-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BA1pSm3SC7unyiS7g4/vu6Fj/1GQ793MRrIR2pdWG356wE3yGV/3kpD6BYG0ZzkH udLSCneqLqYNhdOYy6cc4g== 0000948520-00-000029.txt : 20000324 0000948520-00-000029.hdr.sgml : 20000324 ACCESSION NUMBER: 0000948520-00-000029 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANKSHARES INC /SC/ CENTRAL INDEX KEY: 0000894508 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 570966962 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12341 FILM NUMBER: 575982 BUSINESS ADDRESS: STREET 1: P O BOX 2086 CITY: ORANGEBURG STATE: SC ZIP: 29116-2086 BUSINESS PHONE: 8035351060 MAIL ADDRESS: STREET 1: P O BOX 2086 CITY: ORANGEBURG STATE: SC ZIP: 29116-2086 10-K 1 1999 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 File Number 000-22054 COMMUNITY BANKSHARES, INC. (Exact name of registrant as specified in its charter) South Carolina 57-0966962 (State or Other Jurisdiction of (IRS Employer Identification Incorporation or Organization) Number) 791 Broughton St., Orangeburg, South Carolina 29115 (Address of Principal Executive Office, Zip Code) Registrant's Telephone Number, Including Area Code: (803) 535-1060 Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, No Par Value - American Stock Exchange (Title of Class) - (Name of each exchange on which registered) Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (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 for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting and non-voting common equity held by non-affiliates on February 23, 2000, was approximately $29,064,000. As of February 23, 2000, there were 3,191,462 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 Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders - Part III 10-K TABLE OF CONTENTS
Page Part I Page Item 1 Description of Business 1 Item 2 Description of Property 9 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 Part II Item 5 Market for Common Equity and Related Stockholder Matters 9 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Position and Operations 11 Item 7A Quantitative and Qualitative Disclosures about Market Risk 27 Item 8 Financial Statements and Supplementary Data 29 Independent Auditor's Report 31 Consolidated Balance Sheets, December 31, 1999 and 1998 32 Consolidated Statements of Income, Years Ended December 31, 1999, 1998 and 1997 33 Consolidated Statements of Changes in Shareholders' Equity, Years Ended December 35 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998 and 36 1997 Notes to Consolidated Financial Statements 37 Quarterly Data for 1999 and 1998 61 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial 62 Disclosure Part III Item 10 Directors and Executive Officers * Item 11 Executive Compensation * Item 12 Security Ownership of Certain Beneficial Owners and Management * Item 13 Certain Relationships and Related Transactions * Part IV Item 14 Exhibits and Reports on Form 8-K 63 * Incorporated by reference to Registrant's Proxy Statement for 2000 Annual Meeting of Shareholders
PART I Item 1. Description of Business Form of organization Community Bankshares, Inc. (CBI) is a South Carolina corporation and a bank holding company. CBI commenced operations on July 1, 1993, upon effectiveness of the acquisition of the Orangeburg National Bank as a wholly-owned subsidiary. In June 1996 CBI acquired all the stock of Sumter National Bank, which is also a wholly-owned subsidiary. 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 Orangeburg, Sumter and Florence banks (hereafter referred to as 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. The Federal Deposit Insurance Corporation insures deposits up to applicable limits. Most of the Banks' deposits are attracted from individuals and small businesses. The Banks offer secured and unsecured, short-to-intermediate term loans, with floating and fixed interest rates for commercial and consumer purposes. Consumer loans include: car loans, home equity improvement loans secured by first and second mortgages, personal expenditure loans, education loans, and the like. Commercial loans include short-term unsecured loans, short and intermediate term real estate mortgage loans, loans secured by listed stocks, loans secured by equipment, inventory, accounts receivable, and the like. The Banks do not and will not discriminate against any applicant for credit on the basis of race, color, creed, sex, age, marital status, familial status, handicap, or derivation of income from public assistance programs. Other services offered by the Banks include safe deposit boxes, night depository service, VISA and Master Card charge cards (through a correspondent), tax deposits, sale of U.S. Treasury bonds, notes and bills and other U. S. government securities (through a correspondent), and twenty-four hour automated teller service. Each of the Banks has ATMs and they are all 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 city 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 $160 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, 1999, 1998 and 1997. Orangeburg, S. C. Comparative Bank Deposits
June 1999 June 1998 June 1997 Bank Deposit $ % market Deposit $ % market Deposit $ % market --------- -------- --------- -------- --------- -------- (Dollar amounts in millions) First National Bank $160 31.4% $154 30.8% $148 30.1% First Union National Bank 48 9.4% 61 12.2% 63 12.8% NationsBank 97 19.1% 97 19.4% 100 20.3% BB&T 88 17.4% 90 18.0% 90 18.3% Credit unions 8 1.6% 6 1.2% 5 1.0% Orangeburg National 108 21.1% 92 18.4% 86 17.5% ---- ------ ---- ------ ---- ------ Total deposits $509 100.0% $500 100.0% $492 100.0% ==== ====== ==== ====== ==== ======
Source: FDIC and NCUA websites The financial institution with the largest deposit base in Sumter County is SAFE (Shaw Air Force Employees) Federal Credit Union with deposits of $236 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, 1999, 1998 and 1997. Sumter, S. C. Comparative Bank Deposits
June 1999 June 1998 June 1997 Bank Deposit $ % market Deposit $ % market Deposit $ % market --------- -------- --------- -------- --------- -------- (Dollar amounts in millions) BB&T $103 11.9% $97 12.6% $96 13.2% National Bk of SC 221 25.6% 176 22.8% 171 23.4% NationsBank 73 8.4% 78 10.1% 73 10.0% Sumter National Bank 51 6.0% 38 4.9% 22 3.0% First Citizens Bank 18 2.1% 16 2.1% 17 2.4% Wachovia Bank NA 150 17.4% 151 19.6% 147 20.1% Citizens Bank 6 0.7% - - Centura Bank 3 0.3% - - SAFE FCU * 236 27.4% 215 27.6% 202 27.6% Sumter City CU 1 0.1% 2 0.3% 2 0.3% ---- ------ ---- ------ ---- ------ Total deposits $862 100.0% $773 100.0% $730 100.0% ==== ====== ==== ====== ==== ======
Source: FDIC and NCUA websites * includes deposits outside of Sumter County 2 The financial institution with the largest deposit base in Florence County is Wachovia Bank, NA with deposits of $216 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, 1999, 1998 and 1997. Florence, S. C. Comparative Bank Deposits
June 1999 June 1998 June 1997 BANK Deposit $ % market Deposit $ % market Deposit $ % market --------- -------- --------- -------- --------- -------- (Dollar amounts in millions) Wachovia Bank, NA $216 18.2% $213 17.3% $240 20.1% Branch Banking & Trust 211 17.8% 209 16.9% 164 13.8% Company of SC Peoples FS&LA of SC 184 15.5% 187 15.2% 127 10.7% First Union National Bank 99 8.4% 106 8.6% 119 9.9% NationsBank NA 79 6.6% 109 8.9% 92 7.7% Centura (formerly Pee Dee 75 6.3% 91 7.4% 84 7.0% State Bank) National Bank of SC 74 6.2% 76 6.2% 74 6.2% Citizens Bank 65 5.5% 65 5.3% 58 4.9% Florence National Bank* 15 1.3% - - Florence County National Bank 23 2.0% - - Others (8 institutions) 145 12.2% 176 14.3% 236 19.7% ------ ------ ------ ------ ------ ------ Total $1,185 100.0% $1,230 100.0% $1,194 100.0% ====== ====== ====== ====== ====== ======
Source: FDIC and NCUA websites * opened July 6, 1998 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. As discussed below under the caption "Recent Legislation", Congress has recently adopted extensive changes in the laws governing the financial services industry. Among the changes adopted are creation of the financial holding company, a new type of bank holding company with powers that greatly exceed those of standard holding companies, and creation of the financial subsidiary, a subsidiary that can be used by national banks to engage in many, though not all, of the same activities in which a financial holding company may engage. The legislation also establishes the concept of functional regulation whereby the various financial activities in which financial institutions engage are overseen by the regulator with the relevant regulatory experience. Neither CBI nor the Banks has yet made a decision as to how to adapt the new legislation to its use. Accordingly, the following discussion relates to the supervisory and regulatory provisions that apply to CBI and the Banks as they currently operate. 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 3 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. As discussed below under "Recent Legislation", a bank holding company that meets certain requirements may now qualify as a financial holding company and thereby significantly increase the variety of services it may provide and the investments it may make. CBI is also subject to limited regulation and supervision by the South Carolina State Board of Financial Institutions. A South Carolina bank holding company may be required to 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. Furthermore, pursuant to applicable law and regulations, the Company must receive approval of, or give notice to (as applicable) the State Board prior to engaging in the acquisition of banking or non-banking institutions or assets. 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 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. 4 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 20 to the Financial Statements, contained elsewhere in this report. All three of the Banks are considered well capitalized. 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. Payment of Dividends CBI is a legal entity separate and distinct from the Banks. Most of the revenues of CBI 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. 5 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 semiannual insurance assessments imposed by the FDIC. Since 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, 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. 6 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 described in the previous paragraph. Interstate Banking Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegel-Neal"), CBI and any other adequately capitalized bank holding company located in South Carolina can 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. Rieglel-Neal also provides that, in any state that has not previously elected to prohibit out-of-state banks from operating interstate branches within its territory, adequately capitalized and managed bank holding companies can consolidate their multistate bank operations into a single bank subsidiary and branch interstate through acquisitions. De novo branching by an out-of-state bank is 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. The Riegel-Neal Act, together with legislation adopted in South Carolina, resulted in a number of South Carolina banks being acquired by large out-of-state bank holding companies. Size gives the larger banks certain advantages in competing for business from larger customers. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina and the region. As a result, the Banks do not generally attempt to compete for the banking relationships of large corporations, but concentrates its efforts on small to medium-sized businesses and on individuals. CBI believes its' Banks have competed effectively in this market segment by offering quality, personal service. 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. Recent Legislation On November 12, 1999, the President signed the Gramm-Leach-Bliley Act, which makes it easier for affiliations between banks, securities firms and insurance companies to take place. The Act removes Depression-era barriers that had separated banks and securities firms, and seeks to protect the privacy of consumers' financial information. Most of the provisions of the Act require the applicable regulators to adopt regulations in order to implement these provisions. Under provisions of the new legislation, which are effective March 11, 2000, banks, securities firms and insurance companies are able to structure new affiliations through a holding company structure or through a financial subsidiary. The legislation creates a new type of bank holding company called a "financial holding company" which has powers much more extensive than those of standard holding companies. These expanded powers include authority to engage in "financial activities," which are activities that are (1) financial in nature; (2) identical to activities that are financial in nature; or (3) complimentary to a financial activity and that do not impose a safety and soundness risk. Significantly, the permitted financial activities for financial holding companies include authority to engage in merchant banking and insurance activities, including insurance portfolio investing. A bank holding company can qualify as a financial holding company and expand the services it offers only if all of its subsidiary depository institutions are well-managed, well-capitalized and have received a rating of "satisfactory" on their last Community Reinvestment Act examination. 7 The legislation also creates another new type of entity called a "financial subsidiary." A financial subsidiary may be used by a national bank or a group of national banks to engage in many of the same activities permitted for a financial holding company, though several of these activities, including real estate development or investment, insurance or annuity underwriting, insurance portfolio investing and merchant banking, are reserved for financial holding companies. A bank's investment in a financial subsidiary affects the way in which the bank calculates its regulatory capital, and the assets and liabilities of financial subsidiaries may not be consolidated with those of the bank. The bank must also be certain that its risk management procedures are adequate to protect it from financial and operational risks created both by itself and by any financial subsidiary. Further, the bank must establish policies to maintain the separate corporate identities of the bank and its financial subsidiary and to prevent each from becoming liable for the obligations of the other. The Act also establishes the concept of "functional supervision," meaning that similar activities should be regulated by the same regulator. Accordingly, the Act spells out the regulatory authority of the bank regulatory agencies, the Securities and Exchange Commission and state insurance regulators so that each type of activity is supervised by a regulator with corresponding expertise. The Federal Reserve Board is intended to be an umbrella supervisor with the authority to require a bank holding company or financial holding company or any subsidiary of either to file reports as to its financial condition, risk management systems, transactions with depository institution subsidiaries and affiliates, and compliance with any federal law that it has authority to enforce. Although the Act reaffirms that states are the regulators for insurance activities of all persons, including federally-chartered banks, the Act prohibits states from preventing depository institutions and their affiliates from conducting insurance activities. The Act also establishes a minimum federal standard of privacy to protect the confidentiality of a consumer's personal financial information and gives the consumer the power to choose how personal financial information may be used by financial institutions. The privacy provisions of the Act will not go into effect until after adoption of implementing regulations by various federal agencies. CBI anticipates that the Act and the regulations which are to be adopted pursuant to the Act will be likely to create new opportunities for it to offer expanded services to customers in the future, though CBI has not yet determined what the nature of the expanded services might be or when CBI might find it feasible to offer them. CBI further expects that the Act will increase competition from larger financial institutions that are currently more capable than CBI of taking advantage of the opportunity to provide a broader range of services. However, CBI continues to believe that its commitment to providing high quality, personalized service to customers will permit it to remain competitive in its market area. 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, 1999 the Corporation employed 85 full time equivalent employees Of these, 35 were employed by the Orangeburg bank, 20 were employed by the Sumter bank, 12 were employed by the Florence bank and 18 were employed by the holding company. Management believes that its employee relations are excellent. 8 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 $536,000. The Orangeburg bank also owns a building, which was previously a branch of the bank, 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 $225,546. The Orangeburg bank currently rents this facility to the Corporation for office space. In June 1999 the Bank moved into a new branch facility located adjacent to the old building. This new branch office is approximately 6,500 square feet and the total investment in it was approximately $648,146, with an additional investment of $78,789 in land improvements. 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 Florence bank 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 for the Florence bank of approximately 7,500 square feet on the leased site. 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 1999. Item 5. Market for the Registrant'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. The prices in the table have been adjusted to reflect the 5% stock dividend paid on January 31, 2000. Sales price of the Corporation's Common Stock Quarter ended High Low Mar. 31, 1998 $16.57 $13.30 June 30, 1998 $16.15 $13.30 Sept. 30, 1998 $16.04 $12.35 Dec. 31, 1998 $14.07 $12.35 Mar. 31, 1999 $13.78 $12.29 June 30, 1999 $13.48 $11.51 Sept. 30, 1999 $14.01 $11.29 Dec. 31, 1999 $13.78 $11.16 9 During 1999 the Corporation had a stock sales volume of 262,900 shares on the American Stock Exchange, compared to 159,000 shares in 1998. There were 1,419 holders of record of the Corporation's Common Stock (no par value) as of December 31, 1999, compared to 1,457 the prior year. During 1999 the Corporation authorized and paid two cash dividends totaling 19 cents per share. The total cost of these payments was approximately $608,000 or 28% of after tax profits. During 1998 the Corporation authorized and paid two cash dividends totaling 15 cents per share. The total cost of these payments was approximately $453,000 or 29% 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 subsidiaries. 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 (See Item 1. Description of Business - Supervision and Regulation - Payment of Dividends.). At December 31, 1999 the Banks could pay up to $3,749,000 in dividends without special approval of the Comptroller of the Currency. Item 6. Selected Financial Data The following is a summary of the consolidated financial position and results of operations of the Corporation for the years ended December 31, 1995 through December 31, 1999.
