- ------------------- --------------- -------------- --------------- --------------- 5% 10%
-----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hugo S. Sims, Jr. 8,000 100% $8.00 4-21-07 $40,249 $102,000
William W. Traynham 8,000 100% $8.00 4-21-07 40,249 102,000
Michael A. Wolfe 8,000 100% $8.00 4-21-07 40,249 102,000
William H. Nock 8,000 100% $8.00 4-21-07 40,249 102,000
- --------------------
</TABLE>
(1) These options were granted on 4-21-97 and become exercisable on 4-21-98.
(2) The amounts in these columns are the result of calculations based on the
assumption that the market price of the Common Stock will appreciate in
value from the date of grant to the end of the one-year option term at
rates of 5% and 10% per year. The 5% and 10% annual appreciation
assumptions are required by the Securities and Exchange Commission; they
are not intended to forecast possible future appreciation, if any, of the
Company's stock price.
Director Compensation
The Company pays directors who are not employees of the Company or its
subsidiaries $200 per month for service as directors. In addition, Orangeburg
National Bank pays monthly fees of $600 to its non-employee directors. Sumter
National Bank did not pay director fees in 1997. Director fees paid by the
Company in 1997 totaled $21,600 and director fees paid by Orangeburg National
Bank in 1997 totaled $50,400.
Employee Benefit Plans
401(K) Plan
Effective January 1, 1990, Orangeburg National Bank established a defined
contribution plan pursuant to Internal Revenue Code Section 401(k). The Plan was
assumed by the Company upon acquisition of Orangeburg National Bank. All
employees who have completed 500 hours of service during a six-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.
A participant may elect to make tax deferred contributions up to a maximum
of 12% of eligible compensation. The Company will make a matching contribution
on behalf of each participant in the amount of 100% of the deferral, not
exceeding 3% of the participant's compensation. The Company may also make
elective contributions determined at the discretion of the Board of Directors.
The Company's contributions for the years ended December 31, 1997 and 1996, were
$122,000 and $90,000, respectively.
1997 Employee Stock Option Plan
At the 1997 Annual Meeting of Shareholders, the shareholders approved the
1997 Employee Stock Option Plan, which reserved 106,000 shares of Common Stock
for issuance pursuant to the exercise of options granted pursuant to the plan.
Of the 106,000 shares reserved for issuance under the plan, 30,000 shares were
reserved for issuance pursuant to exercise of non-qualified stock options and
the remainder were reserved for issuance upon the exercise of "incentive stock
options" within the meaning of the Internal Revenue Code. Options may be granted
pursuant to the plan to persons who are employees of the Company or any
subsidiary (including officers and directors who are employees) at the time of
grant. All incentive stock options must have an exercise price not less than the
fair market value of the Common Stock at the date grant, as determined by the
Board of Directors. Non-qualified options will have such exercise prices as may
be determined by the Board of Directors at the time of grant, and such exercise
prices may be less than fair market value. The Board of Directors may set other
terms for the exercise of the options but may not grant to any one holder more
than $100,000 of incentive stock options (based on the fair market value of the
17
<PAGE>
optioned shares on the date of the grant of the option) which first become
exercisable in any calendar year. The Board of Directors also selects the
employees to receive grants under the plan and determines the number of shares
covered by options granted under the plan. No options may be exercised after ten
years from the date of grant, options may not be transferred except by will or
the laws of descent and distribution, and options may be exercised only while
the optionee is an employee of the Company, within three months after the date
of termination of employment, or within twelve months of death or disability.
The plan will terminate on March 16, 2007, and no options will be granted
thereunder after that date.
In April 1997 75,800 incentive stock options were granted to employees
of the Corporation at the then current market price of $8.00. These options may
not be exercised before April 1998, and they expire in April 2007.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 1, 1998, the number and
percentage of outstanding shares beneficially owned by (i) each person known by
the Company to own more than 5% of the outstanding Common Stock, (ii) each
director and director nominee of the Company, (iii) each person named in the
Summary Compensation Table, and (iv) all executive officers and directors of the
Company as a group.
Number of % of
Shares Common
Name and Address Position in the Company Beneficially Stock
of 5% Shareholders and the Banks* Owned Ownership
- ------------------ -------------- ------------ ---------
E. J. Ayers, Jr. Director CBI and ONB 77,600(1) 2.8%
Alvis J. Bynum Director CBI and SNB 30,157(2) 1.1%
Martha Rose C. Carson Director CBI and ONB 55,400 2.0%
Anna O. Dantzler Director CBI and ONB 85,000 3.1%
J. M. Guthrie Director CBI and 126,164(3) 4.6%
Chairman ONB,
Chairman of Executive
Committee of CBI
Phil P. Leventis Director CBI and SNB, 35,098(4) 1.3%
Chairman of SNB
William H. Nock Director CBI and SNB, 47,740(5) 1.7%
Chief Executive Officer
and President of SNB
Samuel F. Reid, Jr. Director CBI and ONB 41,384(6) 1.5%
Hugo S. Sims, Jr. Director CBI and ONB, 188,000(7) 6.8%
1158 Moore Road Chairman, Chief
Orangeburg, S.C. 29118 Executive
Officer of CBI
William W. Traynham Director CBI and ONB, 48,498(8) 1.8%
President of CBI
J. Otto Warren, Jr. Director CBI and ONB, 140,899(9) 5.1%
502 Sellers Ave., SE Vice Chairman of CBI
Orangeburg, S.C. 29115
Michael A. Wolfe Director CBI and ONB, 46,928(10) 1.7%
Chief Executive Officer
and President of ONB
Russell S. Wolfe, II Director CBI and ONB 59,460(11) 2.2%
All executive officers
and directors as a group
(13 persons) 982,328 35.7%
- ------------------------------------
*CBI - the Company; ONB - Orangeburg National Bank; SNB - Sumter National
Bank
18
<PAGE>
(1) Includes 1,200 shares owned by Nancy R. Ayers, Mr. Ayers' wife; 2,600
shares owned by an IRA for the benefit of Nancy R. Ayers; and 2,600 shares
held by Mr. Ayers in an IRA.
(2) Includes 5,504 shares owned by Marjorie F. Bynum, Mr. Bynum's wife; and
9,000 shares held by Mr. Bynum as trustee for his grandnephews.
(3) Includes 451 shares owned by Lou D. Guthrie, Mr. Guthrie's wife.
(4) Includes 2,700 shares held by Ellen L. Leventis, Mr. Leventis' wife; 20,000
shares owned by the Dixie Beverage Co. of Sumter Profit Sharing Plan; and
10,000 shares owned by LPT Enterprises, a limited partnership.
(5) Includes 1,218 shares owned by the Nock Family Trust; 263 shares owned by
an IRA for the benefit of Linda H. Nock, Mr. Nock's wife; 35,519 shares
held by J. C. Bradford & Co., for benefit of Mr. Nock; 2,537 shares held by
Alex Brown & Son; and 8,000 shares subject to qualified stock options that
become exercisable in April 1998.
(6) Includes 13,384 shares held by Mr. Reid as trustee for his minor children;
and 16,000 shares owned by Rosa G. Reid, Mr. Reid's wife.
(7) Includes 50,000 shares owned by Virginia B. Sims, Mr. Sims' wife; and 8,000
shares subject to qualified stock options that become exercisable in April
1998.
(8) Includes 18,471 shares owned jointly with Margaret S. Traynham, Mr.
Traynham's wife; 1,826 shares owned jointly with minor children; 20,000
shares subject to currently exercisable nonqualified stock options; and
8,000 shares subject to qualified stock options that become exercisable in
April 1998.
(9) Includes 41,091 shares owned by Mildred J. Warren, Mr. Warren's wife.
(10) Includes 1,928 shares owned by Joye McGrady Wolfe as custodian for minor
children; 20,000 shares subject to currently exercisable nonqualified stock
options; and 8,000 shares subject to qualified stock options that become
exercisable in April 1998.
(11) Includes 5,075 shares owned by Mary F. Wolfe, Mr. Wolfe's wife.
Item 12. Certain Relationships and Related Transactions
Orangeburg National Bank and Sumter National Bank have loan and deposit
relationships with some of the directors of the Company and with companies with
which the directors are associated as well as members of the immediate families
of the directors ("Affiliated Persons"). (The term `members of the immediate
families' for purposes of this paragraph includes each person's spouse, parents,
children, siblings, mothers and fathers-in-law, sons and daughters-in-law, and
brothers and sisters-in-law.) The total loans outstanding to these parties at
December 31, 1997, were $2,959,000. Loans to Affiliated Persons were made in the
ordinary course of business, were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not, at the time they were
made involve more than the normal risk of collectibility or present other
unfavorable features.
The law firm of Horger, Barnwell and Reid, in which Samuel F. Reid, a
director of the Company, is a partner, provided legal services to the Company in
1997, and such firm is continuing to provide legal services to the Company in
1998.
In 1997, Martha Rose C. Carson, a director of the Company provided interior
decorating services to Sumter National Bank and Orangeburg National Bank. The
fees for such services totaled $30,609. In the opinion of the Company, these
fees were reasonable in relation to the services provided.
During the year ended December 31, 1997, Orangeburg National Bank had
outstanding a loan to Edisto Aquatic, a partnership in which two of the five
partners are sons of Hugo S. Sims, Jr., Chairman of the Board and Chief
Executive Officer of the Company. The original principal amount of the loan was
$349,951 at a floating interest rate equal to prime. The loan was made in June
1990 and was initially unsecured, but was subsequently secured with several
pieces of real estate. The loan matured in 1993 and was renewed until October
1996. In January 1995, this loan was placed on nonaccrual status and has been
turned over to attorneys for collection. In June 1997 this loan was paid off and
all accrued interest was also paid. The balance of the loan at December 31,
1997, was $0. The bank did not incur any loss on this loan.
19
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
No.(from item
601 of
Regulation
S-B)
3.1 Articles of Incorporation, as amended (incorporated by
reference to exhibits filed in the Registrant's Form 10-QSB
for the quarter ended September 30, 1997).
3.2 Bylaws, as amended (incorporated by reference to
exhibits filed in the Registrant's Form S-4,
Commission File No. 33-55314).
4 Stock certificate (incorporated by reference to exhibits
filed in the Registrant's Registration Statement on
Form S-2, Commission File No. 33-96746).
10.1 Form of Unqualified Stock Options (incorporated by reference
to Registrant's Form 10-KSB for the year ended December 31,
1996).
10.2 Organizational Agreement among the Registrant and the
Organizers of Florence National Bank, dated as of September
15, 1997 (incorporated by reference to Registrant's Form
10-QSB for the quarter ended September 30, 1997).
