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, 1998
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:
Title of each class Name of each exchange on which registered
Common Stock, No Par Value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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. [ ]
State issuer's revenue for the most recent fiscal year. $ 13,376,000
The aggregate market value of the Common Stock held by non-affiliates
on March 3, 1999, was approximately $31,106,000. As of March 3, 1999, there were
3,037,288 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, 1998 - Part II
(2) Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders - Part III
- --------------------------------------------------------------------------------
<PAGE>
10-KSB CROSS REFERENCE INDEX
Part I Page
Item 1 Description of Business 2
Item 2 Description of Property 9
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Part II
Item 5 Market for Common Equity and Related Stockholder 10
Matters
Item 6 Management's Discussion and Analysis of Financial 10
Position and Operations
Item 7 Financial Statements 10
Item 8 Changes In and Disagreements with Accountants on 11
Accounting and Financial Disclosure
Part III
Item 9 Directors and Executive Officers *
Item 10 Executive Compensation *
Item 11 Security Ownership of Certain Beneficial Owners *
and Management
Item 12 Certain Relationships and Related Transactions *
Part IV
Item 13 Exhibits and Reports on Form 8-K *
* Incorporated by reference to Registrant's Proxy Statement
for 1999 Annual Meeting of Shareholders 11
PART I
Item 1. Description of Business
Form of organization
Community Bankshares, Inc. (CBI) is a South Carolina corporation and a
bank holding company. CBI commenced operations on July 1, 1993, upon
effectiveness of the acquisition of the Orangeburg National Bank as a
wholly-owned subsidiary. In June 1996 CBI acquired all the stock of Sumter
National Bank, which is also a wholly-owned subsidiary. In July 1998 CBI
acquired all the stock of Florence 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.
Florence National Bank (the Florence bank) is a national bank,
chartered in 1998, operating from one office located in Florence, South
Carolina.
Business of banking
The Banks offer a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. Deposits are insured up to applicable
limits by the Federal Deposit Insurance Corporation. Most of the Banks' deposits
are attracted from individuals and small businesses.
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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, Sumter, and
Florence 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. The 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. The market area for the
Florence bank generally encompasses the county of Florence. 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, Sumter,
and Florence 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 $154 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, 1998, 1997 and 1996
Orangeburg, S. C. Comparative Bank Deposits
<TABLE>
<CAPTION>
June June June
1998 1997 1996
------------------------- --------------------------- -------------------------
Bank Deposit $ % market Deposit $ % market Deposit $ % market
(Dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
First National Bank ............... $154 30.8% $148 30.1% $141 28.9%
First Union National Bank.......... 61 12.2% 63 12.8% 68 13.9%
NationsBank ....................... 97 19.4% 100 20.3% 104 21.4%
BB&T .............................. 90 18.0% 90 18.3% 92 18.8%
Others (estimate).................. 6 1.2% 5 1.0% 5 1.0%
Orangeburg National Bank........... 92 18.4% 86 17.5% 78 16.0%
---- ----- ---- ----- ---- -----
Total deposits .................... $501 100.0% $490 100.0% $488 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
Source: 1997 Branches of South Carolina, Sheshunoff Information Services and the
Federal Deposit Insurance Corp. 1998 Data Book
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The financial institution with the largest deposit base in Sumter
County is SAFE (Shaw Air Force Employees) Federal Credit Union with deposits of
$215 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, 1998, 1997 and 1996. (As of June 30, 1996, Sumter
National Bank had been in business for twenty days.)
Sumter, S. C. Comparative Bank Deposits
<TABLE>
<CAPTION>
June June June
1998 1997 1996
------------------------- --------------------------- -------------------------
Bank Deposit $ % market Deposit $ % market Deposit $ % market
(Dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
BB&T .................................... 97 12.6% 96 13.2% 96 13.7%
First Union NB .......................... - 0.0% - 0.0% 23 3.3%
National Bk of SC ....................... 176 22.8% 171 23.4% 167 23.9%
NationsBank ............................. 78 10.1% 73 10.0% 78 11.2%
Sumter NB ............................... 38 4.9% 22 3.0% 2 0.3%
First Citizens Bank and Trust............ 16 2.1% 17 2.4% - 0.0%
Wachovia Bk of SC ....................... 151 19.6% 147 20.1% 139 19.9%
SAFE FCU * .............................. 215 27.8% 202 27.7% 192 27.4%
Sumter City CU (estimate)................ 2 0.3% 2 0.3% 2 0.3%
---- ----- ---- ----- ---- -----
Total deposits .......................... $774 100.0% $730 100.0% $699 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
Source: 1997 Branches of South Carolina, Sheshunoff Information Services and the
Federal Deposit Insurance Corp. 1998 Data Book
The financial institution with the largest deposit base in Florence
County is Wachovia Bank NA with deposits of $213 million. The following chart
illustrates the relative position of the banks and other financial institutions
in the marketplace in terms of their deposits as of June 30, 1998. (Florence
National Bank opened for business on July 6, 1998, and consequently is not
reflected in the chart.)
Florence, S. C. Comparative Bank Deposits
June 1998
---------------------------
BANK Deposit$ % market
Wachovia Bank, NA .......................... $ 213 17%
Branch Banking & Trust Company of SC ....... 209 17%
Peoples FS&LA of SC ........................ 187 15%
First Union National Bank .................. 106 9%
NationsBank NA ............................. 109 9%
Centura (formerly Pee Dee State Bank) ...... 91 7%
National Bank of SC ........................ 76 6%
Citizens Bank .............................. 65 5%
Other (9 institutions) ..................... 176 14%
------ ----
Total ...................................... $1,230 100%
====== ====
*amounts in millions
Source: Federal Deposit Insurance Corp. 1998 Data Book
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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.
SUPERVISION AND 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.
The BHCA also prohibits CBI from acquiring control of any bank operating outside
the State of South Carolina unless such action is specifically authorized by the
statutes of the state where the Bank to be acquired is located.
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. The BHCA generally does not place territorial
restrictions on the activities of such non-banking related activities.
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
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
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depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. 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.
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 risk-based and leverage capital
adequacy guidelines for holding companies and banks that are members of the
Federal Reserve System subject to its regulation. The capital guidelines and
CBI's capital position are summarized in Note 16 to the Financial Statements,
contained elsewhere in this report. All three of the banks are considered well
capitalized, since they have ratios of total capital to risk weighted assets
exceeding 10% at the end of 1998 and 1997.
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.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.
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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).
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
Federal law regulates transactions among CBI and its affiliates,
including the amount of the Banks' loans to or investments in nonbank affiliates
and the amount of advances to third parties collateralized by securities of an
affiliate. Further, a bank holding company and its affiliates 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, Sumter National Bank's, and
Florence National Bank's deposits are insured by the BIF, the Banks are subject
to insurance assessments imposed by the FDIC. The FDIC equalized the assessment
rates for BIF-insured and SAIF-insured deposits effective January 1, 1997. Thus,
for the semi-annual period beginning January 1, 1997, the assessments imposed on
all FDIC deposits for deposit insurance have an effective rate ranging from 0 to
27 basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. However, because legislation
enacted in 1996 requires that both SAIF-insured and BIF-insured deposits pay a
pro rata portion of the interest due on the obligations issued by the Financing
Corporation ("FICO"), the FDIC is currently assessing BIF-insured deposits an
additional 1.26 basis points per $100 of deposits, and SAIF-insured deposits an
additional 6.30 basis points per $100 of deposits, to cover those obligations.
The FICO assessment will continue to 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, Sumter National Bank, and Florence National
Bank are also subject to examination by the OCC bank examiners. In addition, the
Banks are 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. The Banks' loan operations are subject to
certain federal consumer credit laws and regulations promulgated thereunder,
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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 the Banks are
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.
The Banks are 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 are evaluated as part of
the examination process, and also are considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
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."
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).
CBI does not believe that these regulations will have a material adverse effect
on its operations.
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
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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
adequately capitalized 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
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, 1998, the Corporation employed 75 full-time equivalent
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.
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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 is the site of the
main office for Florence National Bank. The details of the lease are discussed
in Note 6 to the financial statements contained elsewhere in this report.
The Corporation has constructed a one-story building of approximately
7,500 share feet. The building cost approximately $724,000.
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 1998.
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, 1998 (the "1998 Annual
Report") is incorporated herein by reference.
The Corporation sold 53,950 common shares which were subject to resale
restrictions to the original organizers of Florence National Bank pursuant to an
agreement between CBI and the organizers during the period covered by this
report. There were no underwriters involved in this transaction. The sale
generated a total offering price of $665,956. These sales were 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 Position and Results of Operations" in the 1998 Annual
Report is incorporated herein by reference.
Item 7. Financial Statements
The information set forth under the caption "Financial Statements" in
the 1998 Annual Report is incorporated herein by reference.
10
<PAGE>
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 information set forth under the caption "MANAGEMENT" and under
"SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Proxy Statement
to be used in conjunction with the 1999 Annual Meeting of Shareholders (the
"Proxy Statement"), which will be filed within 120 days of the Corporation's
fiscal year end, is incorporated herein by reference.
Item 10. Executive Compensation
The information set forth under the caption "MANAGEMENT COMPENSATION"
in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions
The information set forth under the caption "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" in the Proxy Statement is incorporated herein by
reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
No.(from Item
601 of S-B)
3.1 Articles of Incorporation, as amended (incorporated by
reference to exhibits filed in the Registrant's Form 10-QSB
filed 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 on Form S-2, filed September
11, 1995, 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 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, 1998
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.
11
<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 15, 1999
By: s/E. J. Ayers, Jr.
Chief Executive Officer and Chairman of the Board of Directors
By s/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/ Alvis J. Bynum March 15, 1999
Alvis J. Bynum, Director
s/ Martha Rose C. Carson March 15, 1999
Martha Rose C. Carson, Director
s/ Anna O. Dantzler March 15, 1999
Anna O. Dantzler, Director
s/J. M. Guthrie March 15, 1999
J. M. Guthrie, Director
s/Richard L. Havekost March 15, 1999
Richard L. Havekost, Director
s/ Phil P. Leventis March 15, 1999
Phil P. Leventis, Director
s/Jess A. Nance March 15, 1999
Jess A. Nance, Director
s/William H. Nock March 15, 1999
William H. Nock, Director
s/ Samuel F. Reid, Jr. March 15, 1999
Samuel F. Reid, Jr., Director
s/ J. Otto Warren, Jr. March 15, 1999
J. Otto Warren, Jr., Director
s/ Wm. Reynolds Williams March 15, 1999
Wm. Reynolds Williams, Director
s/ Michael A. Wolfe March 15, 1999
Michael A. Wolfe, Director
12
<PAGE>
EXHIBIT INDEX
Exhibit Description
No.(from Item
601 of S-B)
3.1 Articles of Incorporation, as amended (incorporated by
reference to exhibits filed in the Registrant's Form 10-QSB
filed 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 on Form S-2, filed September
11, 1995, 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 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, 1998
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
13
PORTIONS OF 1998 ANNUAL REPORT TO SHAREHOLDERS
Financial Highlights for Community Bankshares, Inc.
The following is a summary of the consolidated financial position and
results of operations of the Corporation for the years ended December 31, 1994,
through December 31, 1998.
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996 1995 1994
- -------------------------------- ---- ---- ---- ---- ----
Financial Condition (All amounts in thousands of dollars, except per share data.)