For the years ended December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Financial Condition (All amounts in thousands of dollars, except per share data.) Investment securities .................... $ 43,936 $ 34,148 $ 32,452 $ 25,787 $ 24,669 Net loans receivable .................... 155,152 116,336 90,811 67,953 51,617 Total assets ............................. 228,030 182,281 134,574 105,461 83,897 Total deposits ........................... 184,364 147,630 117,167 89,851 72,550 Long-term obligations .................... 19,420 9,490 1,060 1,130 700 Stockholders' equity ..................... $ 20,245 $ 19,659 $ 13,037 $ 12,104 $ 7,346 Earnings Summary Interest income .......................... $ 15,550 $ 12,320 $ 9,820 $ 7,261 $ 6,327 Interest expense ......................... (6,958) (5,554) (4,374) (3,279) (2,965) --------- --------- --------- --------- --------- Net interest income ................. 8,592 6,766 5,446 3,982 3,362 Provision for loan losses ................ (612) (484) (358) (227) (160) Other operating income ................... 1,317 1,055 768 503 431 Other operating expenses ................. (6,066) (5,107) (4,004) (3,097) (2,179) --------- --------- --------- --------- --------- Net income before taxes ............. 3,231 2,230 1,852 1,161 1,454 Income taxes ............................. (1,049) (663) (636) (411) (517) --------- --------- --------- --------- --------- Net income after tax ................ $ 2,182 $ 1,567 $ 1,216 $ 750 $ 937 ========= ========= ========= ========= ========= Per share data Basic earnings .......................... $ 0.68 $ 0.52 $ 0.44 $ 0.29 $ 0.51 Diluted earnings ........................ $ 0.68 $ 0.51 $ 0.43 $ 0.29 $ 0.51 Dividends ............................... $ 0.19 $ 0.15 $ 0.14 $ 0.14 $ 0.13
Per share information is adjusted for a 5% stock dividend paid on Jan. 31, 2000 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION The discussion and data presented below analyze major factors and trends regarding the financial position and results of operations of Community Bankshares Inc. and its subsidiaries (herein after referred to as the Corporation or CBI) for the three year period ended December 31, 1999. Forward Looking Statements Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations that 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 (herein after referred to collectively as the Banks). CBI provides item and data processing and other technical services for its banking subsidiaries. The consolidated financial report for 1999 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.) Orangeburg National Bank is a national banking association and commenced operations in November 1987. It operates two offices in Orangeburg, South Carolina. Sumter National Bank is a national banking association and commenced operations 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. Year 2000 Community Bankshares Inc. did not suffer any unusual circumstances associated with the century date rollover beyond a minimal reduction in earnings as the result of the Banks' increasing their vault cash at year-end to accommodate any increase in customer needs for cash. All mission critical systems functioned normally after the rollover. The Corporation considers its Year 2000 efforts successful. The Banks' cash holdings have returned to normal levels. Stock Split and Stock Dividend On July 21, 1997, the Corporation effected a two-for-one split of its common shares outstanding. On January 31, 2000 the Corporation effected a five- percent stock dividend. All references to per share information contained in this discussion have been adjusted accordingly. DISTRIBUTION OF ASSETS AND LIABILITIES 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, 1999, 1998 and 1997. 11
Years ended December 31, 1999 1998 1997 Interest Interest Interest Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ Assets Balance Expense(1) Rates(1) Balance Expense(1) Rates(1) Balance Expense(1) Rates(1) ------ ------- ---------- -------- ------- ---------- -------- ------- ---------- -------- (Dollar amounts in thousands Interest bearing deposits ........... $ 1,937 $ 101 5.21% $ 2,385 $ 126 5.28% $ 1,283 $ 73 5.69% Investment securities taxable ....... 39,856 2,458 6.17% 30,096 1,915 6.36% 28,727 1,797 6.26% Investment securities--tax exempt ... 783 30 5.81% 341 14 6.22% 410 17 6.28% Federal funds sold .................. 10,967 555 5.06% 10,626 568 5.35% 4,363 241 5.52% Loans receivable (2) ................ 139,215 12,406 8.91% 103,500 9,697 9.37% 81,167 7,692 9.48% -------- ------- ----- -------- ------- ----- -------- ------ ----- Total interest earning assets ....... 192,758 15,550 8.07% 146,948 12,320 8.38% 115,950 9,820 8.47% Cash and due from banks ............. 8,896 6,499 4,990 Allowance for loan losses ........... (1,692) (1,281) (1,011) Premises and equipment .............. 4,549 3,622 2,817 Other assets ........................ 2,251 1,718 1,640 -------- -------- -------- Total assets ........................ $206,762 $157,506 $124,386 ======== ======== ======== Liabilities and Shareholders' Equity Interest bearing deposits Savings ............................. $ 28,321 $ 943 3.33% $ 22,235 $ 774 3.48% $ 19,576 $ 681 3.48% Interest bearing transaction accounts .............. 17,417 269 1.54% 14,028 253 1.80% 11,974 217 1.81% Time deposits ....................... 96,761 4,901 5.07% 73,045 4,018 5.50% 59,522 3,250 5.46% -------- ------- ----- -------- ------- ----- -------- ------ ----- Total interest bearing deposits ..... 142,499 6,113 4.29% 109,308 5,045 4.62% 91,072 4,148 4.55% Short term borrowing ................ 5,210 170 3.26% 3,225 119 3.69% 3,846 153 3.98% FHLB advances ....................... 12,335 675 5.47% 6,905 390 5.65% 1,101 73 6.63% -------- ------- ----- -------- ------- ----- -------- ------ ----- Total interest bearing liabilities .. 160,044 6,958 4.35% 119,438 5,554 4.65% 96,019 4,374 4.56% Noninterest bearing demand deposits . 26,124 19,536 15,098 Other liabilities ................... 978 942 864 Shareholders' equity ................ 19,616 17,590 12,405 -------- -------- -------- Total liabilities and shareholders' equity .............. $206,762 $157,506 $124,386 ======== ======== ======== Interest rate spread (3) 3.72% 3.73% 3.91% Net interest income and net yield on earning assets (4) ............. $ 8,592 4.46% $ 6,766 4.60% $5,446 4.70%
1. Computed on a fully taxable equivalent basis using a federal tax rate of 34%. 2. Nonaccruing loans are included in the average loan balances and income from such loans are 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. Earnings Performance, 1999 compared to 1998 The Corporation's net income was $2,182,000, or $.68 per share, in 1999. This compares to $1,567,000, or $.52 per share, in 1998, an increase of $615,000, or 39%. Management views this increase in earnings as primarily the result of a substantial increase in earning assets resulting from growth in its three markets, but particularly Sumter and Florence. The earnings at the Sumter bank increased to $559,000 in 1999 from $179,000 in 1998, a 212% increase. The earnings at the Orangeburg bank increased to $2,054,000 in 1999 from $1,737,000 in 1998, an 18% increase. The Florence bank showed a net loss of $314,000 for the twelve-month period in 1999 compared to a net loss of $331,000 for six months of operation in 1998. 12 Interest Income and Interest Expense, 1999 compared to 1998 The Corporation's interest income increased substantially in 1999 from 1998. In 1999 the Corporation earned $15,550,000 in total interest income, up from the prior year's $12,320,000. This represented a $3,230,000 or a 26.2% 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 $101,000 to interest income in 1999, down from $126,000 the prior year, a decrease of $25,000 or 19.8%. In 1999 the Corporation had an average of $1,937,000 in interest bearing deposits, down from the prior year's $2,385,000, a decrease of $448,000 or 18.8%. The average yield on these deposits during 1999 was 5.21%, down from the prior year's 5.28%. Investments contributed $2,458,000 to interest income in 1999, up from $1,915,000 the prior year, an increase of $543,000 or 28.4%. The investment portfolio averaged $39,856,000 in 1999, up from the prior year's $30,096,000, an increase of $9,760,000 or 32.4%. The Corporation's investment portfolio consists primarily of short-term U. S. government and agency debt issues. The average yield on investments during 1999 was 6.17%, down from 6.36% in 1998. The Corporation's tax-exempt securities portfolio earned $30,000 during 1999, up from $14,000 the prior year. The portfolio averaged $783,000 in 1999, up from $341,000 in 1998, an increase of $442,000 or 130%. The average yield was 5.81%, compared to 6.22% 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 $555,000 to interest income in 1999, down from $568,000 in the prior year, a decrease of $13,000 or 2.3%. The Corporation had an average of $10,967,000 in federal funds during 1999, up from the prior year's $10,626,000, an increase of $341,000 or 3.2%. The average yield on federal funds during 1999 was 5.06%, down from 5.35% in 1998. The Corporation's major source of interest income is the loan portfolio, which contributed $12,406,000 to interest income in 1999, up from $9,697,000 in the prior year, an increase of $2,709,000 or 28%. The average loan portfolio for 1999 was $139,215,000, compared to the prior year's $103,500,000, an increase of $35,715,000 or 34.5%. The average yield on loans during 1999 was 8.91%, down from 9.37% in 1998. The Corporation had average earning assets in 1999 of $192,758,000, which earned a yield of 8.07%. The Corporation had average earning assets in 1998 of $146,948,000, which earned a yield of 8.38%. Average earning assets increased $45,810,000 or 31.2%. The Corporation's savings deposits consist of savings and money market accounts. Total savings accounts averaged $28,321,000 in 1999, up from $22,235,000 in the prior year, an increase of $6,086,000 or 27.4%. The cost of these funds decreased to 3.33% in 1999 from 3.48% in the prior year. Interest bearing transaction accounts are the primary checking accounts that the Banks offer customers. This overall category was $17,417,000 in 1999, up from $14,028,000 in 1998, an increase of $3,389,000 or 24.2%. The average cost of these funds was 1.54% in 1999, compared to 1.80% in the prior year. Time deposits are the largest category of deposits, totaling $96,761,000 in 1999, up from $73,045,000 in the prior year, an increase of $23,716,000 or 32.5%. The cost of time deposits decreased to 5.07% from 5.50%. Short-term borrowing includes federal funds purchased and securities sold under agreements to repurchase. The repurchase agreements are consummated with several commercial customers of the Orangeburg bank. These accounts are not deposits; they are considered other obligations of the Banks. Balances in these accounts are subject to wide fluctuation, but they constitute a relatively small portion of the balance sheet. The average balance for 1999 was $5,210,000, up from $3,225,000 in the prior year, an increase of $1,985,000 or 61.5%. The cost of these funds decreased to 3.26% from 3.69%. The Orangeburg, Sumter and Florence banks are members of and have the ability to borrow from the Federal Home Loan Bank (FHLB). The banks had an average $12,335,000 outstanding borrowing balance during 1999 at an average cost of 5.47%. The banks had an average $6,905,000 outstanding during 1998 at an 13 average cost of 5.65%. These borrowings are a result of the Banks' 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 Florence bank did not have any borrowing activity with the FHLB during 1999 and 1998. The Corporation had total interest bearing liabilities in 1999 of $160,044,000 costing an average of 4.35%, compared with interest bearing liabilities in 1998 of $119,438,000 that cost an average of 4.65%. Average interest bearing liabilities increased $40,606,000 or 34%. Earnings Performance, 1998 compared to 1997 The Corporation's net income was $1,567,000, or $.52 per share, in 1998. This compares to $1,216,000, or $.44 per share, in 1997, an increase of $351,000, or 29%. Management views this increase in earnings as primarily the result of a substantial increase in earning assets resulting from growth in its three markets. Earnings at the Orangeburg bank increased to $1,737,000 in 1998 from $1,401,000 in 1997, a 24% increase. Earnings at the Sumter bank increased to $179,000 in 1998 from a net loss of $163,000 in 1997. The Florence bank showed a net loss at year-end 1998 of $331,000 for six months of operation. Interest Income and Interest Expense, 1998 compared to 1997 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 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 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 maintained a highly liquid position in its first months of operation. The loan portfolio 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%. 