10.3 1997 Stock Option Plan (incorporated by reference to Exhibit A
of Registrant's Schedule 14A filed in connection with its 1997
Annual Meeting of Shareholders).
13 Portions of the Annual Report to Shareholders for the
Year Ended December 31, 1997
21 Subsidiaries of the registrant (incorporated by reference to
exhibits filed in the Registrant's Registration Statement on
Form S-2, Commission File
No. 333-46111).
23 Consent of J. W. Hunt and Company, LLP
27 Financial data schedule
(b) Reports on Form 8-K. None.
20
<PAGE>
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 30, 1998
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.
E. J. Ayers, Jr., Director
s/ Alvis J. Bynum
Alvis J. Bynum, Director
s/ Martha Rose C. Carson
Martha Rose C. Carson, Director
s/ Anna O. Dantzler
Anna O. Dantzler, Director
s/J. M. Guthrie
J. M. Guthrie, Director
s/William H. Nock
William H. Nock, Director
Phil P. Leventis, Director
Samuel F. Reid, Jr., Director
s/ J. Otto Warren, Jr.
J. Otto Warren, Jr., Director
Michael A. Wolfe, II, Director
Russell S. Wolfe, II, Director
21
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation, as amended (incorporated by
reference to exhibits filed in the Registrant's Form 10-QSB
for the quarter ended September 30, 1997).
3.2 Bylaws, as amended (incorporated by reference to
exhibits filed in the Registrant's Form S-4,
Commission File No. 33-55314).
4 Stock certificate (incorporated by reference to exhibits
filed in the Registrant's Registration Statement on
Form S-2, Commission File No. 33-96746).
10.1 Form of Unqualified Stock Options (incorporated by reference
to Registrant's Form 10-KSB for the year ended December 31,
1996).
10.2 Organizational Agreement among the Registrant and the
Organizers of Florence National Bank, dated as of September
15, 1997 (incorporated by reference to Registrant's Form
10-QSB for the quarter ended September 30, 1997).
10.3 1997 Stock Option Plan (incorporated by reference to Exhibit A
of Registrant's Schedule 14A filed in connection with its 1997
Annual Meeting of Shareholders).
13 Portions of the Annual Report to Shareholders for the
Year Ended December 31, 1997
21 Subsidiaries of the registrant (incorporated by reference to
exhibits filed in the Registrant's Registration Statement on
Form S-2, Commission File
No. 333-46111).
23 Consent of J. W. Hunt and Company, LLP
27 Financial data schedule
22
<PAGE>
EXHIBIT 13
PORTIONS OF 1997 ANNUAL REPORT TO
SHAREHOLDERS INCORPORATED BY REFERENCE
INTO REGISTRANT'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997
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 High Low
Mar. 31, 1996 $5.00 $5.00
June 30, 1996 $5.00 $5.00
Sept. 30, 1996 $6.00 $5.00
Dec. 31, 1996 $6.12 $5.88
Mar. 31, 1997 $7.37 $5.93
June 30, 1997 $14.12 $7.18
Sept. 30, 1997 $19.50 $14.37
Dec. 31, 1997 $15.25 $13.25
Between December 1995 and May 1996 the Corporation sold 450,000 shares of its no
par common stock at $5.00 per share. This sale was in conjunction with the
capitalization of the Sumter bank. On November 20, 1996, CBI was listed on the
AMEX. From that date to year end 1996 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. During 1997
the Corporation had a stock sales volume of 338,000 shares.
There were 1,162 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 1997.
During 1997 the Corporation authorized and paid two cash dividends
totaling 15 cents per share. The total cost to the Corporation of these payments
was approximately $394,000, 32% of after tax profits. During 1996 the
Corporation authorized and paid two cash dividends totaling 14.5 cents per
share. The total cost to the Corporation of these payments was approximately
$318,000, 42% of after tax profits. 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. National banks may pay dividends only out of present and past
earnings with numerous limitations designed to ensure that the banks have
adequate capital to operate safely and soundly. At December 31, 1997, Orangeburg
National Bank could pay up to $1,568,000 in dividends without special approval
of the Comptroller of the Currency.
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, 1997 and 1996. This
commentary should be reviewed in conjunction with the audited consolidated
financial statements and notes contained elsewhere in this report.
23
<PAGE>
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 1997 represents the operations of the holding
company and its two banks. CBI is also currently sponsoring the organization of
a new community bank, Florence National Bank. Management expects the new bank to
open in mid-1998. (Parent-only financial statements are presented in the
footnotes to the consolidated financial statements. Bank-only financial
highlights are presented in the introductory section of this report.)
Orangeburg National Bank is a national banking association and
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 and 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.
Florence National Bank (in organization)
Community Bankshares, Inc. has entered into an agreement with six local
business people in the Florence, South Carolina community to sponsor the
formation of a new national bank. CBI has assisted in the process of submitting
an application for a bank charter to the Comptroller of the Currency and
preliminary approval was obtained in November 1997 to begin the organization
process. There are various other regulatory approvals that must be obtained
before the bank can begin operation. Management estimates that Florence National
Bank will commence operations in mid-1998.
CBI has filed a registration statement with the Securities and Exchange
Commission in order to offer to the public up to 300,000 shares of its common
stock. The majority of the proceeds of this sale will be used to purchase $4.5
million in common stock of the new bank. Should the sale not generate sufficient
amounts to purchase the bank stock, CBI has arranged for a line-of-credit with
an unrelated financial institution to provide the additional funds needed to
capitalize the bank.
During January and February 1998, CBI sold $615,000 in restricted
common stock to the local Florence bank organizers. These 49,650 shares were
sold at $2.00 less than the market price on the American Stock Exchange the day
prior to their tender of payment. These shares are restricted from resale for a
period of one year from the date of issue.
24
<PAGE>
Year 2000
The change in date from 1999 to 2000 poses potential problems for many
computer systems around the world. Certain of the Corporation's systems may be
affected by this so-called millennium bug. CBI is investigating the extent to
which its systems are affected and communicating with all of its computer
vendors concerning timely completion of remedies for those systems that require
modification. The Corporation is also communicating with third parties on which
it relies to assess their progress in evaluating their systems and implementing
any corrective measures. The Corporation has been taking and will continue to
pursue reasonably necessary steps to protect its operations and assets.
Stock Split
On July 21, 1997, the Corporation effected a two-for-one split of its
common shares outstanding. All references to per share information contained in
this discussion have been adjusted accordingly.
1997 compared to 1996
Earnings Performance
The Corporation's net income was $1,216,000, or $.46 per share, in
1997. This compares to $750,000, or $.31 per share, in 1996, an increase of
$466,000, or 62%.
Management views this increase in earnings as primarily the result of a
21% increase in earnings in the Orangeburg bank, to $1,401,000 in 1997 from
$1,162,000 in 1996, and a 52% reduction in the operating losses at the Sumter
bank, to $163,000 in 1997 from $340,000 in 1996.
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, 1997 and 1996.
Balance Sheet Categories as a Percent of Average Total Assets as of
December 31,
Assets 1997 1996
------- -------
Interest bearing deposits ....................... 1.03% 0.72%
Investment securities taxable ................... 23.10% 28.20%
Investment securities--tax exempt ............... 0.33% 0.44%
Federal funds sold .............................. 3.51% 3.21%
Loans receivable ................................ 65.25% 60.58%
------- -------
Total interest earning assets ................... 93.22% 93.15%
Cash and due from banks ......................... 4.01% 3.78%
Allowance for loan losses ....................... -0.81% -0.79%
Premises and equipment .......................... 2.26% 2.47%
Other assets .................................... 1.32% 1.39%
------- -------
Total assets ....................................... 100.00% 100.00%
======= =======
Liabilities and Stockholders' Equity
Interest bearing deposits
Savings ......................................... 15.74% 14.78%
Interest bearing transaction accounts ........... 9.63% 9.36%
Time deposits ................................... 47.85% 48.89%
------- -------
Total interest bearing deposits ................. 73.22% 73.03%
Short-term borrowings ........................... 3.09% 2.48%
FHLB advances ................................... 0.89% 1.20%
------- -------
Total interest bearing liabilities .............. 77.20% 76.71%
Noninterest bearing demand deposits ............. 12.14% 11.02%
Other liabilities ............................... 0.69% 0.70%
Stockholders' equity ............................ 9.97% 11.57%
------- -------
Total liabilities and stockholders' equity ......... 100.00% 100.00%
======= =======
25
<PAGE>
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,
1997 and 1996.
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense (1) Rates (1) Balance Expense (1) Rates (1)
------- ----------- --------- ------- ---------- ---------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits $ 1,283 $ 73 5.69% $ 687 $ 38 5.53%
Investment securities taxable 28,727 1,797 6.26% 26,914 1,599 5.94%
Investment securities--tax exempt 410 17 6.28% 417 17 6.35%
Federal funds sold 4,363 241 5.52% 3,067 163 5.32%
Loans receivable (2) 81,167 7,692 9.48% 57,805 5,444 9.42%
-------- ------ ---- ------- ------ ----
Total interest earning assets 115,950 9,820 8.47% 88,890 7,261 8.17%
Cash and due from banks 4,990 3,606
Allowance for loan losses (1,011) (757)
Premises and equipment 2,817 2,360
Other assets 1,640 1,328
-------- -------
Total assets $124,386 $95,427
======== =======
Liabilities and Stockholders' Equity
Interest bearing deposits
Savings $ 19,576 $ 681 3.47% $14,106 $ 392 2.78%
Interest bearing transaction accounts 11,974 217 1.81% 8,936 183 2.05%
Time deposits 59,522 3,250 5.46% 46,646 2,536 5.44%
-------- ------ ---- ------- ------ ----
Total interest bearing deposits 91,072 4,148 4.55% 69,688 3,111 4.46%
Short-term borrowings 3,846 153 3.98% 2,369 92 3.89%
FHLB advances 1,101 73 6.63% 1,149 76 6.64%
-------- ------ ---- ------- ------ ----
Total interest bearing liabilities 96,019 4,374 4.55% 73,206 3,279 4.48%
Noninterest bearing demand deposits 15,098 10,516
Other liabilities 864 667
Stockholders' equity 12,405 11,038
-------- -------
Total liabilities and stockholders' equity $124,386 $95,427
======== =======
Interest rate spread (3) 3.92% 3.69%
Net interest income and net yield on earning assets (4) $5,446 4.70% $3,982 4.48%
====== ==== ====== ====
</TABLE>
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.
26
<PAGE>
Interest Income and Interest Expense
The Corporation's interest income increased in 1997 from 1996. In 1997
the Corporation earned $9,820,000 in total interest income, up from the prior
year's $7,261,000. This represented a $2,559,000 or a 35.3% increase. This
growth was mostly the result of increased volume in the loan and investment
portfolios.