<S> <C> <C> <C> <C> <C>
Investment securities ...................... $ 34,148 $ 32,452 $ 25,787 $24,669 $23,405
Net loans receivable ...................... 116,336 90,811 67,953 51,617 47,938
Total assets ............................... 182,281 134,574 105,461 83,897 77,158
Total deposits ............................. 147,630 117,167 89,851 72,550 67,669
Federal funds purchased .................... 4,464 2,551 1,744 2,570 2,800
and securities sold
under agreement to
repurchase
Long-term obligations ...................... 9,490 1,060 1,130 700 -
Stockholders' equity ....................... $ 19,659 $ 13,037 $ 12,104 $ 7,346 $ 6,387
Earnings Summary
Interest income ............................ $ 12,320 $ 9,820 $ 7,261 $ 6,327 $ 5,162
Interest expense ........................... 5,554 4,374 3,279 2,965 2,136
-------- -------- -------- ------- -------
Net interest income ................... 6,766 5,446 3,982 3,362 3,026
Provision for loan losses .................. 484 358 227 160 125
Other operating income ..................... 1,055 768 503 431 364
Other operating expenses ................... 5,107 4,004 3,097 2,179 2,111
-------- -------- -------- ------- -------
Net income before ..................... 2,230 1,852 1,161 1,454 1,154
taxes
Income taxes ............................... 663 636 411 517 400
-------- -------- -------- ------- -------
Net income after tax .................. $ 1,567 $ 1,216 $ 750 $ 937 $ 754
======== ======== ======== ======= =======
Per share data
Basic earnings per share ................... $ 0.54 $ 0.46 $ 0.31 $ 0.54 $ 0.44
Dividends .................................. 0.16 0.15 0.145 0.14 0.13
</TABLE>
1
<PAGE>
Financial Highlights for Orangeburg National Bank.
The following is a summary of the financial position and results of
operations of Orangeburg National Bank for the years ended December 31, 1994,
through December 31, 1998.
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996 1995 1994
------------------------ ---- ---- ---- ---- ----
(Dollar amounts in thousands)
Financial Condition
<S> <C> <C> <C> <C> <C>
Investment securities ..................... $ 30,382 $ 29,434 $23,826 $24,669 $23,405
Net loans receivable ...................... 76,708 66,444 59,393 51,617 48,053
Total assets .............................. 116,734 103,266 90,772 83,524 77,102
Total deposits ............................ 92,643 90,663 79,792 72,761 67,782
Federal funds purchased ................... 4,464 2,551 1,744 2,570 2,800
and securities sold
under agreement to
repurchase
Other borrowed money ...................... 9,490 1,060 1,130 700 -
Stockholders' equity ...................... $ 9,520 $ 8,464 $ 7,624 $ 6,988 $ 6,180
Earnings Summary
Interest income ........................... $ 8,905 $ 7,966 $ 6,904 $ 6,326 $ 5,160
Interest expense .......................... 4,076 3,631 3,176 2,956 2,119
--------- -------- ------- ------- -------
Net interest income .................. 4,829 4,335 3,728 3,370 3,041
Provision for loan losses ................. 270 195 130 160 125
Non-interest income ....................... 716 570 469 430 362
Gains on securities ....................... (1) - - - 2
Non-interest expense ...................... 2,782 2,564 2,238 2,080 2,006
--------- -------- ------- ------- -------
Net income before .................... 2,492 2,146 1,829 1,560 1,274
taxes
Income taxes .............................. 755 745 667 553 444
--------- -------- ------- ------- -------
Net income after tax ................. $ 1,737 $ 1,401 $ 1,162 $ 1,007 $ 830
========= ======== ======= ======= =======
</TABLE>
2
<PAGE>
Financial Highlights for Sumter National Bank.
The following is a summary of the financial position and results of
operations of Sumter National Bank for the period June 10, 1996, (inception)
through December 31, 1998.
<TABLE>
<CAPTION>
Years and period ended December 31, 1998 1997 1996
- ----------------------------------- ---- ---- ----
(Dollar amounts in thousands)
Financial Condition
<S> <C> <C> <C>
Investment securities ........................................ $ 3,512 $ 2,319 $ 1,071
Net loans receivable ......................................... 35,009 24,726 8,855
Total assets ................................................. 50,649 30,165 13,322
Total deposits ............................................... 46,755 27,013 10,112
Stockholders' equity ......................................... $ 3,672 $ 2,996 $ 3,159
Earnings Summary
Interest income .............................................. $ 3,077 $ 1,801 $ 338
Interest expense ............................................. 1,439 750 142
------- -------- --------
Net interest income ..................................... 1,638 1,051 196
Provision for loan losses .................................... 162 164 97
Non-interest income .......................................... 352 202 45
Non-interest expense ......................................... 1,557 1,354 701
------- -------- --------
Net income (loss) ....................................... 271 (265) (557)
before taxes
Income tax (benefit) ......................................... 92 (102) (217)
------- -------- --------
Net income (loss) after tax ............................. $ 179 $ (163) $ (340)
======= ======== ========
</TABLE>
3
<PAGE>
Financial Highlights for Florence National Bank.
The following is a summary of the financial position and results of
operations of Florence National Bank for the period July 6, 1998, (inception)
through December 31, 1998.
Period ended December 31, 1998
- ------------------------- ----
(Dollar amounts in thousands)
Financial Condition
Investment securities .......................... $ 203
Net loans receivable ........................... 5,341
Total assets ................................... 14,391
Total deposits ................................. 10,162
Stockholders' equity ........................... $ 4,169
Earnings Summary
Interest income ................................ $ 271
Interest expense ............................... 156
Net interest income ....................... 115
Provision for loan losses ...................... 52
Non-interest income ............................ 34
Non-interest expense ........................... 616
-------
Net loss before taxes ..................... (519)
Income tax (benefit) ........................... (188)
-------
Net loss after tax ........................ $ (331)
=======
4
<PAGE>
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, 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
Mar. 31, 1998 $17.44 $14.00
June 30, 1998 $17.00 $14.00
Sept. 30, 1998 $16.88 $13.00
Dec. 31, 1998 $14.81 $13.00
During 1998 the Corporation had a stock sales volume of 159,000 shares on the
American Stock Exchange. During the first half of 1998 the Corporation sold
414,000 shares of its common stock at an average price of $13.47. During 1997
the Corporation had a stock sales volume of 338,000 shares on the American Stock
Exchange.
There were 1,457 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 1998. There were 1,162 holders of record of
the Corporation's Common Stock (no par value) as of December 31, 1997.
During 1998 the Corporation authorized and paid two cash dividends
totaling 16 cents per share. The total cost to the Corporation of these payments
was approximately $453,000 or 29% of after tax profits. 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
or 32% 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, 1998, Orangeburg
National Bank could pay up to $1,860,000 in dividends without special approval
of the Comptroller of the Currency.
5
<PAGE>
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, 1998 and 1997. This
commentary should be reviewed in conjunction with the audited consolidated
financial statements and notes contained elsewhere in this report.
Forward Looking Statements
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as `forward looking statements'
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. The Corporation cautions readers that forward
looking statements, including without limitation, those relating to the
Corporation's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Corporation's reports filed with the Securities and Exchange
Commission.
Business of the Corporation and the Banks
Community Bankshares, Inc. is a bank holding company. It was
incorporated on November 30, 1992, and commenced operations July 1, 1993, by
acquiring Orangeburg National Bank. CBI now owns three banking subsidiaries:
Orangeburg National Bank, Sumter National Bank, and Florence National Bank. CBI
provides item and data processing and other technical services for its banking
subsidiaries. The consolidated financial report for 1998 represents the
operations of the holding company and its three banks. (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 operation in November 1987. It operates two offices in Orangeburg,
South Carolina. Sumter National Bank is a national banking association and
commenced operation in June 1996. It operates one office in Sumter, South
Carolina. Florence National Bank is a national banking association and commenced
operations in July 1998. It operates one office in Florence, South Carolina. The
banks provide commercial banking services in their respective communities. Their
primary customer markets are consumers and small businesses.
Florence National Bank
In 1997 Community Bankshares, Inc. 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 assisted in the process of submitting an
application for a bank charter to the Comptroller of the Currency. CBI also
assisted in the pre-opening and organizational process. All required regulatory
approvals were obtained and the bank opened for business on July 6, 1998.
During 1998 CBI sold to the public 300,000 shares of its common stock
primarily for the purpose of obtaining funds with which to acquire, and thereby
to capitalize, Florence National Bank. In addition to this offering CBI sold
114,000 shares of common stock, which are subject to resale restrictions, to the
Florence National Bank organizing directors in a limited offering. The combined
results of these stock sales generated $5.4 million in net proceeds. The
majority of the proceeds of both offerings were used to purchase $4.5 million in
common stock of the new bank.
6
<PAGE>
Year 2000 Readiness Disclosure
The change in the year from 1999 to 2000 may create serious problems
for many computer systems around the world. This so-called millennium bug or Y2K
problem may affect certain of the Corporation's systems. 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 and has formed a committee to coordinate
its Year 2000 activities. The Corporation has been taking and will continue to
pursue reasonably necessary steps to protect its operations and assets.
Management estimates that the costs of Year 2000 compliance will
approximate $225,000 and will be funded with internally generated resources. The
majority of these costs have already been expended and the remaining items
relate primarily to the Corporation's testing plans. Most of the Corporation's
local and wide area network computer and communications equipment is relatively
new. For this reason, the overall internal financial impact of the Year 2000
problem is expected to be relatively limited.
The Corporation has been devoting significant time and energy to
management of the Year 2000 problem. It formed a Year 2000 steering committee
comprised of senior officers from each of the three banks and the holding
company to oversee the process. The boards of directors of the Corporation and
its subsidiaries receive regular detailed progress reports on the Year 2000
project. The national bank regulators, which supervise the three banking
subsidiaries, have also devoted a substantial amount of their time and
supervisory attention to the Year 2000 problems and related issues, as well as
monitoring the Banks' progress toward Year 2000 compliance.
The Corporation has concentrated its internal efforts toward making its
own mission critical systems fully Year 2000 compliant as quickly as practical.
Management expects its efforts to be successful and, consequently, has no plans
to implement any major changes in the information technology systems prior to
January 2000.
The Corporation has completed testing its core information system. Test
results have been successful. Management expects to be substantially complete
with testing of other mission critical systems by the end of the first quarter
1999. Management has recently simulated conducting banking business during
January 2000 and was successful in its testing. Management plans to engage its
independent accounting firm early in the second quarter of 1999 to evaluate the
reasonableness and validity of its testing program.
Nevertheless, the Corporation's ability to avoid experiencing difficulty
as a result of the Year 2000 problem could be adversely affected by the
availability of skilled personnel, the success of vendors, customers and
providers of services in dealing with their own Year 2000 problems and by the
difficulty of identifying all the possible causes of the Year 2000 problem and
interrelationships between various mission critical systems. The Corporation is
refining its contingency planning to anticipate potential problems from external
as well as internal Year 2000 problems, including, but not limited to,
telecommunications and power suppliers.
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.
1998 compared to 1997
Earnings Performance
The Corporation's net income was $1,567,000, or $.54 per share, in
1998. This compares to $1,216,000, or $.46 per share, in 1997, an increase of
$351,000, or 29%.
7
<PAGE>
Management views this increase in earnings as primarily the result of a
24% increase in earnings at the Orangeburg bank, to $1,737,000 in 1998 from
$1,401,000 in 1997, and a $342,000 increase in earnings at the Sumter bank, to
$179,000 in 1998 from a net loss of $163,000 in 1997. The Florence bank showed a
net loss at year-end of $331,000 for approximately six months of operation.
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, 1998 and 1997.
Balance Sheet Categories as a Percent of Average Total Assets as of December 31,
Assets 1998 1997
---- ----
Interest bearing deposits .......................... 1.51% 1.03%
Investment securities taxable ...................... 19.11% 23.10%
Investment securities--tax exempt .................. 0.22% 0.33%
Federal funds sold ................................. 6.75% 3.51%
Loans receivable ................................... 65.71% 65.25%
------ ------
Total interest earning assets ................. 93.30% 93.22%
Cash and due from banks ............................ 4.13% 4.01%
Allowance for loan losses .......................... (0.81%) (0.81%)
Premises and equipment ............................. 2.30% 2.26%
Other assets ....................................... 1.08% 1.32%
------ ------
Total assets .................................. 100.00% 100.00%
====== ======
Liabilities and Shareholders' Equity
Interest bearing deposits
Savings ............................................ 14.12% 15.74%
Interest bearing transaction accounts .............. 8.91% 9.63%
Time deposits ...................................... 46.37% 47.85%
------ ------
Total interest bearing deposits ............... 69.40% 73.22%
Short term borrowing ............................... 2.05% 3.09%
FHLB advances ...................................... 4.38% 0.89%
------ ------
Total interest bearing liabilities............. 75.83% 77.20%
Noninterest bearing demand deposits ................ 12.40% 12.14%
Other liabilities .................................. 0.60% 0.69%
Shareholders' equity ............................... 11.17% 9.97%
------ ------
Total liabilities and shareholders' equity .... 100.00% 100.00%
====== ======
8
<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,
1998 and 1997.