14 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 were $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 totaled $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. The average balance of short-term borrowings 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%. The Orangeburg bank had an average $6,905,000 outstanding borrowing balance with the FHLB 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%. 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 1999 net interest income of $1,826,000 is due to changes in volume. All of the $3,230,000 increase in interest income was from volume growth in earning assets, especially the loan portfolio. Likewise, the $1,404,000 increase in interest expense was due to volume increases for time deposits. During 1998 there was a similar pattern, with most of the increase in net interest income coming from changes in volume. The prime interest rate has changed over the last several years in both directions. 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%. It stayed stable through the first half of 1999, then gradually increased to 8.50% by year-end 1999. Management expects that interest rates may increase another 50 basis points during the first half of 2000, as the Federal Reserve maintains its anti-inflation bias. Management expects inflation to remain very low. The Corporation is not aware of any other immediately identifiable factors that would cause short-term interest rates to increase beyond these expectations in the near term. Therefore, as in 1999, any improvements in net interest income during 2000 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. 15 Volume and Rate Variance Analysis
1999 compared to 1998 1998 compared to 1997 Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- Interest earning assets (Dollar amounts in thousands) - ----------------------- Interest bearing deposits ......................... $ (24) $ (1) $ (25) $ 58 $ (5) $ 53 Investment securities taxable ..................... 602 (59) 543 87 31 118 Investment securities--tax exempt ................. 17 (1) 16 (5) - (5) Federal funds sold ................................ 18 (31) (13) 334 (7) 327 Loans receivable .................................. 3,203 (494) 2,709 2,095 (88) 2,007 ------- ------- ------- ------- ------- ------- Total interest income ............................. 3,816 (586) 3,230 2,569 (69) 2,500 ------- ------- ------- ------- ------- ------- Interest bearing liabilities Savings ........................................... 204 (35) 169 93 1 94 Interest bearing transaction accounts ............. 55 (39) 16 37 (1) 36 Time deposits ..................................... 1,221 (338) 883 743 24 767 ------- ------- ------- ------- ------- ------- Total interest bearing deposits ................... 1,480 (412) 1,068 873 24 897 Short term borrowing .............................. 66 (15) 51 (24) (10) (34) FHLB advances ..................................... 297 (12) 285 328 (11) 317 ------- ------- ------- ------- ------- ------- Total interest expense ............................ 1,843 (439) 1,404 1,177 3 1,180 ------- ------- ------- ------- ------- ------- Net interest income .................................. $ 1,973 $ (147) $ 1,826 $ 1,392 $ (72) $ 1,320 ======= ======= ======= ======= ======= =======
(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%. PREMISES AND EQUIPMENT Premises and equipment were $4,619,000 at December 31, 1999, compared to $3,892,000 the prior year, an increase of $727,000 or 18.6%. Most of this increase was associated with the new branch bank in Orangeburg. Premises and equipment are discussed further in Note 6 to the consolidated financial statements. INVESTMENT PORTFOLIO The Corporation's investment portfolio consists primarily of short-term U. S. government and agency debt issues. Investment securities averaged $39.8 million in 1999, $30.1 million in 1998 and $28.7 million in 1997. Note 4 to the consolidated financial statements provides further information on the investment portfolio. The table below gives the amortized cost and fair value of the Corporation's investment portfolio for the past three years. 16
1999 1998 1997 ---- ---- ---- Amortized Fair Amortized Fair Amortized Fair cost value cost value cost value ---- ----- ---- ----- ---- ----- (Dollar amounts in thousands) Securities held to maturity U.S. government and agencies ............. $13,369 $12,919 $15,035 $15,076 $16,906 $16,923 State and local government ............... - - 251 253 405 408 ------- ------- ------- ------- ------- ------- Total held to maturity .............. $13,369 $12,919 $15,286 $15,329 $17,311 $17,331 ======= ======= ======= ======= ======= ======= Securities available for sale U.S. government and agencies ............. $28,931 $28,151 $16,921 $16,975 $14,413 $14,444 State and local government ............... 825 814 225 227 327 327 Other securities ......................... 1,601 1,601 1,660 1,660 370 370 ------- ------- ------- ------- ------- ------- Total available for sale ............ $31,357 $30,566 $18,806 $18,862 $15,110 $15,141 ======= ======= ======= ======= ======= =======
Information on the maturity distribution of the investment portfolio is presented in Note 4 to the financial statements, page 42. At December 31, 1999 the Corporation's available for sale portfolio showed a net of tax other comprehensive loss in the equity section of the balance sheet of $511,000 compared to a net of tax other comprehensive income item of $36,000 the prior year. The change in the valuation of the investment portfolio was directly related to changes in market interest rates during the year. Management considers it unlikely that these investments will be sold prior to maturity and does not regard the valuation as anything other than a temporary fluctuation in market values. LOAN PORTFOLIO The average size of the loan portfolio in 1999 was $139.2 million, in 1998 it was $103.5 million, and in 1997 it was $81.1 million. At December 31, 1999, the loan portfolio was $157.1 million, compared to $117.8 million the prior year, an increase of $39.3 million, or 33%. Management believes the loan portfolio is adequately diversified. There are no foreign loans and few agricultural loans. The table, "Loan Portfolio Composition," on the following page, indicates the amounts of loans outstanding according to the type of loan at the dates indicated. Loan Portfolio Composition The following table shows the composition of the loan portfolio for the years ended December 31, 1995 through 1999.
Loan category 1999 1998 1997 1996 1995 - ------------- ---- ---- ---- ---- ---- (Dollar amounts in thousands) Commercial, financial and agricultural ............. $ 39,752 $ 29,403 $ 21,690 $ 16,520 $ 12,408 Real estate - construction ......................... 9,156 5,738 6,563 5,611 3,449 Real estate - mortgage ............................. 84,680 62,789 46,734 35,553 28,029 Installment loans to individuals ................... 23,033 19,325 16,348 11,021 8,361 Obligations of political subdivisions .............. 468 540 616 124 77 -------- -------- -------- -------- -------- Total loans - gross ........................... $157,089 $117,795 $ 91,951 $ 68,829 $ 52,324 ======== ======== ======== ======== ========
17 Commercial, financial, and agricultural loans, primarily representing loans made to small businesses, increased by $10.3 million or 35% during 1999. 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 collateralized by mortgages. Construction loans are also generally collateralized with mortgages. Because the Corporation's subsidiaries are community banks, real estate loans comprise the bulk of the loan portfolio. Construction loans increased $3.4 million or 60% in 1999. Mortgage loans increased $21.9 million or 35% in 1999. 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 1999, 1998 and 1997 the Corporation sold $9.9 million, $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 generates 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 $3.7 million or 19% in 1999. Interest income from the loan portfolio was $12.4 million in 1999, compared to $9.7 million in 1998, an increase of $2.7 million or 28%. The average yield on the portfolio was 8.91% in 1999, compared to 9.37% in 1998. Maturity Distribution of Loans The following table sets forth the maturity distribution of the Corporation's loans, by type, as of December 31, 1999, as well as the type of interest on loans due after one year. Within one After one After five Total year year but years but within five within ten years years ------- -------- --------- -------- (Dollar amounts in thousands) Commercial .......... $18,574 $17,209 $ 4,874 $ 40,657 Real Estate ......... 22,850 44,410 25,852 93,112 Installment ......... 6,643 15,910 1,036 23,589 ------- ------- ------- -------- Total .......... $48,067 $77,529 $31,762 $157,358 ======= ======= ======= ======== Sensitivity of loans to changes in interest rates-- Loans due after one year Predetermined interest rate $ 89,471 Floating interest rate 19,820 -------- Total $109,291 ======== Note - total of $157,356,000 includes $269,000 in loans held for resale. 18 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. Concentrations of credit also occur where a number of customers are engaged in similar business activities. The banks regularly review their business lending in an effort to detect, monitor and control such loan concentrations. At December 31, 1999 the Corporation had a concentration in the following areas: medical and dental offices - $7,428,000; dwelling operators - $2,620,000; and real estate developers - $2,993,000. 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 1999 or 1998.