Interest bearing deposits in other banks contributed $73,000 to
interest income in 1997, up from $38,000 the prior year, an increase of $35,000
or 92.1%. In 1997 the Corporation had an average of $1,283,000 invested in
interest bearing deposits, up from the prior year's $687,000, an increase of
$596,000 or 86.8%. The average yield on these deposits during 1997 was 5.69%, up
.16% from the prior year's yield of 5.53%. Most of this increase was due to
higher interest bearing balances being maintained with the Federal Home Loan
Bank (FHLB).
Investments contributed $1,797,000 to interest income in 1997, up from
$1,599,000 the prior year, an increase of $198,000 or 12.4%. The investment
portfolio averaged $28.7 million in 1997, up from the prior year's $26.9
million, an increase of $1.8 million or 6.7%. The Corporation's investment
portfolio consists primarily of short- term U. S. government and agency debt
issues. The average yield on investments during 1997 was 6.26%, up .32% from
5.94% in 1996.
The Corporation's tax exempt securities portfolio earned $17,000 during
1997, unchanged from the prior year. The portfolio averaged $410,000 in 1997,
down from $417,000 in 1996, a decrease of $7,000 or 1.7%. The average yield was
6.28%, compared to 6.35% 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 $241,000 to interest income in 1997, up from
$163,000 in the prior year, an increase of $78,000 or 47.9%. The Corporation had
an average of $4,363,000 in federal funds during 1997, up from the prior year's
$3,067,000, an increase of $1,296,000 or 42.3%. The average yield on federal
funds during 1997 was 5.52%, up from 5.32% in 1996.
The Corporation's major source of interest income is the loan
portfolio, which contributed $7,693,000 to interest income in 1997, up from
$5,444,000 in the prior year, an increase of $2,249,000 or 41.3%. The average
loan portfolio for 1997 was $81.2 million, compared to the prior year's $57.8
million, an increase of $23.4 million or 40.5%. Of this increase, approximately
$15 million or 64.1% was generated by the Sumter bank. The average yield on
loans during 1997 was 9.48%, up from 9.42% in 1996.
The Corporation had average earning assets in 1997 of $116 million
which earned a yield of 8.47%. In 1996 the Corporation had average earning
assets of $88.9 million which earned a yield of 8.17%. Average earning assets
increased $27.1 million or 30.5%. Of this increase, approximately $16.4 million
or 60.5% was generated by the new Sumter bank.
The Corporation's savings deposits consist of savings and money market
accounts. Total savings accounts averaged $19.6 million in 1997, up from $14.1
million in the prior year, an increase of $5.5 million or 39.0%. The cost of
these funds increased to 3.47% in 1997 from 2.78% in the prior year.
Interest bearing transaction accounts are the primary checking accounts
that the banks offer customers. This overall category was $11.9 million in 1997,
up from $8.9 million in 1996, an increase of $3 million or 34%. The average cost
of these funds was 1.81% in 1998, compared to 2.05% in the prior year.
Time deposits are the largest category of deposits, totaling $59.5
million in 1997, up from $46.6 million in the prior year, an increase of $12.9
million or 27.7%. The cost of time deposits increased to 5.46% from 5.44%.
The Orangeburg bank has several commercial customers for which it
offers daily repurchase agreements. These accounts are not deposits, they are
considered other obligations of the bank. 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 1997 was
$3.8 million, up from $2.4 million in the prior year, an increase of $1.4
million or 58.3%. The cost of these funds increased to 3.98% from 3.89%.
27
<PAGE>
Orangeburg National Bank is a member of and has the ability to borrow
from the Federal Home Loan Bank. The bank had an average $1.1 million
outstanding balance during 1997 at an average cost of 6.63%. This is almost
unchanged from the prior year. These borrowings are 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 1997 of $96
million costing an average of 4.55%, compared with interest bearing liabilities
in 1996 of $73.2 million that cost an average of 4.48%. Average interest bearing
liabilities increased $22.8 million or 31%. Of this increase, approximately
$13.3 million or 58% was generated by the Sumter bank.
Interest Income and Interest Expense-Sumter National Bank
Sumter National Bank opened for business on June 10, 1996. At December
31, 1997 the bank's earning assets had grown to $27.7 million, total assets were
$30.2 million, and deposits were $27 million. At December 31, 1996 the Sumter
bank's earning assets were $10.6 million, total assets were $13.3 million, and
deposits were $10 million. During 1997 earning assets have increased $17.1
million or 161%, total assets have increased $16.9 million or 123%, and deposits
have increased $17 million or 171%.
The average earning assets for 1997 for the Sumter bank were $20.8
million (18% of consolidated earning assets). These earning assets generated
$1.8 million in interest income for the year (18.4% of consolidated interest
income).
Total average interest bearing liabilities for 1997 for the Sumter bank
were $16.5 million (17.1% of consolidated interest bearing liabilities). These
liabilities generated $750,000 in interest expense for the year (17.1% of
consolidated interest expense).
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 1997 net interest income of
$1,464,000 is due almost entirely to changes in volume. Almost all of the
$2,559,000 increase in interest income was from volume growth in earning assets.
Likewise, most of the $1,095,000 increase in interest expense was due to volume
increases for time deposits. During 1996 there was a similar pattern, with most
of the increase in net interest income coming from changes in volume.
The prime interest rate has been stable during most of the last two
years. The prime rate went from 8.50% to 8.25% in February 1996 and stayed there
until March 1997, when it increased back to 8.50%. Management expects that
interest rates will be mostly stable during 1998. Inflation is expected to
remain very low. Certain elements of the economy are experiencing price
deflation. 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 1997, improvements in net interest income during
1998 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.
28
<PAGE>
<TABLE>
<CAPTION>
Volume and Rate Variance Analysis
1997 compared to 1996 1996 compared to 1995
--------------------- ---------------------
(Dollar amounts in thousands) Volume Rate Total Volume Rate Total
----------------------------- ------ ---- ----- ------ ---- -----
Interest earning assets
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits .............. $ 33 $ 1 $ 34 $ 13 $ (1) $ 12
Investment securities .................. 111 88 199 240 53 293
taxable
Investment securities--tax ............. - - - 13 - 13
exempt(2)
Federal funds sold ..................... 72 6 78 (12) (16) (28)
Loans receivable ....................... 2,213 35 2,248 668 (23) 645
------- ------- ------- ------- ------- -------
Total interest income .................. 2,429 130 2,559 922 13 935
------- ------- ------- ------- ------- -------
Interest bearing liabilities
Savings ................................ 175 113 288 (15) (35) (50)
Interest bearing ....................... 57 (23) 34 57 (23) 34
transaction accounts
Time deposits .......................... 705 11 716 330 28 358
------- ------- ------- ------- ------- -------
Total interest bearing deposits......... 937 101 1,038 372 (30) 342
------- ------- ------- ------- ------- -------
Short-term borrowings .................. 58 2 60 (56) (29) (85)
FHLB advances .......................... (3) - (3) 58 (1) 57
------- ------- ------- ------- ------- -------
Total interest expense ................. 992 103 1,095 374 (60) 314
------- ------- ------- ------- ------- -------
Net interest income ...................... $ 1,437 $ 27 $ 1,464 $ 548 $ 73 $ 621
======= ======= ======= ======= ======= =======
</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 1997 of $39.9
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 1997, 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.
29
<PAGE>
The following table summarizes the Corporation's interest sensitivity
position as of December 31, 1997.
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
Within 3 4-12 months 1-5 years Over 5 years Total
months
-------- -------- -------- -------- --------
(Dollar amounts in thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C>
Interest bearing deposits ........................ $ 1,238 $ - $ - $ - $ 1,238
Taxable investment securities .................... 1,750 3,900 23,500 2,896 32,046
Tax exempt investment securities ................. 151 - 255 - 406
Federal funds sold ............................... 413 - 92 555 1,060
Loans, net of unearned income .................... 39,282 3,873 36,515 12,281 91,951
-------- -------- -------- -------- --------
Total interest earning assets .................... 42,834 7,773 60,362 15,732 126,701
-------- -------- -------- -------- --------
Interest bearing liabilities
Savings .......................................... 19,082 - - - 19,082
Interest bearing transaction account ............. 13,177 - - - 13,177
Time deposits < $100M ............................ 17,109 19,193 9,729 446 46,477
Time deposits > $100M ............................ 9,669 9,774 1,985 - 21,428
Short-term borrowings ............................ 2,551 - - - 2,551
FHLB advances .................................... - - - 1,060 1,060
-------- -------- -------- -------- --------
Total interest bearing liabilities................. $ 61,588 $ 28,967 $ 11,714 $ 1,506 $103,775
-------- -------- -------- -------- --------
Interest sensitivity gap ......................... $(18,754) $(21,194) $ 48,648 $ 14,226 $ 22,926
Cumulative gap ................................... (18,754) (39,948) 8,700 22,926
RSA/RSL .......................................... 70% 27%
Cumulative RSA/RSL ............................... 70% 56%
</TABLE>
RSA- rate sensitive assets; RSL- rate sensitive liability.
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 1997, 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.
Management is aware of its negative gap position and is emphasizing
variable rate loans in 1998. 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.
30
<PAGE>
Investment Portfolio
The Corporation's investment portfolio consists primarily of short-
term U. S. government and agency debt issues. Investment securities averaged
$28.7 million (23.10%) of the Corporation's average assets in 1997 and $26.9
million (28.20%) in 1996. Note 4 to the consolidated financial statements
provides further information on the investment portfolio.
Loan Portfolio
The average size of the loan portfolio in 1997 was $81.2 million,
compared to $57.8 million the prior year, which represents growth of $23.4
million or 40.5%.
At December 31, 1997, the loan portfolio was $91.9 million, compared to
$68.8 million the prior year, an increase of $23.1 million, or 33.6%.
Management believes the loan portfolio is adequately diversified. There
are no foreign loans and few agricultural loans. The Orangeburg bank and the
Sumter bank ordinarily originate 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
concentrations in any particular individuals or industry or group of related
individuals or industries at the end of 1997. 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, 1997 and 1996.
<TABLE>
<CAPTION>
Loan category 1997 1996 Dollar change % change
- -------------
------- ------- ------- -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural.................. $21,690 $16,520 $ 5,170 31.30%
Real estate - construction ............................. 6,563 5,611 952 16.97%
Real estate - mortgage ................................. 46,734 35,553 11,181 31.45%
Installment loans to individuals ....................... 16,348 11,021 5,327 48.33%
Obligations of political subdivisions................... 616 124 492 396.77%
------- ------- ------- -----
Total loans - gross ............................... $91,951 $68,829 $23,122 33.59%
======= ======= ======= =====
</TABLE>
31
<PAGE>
The Corporation has enjoyed significant loan growth in both its
markets. The Sumter bank accounted for $16 million or 69% of the increase in the
portfolio, the Orangeburg bank accounted for the remainder.