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997
---- ----
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 ........................... $ 2,385 $ 126 5.28% $ 1,283 $ 73 5.69%
Investment securities taxable ....................... 30,096 1,915 6.36% 28,727 1,797 6.26%
Investment securities--tax exempt.................... 341 14 6.22% 410 17 6.28%
Federal funds sold .................................. 10,626 568 5.35% 4,363 241 5.52%
Loans receivable (2) ................................ 103,500 9,697 9.37% 81,167 7,692 9.48%
--------- ------- ---- --------- ------ ----
Total interest earning assets................... 146,948 12,320 8.38% 115,950 9,820 8.47%
Cash and due from banks ............................. 6,499 4,990
Allowance for loan losses ........................... (1,281) (1,011)
Premises and equipment .............................. 3,622 2,817
Other assets ........................................ 1,718 1,640
--------- ---------
Total assets ................................... $ 157,506 $ 124,386
========= =========
Liabilities and Shareholders' Equity
Interest bearing deposits
Savings ............................................. $ 22,235 $ 774 3.48% $ 19,576 $ 681 3.47%
Interest bearing transaction accounts................ 14,028 253 1.80% 11,974 217 1.81%
Time deposits ....................................... 73,045 4,018 5.50% 59,522 3,250 5.46%
--------- ------- ---- --------- ------ ----
Total interest bearing deposits................. 109,308 5,045 4.62% 91,072 4,148 4.55%
Short term borrowing ................................ 3,225 119 3.69% 3,846 153 3.98%
FHLB advances ....................................... 6,905 390 5.65% 1,101 73 6.63%
--------- ------- ---- --------- ------ ----
Total interest bearing liabilities.............. 119,438 5,554 4.65% 96,019 4,374 4.55%
Noninterest bearing demand deposits.................. 19,536 15,098
Other liabilities ................................... 942 864
Shareholders' equity ................................ 17,590 12,405
--------- ---------
Total liabilities and shareholders' equity .......... $ 157,506 $ 124,386
========= =========
Interest rate spread(3) ............................. 3.73% 3.92%
Net interest income and yield on earning assets(4)... $ 6,766 4.61% $5,446 4.70%
</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.
9
<PAGE>
Interest Income and Interest Expense
The Corporation's interest income increased in 1998 from 1997. In 1998
the Corporation earned $12,320,000 in total interest income, up from the prior
year's $9,820,000. This represented a $2,500,000 or a 25.4% increase. This
growth was mostly the result of increased volume in the loan and investment
portfolios at each of the three banks.
Interest bearing deposits in other banks contributed $126,000 to
interest income in 1998, up from $73,000 the prior year, an increase of $53,000
or 72.6%. In 1998 the Corporation had an average of $2,385,000 invested in
interest bearing deposits, up from the prior year's $1,283,000, an increase of
$1,102,000 or 85.9%. The average yield on these deposits during 1998 was 5.28%,
down .41% from the prior year's yield of 5.69%.
Investments contributed $1,915,000 to interest income in 1998, up from
$1,797,000 the prior year, an increase of $118,000 or 6.6%. The investment
portfolio averaged $30,096,000 in 1998, up from the prior year's $28,727,000, an
increase of $1,369,000 or 4.7%. The Corporation's investment portfolio consists
primarily of short-term U. S. government and agency debt issues. The average
yield on investments during 1998 was 6.36%, up from 6.26% in 1997.
The Corporation's tax-exempt securities portfolio earned $14,000 during
1998, down from $17,000 the prior year. The portfolio averaged $341,000 in 1998,
down from $410,000 in 1997, a decrease of $69,000 or 16.8%. The average yield
was 6.22%, compared to 6.28% 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 $568,000 to interest income in 1998, up from
$241,000 in the prior year, an increase of $327,000 or 136%. The Corporation had
an average of $10,626,000 in federal funds during 1998, up from the prior year's
$4,363,000, an increase of $6,263,000 or 144%. The average yield on federal
funds during 1998 was 5.35%, down from 5.52% in 1997. The primary reason for the
substantial increase in federal funds was that the new bank in Florence has
maintained a highly liquid position in its first few months of operation.
The Corporation's major source of interest income is the loan
portfolio, which contributed $9,697,000 to interest income in 1998, up from
$7,692,000 in the prior year, an increase of $2,005,000 or 26%. The average loan
portfolio for 1998 was $103,500,000, compared to the prior year's $81,167,000,
an increase of $22,333,000 or 27.5%. The average yield on loans during 1998 was
9.37%, down from 9.48% in 1997.
The Corporation had average earning assets in 1998 of $146,948,000
which earned a yield of 8.38%. In 1997 the Corporation had average earning
assets of $115,950,000 which earned a yield of 8.47%. Average earning assets
increased $30,998,000 or 26.7%.
The Corporation's savings deposits consist of savings and money market
accounts. Total savings accounts averaged $22,235,000 in 1998, up from
$19,576,000 in the prior year, an increase of $2,659,000 or 13.6%. The cost of
these funds increased to 3.48% in 1998 from 3.47% in the prior year.
Interest bearing transaction accounts are the primary checking accounts
that the banks offer customers. This overall category was $14,028,000 in 1998,
up from $11,974,000 in 1997, an increase of $2,054,000 or 17.2%. The average
cost of these funds was 1.80% in 1998, compared to 1.81% in the prior year.
Time deposits are the largest category of deposits, totaling
$73,045,000 in 1998, up from $59,522,000 in the prior year, an increase of
$13,523,000 or 22.7%. The cost of time deposits increased to 5.50% from 5.46%.
The Orangeburg bank has several commercial customers for whom 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 1998 was
$3,225,000, down from $3,846,000 in the prior year, a decrease of $621,000 or
16.1%. The cost of these funds decreased to 3.69% from 3.98%.
10
<PAGE>
The Orangeburg bank is a member of and has the ability to borrow from
the Federal Home Loan Bank (FHLB). The bank had an average $6,905,000
outstanding borrowing balance during 1998 at an average cost of 5.65%. The bank
had an average $1,101,000 outstanding during 1997 with the FHLB at an average
cost of 6.63%. These borrowings are a result of the bank's on-going
asset/liability management strategy. 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 Sumter and Florence banks did not have any
borrowing activity with the FHLB during 1998 and 1997.
The Corporation had total interest bearing liabilities in 1998 of
$119,438,000 costing an average of 4.65%, compared with interest bearing
liabilities in 1997 of $96,019,000 that cost an average of 4.55%. Average
interest bearing liabilities increased $23,419,000 or 24.4%.
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 1998 net interest income of
$1,321,000 is due almost entirely to changes in volume. Almost all of the
$2,500,000 increase in interest income was from volume growth in earning assets,
especially the loan portfolio. Likewise, most of the $1,180,000 increase in
interest expense was due to volume increases for time deposits. During 1997
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 to 8.50% in March 1997, and stayed there until late
1998, when it was reduced in three installments to 7.75%. Management expects
that interest rates will be mostly stable during 1999. 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 1998, improvements in net interest income during
1999 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.
Volume and Rate Variance Analysis
<TABLE>
<CAPTION>
1998 compared to 1997 1997 compared to 1996
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest earning assets (Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits ....................... $ 58 $ (5) $ 53 $ 33 $ 1 $ 34
Investment securities taxable ................... 87 31 118 111 88 199
Investment securities-tax exempt ................ (5) 0 (5) 0 0 0
Federal funds sold .............................. 334 (7) 327 72 6 78
Loans receivable ................................ 2,095 (88) 2,007 2,213 35 2,249
------- ---- ------- ------- ----- -------
Total interest income ........................... 2,569 (69) 2,500 2,429 130 2,559
------- ---- ------- ------- ----- -------
Interest bearing liabilities
Savings ......................................... 93 1 94 175 113 288
Interest bearing transaction accounts ........... 37 (1) 36 57 (23) 34
Time deposits ................................... 743 24 767 705 11 716
------- ---- ------- ------- ----- -------
Total interest bearing deposits ................. 873 24 897 937 101 1,038
Short term borrowing ............................ (24) (10) (34) 58 2 60
FHLB advances ................................... 328 (11) 317 (3) - (3)
------- ---- ------- ------- ----- -------
Total interest expense .......................... 1,177 3 1,180 992 103 1,095
------- ---- ------- ------- ----- -------
Net interest income ................................. $ 1,392 $(72) $ 1,320 $ 1,437 $ 27 $ 1,464
======= ==== ======= ======= ===== =======
</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%.
11
<PAGE>
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 1998 of $49
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 1998, 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.
The following table summarizes the Corporation's interest sensitivity
position as of December 31, 1998.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
Within 3 Over 5
months 4-12 months 1-5 years years Total
------ ----------- --------- ----- -----
(Dollar amounts in thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C>
Interest bearing deposits ................... $ 1,577 $ - $ - $ - $ 1,577
Taxable investment securities ............... 1,352 1,104 9,346 22,346 34,148
Tax exempt investment securities ............ - - - - -
Federal funds sold .......................... 15,550 - - - 15,550
Loans, net of unearned income ............... 42,832 8,511 48,991 18,183 118,517
-------- -------- ------- ------- --------
Total interest earning assets ............... 61,311 9,615 58,337 40,529 169,792
-------- -------- ------- ------- --------
Interest bearing liabilities
Savings ................................ 25,602 - - - 25,602
Interest bearing transaction ................ 16,220 - - - 16,220
accounts
Time deposits < $100M ....................... 19,169 32,077 6,175 - 57,421
Time deposits > $100M ....................... 9,698 12,771 2,035 - 24,504
Short term borrowing ........................ 4,464 - - - 4,464
FHLB advances ............................... 70 - 280 9,140 9,490
-------- -------- ------- ------- --------
Total interest bearing liabilities .......... $ 75,223 $ 44,848 $ 8,490 $ 9,140 $137,701
======== ======== ======= ======= ========
Interest sensitivity gap .................... $(13,912) $(35,233) $49,847 $31,389 $ 32,091
Cumulative gap .............................. (13,912) (49,145) 702 32,091
RSA/RSL ................................ 82% 21%
Cumulative RSA/RSL .......................... 82% 59%
</TABLE>
RSA- rate sensitive assets; RSL- rate
sensitive liabilities
12
<PAGE>
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 1998, 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 1999. Management also will explore variable rate
investments. If successful, these efforts will help to reduce the negative gap
position and reduce interest rate risk. The Corporation also realizes, however,
that these efforts may be constrained by customer demands during the upcoming
year.
Investment Portfolio
The Corporation's investment portfolio consists primarily of short-term
U. S. government and agency debt issues. Investment securities averaged $30.1
million or 19.1% of the Corporation's average assets in 1998 and $28.7 million
or 23.1% in 1997. Note 4 to the consolidated financial statements provides
further information on the investment portfolio.
Loan Portfolio
The average size of the loan portfolio in 1998 was $103.5 million,
compared to $81.1 million the prior year, an increase of $22.4 million or 27.6%.
At December 31, 1998, the loan portfolio was $117.8 million, compared
to $91.9 million the prior year, an increase of $25.9 million, or 28.2%.
Management believes the loan portfolio is adequately diversified. There
are no foreign loans and few agricultural loans. The banks ordinarily originate
mortgage loans for sale to others, but do not service such loans. However,
certain older mortgage loans and selected new loans with acceptable rates are
owned and serviced by the banks. 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 1998. 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, Sumter, and Florence, 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.