Years ended December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Nonaccrual loans ............................................. $ 90 $ 31 $ 81 $ 431 $348 Accruing loans 90 days or more past due ...................... 6 187 - 93 76 ---- ---- ---- ------ ---- Total ................................................... $ 96 $218 $ 81 $ 524 $424 ==== ==== ==== ====== ==== Total as a % of outstanding loans ....................... 0.06% 0.19% 0.13% 0.76% 0.81% ==== ==== ==== ====== ==== Other Real Estate Owned ...................................... $ - $266 $132 $ - $ - ==== ==== ==== ====== ==== Impaired Loans (included in nonaccrual) ...................... $ 90 $ 31 $ 81 $ 120 $108 ==== ==== ==== ====== ====
Gross income that would have been recorded for the year ended December 31, 1999 and 1998, if nonaccrual loans had been performing in accordance with their original terms was approximately $2,100 each year. No interest income was recognized in the current period for the non-accrual loans. 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 1999. Management is aware of no trends, events or uncertainties that would cause nonaccrual loans to change materially in 2000. Potential Problem Loans At December 31, 1999, the Corporation's internal loan review program had identified $1,774,000 (1.1% 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. 19 The amounts reflected above do not represent management's estimate of the potential losses since a large proportion of these loans are collateralized by real estate and other marketable collateral. 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 1999 the Corporation had $9.6 million in unsecured loans or 6.1% of its loan portfolio. In 1998 the Corporation had $7.3 million in unsecured loans or 6.2% of its loan portfolio. Loan Participations Periodically, the Corporation's banking subsidiaries enter into sales or purchases of loan participations with one another 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 1999 the three banks had $7,292,000 in loan participations purchased. Of these loans, all but $564,000 were among the three banks. At the end of 1999 the three banks had $6,701,000 in loan participations sold. Of these loans, all were sold among the three banks. 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. Other Real Estate Other real estate, consisting of foreclosed properties, was $0 in 1999 and $266,000 in 1998 and $132,000 in 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. SUMMARY OF LOAN LOSS EXPERIENCE 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, 1999 and 1998, the allowance for loan losses was 1.23% and 1.24%, respectively, of total loans. The following table provides details on the changes in the allowance for loan losses during the past five years. 20
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Average amount of loans outstanding ................ $139,215 $103,349 $ 81,167 $ 57,806 $ 50,724 ======== ======== ======== ======== ======== Allowance at beginning of year ..................... $ 1,459 $ 1,140 $ 876 $ 707 $ 616 -------- -------- -------- -------- -------- Loan charge-offs: Real estate ........................................ 0 7 0 0 15 Installment ........................................ 95 111 121 70 58 Credit cards and related plans ..................... 5 6 9 5 2 Commercial and other ............................... 80 56 2 11 9 -------- -------- -------- -------- -------- Total charge-offs ............................. 180 180 132 86 84 -------- -------- -------- -------- -------- Recoveries: Real Estate ........................................ 0 0 0 4 0 Installment ........................................ 17 12 34 23 13 Credit cards and related plans ..................... 3 3 4 1 2 Commercial and other ............................... 25 0 0 0 0 -------- -------- -------- -------- -------- Total recoveries .............................. 45 15 38 28 15 -------- -------- -------- -------- -------- Net charge-offs .................................... 135 165 94 58 69 Provision for loan losses .......................... 612 484 358 227 160 -------- -------- -------- -------- -------- Allowance for loan losses at end of year .......... $ 1,936 $ 1,459 $ 1,140 $ 876 $ 707 ======== ======== ======== ======== ======== 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Ratios Net charge-offs to average loans outstanding ................. 0.10% 0.16% 0.12% 0.10% 0.14% Net charge-offs to loans outstanding at end of ............... 0.09% 0.14% 0.10% 0.08% 0.13% year Allowance for loan losses to average loans ................... 1.39% 1.41% 1.40% 1.52% 1.39% Allowance for loan losses to total loans at end .............. 1.23% 1.24% 1.24% 1.27% 1.35% of year Net charge-offs to allowance for losses ...................... 6.97% 11.31% 8.33% 6.62% 9.76% Net charge-offs to provision for loans losses ................ 22.06% 34.09% 26.46% 25.55% 43.13%
Management reviews its allowance for loan losses in three broad categories: commercial, real estate and installment loans. The combination of a relatively short operating history and relatively high asset quality precludes management from establishing a specific loan loss percentage for the computation of the allowance for each category. Instead management assigns an estimated percentage factor to each in the computation of the overall allowance. In general terms, the real estate portfolio is least risky, followed by the commercial loan portfolio, followed by the installment loan portfolio. The Banks' internal and external loan review programs will from time to time identify loans that are subject to specific weaknesses and such loans will be reviewed for a specific loan loss allowance. 21 The Corporation operates three independent community banks in central South Carolina. Under the provisions of the National Bank Act each board of directors is responsible for determining the adequacy of their loan loss allowance. In addition, each bank is supervised and regularly examined by the Office of the Comptroller of the Currency of the U. S. Treasury Department. As a normal part of a safety and soundness examination, the OCC examiners will assess and comment on the adequacy of a national bank's allowance for loan losses. The allowance presented in this discussion is on an aggregated basis and as such will generally show a substantial unallocated reserve that might not be present if the Corporation was comprised of one operating bank subsidiary. The nature of community banking is such that the loan portfolios will be predominantly comprised of small and medium size business and consumer loans. As community banks there is by definition a geographic concentration of loans within the Banks' respective city or county. Management at each bank monitors the loan concentrations and loan portfolio quality on an ongoing basis including, but not limited to: quarterly analysis of loan concentrations, monthly reporting of past dues, non-accruals, and watch loans, and quarterly reporting of loan charge-offs and recoveries. These efforts focus on historical experience and are bolstered by quarterly analysis of local and state economic conditions, which is part of the Banks' assessment of the adequacy of their allowances for loan losses. Based on the current levels of non-performing and other problem loans, management believes that loan charge-offs in 2000 will at least approximate the 1999 levels as such loans progress through the collection, foreclosure, and repossession process. Management believes that the allowance for loan losses, as of December 31, 1999, is sufficient to absorb the expected charge-offs and provide adequately for the inherent losses that remain in the loan portfolio. Management will continue to closely monitor the levels of non-performing and potential problem loans and address the weaknesses in these credits to enhance the amount of ultimate collection or recovery of these assets. Should increases in the overall level of non-performing and potential problem loans accelerate from the current trend, management will adjust the methodology for determining the allowance for loan losses to increase the provision and allowance for loan losses. This would decrease net income. The following table presents the allocation of the allowance for loan losses, as of December 31, 1995 through 1999, compared with the percent of loans in the applicable categories to total loans.
1999 % of 1998 % of 1997 % of 1996 % of 1995 % of loans in loans in loans in loans in loans in each each each each each category category category category category ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- (Dollar amounts in thousands) Commercial ................ $ 660 28% $ 364 25% $ 336 24% $ 314 24% $ 253 24% Real estate ............... 565 57% 385 59% 301 58% 313 60% 171 60% Installment ............... 360 15% 388 16% 288 18% 188 16% 208 16% Unallocated ............... 351 0% 322 0% 215 0% 61 0% 75 0% ------ --- ------ --- ------ --- ------ --- ------ --- Total ................ $1,936 100% $1,459 100% $1,140 100% $ 876 100% $ 707 100% ====== === ====== === ====== === ====== === ====== ===
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. The allowance for each subsidiary bank is available to absorb losses on that bank's loan portfolio only. 22 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 $612,000 and $484,000 in 1999 and 1998, respectively. Based on the available information, the Corporation considers its 1999 provision for loan losses adequate. Net charge-offs in 1999 were $135,000 or 22% of the provision for loan losses compared to $165,000 or 34% 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. AVERAGE DEPOSITS The Corporation's average deposits in 1999 were $168.6 million, compared to $128.8 million in 1998, an increase of $39.8 million or 30.9%. The total average deposits for the Corporation for the years ended December 31, 1999, 1998 and 1997, are summarized below:
1999 1998 1997 ---- ---- ---- Average Average Average Average Average Average balance cost balance cost balance cost ------- ---- ------- ---- ------- ---- (Dollar amounts in thousands) Noninterest bearing demand ........................ $ 26,124 $ 19,536 $ 15,098 Interest bearing transaction accounts ............. 17,417 1.54% 14,028 1.80% 11,974 1.87% Savings-regular ................................... 8,595 2.08% 10,774 2.38% 8,892 2.46% Savings- money market ............................. 19,726 3.97% 11,461 4.96% 10,684 4.32% Time deposits less than $100,000 .................. 39,406 5.09% 52,314 5.39% 43,240 5.40% Time deposits greater than $100,000 ............... 57,355 5.14% 20,731 5.92% 16,282 5.63% -------- -------- -------- Total average deposits ....................... $168,623 $128,844 $106,170 ======== ======== ========
At December 31, 1999, the Corporation had $36,163,000 in certificates of deposit of $100,000 or more. The maturities of these certificates are disclosed in Note 7 to the consolidated financial statements. RETURN ON EQUITY AND ASSETS The following table shows the return on assets (net income divided by average total assets), return on equity (net income divided by average equity), dividend payout ratio (dividends declared per share divided by net income per share), and equity to assets ratio (average equity divided by average total assets) for the years ended December 31, 1999, 1998 and 1997. 1999 1998 1997 ---- ---- ---- Return on assets (ROA) .................. 1.06% 0.99% 0.98% Return on equity (ROE) .................. 11.12% 8.91% 9.80% Dividend payout ratio (dividends/net income) ................ 27.82% 28.91% 32.40% Equity as a percent of assets ........... 9.49% 11.17% 9.97% 23 SHORT-TERM BORROWINGS The Corporation's short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase, which generally mature each business day. There was $2,782,000, $4,464,000 and $2,551,000 outstanding at year-end 1999, 1998 and 1997, respectively. Further information is provided in Note 8 to the consolidated financial statements. FEDERAL HOME LOAN BANK ADVANCES CBI's banking subsidiaries are members of the Federal Home Loan Bank of Atlanta. As such they have access to long-term borrowing from the FHLB. There were $19,420,000 and $9,490,000 outstanding in such advances at year-end 1999 and 1998, respectively. Further information on these borrowings from the FHLB is provided in Note 9 to the consolidated financial statements. CAPITAL Dividends During 1999 CBI paid cash dividends to shareholders of 19 cents per share, which totaled $608,000. This represented a dividend payout ratio (dividends divided by net income) of 28%. The dividend payout ratio in 1998 was 29%. Common Stock Common stock at December 31, 1999, totaled $14,207,000, compared to $14,648,000 the prior year. The changes in this account included a decrease of $630,000 as a result of stock redemption and an increase of $189,000 resulting from the exercise of stock options. 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 risk based capital ratio of 10%. During 1998 and 1999 CBI transferred $1,000,000 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 period. Detailed information on the Corporation's capital position, as well as that of its subsidiary banks, is provided in Note 20 to the consolidated financial statements. The Corporation considers its current and projected capital position to be adequate. NONINTEREST INCOME AND NONINTERST EXPENSE Noninterest income, 1999 compared to 1998 Noninterest income increased to $1,317,000 in 1999 from $1,055,000 in 1998, a $262,000 or 24.8% increase. The major component of this change was in service charge income, which in 1999 was $1,031,000 compared to $798,000 in the prior year, a $235,000 or 29.2% increase. Noninterest expense, 1999 compared to 1998 Overall, non-interest expenses increased to $6,066,000 in 1999 from $5,074,000 in 1998, an increase of $992,000 or 19.6%. The first full year of operation of the new bank in Florence accounted for much of this increase. Accordingly, many of the dollar and percentage changes discussed herein will be larger than normal. 24 Personnel costs in 1999 were $3,493,000 compared to $2,911,000 the prior year, an increase of $582,000 or 20%. Premises and equipment expenses in 1999 were $886,000 compared to $701,000 the prior year, a $185,000 or 26.4% increase. Supplies expense was $155,000 in 1999, compared to $174,000 in the prior year, a decrease of $19,000 or 10.9%. Director fees were $121,000 in 1999, compared to $125,000 in the prior year, a decrease of $4,000 or 3%. 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 currently pay director fees. FDIC insurance costs were $23,000 in 1999, compared to $16,000 in the prior year, an increase of $7,000 or 44%. All other expenses were $1,388,000 in 1999, compared to $1,147,000 in the prior year, an increase of $241,000 or 21%. Income Taxes, 1999 compared to 1998 The Corporation pays U. S. corporate income taxes and South Carolina bank income taxes. The 1999 provision for income taxes was $1,049,000, compared to $663,000 the prior year, an increase of $386,000 or 58.2%. The Corporation's effective average tax rate is 32.4%. CBI was the beneficiary of the exercise of non-qualified stock options on 27,500 shares during 1999. The tax benefit to the Corporation approximated $89,000 and accounts for the reduction in the effective tax rate. Noninterest income, 1998 compared to 1997 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, 1998 compared to 1997 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. The remaining increase was related to growth in the Sumter and Orangeburg banks and increased volumes of their business. 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%. 25 Income Taxes, 1998 compared to 1997 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% in 1998. 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 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 affected 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 3%, during 1999. Prospects appear good for continued low inflation. Although inflation does not normally affect a financial institution as dramatically as it affects 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. In November and December 1999 the Federal Reserve increased the discount rate by a total of 50 basis points. The current bias of the Federal Reserve Board indicates that further interest rate hikes are likely. However, as of late first quarter 2000 the interest rate increases have not slowed new loan demand in the Banks' markets. Competition for new loan business and demand for new loans appear to have mitigated the effect of increased interest rates. Of course, if rates continue to increase it is possible that demand will slow. In any case, it is likely that the Banks will continue to face increased pressure on their net interest margins during 2000. LIQUIDITY Liquidity is the ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of additional liabilities, most often deposits. 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. The Corporation has substantially more liabilities that 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. 26 The Corporation also maintains various 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 $72 million in 1995 to over $184 million in 1999. 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, 1999, the Corporation had approximately $13.4 million in certificates of deposit and other obligations maturing in one to five years. The Corporation had $17.7 million in obligations maturing after five years. The Corporation's assets maturing in the same periods were $87 million and $45 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. NEW ACCOUNTING STANDARDS The effect of new accounting standards on the Corporation is discussed in Footnote 2 to the consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Corporation's market risk arises principally from interest rate risk inherent in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Corporation manages other risks, such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk and this risk could potentially have the largest material effect on the Corporation's financial condition and results of operations. Other types of market risks such as foreign currency exchange risk and commodity price risk do not arise in the normal course of community banking activities. Achieving consistent growth in net interest income is the primary goal of the Corporation's asset/liability function. The Corporation attempts to control the mix and maturities of assets and liabilities to achieve consistent growth in net interest income despite changes in market interest rates. The Corporation seeks to accomplish this goal while maintaining adequate liquidity and capital. The Corporation's asset/liability mix is sufficiently balanced so that the effect of interest rates moving in either direction is not expected to be significant over time. The Corporation's Asset/Liability Committee uses a simulation model to assist in achieving consistent growth in net interest income while managing interest rate risk. The model takes into account interest rate changes as well as changes in the mix and volume of assets and liabilities. The model simulates the Corporation's balance sheet and income statement under several different rate scenarios. The model's inputs (such as interest rates and levels of loans and deposits) are updated on a quarterly basis in order to obtain the most accurate projection possible. The projection presents information over a twelve-month period. It reports a base case in which interest rates remain flat and reports variations that occur when rates increase and decrease 100 and 200 basis points. According to the model as of December 31, 1999, the Corporation is positioned so that net interest income will increase $264,000 and net income will increase $163,000 in the next twelve months if interest rates rise 200 basis points. Conversely, net interest income will decline $175,000 and net income will decline $108,000 in the next twelve months if interest rates decline 200 basis points. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates and loan prepayment, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Corporation could undertake in response to changes in interest rates. 27 The Market Risk Maturity table, which follows this discussion, shows the Corporation's financial instruments that are sensitive to changes in interest rates. The Corporation uses certain assumptions to estimate fair values and expected maturities. For assets, expected maturities are based upon contractual maturity, projected repayments, prepayment of principal and potential calls. For core deposits without contractual maturity (i.e., interest checking, savings and money market accounts), the table presents principal cash flows based on management's judgment concerning their most likely runoff. The actual maturities and runoff could vary substantially if future prepayments, runoff and calls differ from the Corporation's historical experience.