Commercial, financial, and agricultural loans, primarily representing
loans made to small businesses, increased by $5.1 million or 31.3% during 1997.
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 loans and loans secured by
mortgages. Constructions loans are also generally secured with mortgages.
Because the Corporation's subsidiaries are community banks, real estate loans
comprise the bulk of the loan portfolio, 58% in 1997. Construction loans
increased $952,000 or 16.97% in 1997. Mortgage loans increased $11.2 million or
31.45% in 1997.
The Corporation generally does not compete with 15 and 30 year fixed
secondary market mortgage interest rates, so it has 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 1997 and 1996 the Corporation
sold $4.8 million and $4.1 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.
Installment loans to individuals increased $5.3 million or 48.3% in
1997.
Interest income from the loan portfolio was $7,692,000 in 1997,
compared to $5,444,000 in 1996, an increase of $2,248,000 or 41.3%. The average
yield on the portfolio was 9.48% in 1997, compared to 9.42% in 1996.
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 1997 the
Corporation had $5.5 million in unsecured loans or 6% of its loan portfolio. In
1996 the Corporation had $4.4 million in unsecured loans or 6.4% of its loan
portfolio.
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 1997 Orangeburg National Bank had sold no participations
in loans and purchased $1,662,000 ($1,422,000 from Sumter National Bank) in such
participations 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 1997 Sumter National Bank had sold $1,422,000 (all to
Orangeburg National Bank) in participations and purchased no participations in
such loans. 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, 1997, as well as the type of
interest on loans due after one year.
<TABLE>
<CAPTION>
Within After one After five Total
one year but years but
year within within ten
five years years
------- ---------- ----------- -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Commercial ................................. $8,753 $10,197 $2,222 $21,172
Real Estate ................................ 13,683 21,534 18,825 54,042
Installment ................................ 4,360 11,631 746 16,738
------- ------- ------- -------
Total ................................. $26,796 $43,362 $21,793 $91,951
======= ======= ======= =======
Sensitivity of loans to changes in interest rates-Loans due
after one year
Predetermined interest ...................... $43,087
rate
Floating interest rate ...................... 5,600
=======
Total .................................. $48,687
=======
</TABLE>
Non-performing Loans; Other Problem Assets
Nonaccrual and Past Due Loans
The nonaccrual, past due, and impaired loans and other real estate
owned are summarized in Note 5 to the consolidated financial statements. The
Corporation had no restructured loans in 1997 or 1996. The Corporation's
nonaccrual loan policy is discussed in Note 2 to the consolidated financial
statements in the section labeled Loans Receivable. The Corporation's policy on
impaired loans is discussed in Note 5 to the consolidated financial statements.
Nonaccrual loans and impaired loans were not material in relation to
the portfolio as a whole in 1997. Management is aware of no trends, events or
uncertainties which would cause nonaccrual loans to change materially in 1998.
Potential Problem Loans
At December 31, 1997, the Corporation's internal loan review program
had identified $1,101,000 (1.2% of the portfolio) in commercial and industrial
loans, including the above mentioned past due loans, where information about
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 $132,000 at
year-end 1997 and $0 at year end 1996. 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.
33
<PAGE>
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 $358,000 and $227,000 in 1997 and 1996, respectively. Based on the
available information, the Corporation considers its 1997 provision for loan
losses adequate.
Net charge-offs in 1997 were $95,000 or 27% of the provision for loan
losses, compared to $58,000 or 25% 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, 1997 and 1996, the allowance for loan losses was
1.24% and 1.27%, respectively, of total loans, and 1407% and 167%, respectively,
of nonaccrual loans and accruing loans 90 days or more past due. Note 5 to the
consolidated financial statements provides details on the changes in the
allowance for loan losses during 1997 and 1996.
Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 1998 will at least approximate the
1997 levels as such loans progress through the collection, foreclosure, and
repossession process. Management believes that the allowance for loan losses, as
of December 31, 1997, is sufficient to absorb the expected charge-offs 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, 1997 and 1996, compared with the percent of loans in
the applicable categories to total loans.
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
1997 1997 % of 1996 1996 % of loans
loans in each in each category
category to to total loans
total loans
------ ----------- ------ ---------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Commercial ............. $ 336 24% $ 314 24%
Real estate ............ 301 58% 313 60%
Installment ............ 288 18% 188 16%
Unallocated ............ 215 0% 61 0%
------ --- ------ ---
Total ............. $1,140 100% $ 876 100%
====== === ====== ===
</TABLE>
34
<PAGE>
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, 1997.
Premises and Equipment
Premises and equipment were $2,733,000 at December 31, 1997, compared
to $2,837,000 the prior year, a decrease of $104,000 or 3.7%. There were no
material changes in premises and fixed assets during the year. Premises and
equipment are discussed further in Note 6 to the consolidated financial
statements.
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, 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 investment portfolio.
While investment securities purchased for this portfolio 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. The Corporation also maintains a held
to maturity investment portfolio. Securities in this portfolio are generally not
considered a primary source of liquidity. 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 and is able to borrow from the Federal Home Loan Bank
and the Federal Reserve's discount window.
The Corporation has a demonstrated ability to attract deposits from its
market area. Deposits have grown from $59 million in 1993 to over $117 million
in 1997. This stable growing base of deposits is the major source of operating
liquidity.
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, 1997, the Corporation had approximately $11.7 million and $1.5
35
<PAGE>
million 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
$60.4 million and $15.7 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 1997 were $106.2 million,
compared to $80.2 million the prior year, an increase of $26 million or 32.4%.
Orangeburg National Bank's average deposits for 1997 increased to $86.1
million from $77.8 million, an increase of $8.3 million or 10.7%.
Sumter National Bank opened for business in June 1996. The average
deposits for 1997 increased to $20.3 million from $3.8 million, an increase of
$16.5 million or 434%
The total average deposits for the Corporation for the years ended
December 31, 1997 and 1996, are summarized below:
<TABLE>
<CAPTION>
1997 1996
Average balance Average cost Average balance Average cost
--------------- ------------ --------------- ------------
(Dollar amounts in thousands)
<S> <C> <C>
Noninterest bearing demand accounts............. $ 15,098 $ 10,516
Interest bearing transaction ................... 11,974 1.87% 8,936 2.05%
Savings-regular ................................ 8,892 2.46% 9,685 2.42%
Savings- money market .......................... 10,684 4.32% 4,421 3.56%
Time deposits less than 100,000................. 43,240 5.40% 32,597 5.39%
Time deposits greater than 100,000.............. 16,282 5.63% 14,049 5.42%
-------- -----------
Total average deposits ......................... $106,170 $ 80,204
======== ===========
</TABLE>
At December 31, 1997, the Corporation had $21,428,000 in certificates
of deposit of $100,000 or more. The maturities of these certificates are
disclosed in Note 7 to the consolidated financial statements.
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, 1997 and 1996.
1997 1996
---- ----
Return on assets (ROA) 0.98% 0.79%
Return on equity (ROE) 9.80% 6.79%
Dividend payout ratio (dividends/net income) 32.40% 42.40%
Equity as a percent of assets 9.97% 11.57%
36
<PAGE>
Short-term Borrowings
The Corporation's short-term borrowings consist of federal funds
purchased and securities sold under agreements to repurchase, which generally
mature each business day. There was $2,551,000 and $1,744,000 outstanding at
year end 1997 and 1996, respectively. Further information is provided in Note 8
to the consolidated financial statements.
Notes Payable
In connection with the formation of the Sumter National Bank, the
Corporation incurred two notes payable during 1995 and 1996. These notes were
paid off in June 1996. Further information is provided in Note 9 to the
consolidated financial statements.
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. There were $1,060,000 and $1,130,000 outstanding in such
advances at year-end 1997 and 1996, respectively. Further information on these
borrowings from the FHLB is provided in Note 10 the consolidated financial
statements.
Shareholders' Equity
The Common Stock account of the Corporation was $9,156,000 at December
31, 1997, compared to $9,065,000 in the prior year. During 1997 the Corporation
paid $9,000 in expenses related to the initiation of a dividend reinvestment
plan and it also recorded the receipt of $100,000 in restricted stock sales in
connection with its Florence bank project.
Dividend Reinvestment Plan
During 1997 CBI began offering a dividend reinvestment plan to its
shareholders in South Carolina, Arkansas, New Jersey, 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 1997 CBI paid cash dividends to shareholders of 15 cents per
share, which totaled $394,000. This represented a dividend payout ratio
(dividends divided by net income) of 32%. The dividend payout ratio in 1996 was
42%. The unusually high ratio in 1996 was the temporary result of the investment
in the new bank in Sumter.
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%. Orangeburg
National Bank and Sumter National Bank are both considered `well capitalized'
for regulatory purposes. Detailed information on the Corporation's capital
position, as well as that of its subsidiary banks, is provided in Note 18 to the
consolidated financial statements. The Corporation considers its current and
projected capital position to be adequate.
Noninterest income
Noninterest income increased to $768,000 in 1997 from $505,000 in 1996,
a $263,000 or 52% increase. Approximately $151,000 or 57% of this change was
related to the first full year of operation for the Sumter bank.
The major component of this change was in service charge income, which
in 1997 was $561,000 compared to $376,000 in the prior year, a $185,000 or 48.8%
increase. Noninterest expense
37
<PAGE>
Overall, non-interest expenses increased to $4,004,000 in 1997 from
$3,097,000 in 1996, an increase of $907,000 or 29.3%. During 1997 the Sumter
bank operated for 12 months; during 1996 it operated for less than seven months.
Accordingly, many of the dollar and percentage changes discussed herein will be
larger than normal.
Personnel costs in 1997 were $2,332,000 compared to $1,875,000 the
prior year, an increase of $457,000 or 24.4%.
Premises and equipment expenses in 1997 were $527,000 compared to
$368,000 the prior year, a $159,000 or 43.2% increase.
Supplies expense was $121,000 in 1997, compared to $92,000 in the prior
year, an increase of $29,000 or 31.5%.
Director fees were $72,000 in 1997, compared to $70,000 in the prior
year, an increase of $2,000 or 2.9%. Orangeburg National Bank pays its outside
directors $600 per month. Sumter National Bank did not pay director fees during
1997 or 1996. CBI pays its outside directors $200 per month.
FDIC insurance costs were $15,000 in 1997, compared to $5,000 in 1996,
an increase of $10,000 or 200%.