13
<PAGE>
Loan Portfolio Composition
The following table shows the composition of the loan portfolio for the
years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Loan category 1998 1997 Dollar change % change
- ------------- ---- ---- ------------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural ................... $ 29,403 $21,690 $ 7,713 35.6%
Real estate - construction ............................... 5,738 6,563 (825) (12.6%)
Real estate - mortgage ................................... 62,789 46,734 16,055 34.4%
Installment loans to individuals ......................... 19,325 16,348 2,977 18.2%
Obligations of political subdivisions .................... 540 616 (76) (12.3%)
-------- ------- -------- ----
Total loans - gross ................................. $117,795 $91,951 $ 25,844 28.1%
======== ======= ======== ====
</TABLE>
The Corporation has enjoyed significant loan growth in all three of its
markets. The Florence bank accounted for over $5 million or 21% of the increase
in the portfolio. The Orangeburg and Sumter banks shared almost equally the
remaining $20 million or 79% in loan growth.
Commercial, financial, and agricultural loans, primarily representing
loans made to small businesses, increased by $7.7 million or 36% during 1998.
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. Construction 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. Construction loans decreased $825,000 or 13% in
1998. Mortgage loans increased $16 million or 34% in 1998.
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 1998 and 1997 the Corporation
sold $12.1 million and $4.8 million, respectively, in such loans. These loans
are sold at par so no gain or loss is recognized at the time of sale. However,
the origination and sale of these loans generate fee income. 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 rather than a
fixed interest rate.
Installment loans to individuals increased $3 million or 18% in 1998.
Interest income from the loan portfolio was $9.7 million in 1998,
compared to $7.7 million in 1997, an increase of $2 million or 26%. The average
yield on the portfolio was 9.37% in 1998, compared to 9.48% in 1997.
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 1998 the
Corporation had $7.3 million in unsecured loans or 6.2% of its loan portfolio.
In 1997 the Corporation had $5.5 million in unsecured loans or 6% of its loan
portfolio.
14
<PAGE>
Loan Participations
Periodically, the Corporation's banking subsidiaries enter into sales
or purchases of loan participations with each other and 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 1998 the three banks had a total of $3,595,000 in loan
participations purchased. Of these loans, all but $219,000 were among the three
banks.
At the end of 1998 the three banks had $3,333,000 in loan
participations sold. Of these loans, all were sold among the three banks.
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 1997 Sumter National Bank had sold $1,422,000 (all to
Orangeburg National Bank) in participations and purchased no participations in
such loans.
Maturity Distribution of Loans
The following table sets forth the maturity distribution of the
Corporation's loans, by type, as of December 31, 1998, as well as the type of
interest on loans due after one year.
Within After one After five Total
one year year but years
within
five years
(Dollar amounts in thousands)
Commercial ................ $12,370 $14,673 $2,625 $29,668
Real Estate ............... 15,920 28,164 24,425 68,509
Installment ............... 4,460 13,807 1,351 19,618
------- ------- ------- --------
Total ................ $32,750 $56,644 $28,401 $117,795
======= ======= ======= ========
Sensitivity of loans to changes in interest rates-Loans
due after one year
Predetermined interest rate $63,200
Floating interest rate 20,503
Total $83,703
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 1998 or 1997.
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 2 to the
consolidated financial statements in the section labeled Allowance for Loan
Losses.
Nonaccrual loans and impaired loans were not material in relation to
the portfolio as a whole in 1998. Management is aware of no trends, events or
uncertainties that would cause nonaccrual loans to change materially in 1999.
15
<PAGE>
Potential Problem Loans
At December 31, 1998, the Corporation's internal loan review program
had identified $1,180,000 (1% of the portfolio) in various 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 $266,000 at
year-end 1998 compared to $132,000 at year-end 1997. Other real estate is
initially recorded at the lower of net loan balance or its estimated fair value,
net of estimated disposal costs. The estimate of fair value for foreclosed
properties is determined by appraisal at the time of acquisition.
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and general
economic conditions. In reviewing the adequacy of the provision for loan losses
during each period, the Corporation considers historical loan loss experience,
current economic conditions, loans outstanding, trends in non-performing and
delinquent loans, the quality of collateral securing problem loans, and the
results of its ongoing internal loan review process. Provisions for loan losses
totaled $484,000 and $358,000 in 1998 and 1997, respectively. Based on the
available information, the Corporation considers its 1998 provision for loan
losses adequate.
Net charge-offs in 1998 were $165,000 or 34% of the provision for loan
losses compared to $95,000 or 26% 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, 1998 and 1997, the allowance for loan losses was
1.24% and 1.24%, respectively, of total loans. Note 5 to the consolidated
financial statements provides details on the changes in the allowance for loan
losses during 1998 and 1997.
Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 1999 will at least approximate the
1998 levels as such loans progress through the collection, foreclosure, and
repossession process. Management believes that the allowance for loan losses, as
of December 31, 1998, 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.
16
<PAGE>
The following table presents the allocation of the allowance for loan
losses, as of December 31, 1998 and 1997, compared with the percent of loans in
the applicable categories to total loans.
Allocation of Allowance for Loan Losses
1998 1998 % of 1997 1997 % of
loans in each loans in each
category to category to
total loans total loans
(Dollar amounts in thousands)
Commercial ................ $ 364 25% $ 336 24%
Real estate ............... 385 59% 301 58%
Installment ............... 388 16% 288 18%
Unallocated ............... 322 0% 215 0%
------ ---- ------ ----
Total ................ $1,459 100% $1,140 100%
====== ==== ====== ====
The Corporation maintains an allowance for loan losses it believes
sufficient to cover estimated or reasonably expected losses. The allowance is
allocated to different segments of the portfolio, based on management's
expectations of risk in that segment of the portfolio. This allocation is an
estimate only and is not intended to restrict the Corporation's ability to
respond to losses. The Corporation charges losses from any segment of the
portfolio to the allowance, regardless of the allocation.
In reviewing the adequacy of the allowance for loan losses at the end
of each period, the Corporation considers historical loan loss experience,
current economic conditions, loans outstanding, trends in non-performing and
delinquent loans, and the quality of collateral securing problem loans. After
charging off all known losses, management considers the allowance adequate to
provide for estimated future losses inherent in the loan portfolio at December
31, 1998.
Premises and Equipment
Premises and equipment were $3,892,000 at December 31, 1998, compared
to $2,733,000 the prior year, an increase of $1,159,000 or 42%. Virtually all of
this increase was associated with the new bank in Florence. 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, Sumter National Bank, and Florence 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.
17
<PAGE>
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 $67 million in 1994 to over $147 million
in 1998. 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, 1998, the Corporation had approximately $8 million in certificates
of deposit and other obligations maturing in one to five years. The Corporation
had $9 million in obligations maturing over five years. The Corporation's assets
maturing in the same periods were $58 million and $40 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 1998 were $128.8 million,
compared to $106.2 million the prior year, an increase of $22.6 million or
21.3%.
The total average deposits for the Corporation for the years ended
December 31, 1998 and 1997, are summarized below:
<TABLE>
<CAPTION>
1998 1997
Average Average Average Average
balance cost balance cost
------- ---- ------- ----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Noninterest bearing demand ........................... $ 19,536 $ 15,098
Interest bearing transaction accounts ................ 14,028 1.80% 11,974 1.87%
Savings-regular ...................................... 10,774 2.38% 8,892 2.46%
Savings- money market ................................ 11,461 4.96% 10,684 4.32%
Time deposits less than $100,000 ..................... 52,314 5.39% 43,240 5.40%
Time deposits greater than $100,000 ................ 20,731 5.92% 16,282 5.63%
-------- -----------
Total average deposits ............................... $128,844 $ 106,170
======== ===========
</TABLE>
At December 31, 1998, the Corporation had $24,504,000 in certificates
of deposit of $100,000 or more. The maturities of these certificates are
disclosed in Note 7 to the consolidated financial statements.
18
<PAGE>
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, 1998 and 1997.
1998 1997
---- ----
Return on assets (ROA) 0.99% 0.98%
Return on equity (ROE) 8.91% 9.80%
Dividend payout ratio 28.91% 32.40%
Equity as a percent of assets 11.17% 9.97%
From 1997 to 1998 average assets increased 27%, average equity increased 42%,
and net income increased 29%. Consequently, ROA remained virtually unchanged and
ROE showed a decline during the period.
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 $4,464,000 and $2,551,000 outstanding at
year-end 1998 and 1997, respectively. Further information is provided in Note 8
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 $9,490,000 and $1,060,000 outstanding in such
advances at year-end 1998 and 1997, respectively. This substantial increase was
the result of Orangeburg National Bank's ongoing asset/liability management
strategy. Further information on these borrowings from the FHLB is provided in
Note 9 to the consolidated financial statements.
Dividends
During 1998 CBI paid cash dividends to shareholders of 16 cents per
share, which totaled $453,000. This represented a dividend payout ratio
(dividends divided by net income) of 29%. The dividend payout ratio in 1997 was
32%.
Common Stock
Common stock at December 31, 1998, totaled $14,648,000, compared to
$9,156,000 the prior year. This account was increased by the proceeds of the
stock sales conducted during the year in conjunction with the opening of the new
bank in Florence. The corporation sold 360,000 shares for net proceeds of
$5,372,000, options for 53,000 shares were exercised for proceeds of $207,000,
and total expenses for the sales were $87,000.
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, Sumter National Bank, and Florence National Bank are each
considered `well capitalized' for regulatory purposes. This category requires a
minimum capital ratio of 10%. During 1998 the parent company transferred
$500,000 to Sumter National Bank in the form of additional capital in order to
maintain the well-capitalized standing. This additional capital was necessary to
accommodate growth in the bank's balance sheet during the year. Detailed
information on the Corporation's capital position, as well as that of its
subsidiary banks, is provided in Note 16 to the consolidated financial
statements. The Corporation considers its current and projected capital position
to be adequate.
The Corporation's and the Banks' actual capital amounts and ratios are
also presented in the following table (in thousands of dollars).
19
<PAGE>
<TABLE>
<CAPTION>
MINIMUM REQUIRED MINIMUM REQUIRED
FOR CAPITAL TO BE WELL CAPITALIZED
ACTUAL ADEQUACY PURPOSES UNDER PROMPT
------ ----------------- CORRECTIVE
ACTION PROVISIONS
-----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
At December 31, 1998:
Tier I Capital (to
Average Assets):
<S> <C> <C> <C> <C> <C> <C>
Consolidated ................... $19,620 10.9% $7,190 4.0% $ 8,987 5.0%
ONB ............................ 9,481 8.1% 4,693 4.0% 5,867 5.0%
SNB ............................ 3,672 7.9% 1,872 4.0% 2,340 5.0%
FNB ............................ 4,169 30.1% 542 4.0% 677 5.0%
Tier I Capital (to
Risk Weighted
Assets):
Consolidated ................... 19,620 15.9% 4,925 4.0% 7,387 6.0%
ONB ............................ 9,481 9.1% 3,004 4.0% 4,506 6.0%
SNB ............................ 3,672 9.7% 1,508 4.0% 2,262 6.0%
FNB ............................ 4,169 52.7% 316 4.0% 474 6.0%
Total Capital (to
Risk Weighted
Assets):
Consolidated ................... 20,979 17.0% 9,850 8.0% 12,312 10.0%
ONB ............................ 10,421 13.9% 6,008 8.0% 7,510 10.0%
SNB ............................ 4,039 10.7% 3,017 8.0% 3,771 10.0%
FNB ............................ 4,221 53.4% 632 8.0% 791 10.0%
At December 31, 1997:
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 Weighted
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%
</TABLE>
20
<PAGE>
Noninterest income
Noninterest income increased to $1,055,000 in 1998 from $768,000 in
1997, a $287,000 or 37.4% increase. The major component of this change was in
service charge income, which in 1998 was $798,000 compared to $561,000 in the
prior year, a $237,000 or 42.2% increase.
Noninterest expense
Overall, non-interest expenses increased to $5,074,000 in 1998 from
$4,004,000 in 1997, an increase of $1,070,000 or 26.7%. The first six months of
operation of the new bank in Florence accounted for $516,000 of this increase.