Average Market Risk Maturity rate 2000 2001 2002 2003 2004 After 2005 Total Fair value ------- ---- ---- ---- ---- ---- ---------- ----- ---------- (Dollar amounts in thousands) Earning Assets Interest bearing deposits .......... 5.21% $ 788 $ - $ - $ - $ - $ - $ 788 $ 788 Investment securities .............. 6.17% 2,292 2,424 4,926 6,514 7,565 20,214 43,935 43,485 Federal funds sold ................. 5.06% 8,040 - - - - - 8,040 8,040 Loans .............................. 5.06% 36,033 14,091 18,329 21,304 31,519 36,082 157,358 155,422 Interest bearing liabilities Savings ............................ 3.33% 1,525 1,449 1,377 1,308 1,242 23,605 30,506 30,506 Interest bearing ................... 1.54% 937 890 845 803 763 14,494 18,732 18,732 transaction accounts Time deposits < $100,000 ........... 5.09% 62,150 8,917 591 487 121 179 72,445 72,377 Time deposits > $100,000 ........... 5.14% 31,983 4,075 - - - 105 36,163 36,095 Short term borrowing ............... 3.26% 2,782 - - - - - 2,782 2,782 FHLB advances ...................... 5.47% $ 2,000 $ - $ - $ - $ - $17,420 $ 19,420 $ 19,420
The Corporation also reviews its interest rate risk by periodically evaluating its interest rate sensitivity gap (the ratio of assets and liabilities repricing within specific maturity ranges). At December 31, 1999 on a cumulative basis through twelve months, rate sensitive liabilities exceeded rate sensitive assets, by $71.8 million. The liability sensitive position is largely due to the assumption that the Banks' $48.8 million in interest bearing transaction accounts, savings accounts and money market accounts will reprice within a year. This assumption may or may not be valid, since these accounts vary greatly in their sensitivity to interest rate changes in the market. The following table summarizes the Corporation's interest sensitivity position as of December 31, 1999. 28 Interest Sensitivity Analysis
Within 3 4-12 months 1-5 years Over 5 Total months years -------- ----------- --------- ------ ----- (Dollar amounts in thousands) Interest earning assets Interest bearing deposits ...................... $ 788 $ - $ - $ - $ 788 Investment securities .......................... 500 1,700 20,952 20,783 43,935 Federal funds sold ............................. 8,040 - - - 8,040 Loans, net of unearned income .................. 54,863 10,852 66,703 24,940 157,358 -------- -------- -------- -------- -------- Total interest earning assets .................. 64,191 12,552 87,655 45,723 210,121 -------- -------- -------- -------- -------- Interest bearing liabilities Savings ........................................ 30,506 - - - 30,506 Interest bearing transaction accounts .......... 18,372 - - - 18,372 Time deposits .................................. 24,432 70,599 13,369 208 108,608 Short term borrowings .......................... 2,782 - - - 2,782 FHLB advances .................................. 1,910 - - 17,510 19,420 -------- -------- -------- -------- -------- Total interest bearing liabilities ............. $ 78,002 $ 70,599 $ 13,369 $ 17,718 $179,688 -------- -------- -------- -------- -------- Interest sensitivity gap ....................... $(13,811) $(58,047) $ 74,286 $ 28,005 $ 30,433 Cumulative gap ................................. (13,811) (71,858) 2,428 30,433 RSA/RSL ........................................ 82% 18% Cumulative RSA/RSL ............................. 82% 52%
RSA- rate sensitive assets; RSL- rate sensitive liabilities The above table reflects the balances of interest earning assets and interest bearing liabilities at the earlier of their repricing or maturity dates. Amortizing fixed rate loans are reflected at the scheduled maturity date. Variable rate amortizing loans are reflected at the earliest date at which they may be repriced contractually. Deposits in other banks and debt securities are reflected at each instrument's ultimate maturity date. Overnight federal funds sold are reflected as instantly repriceable. Interest bearing liabilities with no contractual maturity, such as savings deposits and interest bearing transaction accounts, are reflected in the earliest repricing period possible. Fixed rate time deposits are reflected at the earlier of their next repricing or maturity dates. Item 8. Financial Statements and Supplementary Data Please see the attached consolidated audited financial statements for the years ended December 31, 1999, 1998 and 1997. 29 COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Independent Auditors' Report ................................................................ 31 Consolidated Balance Sheets, December 31, 1999 and 1998 ..................................... 32 Consolidated Statements of Income, Years Ended December 31, 1999, 1998 and 1997 ...................................................................... 33-34 Consolidated Statements of Changes in Shareholders' Equity, Years Ended December 31, 1999, 1998 and 1997 ......................................................... 35 Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998 and 1997 ...................................................................... 36 Notes to Consolidated Financial Statements .................................................. 37
30 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. J. W. HUNT AND COMPANY, LLP Columbia, South Carolina January 31, 2000 31 COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1999 AND 1998
ASSETS ($ in thousands) 1999 1998 ---- ---- Cash and due from banks ............................................................... $ 12,275 $ 7,746 Federal funds sold .................................................................... 8,040 15,550 --------- --------- Total cash and cash equivalents ...................................... 20,315 23,296 Interest-bearing deposits with banks .................................................. 788 1,577 Securities held to maturity (fair value approximates $12,919 and $15,329 as of December 31, 1999 and 1998, respectively) ................................................................. 13,369 15,286 Securities available for sale, at fair value .......................................... 30,566 18,862 Loans held for sale ................................................................... 269 722 Loans receivable, net of allowance for loan losses of $1,936 in 1999 and $1,459 in 1998 ........................................ 155,153 116,336 Accrued interest receivable ........................................................... 1,700 1,242 Premises and equipment - net .......................................................... 4,619 3,892 Net deferred tax asset ................................................................ 858 453 Other assets .......................................................................... 393 615 --------- --------- Total assets ........................................................ 228,030 182,281 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Demand, non interest bearing .................................................... $ 26,878 $ 23,883 Interest-bearing transaction accounts ........................................... 18,372 16,220 Savings ......................................................................... 30,506 25,602 Certificates of deposit of $100 and over ........................................ 36,163 24,504 Other time deposits ............................................................. 72,445 57,421 --------- --------- Total deposits ...................................................... 184,364 147,630 Federal funds purchased and securities sold under agreements to repurchase ..................................................... 2,782 4,464 Federal Home Loan Bank advances ................................................. 19,420 9,490 Accrued interest payable ........................................................ 770 603 Accrued expenses and other liabilities .......................................... 449 435 --------- --------- Total liabilities ................................................... 207,785 162,622 --------- --------- Shareholders' equity: Common stock - no par value, authorized shares - 12,000,000; issued and outstanding - 3,191,462 shares in 1999 and 3,200,070 shares in 1998 ............................................. 14,207 14,648 Retained earnings .................................................................. 6,549 4,975 Accumulated other comprehensive income (loss) ...................................... (511) 36 --------- --------- Total shareholders' equity .......................................... 20,245 19,659 --------- --------- Total liabilities and shareholders' equity .......................... 228,030 182,281 ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 32 CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
($ in thousands, except per share data) 1999 1998 1997 ---- ---- ---- Interest and dividend income: Loans, including fees .................................................. $12,406 $ 9,697 $ 7,692 Deposits with other financial institutions ............................. 101 126 73 ------- ------- ------- Total ................................................... 12,507 9,823 7,765 ------- ------- ------- Investment securities interest and dividends: Interest - U. S. Treasury and U.S. Government Agencies ......................................... 2,352 1,831 1,754 Interest - tax exempt securities .................................... 30 14 17 Dividends ........................................................... 106 84 43 ------- ------- ------- Total investment securities interest and dividends ........................................ 2,488 1,929 1,814 ------- ------- ------- Federal funds sold and securities purchased under agreements to resell ............................. 555 568 241 ------- ------- ------- Total interest and dividend income ...................... 15,550 12,320 9,820 ------- ------- ------- Interest expense: Deposits: Interest-bearing transaction accounts ............................... 269 253 217 Savings ............................................................. 942 774 681 Certificates of deposit of $100 and over ............................ 1,523 1,174 897 Certificates of deposit of less than $100 ........................... 3,379 2,844 2,353 ------- ------- ------- Total interest on deposits .............................. 6,113 5,045 4,148 Federal funds purchased and securities sold under agreements to repurchase ...................................... 170 119 153 Federal Home Loan Bank advances ........................................ 675 390 73 ------- ------- ------- Total interest expense .................................. 6,958 5,554 4,374 ------- ------- ------- Net interest income ....................................................... 8,592 6,766 5,446 Provision for loan losses ................................................. 612 484 358 ------- ------- ------- Net interest income after provision for loan losses ...................................... 7,980 6,282 5,088 ------- ------- ------- Noninterest income: Service charges on deposit accounts .................................... 1,031 798 561 Deposit box rent ....................................................... 24 19 16 Bank card fees ......................................................... 14 12 9 Credit life insurance commissions ...................................... 48 74 52 Other .................................................................. 200 152 130 ------- ------- ------- Total noninterest income ................................ 1,317 1,055 768 ------- ------- ------- Noninterest expenses: Salaries and employee benefits ......................................... 3,493 2,911 2,332 Premises and equipment ................................................. 886 701 527 Marketing .............................................................. 180 166 173 Regulatory fees ........................................................ 155 92 75 Supplies ............................................................... 155 174 121 Director fees .......................................................... 121 125 72 FDIC insurance ......................................................... 23 16 15 Other .................................................................. 1,053 889 689 ------- ------- ------- Total noninterest expenses .............................. 6,066 5,074 4,004 ------- ------- ------- (Continued)-1
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 33 COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - -------------------------------------------------------------------------------
1999 1998 1997 ---- ---- ---- Income before provision for income taxes and cumulative effect of a change in accounting principle .................... $ 3,231 $ 2,263 $ 1,852 Provision for income taxes .................................................. 1,049 663 636 ------- ------- ------- Income before cumulative effect of a change in accounting principle ..................................................... 2,182 1,600 1,216 Cumulative effect of a change in accounting principle, net of tax ............................................................... - 33 - ------- ------- ------- Net income ...................................................... 2,182 1,567 1,216 ======= ======= ======= Average number of common shares outstanding ................................. 3,189 3,041 2,766 ======= ======= ======= Average number of common shares outstanding, assuming dilution ........................................................ 3,215 3,097 2,816 ======= ======= ======= Basic earnings per common share: Income before cumulative effect of a change in accounting principle .................................................. $ 0.68 $ 0.53 $ 0.44 Cumulative effect of a change in accounting principle, net of tax ............................................................ - (0.01) - ------- ------- ------- Net income ............................................................... 0.68 0.52 0.44 ======= ======= ======= Diluted earnings per common share: Income before cumulative effect of a change in accounting principle .................................................. $ 0.68 $ 0.52 $ 0.43 Cumulative effect of a change in accounting principle, net of tax ............................................................ - (0.01) - ------- ------- ------- Net income ............................................................... 0.68 0.51 0.43 ======= ======= ======= (Concluded)-2
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 34 COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 ($ in thousands, except per share data)