All other expenses were $955,000 in 1997, compared to $687,000 in the
prior year, an increase of $268,000 or 39%.
Income Taxes
The Corporation pays U. S. corporate income taxes and South Carolina
bank income taxes. The 1997 provision for income taxes was $636,000, compared to
$411,000 the prior year, an increase of $225,000 or 54.7%. The Corporation's
effective average tax rate is 34.3%. The increase in income taxes parallels the
increase 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 1997. 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.
38
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report 40
Consolidated Balance Sheets, December 31, 1997 and 1996 41
Consolidated Statements of Income, Years Ended December 31,
1997, 1996 and 1995 42-43
Consolidated Statements of Changes in Shareholders
Equity, Years Ended December 31, 1997, 1996 and 1995 44
Consolidated Statements of Cash Flows, Years Ended December 31,
1997, 1996 and 1995 45
Notes to Consolidated Financial Statements 46
39
<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, 1997 and 1996, 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,
1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
J. W. Hunt and Company, LLP
Columbia, South Carolina
January 30, 1998
40
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
$ in thousands 1997 1996
- -------------- ---- ----
<S> <C> <C>
Cash and due from banks ...................................................................... $ 4,062 $ 5,348
Federal funds sold ........................................................................... 1,060 1,300
--------- ---------
Total cash and cash equivalents .................................................. 5,122 6,648
Interest-bearing deposits with banks ......................................................... 1,238 432
Securities held-to-maturity, at amortized cost ............................................... 17,311 15,027
Securities available-for-sale, at fair value ................................................. 15,141 10,761
Loans held for sale .......................................................................... 358 295
Loans receivable ............................................................................. 91,951 68,829
Less, allowance for loan losses ........................................................... (1,140) (876)
--------- ---------
Net loans receivable ............................................................. 90,811 67,953
Accrued interest receivable .................................................................. 1,168 855
Premises and equipment - net ................................................................. 2,733 2,837
Deferred income taxes ........................................................................ 351 283
Other assets ................................................................................. 341 370
--------- ---------
Total assets ..................................................................... 134,574 105,461
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand ................................................................................... $ 17,003 $ 13,337
Interest-bearing transaction accounts .................................................... 13,176 10,333
Savings .................................................................................. 18,984 16,138
Certificates of deposit of $100 and over ................................................. 21,428 13,640
Other time deposits ...................................................................... 46,576 36,403
--------- ---------
Total deposits ................................................................... 117,167 89,851
Federal funds purchased and securities sold under
agreements to repurchase ................................................................. 2,551 1,744
Federal Home Loan Bank advances .............................................................. 1,060 1,130
Other liabilities ............................................................................ 759 632
--------- ---------
Total liabilities ................................................................ 121,537 93,357
--------- ---------
Shareholders' equity:
Common stock - no par value, authorized shares - 12,000,000, issued and
outstanding, 2,634,676 shares in 1997 and 2,626,476 shares in 1996 ................... 9,156 9,065
Retained earnings ........................................................................ 3,861 3,039
Unrealized gain on securities available-for-sale,
net of applicable deferred income taxes .................................................. 20 -
--------- ---------
Total shareholders' equity ....................................................... 13,037 12,104
--------- ---------
Total liabilities and shareholders' equity ....................................... 134,574 105,461
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS
41
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
$ in thousands, except per share 1997 1996 1995
---- ---- ----
Interest and dividend income:
<S> <C> <C> <C>
Interest and fees on loans .............................................. $ 7,692 $ 5,444 $ 4,800
Deposits with other financial institutions .............................. 73 38 26
Investment securities interest and dividends:
Interest - U. S. Treasury and
U.S. Government Agencies ............................................ 1,754 1,569 1,280
Interest - tax exempt securities ........................................ 17 17 4
Dividends - Federal Reserve Bank and Federal Home Loan Bank 43 30 26
---------- ---------- ----------
Total investment securities interest and dividends .............. 1,814 1,616 1,310
---------- ---------- ----------
Federal funds sold and securities
purchased under agreements to resell ................................ 241 163 191
---------- ---------- ----------
Total interest and dividend income .............................. 9,820 7,261 6,327
Interest expense:
---------- ---------- ----------
Deposits:
Interest-bearing transaction accounts ............................... 217 194 149
Savings ............................................................. 681 392 443
Certificates of deposit of $100 and over ............................ 897 757 638
Certificates of deposit of less than $100 ........................... 2,353 1,778 1,539
---------- ---------- ----------
Total deposits .................................................. 4,148 3,121 2,769
Federal funds purchased and securities sold
under agreements to repurchase ...................................... 153 82 169
Note payable ............................................................ - 8
Federal Home Loan Bank advances ......................................... 73 76 19
---------- ---------- ----------
Total interest expense .......................................... 4,374 3,279 2,965
---------- ---------- ----------
Net interest income .......................................................... 5,446 3,982 3,362
Provision for loan losses .................................................... 358 227 160
---------- ---------- ----------
Net interest income after provision
for loan losses ............................................. 5,088 3,755 3,202
---------- ---------- ----------
Non-interest income:
Service charges on deposit accounts ..................................... 561 377 324
Deposit box rent ........................................................ 16 14 11
Bank card fees .......................................................... 9 9 9
Credit life insurance commissions ....................................... 52 27 21
Other ................................................................... 130 78 65
---------- ---------- ----------
Total non-interest income ....................................... 768 505 430
---------- ---------- ----------
Non-interest expenses:
Salaries and employee benefits .......................................... 2,332 1,875 1,247
Premises and equipment .................................................. 527 368 264
Supplies ................................................................ 121 92 60
Director fees ........................................................... 72 70 58
FDIC insurance .......................................................... 15 5 78
Other ................................................................... 937 687 472
---------- ---------- ----------
Total non-interest expenses ..................................... 4,004 3,097 2,179
---------- ---------- ----------
Income before provision for income taxes ..................................... 1,852 1,161 1,454
Provision for income taxes ................................................... 636 411 517
---------- ---------- ----------
Net income ...................................................... 1,216 750 937
========== ========== ==========
42
<PAGE>
Basic earnings per common share:
Weighted average shares outstanding ..................................... 2,634,676 2,455,878 1,726,476
========== ========== ==========
Net income per weighted average number
of shares outstanding ............................................... $ 0.46 $ 0.31 $ 0.54
========== ========== ==========
Diluted earnings per common share:
Weighted average shares outstanding ..................................... 2,681,862 2,467,404 1,735,716
========== ========== ==========
Net income per weighted average number
of shares outstanding ............................................... $ 0.45 $ 0.30 $ 0.54
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
43
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
$ in thousands, except per share
<TABLE>
<CAPTION>
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> <C>
January 1, 1995 ......................... 1,726,476 $ 4,668 $ - $ 1,912 $ (193) $ 6,387
Common Stock subscribed ................. - - 98 - - 98
Stock issuance cost .................. - (51) - - - (51)
Net income ........................... - - - 937 - 937
Dividends paid at $.14
per share ........................ - - - (242) - (242)
Change in unrealized gain
(loss), net of applicable
deferred income taxes
on securities
available-for-sale ............... - - - - 216 216
--------- --------- --- --------- --------- ---------
Balance
December 31, 1995 .................... 1,726,476 4,617 98 2,607 23 7,345
Sale of shares ....................... 900,000 4,500 (98) - - 4,402
Stock issuance cost .................. - (52) - - - (52)
Net income ........................... - - - 750 - 750
Dividends paid at $.145
per share ........................ - - - (318) - (318)
Change in unrealized gain
(loss), net of
applicable deferred
income taxes
on securities
available-for-sale ............... - - - - (23) (23)
--------- --------- --- --------- --------- ---------
Balance,
December 31, 1996 .................... 2,626,476 $ 9,065 $- $ 3,039 $- $ 12,104
Sale of shares ....................... 8,200 100 - - - 100
Stock issuance cost .................. - (9) - - - (9)
Net income ........................... - - - 1,216 - 1,216
Dividends paid at $.15
per share ........................ - - - (394) - (394)
Change in unrealized gain
(loss), net of applicable
deferred income taxes
on securities
available-for-sale ............... - - - - 20 20
--------- --------- --- --------- --------- ---------
Balance, December 31, 1997 ................ 2,634,676 9,156 - 3,861 20 13,037
========= ========= === ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
44
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
$ in thousands
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ................................................................. $ 1,216 $ 750 $ 937
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................................... 294 222 139
Accretion of discounts and amortization of premiums -
securities - net ................................................... (103) (40) (21)
Provision for loan losses .............................................. 359 227 160
Loss on sale of other real estate owned ................................ - - 7
Deferred income taxes .................................................. (68) (103) 84
Proceeds from sales of real estate loans held for sale ................. 4,768 4,105 2,900
Originations of real estate loans held for sale ........................ (4,768) (4,105) (2,900)
(Increase) decrease in real estate loans held for sale ................. (63) (295) 115
Changes in operating assets and liabilities:
Increase in accrued interest receivable ................................ (313) (139) (119)
(Increase) decrease in other assets .................................... 29 (237) 72
Increase (decrease) in other liabilities ............................... 127 142 189
-------- -------- --------
Net cash provided by operating activities .......................... 1,478 527 1,563
-------- -------- --------
Cash flows from investing activities:
Net increase in interest-bearing deposits with banks ....................... (806) (111) (121)
Purchases of securities held-to-maturity ................................... (10,156) (9,175) (17,567)
Purchases of securities available-for-sale ................................. (11,918) (6,786) (2,645)
Proceeds from maturities of securities held-to-maturity .................... 8,999 9,786 16,145
Proceeds from maturities of securities available-for-sale .................. 7,614 5,095 3,041
Proceeds from sale of other real estate owned .............................. - - 93
Net increase in loans ...................................................... (24,296) (16,588) (3,839)
Purchases of premises and equipment ........................................ (190) (1,331) (585)
-------- -------- --------
Net cash used by investing activities .............................. (30,753) (19,110) (5,478)
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in demand, transaction
and savings deposit accounts ........................................... $ 9,354 $ 10,037 $ (2,932)
Net increase in time deposits .............................................. 17,961 7,264 7,814
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase ..................... 807 (826) (230)
Federal Home Loan Bank advances ............................................ (70) 430 700
Increase in note payable ................................................... - 809 240
Repayment of note payable .................................................. - (1,049) -
Proceeds from issuance of common stock ..................................... 100 4,402 -
Stock issuance cost ........................................................ (9) (52) (51)
Dividends paid ............................................................. (394) (318) (242)
-------- -------- --------
Net cash provided by financing activities .......................... 27,749 20,697 5,299
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............................ (1,526) 2,114 1,481
Cash and cash equivalents at beginning of year .................................. 6,648 4,534 3,053
-------- -------- --------
Cash and cash equivalents at end of year ........................................ 5,122 6,648 4,534
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest payments on a cash basis (net of $ 6 capitalized in 1996)...... $ 4,222 $ 3,222 $ 2,868
======== ======== ========
Cash payments for income taxes ......................................... $ 758 $ 516 $ 527
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Non-cash transfers during the year for transfer of
loans receivable to other real estate owned ........................ $ 132 $ - $ -
======== ======== ========
Total increase (decrease) in unrealized gain (loss) on securities
available-for-sale, net of applicable deferred income taxes ................ $ 20 $ (23) $ 216
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS
45
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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.