Pre-opening expenses associated with the new bank accounted for $75,000 of this
increase. Accordingly, many of the dollar and percentage changes discussed
herein will be larger than normal.
Personnel costs in 1998 were $2,911,000 compared to $2,332,000 the
prior year, an increase of $579,000 or 24.8%.
Premises and equipment expenses in 1998 were $701,000 compared to
$527,000 the prior year, a $174,000 or 33% increase.
Supplies expense was $174,000 in 1998, compared to $121,000 in the
prior year, an increase of $53,000 or 43.8%.
Director fees were $125,000 in 1998, compared to $72,000 in the prior
year, an increase of $53,000 or 73.6%. Orangeburg National Bank pays its outside
directors $600 per month. Sumter National Bank pays its directors $300 per
month. CBI pays its outside directors $200 per month.
Florence National Bank does not pay director fees.
FDIC insurance costs were $16,000 in 1998, compared to $15,000 in 1997,
an increase of $1,000 or 6.7%.
All other expenses were $1,147,000 in 1998, compared to $937,000 in the
prior year, an increase of $210,000 or 22.4%.
Income Taxes
The Corporation pays U. S. corporate income taxes and South Carolina
bank income taxes. The 1998 provision for income taxes was $663,000, compared to
$636,000 the prior year, an increase of $27,000 or 4.2%. The Corporation's
effective average tax rate is 29.3%. CBI was the beneficiary of the exercise of
non-qualified stock options on 58,000 shares during 1998. The tax benefit to the
corporation approximated $174,000 and accounts for the temporary reduction in
the effective tax rate.
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, less than 2%,
during 1998. Prospects appear good for continued low inflation. 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.
21
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report 35
Consolidated Balance Sheets, December 31, 1998 and 1997 36
Consolidated Statements of Income, Years Ended December 31,
1998, 1997 and 1996 37-38
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1998, 1997 and 1996 39-40
Consolidated Statements of Cash Flows, Years Ended December 31,
1998, 1997 and 1996 41-42
Notes to Consolidated Financial Statements 43-73
22
<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, 1998 and 1997, 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,
1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Columbia, South Carolina
January 29, 1999
23
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
($ in thousands) 1998 1997
---- ----
<S> <C> <C>
Cash and due from banks .................................................................... $ 7,746 $ 4,062
Federal funds sold ......................................................................... 15,550 1,060
Total cash and cash equivalents ........................................... 23,296 5,122
Interest-bearing deposits with banks ....................................................... 1,577 1,238
Securities held-to-maturity, at amortized cost ............................................. 15,286 17,311
Securities available-for-sale, at fair value ............................................... 18,862 15,141
Loans held for sale ........................................................................ 722 358
Loans receivable ........................................................................... 117,795 91,951
Less, allowance for loan losses ......................................................... (1,459) (1,140)
Net loans receivable ..................................................... 116,336 90,811
Accrued interest receivable ................................................................ 1,242 2,733
Premises and equipment - net ............................................................... 3,892 1,168
Net deferred tax asset ..................................................................... 453 351
Other assets ............................................................................... 615 341
--------- ---------
Total assets ............................................................. 182,281 134,574
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand .................................................................................. $ 23,883 $ 17,003
Interest-bearing transaction accounts ................................................... 16,220 13,176
Savings ................................................................................. 25,602 18,984
Certificates of deposit of $100 and over ................................................ 24,504 21,428
Other time deposits ..................................................................... 57,421 46,576
Total deposits ........................................................... 147,630 117,167
Federal funds purchased and securities sold under
agreements to repurchase ................................................................ 4,464 2,551
Federal Home Loan Bank advances ............................................................ 9,490 1,060
Accrued interest payable ................................................................... 603 511
Other liabilities .......................................................................... 435 248
--------- ---------
Total liabilities ........................................................ 162,622 121,537
--------- ---------
Shareholders' equity:
Common stock - no par value, authorized shares -
12,000,000, issued and outstanding, 3,047,686 shares
in 1998 and 2,634,676 shares in 1997 ................................................. 14,648 9,156
Retained earnings ....................................................................... 4,975 3,861
Accumulated other comprehensive income .................................................. 36 20
--------- ---------
Total shareholders' equity ............................................... 19,659 13,037
--------- ---------
Total liabilities and shareholders' equity ............................... 182,281 134,574
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS
24
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
($ in thousands, except per share) 1998 1997 1996
---- ---- ----
Interest and dividend income:
<S> <C> <C> <C>
Interest and fees on loans ............................................................ $ 9,697 $7,692 $5,444
Deposits with other financial institutions ............................................ 126 73 38
Investment securities interest and dividends:
Interest - U. S. Treasury and U.S. Government Agencies ............................... 1,831 1,754 1,569
Interest - tax exempt securities ...................................................... 14 17 17
Dividends - Federal Reserve Bank and Federal Home Loan Bank ........................... 84 43 30
-------- ------ ------
Total investment securities interest
and dividends ........................................................ 1,929 1,814 1,616
-------- ------ ------
Federal funds sold and securities purchased under agreements to resell ................ 568 241 163
-------- ------ ------
Total interest and dividend income ..................................... 12,320 9,820 7,261
-------- ------ ------
Interest expense:
Deposits:
Interest-bearing transaction accounts .............................................. 253 217 194
Savings ............................................................................ 774 681 392
Certificates of deposit of $100 and over ........................................... 1,174 897 757
Certificates of deposit of less than $100 .......................................... 2,844 2,353 1,778
-------- ------ ------
Total deposits ......................................................... 5,045 4,148 3,121
Federal funds purchased and securities sold under agreements to repurchase ............ 119 153 82
Federal Home Loan Bank advances ....................................................... 390 73 76
Total interest expense ................................................. 5,554 4,374 3,279
Net interest income ...................................................................... 6,766 5,446 3,982
Provision for loan losses ................................................................ 484 358 227
-------- ------ ------
Net interest income after provision for loan losses .................... 6,282 5,088 3,755
-------- ------ ------
Non-interest income:
Service charges on deposit accounts ................................................... 798 561 377
Deposit box rent ...................................................................... 19 16 14
Bank card fees ........................................................................ 12 9 9
Credit life insurance commissions ..................................................... 74 52 27
Other ................................................................................. 152 130 78
-------- ------ ------
Total non-interest income .............................................. 1,055 768 505
-------- ------ ------
Non-interest expenses:
Salaries and employee benefits ........................................................ 2,911 2,332 1,875
Premises and equipment ................................................................ 701 527 368
Supplies .............................................................................. 174 121 92
Director fees ......................................................................... 125 72 70
FDIC insurance ........................................................................ 16 15 5
Other ................................................................................. 1,147 937 687
-------- ------ ------
Total non-interest expenses ............................................ 5,074 4,004 3,097
-------- ------ ------
Income before provision for income taxes and
cumulative effect of a change in accounting principle ................................. $ 2,263 $1,852 $1,161
Provision for income taxes ............................................................... 663 636 411
Income before cumulative effect of a change in accounting principle ...................... 1,600 1,216 750
Cumulative effect of a change in accounting principle, net of tax ........................ 33 - -
-------- ------ ------
Net income ................................................................... 1,567 1,216 750
======== ====== ======
Average number of common shares outstanding .............................................. 2,896 2,635 2,456
Average number of common shares outstanding, assuming dilution ........................... 2,950 2,682 2,467
Earnings per common share:
Income per share before cumulative effect of a change in accounting principle ......... $ 0.55 $ 0.46 $ 0.31
Per share for cumulative effect of a change
in accounting principle, net of tax ................................................... (0.01) - -
-------- ------ ------
Net income per share .................................................................. $ 0.54 $ 0.46 $ 0.31
======== ====== ======
Earnings per common share, assuming dilution:
Income per share before cumulative effect of a change in accounting principle ......... $ 0.54 $ 0.45 $ 0.30
Per share for cumulative effect of a change in accounting principle, net of tax ....... (0.01) - -
-------- ------ ------
Net income per share .................................................................. $ 0.53 $ 0.45 $ 0.30
======== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS
25
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
($ in thousands, except per share)
ACCUMULATED
OTHER
............ COMMON STOCK.......... RETAINED COMPREHENSIVE
SHARES AMOUNT SUBSCRIBED EARNINGS INCOME TOTAL
------ ------ ---------- -------- ------ -----
Balance
<S> <C> <C> <C> <C> <C> <C>
January 1, 1996 ............................... 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)
--------
Comprehensive income:
Net income .................................. - - - 750 - 750
Change in unrealized gain
(loss), net of applicable
deferred income taxes
on securities
available-for-sale ....................... - - - - (23) (23)
--------
Total comprehensive income .......... 727
--------
Dividends paid at $.145
per share .................................. - - - (318) - (318)
--------- ------- --- ------- ------- --------
Balance,
December 31, 1996 ............................. 2,626,476 9,065 - 3,039 - 12,831
Sale of shares ................................ 8,200 100 - - - 100
Stock issuance cost ........................... - (9) - - - (9)
--------
Comprehensive Income:
Net income .................................. - - - 1,216 - 1,216
Change in unrealized gain
(loss), net of applicable
deferred income taxes
on securities
available-for-sale ....................... - - - - 20 20
--------
Total comprehensive income ........... 1,236
--------
Dividends paid at $.15
per share .................................. - - - (394) - (394)
--------- ------- --- ------- ------- --------
Balance,
December 31, 1997 ............................. 2,634,676 9,156 - $ 3,861 $ 20 $ 13,037
Sale of shares ................................ 360,010 5,372 - - - 5,372
Stock issuance cost ........................... - (87) - - - (87)
Stock options exercised ....................... 53,000 207 - - - 207
Comprehensive income:
Net income .................................. - - - 1,567 1,567
Change in unrealized gain
(loss), net of applicable
deferred income taxes
on securities
available-for-sale ....................... - - - - 16 16
--------
Total comprehensive income ............... - - - - - 1,583
--------
Dividends paid at $.16
per share .................................. - - - (453) - (453)
--------- ------- --- ------- ------- --------
Balance,
December 31, 1998 ............................. 3,047,686 14,648 - 4,975 36 19,659
========= ======= === ======= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS
26
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
($ in thousands)
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ............................................................. $ 1,567 $ 1,216 $ 750
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................................... 437 295 222
Accretion of discounts and amortization of premiums -
securities - net ................................................. (8) (103) (40)
Provision for loan losses ........................................... 484 358 227
Deferred income taxes ............................................... (102) (68) (103)
Proceeds from sales of real estate loans held for sale .............. 12,089 4,768 4,105
Originations of real estate loans held for sale ..................... (12,089) (4,768) (4,105)
Increase in real estate loans held for sale ......................... (363) (63) (295)
Net changes in operating assets and liabilities:
Accrued interest receivable ...................................... (75) (313) (139)
Other assets ..................................................... (339) 29 (237)
Accrued interest payable ......................................... 93 160 58
Other liabilities ................................................ 187 (33) 84
-------- -------- --------
Net cash provided by operating activities ............... 1,881 1,478 527
-------- -------- --------
Cash flows from investing activities:
Net increase in interest-bearing deposits
with banks .......................................................... (339) (806) (111)
Purchases of securities held-to-maturity ............................... (19,253) (10,156) (9,175)
Purchases of securities available-for-sale ............................. (23,181) (11,918) (6,786)
Proceeds from maturities of securities
held-to-maturity .................................................... 21,284 8,999 9,786
Proceeds from maturities of securities
available-for-sale ................................................. 19,479 7,614 5,095
Loan originations and principal collections, net ....................... (26,012) (24,296) (16,588)
Purchases of premises and equipment .................................... (1,530) (190) (1,331)
-------- -------- --------
Net cash used by investing activities ................... (29,552) (30,753) (19,110)
-------- -------- --------
Cash flows from financing activities:
Net increase in demand, transaction
and savings deposit accounts ........................................ $ 16,544 $ 9,354 $ 10,037
Net increase in time deposits .......................................... 13,919 17,961 7,264
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase .................. 1,913 807 (826)
Federal Home Loan Bank advances ........................................ 8,430 (70) 430
Increase in note payable ............................................... - - 809
Repayment of note payable .............................................. - - (1,049)
Proceeds from issuance of common stock ................................. 5,372 100 4,402
Stock issuance cost .................................................... (87) (9) (52)
Proceeds from stock options exercised .................................. 207 - -
Dividends paid ......................................................... (453) (394) (318)
-------- -------- --------
Net cash provided by financing activities ............... 45,845 27,749 20,697
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...................... 18,174 (1,526) 2,114
Cash and cash equivalents at beginning of year ............................ 5,122 6,648 4,534
-------- -------- --------
Cash and cash equivalents at end of year .................................. 23,296 5,122 6,648
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments on a cash basis (net of
$ 6 capitalized in 1996) ......................................... $ 5,461 $ 4,222 $ 3,222
======== ======== ========
Cash payments for income taxes ...................................... $ 718 $ 758 $ 516
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Non-cash transfers during the year for transfer of
loans receivable to other real estate owned ...................... $ - $ 132 $ -
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS
27
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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 on
November 30, 1992. Pursuant to the provisions of the Federal 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).