ACCUMULATED OTHER COMMON STOCK RETAINED COMPREHENSIVE SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL ------ ------ -------- ------------- ----- Balance, January 1, 1997 .............................. 2,757,800 $ 9,065 $ 3,039 $ - $ 12,831 Sale of common stock ......................... 8,610 100 - - 100 Stock issuance cost .......................... - (9) - - (9) --------- Comprehensive Income: Net income ................................. - - 1,216 - 1,216 Change in unrealized gains (losses), net of applicable deferred income taxes on securities available for sale ...................... - - - 20 20 --------- Total comprehensive income 1,236 --------- Dividends paid at $.14 per share ................................. - - (394) - (394) --------- --------- --------- --------- --------- Balance, December 31, 1997 ............................ 2,766,410 9,156 3,861 20 13,037 Sale of common stock ......................... 378,010 5,372 - - 5,372 Stock issuance cost .......................... - (87) - - (87) Exercise of stock options .................... 55,650 207 - - 207 --------- Comprehensive income: Net income ................................. - - 1,567 - 1,567 Change in unrealized gains (losses), net of applicable deferred income taxes on securities available for sale ...................... - - - 16 16 --------- Total comprehensive income .......... - - - - 1,583 --------- Dividends paid at $.15 per share ................................. - - (453) - (453) --------- --------- --------- --------- --------- Balance, December 31, 1998 ............................ 3,200,070 $ 14,648 $ 4,975 $ 36 $ 19,659 Repurchase of stock .......................... (49,455) (630) - - (630) Stock options exercised ...................... 40,847 189 - - 189 ---------- Comprehensive income: Net income ................................. - - 2,182 - 2,182 Change in unrealized gains (losses), net of applicable deferred income taxes on securities available for sale ...................... - - - (547) (547) ---------- Total comprehensive income 1,635 Dividends paid at $.19 ---------- per share ................................. - - (608) - (608) ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1999 ............................ 3,191,462 14,207 6,549 (511) 20,245 ========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 35 CONSOLIDATED STATEMENTS OF CASH FLOWS, YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
($ in thousands) 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income ................................................................ $ 2,182 $ 1,567 $ 1,216 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......................................... 462 437 295 Accretion of discounts and amortization of premiums - securities - net .................................................... (14) (8) (103) Provision for loan losses .............................................. 612 484 358 Deferred income taxes .................................................. (405) (102) (68) Proceeds from sales of real estate loans held for sale ................. 9,963 12,089 4,768 Originations of real estate loans held for sale ........................ (9,963) (12,089) (4,768) Decrease in real estate loans held for sale ............................ (453) (363) (63) Net changes in operating assets and liabilities: Accrued interest receivable ......................................... (458) (75) (313) Other assets ........................................................ 289 (339) 29 Accrued interest payable ............................................ 167 93 160 Other liabilities ................................................... 14 187 (33) -------- -------- -------- Net cash provided by operating activities .................. 2,396 1,881 1,478 -------- -------- -------- Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits with banks ............................................................. 789 (339) (806) Purchases of securities held to maturity .................................. (2,424) (19,253) (10,156) Purchases of securities available for sale ................................ (23,050) (23,181) (11,918) Proceeds from maturities of securities held to maturity ....................................................... 4,340 21,284 8,999 Proceeds from maturities of securities available for sale ..................................................... 10,485 19,479 7,614 Loan originations and principal collections, net .......................... (38,261) (26,012) (24,296) Purchases of premises and equipment ...................................... (1,189) (1,530) (190) -------- -------- -------- Net cash used by investing activities ...................... (49,310) (29,552) (30,753) -------- -------- -------- Cash flows from financing activities: Net increase in demand, transaction and savings deposit accounts ............................................ $ 10,048 $ 16,544 9,354 Net increase in time deposits ............................................. 26,686 13,919 17,961 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase ...................... (1,682) 1,913 807 Federal Home Loan Bank advances ........................................... 9,930 8,430 (70) Repurchase of stock ....................................................... (630) - - Proceeds from issuance of common stock .................................... - 5,372 100 Stock issuance cost ....................................................... - (87) (9) Proceeds from exercise of stock options ................................... 189 207 - Dividends paid ............................................................ (608) (453) (394) -------- -------- -------- Net cash provided by financing activities .................. 43,933 45,845 27,749 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ......................... (2,981) 18,174 (1,526) Cash and cash equivalents at beginning of year ............................... 23,296 5,122 6,648 -------- -------- -------- Cash and cash equivalents at end of year ..................................... 20,315 23,296 5,122 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments of interest .............................................. $ 6,751 $ 5,461 $ 4,222 ======== ======== ======== Cash payments for income taxes ......................................... $ 1,287 $ 718 $ 758 ======== ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Transfers of loans receivable to other real estate owned ................................................... $ 99 $ - $ 132 ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 36 COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 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: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Corporation (the Parent Holding Company) and its 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 assets. 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 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. 37 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 in 1998 was to decrease income before provision for income taxes and net income by approximately $46,000 and $33,000, 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, increase in 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. 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. 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. All fees and other income from these activities are recognized in income when loan sales are completed. 38 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 collateralized 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 as losses are estimated to have occurred. 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 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. Management of each Bank reviews its allowance for loan losses in three broad categories: commercial, real estate, and installment loans, and assigns an estimated percentage factor to each in the determination of the estimate of the allowance for loan losses. The Banks' internal and external loan review programs identify loans that are subject to specific weaknesses, and such loans will be reviewed for a specific loan loss allowance. 39 A loan is considered impaired when, based on current information and events, it is probable that the Corporation 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 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. 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 plans 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 and are held for sale. Foreclosed assets are initially 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 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 doors, safe deposit boxes, night depository, etc. 40 years Furniture, fixtures and equipment 5-25 years 40 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 Banks enter into commitments to extend credit and grant standby letters of credit. Such off-balance-sheet financial instruments are recorded in the consolidated financial statements when they are funded. SEGMENTS: 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, the banking operations are not considered by management to comprise more than one reportable operating segment. 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 (Loss) is its unrealized gains (losses) on securities available for sale. 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 balance sheet and measure them at fair value. 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 available cash. The average daily reserve balance requirements for December 31, 1999 and 1998, were met by cash held in the three banks. At December 31, 1999, the Corporation had cash balances with correspondent banks totaling approximately $283,000, all fully insured by the FDIC. 41 NOTE 4 - SECURITIES: Securities held to maturity consist of the following (in thousands of dollars): DECEMBER 31, 1999 ----------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- U.S. Government and federal agencies ....... $13,369 $ 2 $ (452) $12,919 ======= ======= ======= ======= 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 ======= ======= ======= ======= Securities available for sale consist of the following (in thousands of dollars): DECEMBER 31, 1999 ----------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- U.S. Government and federal agencies ....... $28,931 $ 2 $ (782) $28,151 State and local governments ............ 825 1 (12) 814 Federal Home Loan Bank stock ............. 1,016 - - 1,016 Federal Reserve Bank stock ............. 408 - - 408 Equity securities ......... 177 - - 177 ------- ------- ------- ------- Total ......... 31,357 3 (794) 30,566 ======= ======= ======= ======= 42 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 governments ............ 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 ====== == === ====== The following is a summary of maturities and yields of securities held to maturity and securities available for sale as of December 31, 1999 (in thousands of dollars):
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: Federal agency obligations ............... $ 999 6.60% $ 4,999 6.13% $ 7,371 6.28% $ - 0.00% $13,369 6.25% ----- ---- ------ ---- ------ ---- ----- ---- ------ ---- Total held to maturity ......... 999 6.60% 4,999 6.13% 7,371 6.28% - 0.00% 13,369 6.25% ----- ---- ------ ---- ------ ---- ----- ---- ------ ---- Securities available for sale: Federal agency obligations ............... 1,199 6.36% 15,751 5.94% 11,201 6.19% - 0.00% 28,151 6.06% State and local governments .............. - 0.00% 814 5.38% - 0.00% - 0.00% 814 5.38% Equities ................................. - 0.00% - 0.00% - 0.00% 1,601 6.63% 1,601 6.63% ----- ---- ------ ---- ------ ---- ----- ---- ------ ---- Total available for sale ........ 1,199 6.36% 16,565 5.92% 11,201 6.19% 1,601 6.63% 30,566 6.07% ----- ---- ------ ---- ------ ---- ----- ---- ------ ---- Total for portfolio ...................... 2,198 6.46% 21,564 5.97% 18,572 6.22% 1,601 6.63% 43,935 6.12% ===== ==== ====== ==== ====== ==== ===== ==== ====== ====
Yields on tax exempt obligations have been computed on a tax equivalent basis using the maximum federal tax rate of 34%. The Banks, as members of the Federal Home Loan Bank ("FHLB") of Atlanta, are required to own capital stock in the FHLB of Atlanta based generally upon their balances of residential mortgage loans and FHLB advances. FHLB capital stock owned by ONB and SNB is pledged as collateral on FHLB advances. No ready market exists for this stock, and it has no quoted market value. However, redemption of this stock has historically been at par value. 43 All equity securities including investments in the FHLB stock and Federal Reserve Bank stock (as required of 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 $18,289,000 and $15,719,000 at December 31, 1999 and 1998, respectively, were pledged as collateral on securities sold under agreements to repurchase. Of these respective amounts, approximately $5,216,000 and $7,590,000 was pledged to secure public deposits in excess of FDIC limits. NOTE 5 - LOANS RECEIVABLE: The following is a summary of loans by category at December 31, 1999 and 1998 (in thousands of dollars): 1999 1998 ---- ---- Commercial, financial and agricultural ................. $ 39,752 $ 29,403 Real estate - construction ............................. 9,156 5,738 Real estate - mortgage ................................. 84,680 62,789 Installment loans to individuals ....................... 23,033 19,325 Obligations of states and political subdivisions ....... 468 540 -------- -------- Total loans - gross $157,089 $117,795 ======== ======== The loan portfolio included fixed rate and adjustable rate loans totaling $104,546,000 and $52,543,000, respectively, at December 31, 1999. Overdrawn demand deposits totaling $492,000 and $142,000 have been reclassified as loan balances at December 31, 1999. Gross proceeds on mortgage loans originated for resale were approximately $9,900,000, $12,100,000, and $4,800,000 for the years ended December 31, 1999, 1998 and 1997, 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 $7,581,000 at December 31, 1999, and $6,595,000 at December 31, 1998. A total of $8,906,000 in loans were made or added, while a total of $7,920,000 were repaid or deducted during 1999. 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. 44 Changes in the allowance for loan losses and related ratios for the years ended December 31, 1999, 1998 and 1997, were as follows (in thousands of dollars):
1999 1998 1997 ---- ---- ---- Average amount of loans outstanding .............................. $139,215 $103,349 $ 81,167 ======== ======== ======== Allowance for loan losses at beginning of year ....................................................... $ 1,459 $ 1,140 $ 876 -------- -------- -------- Loan charge-offs: Real estate ................................................... - 7 - Installment ................................................... 95 111 121 Credit cards and related plans ................................ 5 6 9 Commercial and other .......................................... 80 56 2 -------- -------- -------- Total charge-offs ....................................... 180 180 132 -------- -------- -------- Recoveries: Installment ................................................... 17 12 34 Credit cards and related plans ................................ 3 3 4 Commercial and other .......................................... 25 - - -------- -------- -------- Total recoveries ........................................ 45 15 38 -------- -------- -------- Net charge-offs .................................................. 135 165 94 -------- -------- -------- Provision for loan losses ........................................ 612 484 358 -------- -------- -------- Allowance for loan losses at end of year ......................... 1,936 1,459 1,140 ======== ======== ======== Ratios Net charge-offs to average loans outstanding ................................................... 0.10% 0.16% 0.12% Net charge-offs to loans outstanding at end of year ................................................ 0.09% 0.14% 0.10% Allowance for loan losses to average loans ......................................................... 1.39% 1.41% 1.40% Allowance for loan losses to total loans at end of year ................................................ 1.23% 1.24% 1.24% Net charge-offs to allowance for loan losses ................... 6.97% 11.31% 8.33% Net charge-offs to provision for loan losses ................................................... 22.06% 34.09% 26.46%