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. Their primary source of revenue is
providing loans to customers, who are predominately small and middle-market
businesses and middle-income individuals.
The Corporation is in the process of filing an application with the Board of
Governors of the Federal Reserve System for approval of its acquisition of all
of the stock of Florence National Bank (in organization). Florence National
Bank's organization is being sponsored by the Corporation. Preliminary approval
for issuance of the bank's charter has been granted to the bank's organizers by
the Comptroller of the Currency. This newly formed bank will be a wholly-owned
subsidiary of the Corporation and is expected to begin operation during 1998
(see Note 17).
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 in consolidation.
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
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.
46
<PAGE>
Stock issuance costs were charged to common stock as incurred.
Preopening costs were expensed as incurred.
Costs associated with the organization of a planned new bank in Florence, South
Carolina, have been accounted for as follows:
Organization costs have been deferred and will be amortized using the
straight-line method over five years upon commencement of operations.
Stock issuance costs have been 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."
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SECURITIES:
Securities that management has both the ability and positive 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. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, changes in prepayment risk, to increase regulatory capital or
other similar factors, 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 securities
available-for-sale are recognized using the specific identification method.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on
securities.
No securities are being held for short-term resale; therefore, the Corporation
does not currently use a trading account classification.
LOANS HELD FOR SALE:
Mortgage 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.
LOANS RECEIVABLE:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding unpaid principal balance adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans. Interest income is accrued
on the unpaid principal balance.
47
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
LOANS RECEIVABLE (CONTINUED):
Commercial loans are placed on nonaccrual at the time the loan is 90 days
delinquent unless the credit is well secured and in process of collection.
Residential real estate loans are typically placed on nonaccrual at the time the
loan is 120 days delinquent. Credit card loans, other unsecured personal credit
lines and certain consumer finance loans are typically charged-off no later than
180 days delinquent. Other consumer loans are charged-off at 120 days
delinquent. In all cases, loans must be placed on nonaccrual or charged-off at
an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged-off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are reasonably assured of repayment
within a reasonable time frame and when the borrower has demonstrated payment
performance of cash or cash equivalents for a minimum of six months.
The allowance for loan losses is established through provisions for loan losses
charged against income. Portions of loans deemed to be uncollectible are charged
against the allowance for losses, and subsequent recoveries, if any, are
credited to the allowance.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flows using the loan's initial effective
interest rate or the fair value, less selling costs, of the collateral for
collateral dependent loans. By the time a loan becomes probable of foreclosure
it has been charged down to fair value, less estimated cost to sell.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable inherent loan losses. Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the timing
of future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions, and other
relevant factors. This evaluation is inherently subjective as it requires
material estimates that are susceptible to significant change including the
amounts and timing of future cash flows expected to be received on impaired
loans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES:
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (FASB No. 125), which
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets and extinguishments of
liabilities.
FASB No. 125 is effective for transactions occurring after December 31, 1996,
except those provisions relating to repurchase agreements, securities lending
and other similar transactions and pledged collateral, which have been delayed
until after December 31, 1997, by FASB No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement
No. 125." The adoption of FASB No. 125 in 1997 did not have a material impact on
the Corporation's financial position or results of operation. The adoption of
FASB No. 127 in 1998 is not expected to have a material impact on the
Corporation's financial position or results of operations.
48
<PAGE>
STOCK-BASED COMPENSATION:
The Corporation applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Corporation's stock at the date of grant over the
amount an employee must pay to acquire the stock. Compensation cost for stock
awards and appreciation rights is recorded based on the market price at the end
of the period. In October 1995, Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (FASB No. 123), was issued and
encourages, but does not require, adoption of a fair value method of accounting
for employee stock-based compensation plans. As permitted by FASB No. 123, the
Corporation has elected to disclose the pro forma net income and net income per
share as if the fair value method had been applied in measuring compensation
cost.
OTHER REAL ESTATE OWNED:
Foreclosed assets, which are recorded in other assets, include properties
acquired through foreclosure or in full or partial satisfaction of the related
loan.
Foreclosed assets initially are recorded at the lower of fair value, net of
estimated selling costs, or cost, at the date of foreclosure. After foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of (1) cost or (2) fair value, less estimated costs to sell.
Revenue and expenses from operations and changes in the valuation allowance are
included in other expenses.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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, 40 years
etc.
Furniture, fixtures and equipment 5-25 years
MARKETING EXPENSES:
The Corporation expenses the costs of marketing as incurred. Marketing expenses
totaled approximately $112,000, $86,000 and $52,000 in 1997, 1996 and 1995,
respectively.
INCOME TAXES:
Deferred income tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The provision (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:
49
<PAGE>
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED):
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.
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:
Basic earnings per common share are calculated on the basis of the weighted
average number of shares outstanding during the year. Diluted earnings per
common share includes stock options which have been granted but not exercised.
All common share and per share amounts have been restated to reflect the 1997
two-for-one stock split. Basic earnings per common share and diluted earnings
per common share for 1997 would have been $0.45 and $0.44, respectively, if the
additional 53,950 common shares issued through January 30, 1998, from the sale
of stock to acquire the stock of Florence National Bank had been considered
outstanding all of 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
50
<PAGE>
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:
The Banks are required to maintain average reserve balances with the Federal
Reserve, or in vault cash. The average daily reserve balance requirements for
December 31, 1997 and 1996, were met by vault cash held in the two banks.
At December 31, 1997, the Corporation had bank balances with correspondent banks
totaling approximately $1,062 thousand, of which $275 thousand was fully insured
by the FDIC.
NOTE 4 - SECURITIES:
The carrying amount of securities and their approximate fair values follow (in
thousands of dollars).
Securities held-to-maturity consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and federal agencies .............. $16,906 $ 37 $ (20) $16,923
State and local governments........................ 405 3 - 408
------- ------- ------- -------
Total ........................ 17,311 40 (20) 17,331
====== == === ======
</TABLE>
NOTE 4 - SECURITIES (CONTINUED):
<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 ............... $14,613 $ - $ - $14,613
State and local governments ........................ 414 3 - 417
------- ------ ----- -------
Total ......................... 15,027 3 - 15,030
====== ====== ===== ======
</TABLE>
51
<PAGE>
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- -------- --------- -----
<S> <C> <C> <C> <C>
U.S. Government and federal agencies ...................... $14,413 $ 52 $ (21) $14,444
Federal Home Loan Bank stock .............................. 327 - - 327
Federal Reserve Bank stock ................................ 229 - - 229
Equity securities ......................................... 141 - - 141
------ ------ ------ ------
Total ................................ 15,110 52 (21) 15,141
====== ====== ====== ======
<CAPTION>
DECEMBER 31, 1996
<S> <C> <C> <C> <C>
U.S. Government and federal agencies ..................... $10,175 $ 15 $ (15) $10,175
Federal Home Loan Bank stock .............................. 251 - - 251
Federal Reserve Bank stock ................................ 244 - - 244
Equity securities ......................................... 91 - - 91
------ ------ ----- ------
Total ................................ 10,761 15 (15) 10,761
====== ====== ===== ======
</TABLE>
52
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - INVESTMENT SECURITIES (CONTINUED):
The following is a summary of maturities and yields of securities
held-to-maturity and securities (other than equity securities)
available-for-sale as of December 31, 1997 (in thousands of dollars):
<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)
Securities
held-to-maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.Treasury securities ......... $ 2,248 5.40% $ - 0.00% $ - 0.00% $ - 0.00% $ 2,248 5.40%
Federal agency obligations ...... 2,197 5.44% 11,965 6.00% 495 6.45% - 0.00% 14,658 5.94%
State and local governments...... 151 6.49% 255 6.58% - 0.00% - 0.00% 406 6.54%
------- ---- ------- ---- ------ ---- ----- ---- ------- ----
Total held-to-maturity .......... 4,596 5.46% 12,220 6.01% 495 6.45% - 0.00% 17,311 5.88%
------- ---- ------- ---- ------ ---- ----- ---- ------- ----
Securities
available-for-sale:
U.S.Treasury securities ......... 284 5.19% 704 6.07% - 0.00% - 0.00% 988 5.82%
Federal agency obligations ...... 1,101 5.78% 10,627 6.01% 1,727 6.43% - 0.00% 13,455 6.05%
Equities ........................ - 0.00% 141 0.00% - 0.00% 555 6.74% 696 5.37%
------- ---- ------- ---- ------ ---- ----- ---- ------- ----
Total available-for-sale ........ 1,385 5.65% 11,472 5.94% 1,727 6.43% 555 6.74% 15,139 6.01%
------- ---- ------- ---- ------ ---- ----- ---- ------- ----
Total for portfolio ............. 5,981 5.51% 23,692 5.98% 2,222 6.44% 555 6.74% 32,450 5.94%
======= ==== ======= ==== ====== ==== ===== ==== ======= ====
</TABLE>
Yields on tax exempt obligations have been computed on a tax equivalent basis
using the maximum federal tax rate of 34%.
Securities with a carrying amount of approximately $9,894 thousand and $10,665
thousand at December 31, 1997 and 1996, respectively, were pledged. Of these
respective amounts, approximately $3,580 thousand and $4,150 thousand was
pledged to secure public deposits.
NOTE 5 - LOANS RECEIVABLE:
The following is a summary of loans by category at December 31, 1997 and 1996
(in thousands of dollars):
1997 1996
---- ----
Commercial, financial and agricultural $21,690 $16,520
Real estate - construction 6,563 5,611
Real estate - mortgage 46,734 35,553
Installment loans to individuals 16,348 11,021
Obligations of states and political subdivisions 616 124
------- -------
------- -------
Total loans - gross 91,951 68,829
======= ========
Overdrawn demand deposits totaling $391 and $123 have been reclassified as loan
balances at December 31, 1997 and 1996, respectively.