In June 1996, Sumter National Bank (SNB) and in July 1998, Florence National
Bank (FNB) commenced operations in Sumter and Florence, South Carolina,
respectively, following approval by the Comptroller of the Currency and other
regulators. Upon completion of their organization, the common stock of SNB and
FNB was acquired by the Corporation.
The Banks operate as wholly-owned subsidiaries of the Corporation with separate
Boards of Directors and operating policies and provide a variety of financial
services to individuals and small businesses through their offices in South
Carolina. The primary deposit products are checking, savings and term
certificate accounts and the primary lending products are consumer, commercial
and mortgage loans.
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 include the accounts of the Corporation
(the Parent Holding Company) and its wholly-owned subsidiaries, the Banks. All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES:
The preparation of consolidated 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 balance sheet and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of deferred taxes.
28
<PAGE>
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of the Corporation's activities are with customers located within South
Carolina. Note 4 discusses the types of securities the Corporation purchases.
Note 5 discusses the types of lending that the Corporation engages in. The
Corporation does not have any significant concentrations to any one industry or
customer. 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 Florence,
Orangeburg and Sumter Counties, South Carolina and the surrounding areas.
ORGANIZATION, STOCK OFFERING AND PREOPENING COSTS:
Preopening costs associated with the organization of the Banks were expensed as
incurred while stock issuance costs were charged to common stock as incurred.
Organization costs were, until 1998, deferred and amortized over five years
using the straight-line method. In 1998, the Corporation adopted Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This SOP
requires costs of start-up activities and organization costs to be expensed as
incurred. The initial application of this SOP is reported as the cumulative
effect of a change in accounting principle.
The effect of adopting this SOP was to decrease income before provision for
income taxes and net income by $45,907 and $32,349, respectively, and basic
earnings per share and diluted earnings per share by $0.01 and $0.01,
respectively.
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,"
all of which mature within ninety days.
INTEREST-BEARING DEPOSITS WITH BANKS:
Interest-bearing deposits with banks mature within one year and are carried at
cost.
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
excluded from earnings and reported in other comprehensive income. Gains and
losses on the sale of securities available-for-sale are recorded on the trade
date and are determined using the specific identification method. Declines in
the fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses.
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.
29
<PAGE>
LOANS HELD FOR SALE:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. 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:
The Corporation grants mortgage, commercial and consumer loans to customers. The
ability of the Corporation's debtors to honor their contracts is dependent upon
the real estate and general economic conditions in its service areas. Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balance adjusted for 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.
The accrual of interest on mortgage and commercial loans is discontinued 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 the time the loan is 180 days delinquent. Other
consumer loans are charged-off at the time the loan is 120 days delinquent. In
all cases, loans are 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 brought current and future payments
are reasonably assured.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established through a provision for loan losses
charged against earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
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 evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines
30
<PAGE>
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons for the delay,
the borrower's prior payment record, and the amount of the shortfall in relation
to the principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
TRANSFERS OF FINANCIAL ASSETS:
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Corporation, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Corporation does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Corporation's stock option plan have no intrinsic value at the grant date, and
under Opinion No. 25 no compensation cost is recognized for them. The
Corporation has elected to continue with the accounting methodology in Opinion
No. 25 and, as a result, has provided pro forma disclosures of net income and
earnings per share and other disclosures, as if the fair value based method of
accounting had been applied.
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 fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value, less estimated costs to sell.
Revenue and expenses from operations and changes in the valuation allowance are
included in other expenses.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
computed principally on the straight-line method over the estimated useful lives
of the assets. Useful lives generally used in providing for depreciation are as
follows:
Building 40 years
Building components 5-30 years
Vault door, safe deposit boxes, night depository, etc. 40 years
Furniture, fixtures and equipment 5-25 years
31
<PAGE>
MARKETING EXPENSES:
The Corporation expenses the costs of marketing as incurred. Marketing expenses
totaled approximately $166,000, $112,000, and $86,000 in 1998, 1997 and 1996,
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.
FINANCIAL 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.
Community Bankshares, Inc. through its banking subsidiaries, ONB, SNB, and FNB,
provides a broad range of financial services to individuals and companies in
central South Carolina. These services include demand, time, and savings
deposits; lending services; ATM processing; and similar financial services.
While the Corporation's decision makers monitor the revenue streams of the
various financial products and services, operations are managed and financial
performance is evaluated on a corporate-wide basis. Accordingly, all of the
Corporation's banking operations are considered by management to be aggregated
in one reportable operating segment.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and cash equivalents
approximate fair values.
Interest-bearing deposits with banks. The carrying amounts of
interest-bearing deposits with banks approximate their fair values.
Securities available-for-sale and held-to-maturity. Fair values for
securities, excluding Federal Home Loan Bank and Federal Reserve Bank stock,
are based on quoted market prices. The carrying value of Federal Home Loan
Bank and Federal Reserve Bank stock approximates fair value based on the
redemption provisions of the Federal Home Loan Bank and Federal Reserve
Bank. 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.
32
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED):
Loans held for sale. The carrying amounts approximate their fair values.
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 non-performing 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.
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 fair
value.
Off-balance-sheet instruments. Fair values for off-balance-sheet
credit-related financial instruments 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 represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the year. Diluted earnings per common share reflects additional common
shares that would have been outstanding if dilutive potential common shares had
been issued. Potential common shares that may be issued by the Corporation
relate solely to outstanding stock options, and are determined using the
treasury stock method.
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net income applicable to common stock .................................. $ 1,567 $ 1,216 $ 750
========== ========== ==========
Average number of common shares outstanding ............................ 2,895,726 2,634,676 2,455,878
Effect of dilutive options ............................................. 53,857 47,186 11,526
---------- ---------- ----------
Average number of common shares outstanding
used to calculate diluted earnings per common share .................. 2,949,583 2,681,862 2,467,404
========== ========== ==========
</TABLE>
In January 1999, the Corporation purchased 47,100 shares of its common stock
from the Corporation's former chief executive officer. The redemption price per
share was at the then market price of $13 3/8 and totaled approximately
$630,000.
33
<PAGE>
COMPREHENSIVE INCOME:
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
securities available-for-sale, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Corporation's net income or shareholders' equity. Currently, the
Corporation's only component of Comprehensive Income is its unrealized gains on
securities available-for-sale.
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.
ACCOUNTING PRONOUNCEMENTS:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
will be effective for the Corporation beginning January 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. The adoption of this Statement in 2000
is not expected to have a material effect on the Corporation's consolidated
financial statements.
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, 1998 and 1997, were met by vault cash held in the three banks.
At December 31, 1998, the Corporation had bank balances with correspondent banks
totaling approximately $249,000, all 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:
............ DECEMBER 31, 1998..............
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies .......... $15,035 $61 $(20) $15,076
State and local
governments ............... 251 2 - 253
------- --- ---- -------
Total ............ 15,286 63 (20) 15,329
======= === ==== =======
............ DECEMBER 31, 1997..............
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
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
======= === ==== =======
34
<PAGE>
NOTE 4 - SECURITIES (CONTINUED):
Securities available-for-sale consist of the following:
............ DECEMBER 31, 1998..............
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies .......... $16,921 $74 $(20) $16,975
State and local
governements .............. 225 2 - 227
Federal Home Loan
Bank stock ................ 1,189 - - 1,189
Federal Reserve
Bank stock ................ 385 - - 385
Equity securities ............ 86 - - 86
------- --- ---- -------
Total ............ 18,806 76 (20) 18,862
======= === ==== =======
............ DECEMBER 31, 1997..............
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
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
======= === ==== =======
35
<PAGE>
NOTE 4 - INVESTMENT SECURITIES (CONTINUED):
The following is a summary of maturities and yields of securities
held-to-maturity and securities available-for-sale as of December 31, 1998 (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
--------------- ----------------- -------------- --------------- ----------------
Securities held-to-maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities ......... $ - 0.00% $ - 0.00% $ - 0.00% $ - 0.00% $ - 0.00%
Federal agency obligations ....... 1,000 5.60% 3,586 6.48% 10,449 6.04% - 0.00% 15,035 6.15%
State and local governments ...... 251 5.67% - 0.00% - 0.00% - 0.00% 251 5.67%
------ ---- ------- ---- ------- ---- ------ ---- ------- ----
Total held-to-maturity . 1,251 5.64% 3,586 6.48% 10,449 6.04% - 0.00% 15,286 5.91%
------ ---- ------- ---- ------- ---- ------ ---- ------- ----
Securities available-for-sale:
U.S. Treasury securities ......... 705 6.14% - 0.00% - 0.00% - 0.00% 705 6.14%
Federal agency obligations ....... 500 5.40% 7,156 5.77% 8,614 6.21% - 0.00% 16,270 5.79%
State and local governments ...... - 0.00% 227 7.20% - 0.00% - 0.00% 227 7.20%
Equities ......................... - 0.00% - 0.00% - 0.00% 1,660 7.37% 1,660 7.37%
------ ---- ------- ---- ------- ---- ------ ---- ------- ----
Total available-for-sale 1,205 5.77% 7,383 6.49% 8,614 6.21% 1,660 7.37% 18,862 6.63%
------ ---- ------- ---- ------- ---- ------ ---- ------- ----
Total for portfolio .............. 2,456 5.71% 10,969 6.49% 19,063 6.13% 1,660 7.37% 34,148 6.27%
====== ==== ======= ==== ======= ==== ====== ==== ======= ====
</TABLE>
Yields on tax exempt obligations have been computed on a tax equivalent basis
using the maximum federal tax rate of 34%.
All equity securities including investments in the Federal Home Loan Bank stock
and Federal Reserve Bank stock (as required by the respective banks) have no
contractual maturity and are classified in the maturity category of over ten
years.
Securities with a carrying amount of approximately $15,719,000 and $9,894,000 at
December 31, 1998 and 1997, respectively, were pledged. Of these respective
amounts, approximately $7,590,000 and $3,580,000 was pledged to secure public
deposits.
36
<PAGE>
NOTE 5 - LOANS RECEIVABLE:
The following is a summary of loans by category at December 31, 1998 and 1997
(in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial, financial and agricultural ............................................ $ 29,403 $21,690
Real estate - construction ........................................................ 5,738 6,563
Real estate - mortgage ............................................................ 62,789 46,734
Installment loans to individuals .................................................. 19,325 16,348
Obligations of states and political subdivisions .................................. 540 616
------- ------
Total loans - gross ..................................................... 117,795 91,951
======= ======
</TABLE>
The loan portfolio included fixed rate and adjustable rate loans totaling
$72,458,000 and $45,337,000 at December 31, 1998 and 1997, respectively.
Overdrawn demand deposits totaling $142,000 and $391,000 have been reclassified
as loan balances at December 31, 1998 and 1997, respectively.
Gross proceeds on mortgage loans originated for resale were approximately
$12,100,000, $4,800,000, and $4,100,000 for the years ended December 31, 1998,
1997 and 1996, 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 $6,595,000 at December 31,
1998, and $2,946,000 at December 31, 1997. A total of $6,585,005 in loans were
made or added, while a total of $2,936,000 were repaid or deducted during 1998.
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, 1998, 1997 and 1996, were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average amount of loans outstanding ................................ $103,349 $81,167 $57,806
======== ======= =======
Allowance for loan losses at beginning
of year ......................................................... $ 1,140 $ 876 $ 707
-------- ------- -------
Loan charge-offs:
Real estate ..................................................... $ 7 $ - $ -
Installment ..................................................... 111 121 70
Credit cards and related plans .................................. 6 9 5
Commercial and other ............................................ 56 2 11
-------- ------- -------
Total charge-offs ............................................... 180 132 86
Recoveries:
Real estate ..................................................... - - 4
Installment ..................................................... 12 34 23
Credit cards and related plans .................................. 3 4 1
-------- ------- -------
Total recoveries ................................................ 15 38 28
-------- ------- -------
Net charge-offs .................................................... 165 94 58
-------- ------- -------
Provision for loan losses .......................................... 484 358 227
-------- ------- -------
Allowance for loan losses at end of year ........................... 1,459 1,140 876
======== ======= =======
Ratios
Net charge-offs to average loans outstanding ....................... 0.16% 0.12% 0.10%
Net charge-offs to loans outstanding at end of year ................ 0.14% 0.10% 0.08%
Allowance for loan losses to average loans ......................... 1.41% 1.40% 1.52%
Allowance for loan losses to total loans at end of year ............ 1.24% 1.24% 1.27%
Net charge-offs to allowance for losses ............................ 11.31% 8.33% 6.62%
Net charge-offs to provision for loan losses ....................... 34.09% 26.46% 25.55%
</TABLE>
37
<PAGE>
The following is a summary of information pertaining to impaired loans:
Year Ended December 31,
-----------------------
1998 1997
---- ----
(In thousands)
Impaired loans without a valuation allowance ........ $ - $ -
Impaired loans with a valuation allowance ........... 31 81
--- ---
Total impaired loans ................................ 31 81
=== ===
Valuation allowance related to impaired loans ....... $ 6 $12
=== ===
NOTE 5 - LOANS RECEIVABLE (CONTINUED):
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Average investment in impaired loans ............... $ 74 $ 98 $ 114
==== ==== =====
Interest income recognized on impaired loans ....... $ - $ - $ -
==== ==== =====
Interest income recognized on
a cash basis on impaired loans ................... $ - $ - $ -
==== ==== =====
No additional funds are committed to be advanced in connection with impaired
loans.
Nonaccrual, past due loans, and other real estate owned at December 31, 1998 and
1997, were as follows (in thousands of dollars):
1998 1997
---- ----
Nonaccrual loans ......................................... $ 31 $ 81
Accruing loans 90 days or more past due .................. 187 -
---- ----
Total .......................................... 218 81
==== ====
Total as a percentage of outstanding loans ..... 0.19% 0.09%
==== ====
Other real estate owned .................................. $266 $132
==== ====
Gross interest income that would have been recorded for the year ended December
31, 1998 and 1997, if nonaccrual loans had been performing in accordance with
their original terms was approximately $2,066 and $7,700, respectively.
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1998 and 1997, consist of the following
(in thousands of dollars):
1998 1997
---- ----
Land ............................................... $ 684 $ 684
Building and components ............................ 2,101 1,381
Furniture, fixtures and equipment .................. 2,440 1,726
------ ------
Total .................................... 5,225 3,791
Less, accumulated depreciation ..................... 1,408 1,058
------ ------
3,817 2,733
Construction in progress ........................... 75 -
------ ------
Premises and equipment - net ............. 3,892 2,733
====== ======
38
<PAGE>
NOTE 6 - PREMISES AND EQUIPMENT (CONTINUED):
Depreciation expense charged to operations was approximately $371,000, $294,000,
and $202,000, for the years ended December 31, 1998, 1997 and 1996,
respectively.
The FNB office building was constructed on leased land. The land is being leased
under a noncancellable operating lease for an initial term of ten years. The
lease terms provide for two ten year renewal options and a third renewal of two
years. FNB is responsible for property taxes and improvements. The annual basic
rent in lease years one through five will be $48,000 and in years six through
ten $53,000.
Rent expense totaled approximately $25,000 in 1998.
NOTE 7 - DEPOSITS:
At December 31, 1998, the scheduled maturities of time deposits greater than
$100,000 are as follows (in thousands of dollars):
Maturity
Less than 3 months $ 9,697
Over 3 through 6 months 5,818
Over 6 through 12 months 6,955
One to five years 2,034
-------
Total $24,504
=======
Deposits of directors and officers totaled approximately $5,662,000 and
$1,756,000 at December 31, 1998 and 1997, respectively.
NOTE 8 - OTHER BORROWED FUNDS:
Federal funds purchased and securities sold under agreements with customers to
repurchase generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction.
The Corporation monitors the fair value of the underlying securities on a daily
basis.
Information concerning securities sold under agreements to repurchase is
summarized as follows (in thousands of dollars):
1998 1997
---- ----
Outstanding at year-end .............................. $4,464 $2,551
====== ======
Interest rate at year-end ............................ 3.00% 4.00%
====== ======
Maximum month-end balance during the year ............ $7,315 $6,473
====== ======
Average amount outstanding during the year ........... $3,220 $3,826
====== ======
Weighted average interest rate during the year ....... 3.69% 3.99%
====== ======
NOTE 9 - 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.
39
<PAGE>
Borrowings during 1998 and 1997 are summarized as follows (in thousands of
dollars):
1998 1997
---- ----
Outstanding at year-end .............................. $9,490 $1,060
====== ======
Interest rate at year-end ............................ 5.41% 6.60%
====== ======
Maximum amount outstanding at any month-end .......... $9,560 $1,130
====== ======
Average amount outstanding during the year ........... $6,905 $1,101
====== ======
Weighted average interest rate during the year ....... 5.65% 6.63%
====== ======
Principal reductions are as follows (in thousands of dollars):
YEAR ENDED:
1999 $ 70
2000 70
2001 70
2002 70
2003 70
Thereafter $9,140
------
Total $9,490
======
NOTE 10 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES:
At December 31, 1998, 190,000 common shares were reserved for issuance for
employee stock option plans and 600,000 common shares were reserved for issuance
pursuant to the dividend reinvestment and additional stock purchase plan.
Under the 1997 Stock Option Plan, up to 106,000 shares of common stock were
authorized to be granted to selected officers and other employees of the
Corporation and its subsidiaries pursuant to exercise of incentive and
nonqualified stock options. Of such shares, 76,000 were reserved for issuance
pursuant to exercise of incentive stock options and 30,000 were reserved for
issuance pursuant to exercise of nonqualified stock options. In April, 1997,
incentive stock options relating to 75,800 shares of common stock were granted
to officers and employees of the Corporation. These options were not exercisable
before April, 1998, and expire April, 2007.
Under the 1994 Stock Option Plan, the Corporation reserved 84,000 shares of
common stock for issuance upon exercise of options granted to key employees as
nonqualified stock options. The options expire in 2000.
The exercise price of any option granted is equal to the fair value of the
common stock on the date the option is granted.
The Corporation applies APB Opinion 25 and related Interpretations in accounting
for stock options. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Corporation's stock options been determined based on
the fair value at the grant date for its stock options consistent with the
method prescribed by SFAS No. 123, the Corporation's 1997 net income and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
Year Ended December 31, 1997
----------------------------
(In thousands, except per share data)
Net income As reported $1,216
Pro Forma 1,094
Earnings per share As reported $0.46
Pro Forma 0.42
Earnings per share, As reported $0.45
assuming dilution Pro Forma 0.41
40
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Year Ended December 31, 1997
Dividend yield 1.88%
Expected life 4.7 years
Expected volatility .339
Risk-free interest rate 5.28%
Pro forma net income reflects only options granted since 1995, therefore, the
full impact of calculating the compensation expense for stock options under SFAS
No. 123 is not reflected in the pro forma net income amount presented above
since options granted prior to January 1, 1995, are not considered. The per
share weighted average fair value of stock options granted during 1997 was $8.69
on the date of grant.
A summary of the status of the Corporation's 1994 stock option plan is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Fixed options:
Outstanding at beginning
<S> <C> <C> <C> <C> <C> <C>
of year 80,500 $3.90 84,000 $3.90 84,000 $3.90
Granted - - - - - -
Exercised (53,000) 3.90 - - - -
Forfeited - - (3,500) 3.90 - -
- ------- -
Outstanding at end of
year 27,500 3.90 80,500 3.90 84,000 3.90
======= ======= ======
Options exercisable at
year-end 27,500 3.90 80,500 3.90 84,000 3.90
Fair value of options
granted during the year.
- - -
</TABLE>
A summary of the status (shares in thousands) of the Corporation's 1997 stock
option plan is presented below:
1998 1997
---- ----
Exercise Exercise
Shares Price Shares Price
Fixed options:
Outstanding at beginning
of year 75,800 $8.00 - $ -
Granted - - 75,800 8.00
Exercised (2,200) 8.00 - -
Forfeited (1,800) 8.00 - -
------- ------
Outstanding at end of
year 71,800 75,800
====== ======
Options exercisable at
year-end 71,800 8.00 - -
Fair value of options
granted during the year. -
41
<PAGE>
NOTE 10 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES
(CONTINUED):
Information pertaining to options (in thousands) outstanding at December 31,
1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$3.90 27,500 1.4 years $3.90 27,500 $3.90
8.00 71,800 8.3 years 8.00 71,800 8.00
------ ------
Outstanding at
end of year 99,300 6.4 years $6.90 99,300 $6.86
====== ======
</TABLE>
NOTE 11 - INCOME TAXES:
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The 1998, 1997 and 1996 provision for income taxes consists of the following (in
thousands of dollars):
1998 1997 1996
---- ---- ----
Currently payable:
Federal ........................ $ 710 $ 636 $ 460
South Carolina ................. 80 77 54
Deferred income taxes ............. (127) (77) (103)
----- ----- -----
Total ................... 663 636 411
===== ===== =====
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):
1998 1997 1996
---- ---- ----
Income tax at statutory rate on income
before income taxes ........................ $769 $630 $ 394
Increase (decrease):
Exercise of certain stock options .......... (165) - -
South Carolina bank tax, net of federal
tax benefit ............................. 67 55 34
Tax exempt interest ........................ (14) (14) (7)
Other ...................................... 6 (35) (10)
---- ----- -----
Provision for income taxes .......... 663 636 411
==== ===== =====
42
<PAGE>
NOTE 11 - INCOME TAXES (CONTINUED):
Temporary differences which give rise to deferred tax assets and liabilities at
December 31, 1998 and 1997, follow (in thousands of dollars):
1998 1997
---- ----
Deferred tax assets:
Allowance for loan losses .............................. $443 $346
Preopening costs ....................................... 78 69
State tax net operating loss carry forward ............ 48 -
Other .................................................. 16 43
---- ---
Total deferred tax assets ...................... 585 458
==== ===
Deferred tax liabilities:
Depreciation ........................................... 87 80
Accretion .............................................. 8 15
Unrecognized gain on securities available-for-
sale ................................................... 24 12
---- ---
Total deferred tax liabilities ................. 119 107
==== ===
Net deferred tax asset before valuation
allowance ................................. 466 351
Less, valuation allowance ...................... (13) -
---- ---
Net deferred tax asset ......................... 453 351
==== ===
At December 31, 1998, the Corporation had net operating loss (NOL) carryforwards
for state income tax purposes of approximately $1,041,000 available to offset
future state taxable income. The NOL carryforwards expire primarily in the years
2011 through 2014. The valuation allowance represents management's estimate of
the allowance for the NOL deferred tax asset.
NOTE 12 - 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 may participate in
the plan.
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.
The Corporation's contributions for the years ended December 31, 1998, 1997, and
1996 totaled approximately $140,000, $122,000, and $90,000, respectively.