53
<PAGE>
Gross proceeds on mortgage loans originated for resale was approximately $4.8
million, $4.1 million and $2.9 million for the years ended December 31, 1997,
1996 and 1995, 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 $2,946 thousand at December
31, 1997, and $2,959 thousand at December 31, 1996. A total of $2,242 thousand
in loans were made or added, while a total of $2,255 thousand were repaid or
deducted during 1997. 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.
Changes in the allowance for loan losses and related ratios for the years ended
December 31, 1997, 1996 and 1995, were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Average amount of loans outstanding .................................... $81,167 $57,806 $50,724
======= ======= =======
Allowance for loan losses at beginning of year ......................... $ 876 $ 707 $ 616
------- ------- -------
Loan charge-offs
Real estate ............................................................ - - 15
Installment ............................................................ 121 70 58
Credit cards and related plans ......................................... 9 5 2
Commercial and other ................................................... 2 11 9
------- ------- -------
Total charge-offs ...................................................... 132 86 84
------- ------- -------
<CAPTION>
NOTE 5 - LOANS RECEIVABLE (CONTINUED):
1997 1996 1995
------- ------- -------
Recoveries
<S> <C> <C> <C>
Real estate ............................................................ $ - $ 4 $ -
Installment ............................................................ 33 23 13
Credit cards and related plans ......................................... 4 1 2
Commercial and other ................................................... - - -
------- ------- -------
Total recoveries ....................................................... 37 28 15
------- ------- -------
Net charge-offs ........................................................ 95 58 69
------- ------- -------
Provision for loan losses .............................................. 359 227 160
------- ------- -------
Allowance for loan losses at end of year ............................... 1,140 876 707
======= ======= =======
Ratios
Net charge-offs to average loans outstanding ........................... 0.12% 0.10% 0.14%
Net charge-offs to loans outstanding at end of year................. 0.10% 0.08% 0.13%
Allowance for loan losses to average loans ............................. 1.40% 1.52% 1.39%
Allowance for loan losses to total loans
at end of year ................................................. 1.24% 1.27% 1.35%
Net charge-offs to allowance for losses ................................ 8.33% 6.62% 9.76%
Net charge-offs to provision for loan losses ........................... 26.46% 25.55% 43.13%
</TABLE>
54
<PAGE>
Impairment of loans having recorded investments of $81 thousand at December 31,
1997, and $120 thousand at December 31, 1996, has been recognized in conformity
with FASB Statement 114, as amended by FASB Statement 118. The average recorded
investment in impaired loans during 1997 and 1996 was $98 thousand and $114
thousand, respectively. The total allowance for loan losses related to these
loans was $12 thousand and $22 thousand at December 31, 1997 and 1996,
respectively. No interest income was recognized on impaired loans during periods
classified as such. Large groups of smaller balance homogeneous loans 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 FASB 114 is applied are
commercial loans.
NOTE 5 - LOANS RECEIVABLE (CONTINUED):
Nonaccrual, past due loans, impaired loans and other real estate owned at
December 31, 1997 and 1996, were as follows (in thousands of dollars):
1997 1996
---- ----
Nonaccrual loans ..................................... $ 81 $431
Accruing loans 90 days or more past due .............. - 93
---- ----
Total ........................................... 81 524
==== ====
Total as a percentage of outstanding loans 0.09% 0.76%
==== ====
Impaired loans (included in nonaccrual loans) ........ $ 81 $120
==== ====
Other real estate owned .............................. $132 $-
==== ====
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1996 and 1995, consist of the following
(in thousands of dollars):
1997 1996
---- ----
Land ........................................... $ 684 $ 683
Building and components ........................ 1,381 1,368
Furniture, fixtures and equipment .............. 1,726 1,550
------- -------
Total ..................... 3,791 3,601
Less, accumulated depreciation ................. 1,058 764
------- -------
Premises and equipment - net ..... 2,733 2,387
======= =======
Depreciation expense charged to operations was $294 thousand, $202 thousand, and
$125 thousand, for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE 7 - DEPOSITS:
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100 thousand, totaled approximately $19.5 million and
$12.1 million at December 31, 1997 and 1996, respectively.
55
<PAGE>
NOTE 7 - DEPOSITS (CONTINUED):
At December 31, 1997, the scheduled maturities of time deposits greater than
$100 thousand are as follows (in thousands of dollars):
Maturity
Less than 3 months $ 9,669
Over 3 through 6 months 4,632
Over 6 through 12 5,142
months
Over 1 year through 5 1,985
years
Over 5 years -
-----------
Total 21,428
===========
Deposits of directors and officers totaled approximately $1,756 thousand and
$1,907 thousand at December 31, 1997 and 1996, respectively.
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 (in thousands of dollars):
1997 1996
---- ----
Outstanding at year-end ........................ $ 2,551 $ 1,744
======== ========
Interest rate at year-end ...................... 4.00% 3.75%
======== ========
Maximum month-end balance during the year ...... $ 6,473 $3,776
======== ========
Average amount outstanding during the year ..... $ 3,826 $2,138
======== ========
Weighted average interest rate during the year . 3.99% 3.83%
======== =========
NOTE 9 - NOTES PAYABLE:
In August 1995, the Corporation negotiated a $500 thousand, 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 thousand 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 (in thousands of
dollars):
1996 1995
---- ----
Interest rate at year-end ........................ - 8.50%
====== =====
Maximum amount outstanding at any month-end ...... $1,049 $ 240
====== =====
Average amount outstanding during the year ....... $ 196 $ 95
====== =====
Weighted average interest rate during the year ... 8.25% 8.70%
====== =====
56
<PAGE>
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 thousand and
interest is payable monthly and the advances mature August 2005.
Borrowings during 1997 and 1996 are summarized as follows (in thousands of
dollars):
1997 1996
------ ------
Outstanding at year-end ............................ $1,060 $1,130
====== ======
Interest rate at year-end .......................... 6.60% 6.73%
====== ======
Maximum amount outstanding at any month-end ........ $1,130 $1,300
====== ======
Average amount outstanding during the year ......... $1,101 $1,149
====== ======
Weighted average interest rate during the year ..... 6.63% 6.64%
====== ======
Principal reductions are as follows (in thousands of dollars):
YEAR ENDED:
1998 $70
1999 70
2000 70
2001 70
2002 70
Thereafter 710
------
1,060
Total
=======
NOTE 11 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES:
At December 31, 1997, 190 thousand common shares were reserved for issuance for
employee stock option plans and 600 thousand common shares were reserved for the
dividend reinvestment and additional stock purchase plan.
Under the 1997 Stock Option Plan, up to 106 thousand shares are authorized to be
granted to selected officers and other employees of the Corporation and its
subsidiaries in the form of incentive and nonqualified stock options. Of such
shares, 76,000 are reserved for issuance of incentive stock options and 30,000
are reserved for issuance of nonqualified stock options. In April, 1997, 75,800
incentive stock options were granted to employees of the Corporation at the then
current market price of $8.00 per share. These options may not be exercised
before April, 1998, and expire April, 2007.
The exercise price is determined by the Board of Directors but the exercise
price of incentive stock options may not be less than the fair value of the
shares of common stock at the date of grant.
Under a separate plan, the Corporation granted 84 thousand shares of common
stock for issuance to key employees as nonqualified stock options. The options
expire in year 2000 and the exercise price per share is $3.90 (fair value at
date of grant, adjusted for two, two-for-one stock splits). All options under
this plan are exercisable at December 31, 1997.
57
<PAGE>
NOTE 12 - INCOME TAXES:
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The 1997, 1996 and 1995 provision for income taxes consists of the following (in
thousands of dollars):
1997 1996 1995
---- ---- ----
Currently payable:
Federal ................... $ 636 $ 460 $ 508
South Carolina ............ 77 54 46
Deferred income taxes ............. (77) (103) (37)
----- ----- -----
Total ...... 636 411 517
===== ===== =====
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 (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax at statutory rate on income before income taxes ............... $ 630 $ 394 $ 494
Increase (decrease):
South Carolina bank tax, net of federal tax benefit............. 55 34 43
Tax exempt interest ............................................... (14) (7) (3)
Other ............................................................. (35) (10) (17)
----- ----- -----
Provision for income taxes ................................. 636 411 517
===== ===== =====
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities at
December 31, 1997 and 1996 follow (in thousands of dollars):
1997 1996
---- ----
Allowance for loan losses ............................. $346 $255
Preopening costs ...................................... 69 53
Other ................................................. 43 26
---- ----
Total deferred tax assets .............. 458 334
---- ----
Depreciation .......................................... 80 40
Accretion ............................................. 15 11
Unrecognized gain on securities available-for-sale .... 12 -
---- ----
Total deferred tax liabilities ........ 107 51
---- ----
Total deferred taxes .................. 351 283
==== ====
58
<PAGE>
NOTE 13 - EMPLOYEE BENEFIT PLANS:
The Corporation provides a defined contribution plan with an Internal Revenue
Code Section 401(K) provision. All employees who have completed 500 hours of
service during a six-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.
A participant may elect to make tax deferred contributions up to a maximum of
12% of eligible compensation. The Corporation 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 Corporation may also
make nonelective contributions determined at the discretion of the Board of
Directors. NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED):
The Corporation's contributions for the years ended December 31, 1997, 1996, and
1995 totaled $122 thousand, $90 thousand, and $69 thousand, 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.
59
<PAGE>
NOTE 14 - FINANCIAL INSTRUMENTS (CONTINUED):
The estimated fair value of the Corporation's consolidated financial instruments
at December 31, 1997 and 1996, are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $5,122 $5,122 $6,648 $6,648
Interest-bearing deposits in other banks 1,238 1,238 432 432
Investment securities 32,452 32,472 25,787 25,790
Loans receivable 90,811 94,528 67,953 68,329
Financial liabilities:
Deposits 117,167 117,449 89,851 89,909
Federal funds purchased and securities sold
under agreement to repurchase 2,551 2,551 1,744 1,744
Federal Home Loan Bank advances 1,060 1,061 1,130 1,174
Off-balance-sheetfinancial instruments:
Commitments to extend credit 5,805 5,805 10,626 10,626
Standby letters of credit 537 537 355 355
</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:
CLAIMS AND LAWSUITS:
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, 1997.
NOTE 16 - CONTINGENCIES (CONTINUED):
YEAR 2000 CONSIDERATIONS:
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If uncorrected, many applications
could fail or create erroneous results by or at the year 2000. The year 2000
issue affects virtually all organizations.
60
<PAGE>
The Corporation uses the services of outside software vendors for certain of its
data processing applications. Based on discussions with software vendors,
management does not expect the cost of addressing any year 2000 issue will be a
material event or uncertainty that would cause its reported financial
information not be necessarily indicative of future operating results or future
financial condition, or that the costs or consequences of incomplete or untimely
resolution of any year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.