NOTE 13 - OFF-BALANCE-SHEET ACTIVITIES:
The Banks are parties to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Banks' exposure to credit loss is represented by the contractual amount of
these commitments. The Banks use the same credit policies in making commitments
as they do for on-balance-sheet instruments.
At December 31, 1998 and 1997, the following financial instruments were
outstanding whose contract amounts represent credit risk:
Contract Amount
---------------
1998 1997
---- ----
(In thousands)
Commitments to grant loans ...................... $10,159 $6,153
Unfunded commitments under lines of
credit ...................................... 8,405 6,629
Standby letters of credit ....................... 929 537
43
<PAGE>
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 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 letters of
credit 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 Corporation generally holds collateral supporting
those commitments if deemed necessary.
To reduce credit risk related to the use of both derivatives and credit-related
financial instruments, the Bank might deem it necessary to obtain collateral.
The amount and nature of the collateral obtained is based on the Banks' credit
evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant and equipment and
real estate.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values and related carrying or notional amounts of the
Corporation's financial instruments at December 31, 1998 and 1997, are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ....................................... $ 23,296 $ 23,296 $ 5,122 $ 5,122
Interest-bearing deposits with banks ............................ 1,577 1,577 1,238 1,238
Investment securities ........................................... 34,148 34,190 32,452 32,472
Loans held for sale ............................................. 722 722 358 358
Loans receivable ................................................ 116,336 116,537 90,811 94,528
Accrued interest receivable ..................................... 1,242 1,242 2,733 2,733
Financial liabilities:
Deposits ........................................................ $147,630 $148,005 $117,167 $117,449
Federal funds purchased and
securities sold under agreements
to repurchase ................................................ 4,464 4,464 2,551 2,551
Federal Home Loan Bank advances ................................. 9,490 9,563 1,060 1,061
Accrued interest payable ........................................ 603 603 511 511
Off-balance-sheet credit related financial instruments:
Commitments to extend credit .................................... 10,159 10,159 6,153 6,153
Unfunded commitments under
lines of credit .............................................. 8,405 8,405 6,629 6,629
Standby letters of credit ....................................... 929 929 537 537
</TABLE>
NOTE 15 - CONTINGENCIES:
CLAIMS AND LAWSUITS:
The Corporation is subject at times to claims and lawsuits arising out of the
normal course of business which, in the opinion of management, will have no
material effect on the Corporation's consolidated financial statements.
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. The Corporation has an on-going plan
to address the year 2000 issue.
44
<PAGE>
NOTE 15 - CONTINGENCIES (CONTINUED):
YEAR 2000 CONSIDERATIONS (CONTINUED):
The Corporation uses the services of outside software vendors for certain of its
data processing applications. Based on discussions with software vendors and the
execution of its year 2000 plan to date, 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 to be 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. Costs totaling approximately $225,000 have been budgeted to address
the year 2000 issue. As of December 31, 1998, approximately 85 percent of the
budgeted amount had been expended.
CONSTRUCTION PROJECTS:
ONB has commenced construction of a branch office to replace the existing branch
on adjacent land already owned. At December 31, 1998, the cost to complete the
branch was estimated to be approximately $651,000 with additional cost of
equipment, furniture and fixtures estimated to be approximately $175,000.
Management anticipates the completion and opening of the replacement branch
office by July, 1999.
Following the completion of the branch office, the existing branch office will
be renovated for expanded use by the Holding Company. Management estimates the
cost of renovations will total approximately $25,000 and that the cost of
related equipment, furniture and fixtures will not be significant.
NOTE 16 - 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, 1998, that the Banks could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $1,860,000.
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 totaled approximately
$3,472,000 at December 31, 1998.
The Corporation (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can result in initiations of
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material adverse effect on the
Corporation's and the Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and 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.
Prompt corrective action provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and 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 to
average assets (as defined). Management believes, as of December 31, 1998, that
the Corporation and the Banks met all capital adequacy requirements to which
they are subject.
As of June 30, 1998, for ONB and SNB and September 30, 1998, for FNB, 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.
45
<PAGE>
NOTE 16 - REGULATORY MATTERS (CONTINUED):
The Corporation's and the Banks' actual capital amounts and ratios are also
presented in the table (in thousands of dollars).
<TABLE>
<CAPTION>
MINIMUM REQUIRED MINIMUM REQUIRED
FOR CAPITAL TO BE WELL CAPITALIZED
ACTUAL ADEQUACY PURPOSES UNDER PROMPT
------ ----------------- CORRECTIVE
ACTION PROVISIONS
-----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
At December 31, 1998:
Tier I Capital (to
Average Assets):
<S> <C> <C> <C> <C> <C> <C>
Consolidated ................... $19,620 10.9% $7,190 4.0% $ 8,987 5.0%
ONB ............................ 9,481 8.1% 4,693 4.0% 5,867 5.0%
SNB ............................ 3,672 7.9% 1,872 4.0% 2,340 5.0%
FNB ............................ 4,169 30.1% 542 4.0% 677 5.0%
Tier I Capital (to
Risk Weighted
Assets):
Consolidated ................... 19,620 15.9% 4,925 4.0% 7,387 6.0%
ONB ............................ 9,481 9.1% 3,004 4.0% 4,506 6.0%
SNB ............................ 3,672 9.7% 1,508 4.0% 2,262 6.0%
FNB ............................ 4,169 52.7% 316 4.0% 474 6.0%
Total Capital (to
Risk Weighted
Assets):
Consolidated ................... 20,979 17.0% 9,850 8.0% 12,312 10.0%
ONB ............................ 10,421 13.9% 6,008 8.0% 7,510 10.0%
SNB ............................ 4,039 10.7% 3,017 8.0% 3,771 10.0%
FNB ............................ 4,221 53.4% 632 8.0% 791 10.0%
At December 31, 1997:
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 Weighted
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%
</TABLE>
NOTE 17 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only) (in thousands of dollars):
46
<PAGE>
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1998 1997
---- ----
Balance Sheets:
Assets:
<S> <C> <C>
Cash ............................................................................... $ 1,930 $ 494
Investment in banking subsidiaries ................................................. 17,361 11,460
Securities held-to-maturity, at amortized cost ..................................... - 649
Securities available-for-sale, at fair value ....................................... 50 50
Premises and equipment (net of accumulated depreciation
of $313 in 1998 and $217 in 1997) ............................................... 329 256
Other assets ....................................................................... 128 184
------- -------
Total assets ........................................................... 19,798 13,093
Liabilities and shareholders' equity:
Other liabilities ..................................................................... $ 140 $ 55
Shareholders' equity .................................................................. 19,658 13,038
------- -------
Total liabilities and shareholders' equity ............................. 19,798 13,093
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997 1996
---- ---- ----
Statements of Income:
Income:
<S> <C> <C> <C>
Dividends from banking subsidiaries ................................. $ 700 $ 580 $ 504
Management fees assessed banking subsidiaries ....................... 1,141 948 438
Interest ............................................................ 138 50 69
------ ------ ------
Total ................................................... 1,979 1,578 1,011
Expenses:
Salaries and employee benefits ...................................... 648 558 264
Premises and equipment .............................................. 230 184 86
Supplies ............................................................ 70 35 22
Director fees ....................................................... 24 22 19
Interest ............................................................ - - 11
Preopening - FNB .................................................... 75 - -
Other general expenses .............................................. 258 228 215
------ ------ ------
Total ................................................... 1,305 1,027 617
Income before equity in undistributed
earnings of banking subsidiaries ....................................... 674 551 393
Applicable income tax benefit ............................................. 8 7 39
Equity in undistributed earnings of
banking subsidiaries ................................................... 885 658 318
------ ------ ------
Net income ................................................................ 1,567 1,216 750
</TABLE>
47
<PAGE>
NOTE 17 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY) (CONTINUED):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997 1996
---- ---- ----
Statements of Cash Flows:
Cash flows from operating activities:
<S> <C> <C> <C>
Net income .......................................................... $ 1,567 $ 1,216 $ 750
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................. 106 91 56
Accretion of discounts - securities ........................... - (23) -
Decrease in due from banking
Subsidiaries ............................................... - (3) 33
Decrease (increase) in other assets ........................... 46 (68) (65)
Increase (decrease) in other liabilities ...................... 85 6 (22)
Equity in undistributed earnings of banking
subsidiaries ............................................ (885) (658) (318)
------- ------- -------
Net cash provided by operating
activities ........................................... 919 561 434
------- -------
Cash flows from investing activities:
Investment in SNB ...................................................... $ (500) $ - $(3,500)
Investment in FNB ...................................................... (4,500) - -
Transfer of premises and equipment to SNB .............................. - - 444
Purchase of premises and equipment ..................................... (169) (60) (408)
Purchases of securities held-to-maturity ............................... - (636) (1,137)
Purchases of securities available-for-sale ............................. - (50) -
Proceeds from maturities of securities
held-to-maturity .................................................... 647 900 247
------- ------- -------
Net cash provided (used) by
investing ................................................................. (4,522) 154 (4,354)
------- ------- -------
activities
Cash flows from financing activities:
Increase in note payable ............................................... - - 809
Repayment of note payable .............................................. - - (1,049)
Common stock issued .................................................... 5,579 100 4,402
Stock issuance cost .................................................... (87) (9) (52)
Cash dividends paid .................................................... (453) (394) (318)
------- ------- -------
Net cash used (provided) by financing
activities ........................................... 5,039 (303) 3,792
------- -------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents ........................ $1,436 $412 $(129)
Cash and cash equivalents at beginning of year .............................. 494 82 211
------ ---- -----
Cash and cash equivalents at end of year .................................... 1,930 494 82
====== ==== =====
Supplemental disclosures of cash flow information:
Cash payments for income taxes ........................................... $ 656 $640 $ 438
====== ==== =====
</TABLE>
48
<PAGE>
NOTE 18 - OTHER COMPREHENSIVE INCOME:
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Unrealized holding gains on available-for-sale
securities ......................................... $56 $31 $-
Less: Reclassification adjustment for gains
realized in income ................................. - - -
--- --- --
Net unrealized gains ................................. 56 31 -
Tax effect ........................................... 20 11 -
--- --- --
Net-of-tax amount .................................... 36 20 -
=== === ==
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
49
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-3 of
Community Bankshares, Inc. of our report dated January 29, 1999, relating to the
consolidated balance sheets of Community Bankshares, Inc. and subsidiaries as of
December 31, 1998 and 1997, 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, 1998, which report appears in the December
31, 1998, annual report on Form 10-KSB of Community Bankshares, Inc.
J. W. Hunt and Company, LLP
Columbia, South Carolina
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1998, and the Consolidated Statement
of Income for the Year Ended December 31, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,346
<INT-BEARING-DEPOSITS> 1,577
<FED-FUNDS-SOLD> 15,550
<TRADING-ASSETS> 722
<INVESTMENTS-HELD-FOR-SALE> 18,862
<INVESTMENTS-CARRYING> 15,286
<INVESTMENTS-MARKET> 15,329
<LOANS> 117,795
<ALLOWANCE> 1,459
<TOTAL-ASSETS> 182,281
<DEPOSITS> 147,620
<SHORT-TERM> 4,464
<LIABILITIES-OTHER> 1,038
<LONG-TERM> 9,490
0
0
<COMMON> 14,648
<OTHER-SE> 5,011
<TOTAL-LIABILITIES-AND-EQUITY> 182,281
<INTEREST-LOAN> 9,697
<INTEREST-INVEST> 1,929
<INTEREST-OTHER> 695
<INTEREST-TOTAL> 12,321
<INTEREST-DEPOSIT> 5,045
<INTEREST-EXPENSE> 5,554
<INTEREST-INCOME-NET> 6,766
<LOAN-LOSSES> 484
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,107
<INCOME-PRETAX> 2,263
<INCOME-PRE-EXTRAORDINARY> 2,263
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,567
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
<YIELD-ACTUAL> 4.61
<LOANS-NON> 31
<LOANS-PAST> 187
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 218
<ALLOWANCE-OPEN> 1,140
<CHARGE-OFFS> 180
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 1,459
<ALLOWANCE-DOMESTIC> 1,459
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