NOTE 17 - FLORENCE NATIONAL BANK (IN ORGANIZATION):
In August, 1997, the Corporation's Board of Directors approved the sponsorship
of a new national bank, Florence National Bank (FNB), to be located in Florence,
South Carolina. FNB will offer general banking services in the Florence area.
Subject to regulatory approvals and upon completion of the organization of FNB,
the Corporation will acquire all of the common stock of FNB for $4.5 million.
The acquisition of FNB's common stock is to be primarily funded with the sale of
up to $615 thousand in restricted stock of the Corporation to FNB's directors at
a price two dollars per share less than the market price on the American Stock
Exchange the day prior to their purchase and by the sale of up to 300,000 shares
of the Corporation's common stock to the public at the market price on the
American Stock Exchange the day prior to their purchase.
The restricted stock may not be traded for one year from the date of purchase.
The Corporation also has arranged a line-of-credit of up to $4.5 million under
an agreement with an unaffiliated bank to provide cash to purchase the stock of
FNB. The line-of-credit will be reduced dollar for dollar by the stock sale
proceeds. Interest only will be due monthly during the first year of borrowing
under the agreement at LIBOR + 2.25% followed by a seven year balloon payment
amortized over ten years. A portion of the Corporation's capital stock in ONB
will serve as collateral for the line-of-credit. Under the agreement, the
Corporation will be required to maintain a minimum consolidated return on assets
of 1.0 and a minimum cash flow coverage ratio of 1.2 to 1.0 (after the payout of
dividends or other distributions).
NOTE 17 - FLORENCE NATIONAL BANK, IN ORGANIZATION (CONTINUED):
At December 31, 1997, $100 thousand was recorded as common stock subscribed.
Subscription funds will not be escrowed and subscribers will become shareholders
of the Corporation upon acceptance of their subscriptions and issuance of
certificates representing the shares purchased.
Management anticipates the construction of FNB will cost approximately $659
thousand and anticipates completion of construction by June, 1998. The general
contractor on the construction project is a company owned by a director of a
subsidiary of the Corporation. Additionally, management anticipates the cost of
certain furnishings and equipment to be used by FNB will total approximately
$400 thousand. The FNB office building will be constructed on leased land. The
land will be leased under a noncancellable operating lease for an initial term
of ten years beginning the earlier of June 30, 1998 or the date FNB commences
operations. The lease terms provide for two, ten year renewal options and a
third renewal of two years. FNB will be responsible for property taxes on the
leased land and improvements. Annual basic rent in lease years one through five
will be $48 thousand and in years six through ten will be $53 thousand.
NOTE 18 - 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, 1997, that the Banks could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $1,568 thousand.
61
<PAGE>
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 $2,292 thousand
at December 31, 1997.
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, 1997, that the
Banks meet all capital adequacy requirements to which they are subject.
NOTE 18 - REGULATORY MATTERS (CONTINUED):
As of March 31, 1997 and September 30, 1997, for ONB and SNB, respectively, 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.
62
<PAGE>
The Banks' actual capital amounts and ratios are also presented in the table (in
thousands of dollars).
<TABLE>
<CAPTION>
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
FOR CAPITAL CAPITALIZED
ACTUAL ADEQUACY PURPOSES UNDER PROMPT
CORRECTIVE
ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
At December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital (to
Average Assets):
Consolidated $13,066 9.6% $5,449 4.0% $6,812 5.0%
ONB 8,444 8.0% 4,204 4.0% 5,255 5.0%
SNB 2,997 10.0% 1,198 4.0% 1,497 5.0%
Tier I Capital (to Risk
Weighte Assets):
Consolidated 13,066 14.1% 3,706 4.0% 5,559 6.0%
ONB 8,444 12.8% 2,631 4.0% 3,947 6.0%
SNB 2,997 11.6% 1,031 4.0% 1,546 6.0%
Total Capital (to Risk
Weighted Assets):
Consolidated 14,149 15.3% 7,412 8.0% 9,265 10.0%
ONB 9,267 14.1% 5,262 8.0% 6,578 10.0%
SNB 3,257 12.6% 2,061 8.0% 2,577 10.0%
At December 31, 1996:
Tier I Capital (to
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%
</TABLE>
NOTE 19 - STOCK SPLIT:
On June 16, 1997, the Corporation's board of directors declared a two-for-one
common stock split effected in the form of a 100 percent stock dividend
distributed on July 21, 1997, to holders of record on July 2, 1997. Accordingly,
all numbers of common shares and per share data have been restated to reflect
the stock split.
63
<PAGE>
NOTE 20 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only) (in thousands of dollars):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
... DECEMBER 31 ...
1997 1996
---- ----
Balance Sheets:
Assets:
Cash .................................................. $ 494 $ 82
Investment in banking subsidiaries .................... 11,460 10,783
Securities held-to-maturity at amortized cost ......... 649 890
Securities available-for-sale, at fair value .......... 50 -
Premises and equipment (net of accumulated
depreciation of $217 thousand in 1997 and $141
thousand in 1996) ..................................... 256 271
Due from banking subsidiaries ......................... - 3
Other assets .......................................... 184 120
------- -------
Total assets .......................................... 13,093 12,149
======= =======
Liabilities and shareholders' equity:
Other liabilities ..................................... $ 55 $ 45
Shareholders' equity .................................. 13,018 12,104
Unrealized gain on securities available-for-sale,
net of applicable deferred income taxes ............... 20 -
------- -------
Total liabilities and shareholders' equity ............ 13,093 12,149
======= =======
NOTE 20 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
64
<PAGE>
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY) (CONTINUED):
<TABLE>
<CAPTION>
..... YEAR ENDED DECEMBER 31 .....
1997 1996 1995
---- ---- ----
Statements of Income:
Income:
<S> <C> <C> <C>
Dividends from banking subsidiaries ................................. $ 580 $ 504 $ 415
Management fees ..................................................... 948 438 -
Interest ............................................................ 50 69 -
------- ------- -------
Total ............................................................... 1,578 1,011 415
------- ------- -------
Expenses:
Salaries and employee benefits ...................................... 558 264 45
Premises and equipment .............................................. 184 86 1
Supplies ............................................................ 35 22 -
Director fees ....................................................... 22 19 3
Interest ............................................................ - 11 9
Other general expenses .............................................. 228 215 48
------- ------- -------
Total ............................................................... 1,027 617 106
------- ------- -------
Income before equity in undistributed
earnings of banking subsidiaries .................................... 551 393 309
Applicable income tax benefit ....................................... 7 39 36
Equity in undistributed earnings of
banking subsidiaries ................................................ 658 318 592
------- ------- -------
Net income .......................................................... 1,216 750 937
======= ======= =======
Statements of Cash Flows:
Cash flows from operating activities:
Net income .......................................................... $ 1,216 $ 750 $ 937
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ....................................... 91 56 14
Accretion of discounts - securities ................................. (23) - -
Decrease in due from banking subsidiaries ........................... (3) 33 8
Increase in other assets ............................................ (103) (65) (30)
Increase (decrease) in other liabilities ............................ 6 (22) 61
Undistributed earnings of banking subsidiaries ...................... (658) (318) (592)
------- ------- -------
Net cash provided by operating activities ........................... 526 434 398
------- ------- -------
</TABLE>
65
<PAGE>
NOTE 20 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY) (CONTINUED):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
Cash flows from investing activities:
<S> <C> <C> <C>
Investment in SNB ...................................................... $ - $(3,500) $ -
Transfer of premises and equipment to SNB .............................. - 444 -
Purchase of premises and equipment ..................................... (60) (408) (347)
Purchases of securities held-to-maturity ............................... (636) (1,137) -
Purchases of securities available-for-sale ............................. (50) - -
Proceeds from maturities of securities
held-to-maturity ....................................................... 900 247 -
------- ------- -------
Net cash provided (used) by investing activities ....................... 154 (4,354) (347)
------- ------- -------
Cash flows from financing activities:
Increase in note payable ............................................... - 809 240
Repayment of note payable .............................................. - (1,049) -
Common stock issued .................................................... 135 4,402 -
Stock issuance cost .................................................... (9) (52) (50)
Cash dividends paid .................................................... (394) (318) (242)
------- ------- -------
Net cash used (provided) by financing activities ....................... (268) 3,792 46
------- ------- -------
Net increase (decrease) in cash and cash equivalents ................... 412 (129) 97
Cash and cash equivalents at beginning of year ......................... 82 211 113
------- ------- -------
Cash and cash equivalents at end of year ............................... 494 82 211
======= ======= =======
Supplemental disclosures:
Total increase (decrease) in unrealized gain
(loss) on securities available-for-sale ................................ $ 20 $ (23) $ 216
======= ======= =======
</TABLE>
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
66
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Community Bankshares, Inc.
We consent to incorporation by reference into Registration Statement No.
333-18461 on Form S-8 and Registration Statement No. 333-46111 on Form S-2 of
Community Bankshares, Inc. of our report dated January 30, 1998, relating to the
consolidated balance sheets of Community Bankshares, Inc. and subsidiaries as of
December 31, 1997 and 1996, 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, 1997, which report appears in the December
31, 1997, annual report on Form 10-KSB of Community Bankshares, Inc.
J. W. Hunt and Company, LLP
Columbia, South Carolina
March 30, 1998
67
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1997, and the Consolidated Statement
of Income for the Year Ended December 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,062
<INT-BEARING-DEPOSITS> 1,238
<FED-FUNDS-SOLD> 1,060
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,141
<INVESTMENTS-CARRYING> 17,311
<INVESTMENTS-MARKET> 17,331
<LOANS> 91,951
<ALLOWANCE> 1,140
<TOTAL-ASSETS> 134,574
<DEPOSITS> 117,167
<SHORT-TERM> 2,551
<LIABILITIES-OTHER> 1,060
<LONG-TERM> 759
0
0
<COMMON> 9,156
<OTHER-SE> 3,861
<TOTAL-LIABILITIES-AND-EQUITY> 134,574
<INTEREST-LOAN> 7,692
<INTEREST-INVEST> 1,814
<INTEREST-OTHER> 314
<INTEREST-TOTAL> 9,820
<INTEREST-DEPOSIT> 4,143
<INTEREST-EXPENSE> 4,369
<INTEREST-INCOME-NET> 5,446
<LOAN-LOSSES> 358
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,004
<INCOME-PRETAX> 1,852
<INCOME-PRE-EXTRAORDINARY> 1,852
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,216
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 4.70
<LOANS-NON> 81
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 81
<ALLOWANCE-OPEN> 876
<CHARGE-OFFS> 132
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 1,140
<ALLOWANCE-DOMESTIC> 1,140
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