The following is a summary of information pertaining to impaired loans: Year Ended December 31, 1999 1998 ---- ---- (In thousands) Impaired loans without a valuation allowance ........ $ - $ - Impaired loans with a valuation allowance ........... 90 31 --- --- Total impaired loans ................................ 90 31 === === Valuation allowance related to impaired loans ....... $14 $ 6 === === 45
Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- (In thousands) Average investment in impaired loans ...................................... $ 53 $ 74 $ 98 ====== ====== ===== 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, 1999 and 1998, were as follows (in thousands of dollars):
1999 1998 ---- ---- Nonaccrual loans .......................................................... $ 90 $ 31 Accruing loans 90 days or more past due ................................... 6 187 ---- ---- Total ........................................................... 96 218 ==== ==== Total as a percentage of outstanding loans ...................... 0.06% 0.19% ==== ==== Other real estate owned ................................................... $ - $266 ==== ====
Gross interest income that would have been recorded for the years ended December 31, 1999, 1998 and 1997, if nonaccrual loans had been performing in accordance with their original terms was approximately $2,100, $2,100 and $7,700, respectively. NOTE 6 - PREMISES AND EQUIPMENT: Premises and equipment at December 31, 1999 and 1998, consist of the following (in thousands of dollars): 1999 1998 ---- ---- Land ............................................... $ 761 $ 684 Building and components ............................ 2,749 2,101 Furniture, fixtures and equipment .................. 2,921 2,440 ------ ------ Total .................................... 6,431 5,225 Less, accumulated depreciation ..................... 1,812 1,408 ------ ------ 4,619 3,817 Construction in progress ........................... - 75 ------ ------ Premises and equipment - net ............. 4,619 3,892 ====== ====== 46 Depreciation expense was approximately $462,000, $371,000, and $294,000, for the years ended December 31, 1999, 1998 and 1997, 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 is $48,000 and in years six through ten $53,000. Rent expense totaled approximately $49,500 and $25,000 in 1999 and 1998, respectively. NOTE 7 - DEPOSITS: At December 31, 1999, the scheduled maturities of time deposits greater than $100,000 are as follows (in thousands of dollars): Maturity -------- Less than 3 months $ 9,694 Over 3 through 6 months 6,974 Over 6 through 12 months 15,204 One to five years 4,291 ------- Total $36,163 ======= Deposits of directors and officers totaled approximately $4,484,000 and $5,662,000 at December 31, 1999 and 1998, 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): 1999 1998 ---- ---- Outstanding at year-end ................................ $2,782 $4,464 ====== ====== Interest rate at year-end .............................. 3.50% 3.00% ====== ====== Maximum month-end balance during the year .............. $6,473 $7,315 ====== ====== Average amount outstanding during the year ............. $4,846 $3,220 ====== ====== Weighted average interest rate during the year ......... 3.26% 3.69% ====== ====== 47 NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES: The Banks are members of the Federal Home Loan Bank of Atlanta and as such, have access to long-term borrowing. The collateral for any such borrowings are blanket liens on ONB's and SNB's one-to-four family residential loans and the stock in the Federal Home Loan Bank. Borrowings during 1999 and 1998 are summarized as follows (in thousands of dollars): 1999 1998 ---- ---- Outstanding at year-end ............................... $19,420 $9,490 ======= ====== Interest rate at year-end ............................. 5.55% 5.41% ======= ====== Maximum amount outstanding at any month-end ........... $19,420 $9,560 ======= ====== Average amount outstanding during the year ............ $12,290 $6,905 ======= ====== Weighted average interest rate during the year ........ 5.47% 5.65% ======= ====== Required principal reductions are as follows (in thousands of dollars): YEAR ENDED: 2000 $70 2001 70 2002 70 2003 70 2004 70 Thereafter 19,070 ------ Total 19,420 ====== NOTE 10 - COMMON STOCK: The Company declared a five percent stock dividend in January 2000. The average number of common shares outstanding and all earnings per common share amounts included in the accompanying consolidated financial statements and notes are based on the increased number of shares giving retroactive effect for the stock dividend. The Corporation repurchased 49,455 shares of its common stock from the Corporation's former chief executive officer in January 1999. The repurchase price per share was at the then market price of $12.74 and totaled approximately $630,000. Under the Corporation's Dividend Reinvestment Plan, shareholders may reinvest all or part of their cash dividends in shares of common stock and also purchase additional shares of common stock. NOTE 11 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES: The information in this Note has been adjusted for the five percent stock dividend. At December 31, 1999, 272,000 common shares were reserved for issuance for employee stock option plans and 630,000 common shares were reserved for issuance pursuant to the dividend reinvestment and additional stock purchase plan. During 1999, the Corporation amended its 1997 Stock Option Plan. Under the amended Plan, up to 272,000 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, 181,000 were reserved for issuance pursuant to exercise of incentive stock options and 91,000 were reserved for issuance pursuant to exercise of nonqualified stock options. Stock options granted in 1999 under this Plan are not exercisable until February 2000. 48 Under the 1994 Stock Option Plan, the Corporation reserved 88,200 shares of common stock for issuance upon exercise of options granted to key employees as nonqualified stock options. All options under the 1994 Plan had been exercised or forfeited as of December 31, 1999. 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 the stock-based option plans. Accordingly, no compensation cost has been recognized for the stock-based option plans. Had compensation cost for the stock-based option plans been recognized based on the fair value at the grant dates for the stock options consistent with the method prescribed by SFAS No. 123, the Corporation's net income and earnings per share would have been adjusted to the pro forma amounts indicated below: Year Ended December 31, ----------------------- (In thousands, except per share data) 1999 1997 ---- ---- Net income As reported $2,182 $1,216 Pro Forma 1,678 1,094 Basic earnings per share As reported $0.68 $0.44 Pro Forma 0.53 0.40 Diluted earnings per share As reported $0.68 $0.43 Pro Forma 0.52 0.39 The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Year Ended December 31, ----------------------- 1999 1997 ---- ---- Dividend yield 1.54% 1.88% Expected life 7.9 years 4.7 years Expected volatility 27.5% 33.9% Risk-free interest rate 5.30% 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 fair value of each option granted in 1999 was estimated using the Black-Scholes option-pricing model to be less than the exercise price. 49 A summary of the status of the Corporation's 1994 stock option plan is presented below:
1999 1998 1997 ---- ---- ---- Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Fixed options: Outstanding at beginning of year .............................. 28,875 $ 3.71 84,525 $ 3.71 88,200 $ 3.71 Granted ................................... - - - - - - Exercised ................................. (28,875) 3.71 (55,650) 3.71 - - Forfeited ................................. - - - - (3,675) 3.71 ------- ------- ------ Outstanding at end of year ................................ - - 28,875 3.71 84,525 3.71 ======= ======= ====== Options exercisable at year-end ................................. - - 28,875 3.71 84,525 3.71 Weighted average fair value of options granted during the year .......................... - - - - - -
A summary of the status of the Corporation's 1997 pre-amended stock option plan is presented below:
1999 1998 1997 ---- ---- ---- Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Fixed options: Outstanding at beginning of year .......................... 75,390 $ 7.60 79,590 $ 7.60 - $ - Granted ............................... - - - - 79,590 7.60 Exercised ............................. (10,710) 7.60 (2,310) 7.60 - - Forfeited ............................. (840) 7.60 (1,890) 7.60 - - ------- ------ ------- Outstanding at end of year ............................ 63,840 - 75,390 - 79,590 - ======= ====== ======= Options exercisable at year-end ............................. 63,840 7.60 75,390 7.60 - - Weighted average fair value of options .................... - - - - - 8.28 granted during the year.
50 A summary of the status of the Corporation's 1999 stock option activity is presented below: 1999 ---- Exercise Shares Price ------ ----- Fixed options: Outstanding at beginning of year .................. - $ - Granted ........................................ 161,700 12.83 Exercised ...................................... - - Forfeited ...................................... - - ------- ----- Outstanding at end of year ........................ 161,700 12.83 ======= ===== Options exercisable at year end ................... - $ - Weighted average fair value of options granted during the year ....................... - 4.62 Information pertaining to options (in thousands) outstanding at December 31, 1999 is as follows:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ---- ----- ----------- ----- $12.83 161,700 8.4 years $12.83 - $ - 7.60 63,840 7.3 years 7.60 63,840 7.60 ------- ------ Outstanding at End of year 225,540 11.35 63,840 7.60 ======= ======
NOTE 12 - INCOME TAXES: The Corporation files consolidated federal income tax returns on a calendar-year basis. The 1999, 1998 and 1997 provision for income taxes consists of the following (in thousands of dollars): 1999 1998 1997 ---- ---- ---- Current tax provision: Federal .............................. $ 1,065 $ 710 $ 636 South Carolina ....................... 85 80 77 Deferred tax benefit .................... (101) (127) (77) ------- ------- ------- Total ......................... 1,049 663 636 ======= ======= ======= 51 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 summary (in thousands of dollars): 1999 1998 1997 ---- ---- ---- Income tax at statutory rate on income before income taxes ........................ $ 1,099 $ 769 $ 630 Increase (decrease) resulting from: Exercise of certain stock options .......... (89) (165) - South Carolina bank tax, net of federal tax benefit ............................. 96 67 55 Tax exempt interest ........................ (19) (14) (14) Other ...................................... (38) 6 (35) ------- ------- ------- Provision for income taxes .......... 1,049 663 636 ======= ======= ======= Temporary differences, which give rise to deferred tax assets and liabilities at December 31, 1999 and 1998, are as follows (in thousands of dollars): 1999 1998 ---- ---- Deferred tax assets: Allowance for loan losses .......................... $ 614 $ 443 Net unrealized losses on securities available for sale .............................. 280 - Preopening costs ................................... 67 78 State tax net operating loss carry forward ......... 65 48 Other .............................................. 1 16 ------ ------ Total deferred tax assets .................. 1,027 585 ------ ------ 1999 1998 ---- ---- Deferred tax liabilities: Depreciation ........................................... $ 145 $ 87 Accretion .............................................. 6 8 Net unrealized gain on securities available for sale ................................................ - 24 ----- ----- Total deferred tax liabilities ................. 151 119 ----- ----- Net deferred tax asset before valuation allowance ................................. 876 466 Less, valuation allowance ...................... (18) (13) ----- ----- Net deferred tax asset ......................... 858 453 ===== ===== At December 31, 1999, the Corporation had net operating loss (NOL) carryforwards for state income tax purposes of approximately $1,412,000 available to offset future state taxable income. The NOL carryforwards expire primarily in the years 2011 through 2019. The Corporation and the Banks each file separate state income tax returns. The valuation allowance represents management's estimate of the state NOL carryforwards that will not be realized in the foreseeable future. 52 NOTE 13 - EMPLOYEE BENEFIT PLANS: The Corporation provides a defined contribution plan with an Internal Revenue Code Section 401(K) provision. All employees who have completed 500 hours of service during a six-month period and have attained age 18 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, 1999, 1998, and 1997 totaled approximately $149,000, $140,000, and $122,000, respectively. NOTE 14 - 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, 1999 and 1998, the following financial instruments were outstanding whose contract amounts represent credit risk: Contract Amount --------------- 1999 1998 ---- ---- (In thousands) Commitments to grant loans ....................... $11,231 $10,159 Unfunded commitments under lines of credit ....................................... 11,269 8,405 Standby letters of credit ........................ 3,427 929 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 Banks generally hold 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. 53 NOTE 15 - 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:
Years Ended December 31, 1999 1998 1997 ---- ---- ---- (In thousands) Net income ............................................................. $ 2,182 $ 1,567 $ 1,216 ========== ========== ========== Average number of common shares outstanding ............................ 3,189,235 3,040,512 2,766,410 Effect of dilutive options ............................................. 25,888 56,550 49,545 ---------- ---------- ---------- Average number of common shares outstanding used to calculate diluted earnings per common share 3,215,123 3,097,062 2,815,955 ========== ========== ==========
NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS): The components of other comprehensive income (loss) and related tax effects are as follows:
Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- (In thousands) Unrealized holding gains (losses) on available for sale securities ............................................................. $(791) $ 56 $ 31 Less: Reclassification adjustment for gains (losses) realized in income .............................................. - - - ----- ----- ----- Net unrealized gains (losses) ............................................... (791) 56 31 Tax effect .................................................................. 280 20 11 ----- ----- ----- Net-of-tax amount ........................................................... (511) 36 20 ===== ===== =====
Unrealized holding losses on available for sale securities increased approximately $328,000 in January 2000. NOTE 17 - CREDIT RISK CONCENTRATIONS Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Banks regularly monitor various segments of their credit risk portfolio to assess potential concentration risks and to obtain collateral when considered necessary. 54 The Banks' exposure within these major segments are diversified and these diversification factors reduce concentration risk. Major industry exposures at December 31, 1999, representing on a consolidated basis loans receivable balances by loan type in excess of ten percent of total shareholders' equity (in thousands of dollars), are as follows: Medical and dental offices $7,428 Rental housing 2,620 Real estate developers 2,993 NOTE 18 - FAIR VALUE 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. These 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, "Disclosures about Fair Value of Financial Instruments", 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. Loans held for sale. The carrying amounts approximate their fair values. Loans receivable. For variable-rate loans that reprice frequently and with 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. 55 Short-term borrowings. The carrying amounts of federal funds purchased and borrowings under repurchase agreements, approximate their fair values. Federal Home Loan Bank advances. The fair values of the Federal Home Loan Bank advances 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. The estimated fair values and related carrying or notional amounts of the Corporation's financial instruments at December 31, 1999 and 1998, are as follows (in thousands of dollars):
1999 1998 ---- ---- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Financial assets: Cash and cash equivalents ........................................... $ 20,315 $ 20,315 $ 23,296 $ 23,296 Interest-bearing deposits with banks ................................ 788 788 1,577 1,577 Investment securities ............................................... 43,935 43,485 34,148 34,190 Loans held for sale ................................................. 269 269 722 722 Loans receivable .................................................... 155,153 152,327 116,336 116,537 Accrued interest receivable ......................................... 1,700 1,700 1,242 1,242 Financial liabilities: Deposits ............................................................ $184,364 $184,228 $147,630 $148,005 Federal funds purchased and securities sold under agreements to repurchase .................................................... 2,782 2,782 4,464 4,464 Federal Home Loan Bank advances ..................................... 19,420 19,324 9,490 9,563 Accrued interest payable ............................................ 770 770 603 603 Off-balance-sheet credit related financial instruments: Commitments to extend credit ..................................... $ 11,231 $ 11,231 $ 10,159 $ 10,159 Unfunded commitments under lines of credit ............................................... 11,269 11,269 8,405 8,405 Standby letters of credit ........................................ 3,427 3,427 929 929
NOTE 19 - 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. NOTE 20 - 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 year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends, at December 31, 1999, that the Banks could declare, without the approval of the 56 Comptroller of the Currency, amounted to approximately $2,974,000. In addition, dividends paid by the Banks to the Corporation would be prohibited if the effect thereof would cause the Banks' capital to be reduced below applicable minimum capital requirements. 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 $3,749,000 at December 31, 1999. 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 initiate 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 their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The 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, 1999, and 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, 1999, 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 the notifications that management believes have changed the Banks' categories. The Corporation's and the Banks' actual capital amounts and ratios are also presented in the table (in thousands of dollars). 57
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, 1999: Tier I Capital (to Average Assets): Consolidated $ 20,757 9.4% $ 8,861 4.0% $ 11,077 5.0% ONB 10,667 7.8% 5,485 4.0% 6,857 5.0% SNB 4,735 7.8% 2,443 4.0% 3,054 5.0% FNB 3,855 16.5% 933 4.0% 1,166 5.0% Tier I Capital (to Risk Weighted Assets): Consolidated 20,757 13.0% 6,377 4.0% 9,566 6.0% ONB 10,667 11.7% 3,647 4.0% 5,470 6.0% SNB 4,735 9.3% 2,027 4.0% 2,841 6.0% FNB 3,855 23.2% 665 4.0% 998 6.0% Total Capital (to Risk Weighted Assets): Consolidated 22,694 14.2% 12,754 8.0% 15,944 10.0% ONB 11,808 13.0% 2,293 8.0% 9,117 10.0% SNB 5,266 10.4% 4,054 8.0% 5,067 10.0% FNB 4,028 24.2% 1,331 8.0% 1,664 10.0% At December 31, 1998: Tier I Capital (to Average Assets): 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%
58 NOTE 21 - CONDENSED FINANCIAL STATEMENTS: Presented below are the condensed financial statements for Community Bankshares, Inc. (Parent Company only) (in thousands of dollars): COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
DECEMBER 31, ------------ 1999 1998 ---- ---- Balance Sheets: Assets: Cash ............................................................................... $ 1,041 $ 1,930 Investment in banking subsidiaries ................................................. 18,746 17,361 Securities available for sale, at fair value ....................................... 50 50 Premises and equipment (net of accumulated depreciation of $411 in 1999 and $313 in 1998) ............................................... 292 329 Other assets ....................................................................... 166 128 ------- ------- Total assets ........................................................... 20,295 19,798 ======= ======= Liabilities and shareholders' equity: Other liabilities ..................................................................... $ 50 $ 140 Shareholders' equity .................................................................. 20,245 19,658 ------- ------- Total liabilities and shareholders' equity ............................. 20,295 19,798 ======= =======
59
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ---- ---- ---- Statements of Income: Income: Management fees assessed banking subsidiaries ....................... $ 1,176 $ 1,141 $ 948 Dividends ........................................................... 872 700 580 Interest ............................................................ 61 138 50 ------- ------- ------- Total ................................................... 2,109 1,979 1,578 ------- ------- ------- Expenses: Salaries and employee benefits ...................................... 796 648 558 Premises and equipment .............................................. 260 230 184 Supplies ............................................................ 59 70 35 Director fees ....................................................... 22 24 22 Preopening - FNB .................................................... - 75 - Other general expenses .............................................. 281 258 228 ------- ------- ------- Total ................................................... 1,418 1,305 1,027 ------- ------- ------- Income before income tax benefit and equity in undistributed earnings of banking subsidiaries ......................... 691 674 551 Applicable income tax benefit ............................................. 60 8 7 Equity in undistributed earnings of banking subsidiaries .................. 1,431 885 658 ------- ------- ------- Net income ................................................................ 2,182 1,567 1,216 ======= ======= ======= Statements of Cash Flows: Cash flows from operating activities: Net income .......................................................... $ 2,182 $ 1,567 $ 1,216 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................. 107 106 91 Accretion of discounts - securities ........................... - - (23) Decrease in due from banking Subsidiaries ............................................... - - (3) Decrease (increase) in other assets ........................... (38) 46 (68) Increase (decrease) in other liabilities ...................... (90) 85 6 Equity in undistributed earnings of banking subsidiaries ...... (1,431) (885) (658) ------- ------- ------- Net cash provided by operating activities ............... 730 919 561 ------- ------- ------- Cash flows from investing activities: Investment in SNB ...................................................... (500) (500) - Investment in FNB ...................................................... - (4,500) - Purchase of premises and equipment ..................................... (70) (169) (60) Purchases of securities held to maturity ............................... - - (636) Purchases of securities available for sale ............................. - - (50) Proceeds from maturities of securities held to maturity ................ - 647 900 ------- ------- ------- Net cash provided (used) by investing activities ........ (570) (4,522) 154 ------- ------- ------- Cash flows from financing activities: Repurchase of stock .................................................... (630) - - Common stock issued .................................................... 189 5,579 100 Stock issuance cost .................................................... - (87) (9) Cash dividends paid .................................................... (608) (453) (394) ------- ------- ------- Net cash used (provided) by financing activities ........ (1,049) 5,039 (303) ------- ------- ------- Net increase (decrease) in cash ........................................... (889) 1,436 412 Cash at beginning of year ................................................. 1,930 494 82 ------- ------- ------- Cash at end of year ....................................................... 1,041 1,930 494 ======= ======= ======= Supplemental disclosures of cash flow information: Cash payments for income taxes ......................................... $ 1,214 $ 656 $ 640 ======= ======= =======
60 NOTE 22 - QUARTERLY DATA (UNAUDITED):
YEARS ENDED DECEMBER 31, ------------------------ 1999 1998 ---- ---- Fourth Third Second First Fourth Third Second First quarter quarter quarter quarter quarter quarter quarter quarter ------- ------- ------- ------- ------- ------- ------- ------- (In thousands, except per share data) Interest and dividend income ............... $ 4,313 $ 4,092 $ 3,730 $ 3,415 $ 3,411 $ 3,201 $ 2,944 $ 2,764 Interest expense ........................... (1,942) (1,827) (1,670) (1,519) (1,540) (1,466) (1,295) (1,253) ------- ------- ------- ------- ------- ------- ------- ------- Net interest income ........................ 2,371 2,265 2,060 1,896 1,871 1,735 1,649 1,511 Provision for loan losses .................. (173) (166) (139) (134) (160) (136) (97) (91) ------- ------- ------- ------- ------- ------- ------- ------- Net interest income after provision for loan losses ............... 2,198 2,099 1,921 1,762 1,711 1,599 1,552 1,420 Noninterest income ......................... 323 344 345 305 270 294 261 230 Noninterest expenses ....................... (1,639) (1,530) (1,460) (1,437) (1,534) (1,371) (1,143) (1,059) ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes ................. 882 913 806 630 447 522 670 591 Provision for income taxes ................. (286) (299) (263) (201) (62) (187) (222) (192) ------- ------- ------- ------- ------- ------- ------- ------- Net income ................................. 596 614 543 429 385 335 448 399 ======= ======= ======= ======= ======= ======= ======= ======= Earnings per share Basic ................................... $ 0.19 $ 0.19 $ 0.17 $ 0.13 $ 0.13 $ 0.11 $ 0.15 $ 0.13 ======= ======= ======= ======= ======= ======= ======= ======= Diluted ................................. $ 0.19 $ 0.19 $ 0.17 $ 0.13 $ 0.12 $ 0.11 $ 0.14 $ 0.13 ======= ======= ======= ======= ======= ======= ======= =======
Florence National Bank began operations in July 1998. The operating losses of Florence National Bank are reflected in consolidated net income beginning in the third quarter of 1998. THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS 61 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The information set forth under the caption "Directors and Executive Officers" and under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement to be used in conjunction with the 2000 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 11. Executive Compensation The information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. 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 13. 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. 62 Item 14. Exhibits and Reports on Form 8-K (a) (1) All financial statements: Consolidated Balance Sheets, December 31, 1999 and 1998 Consolidated Statements of Income, Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Shareholders' Equity, Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (2) Financial statement schedules: Quarterly Data for 1999 and 1998 (3) Exhibit No. Description (from item 601 of S-K) 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 Statement on Form S-2, filed September 11, 1995, Commission File No. 33-96746). 10.1 1997 Stock Option Plan (incorporated by reference to Registrant's Form S-8, filed May 20, 1999, Commission File No. 333-78867). 10.2 Lease for site of Florence National Bank 10.3 Change of Control Agreements between the Registrant and each of E. J. Ayers, Jr., William W. Traynham, Michael A. Wolfe, William H. Nock and Jesse A. Nance (incorporated by reference to exhibits to Registrant's Form 10-QSB for the quarter ended June 30, 1999). 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. 63 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNITY BANKSHARES, INC. DATED: March 22, 2000 By: s/E. J. Ayers, Jr. ------------------- Chief Executive Officer By s/William W. Traynham, Jr. -------------------------- Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. s/ Alvis J. Bynum - --------------------------------- Alvis J. Bynum, Director s/ Martha Rose C. Carson - --------------------------------- Martha Rose C. Carson, Director s/ Anna O. Dantzler - --------------------------------- Anna O. Dantzler, Director s/J. M. Guthrie - --------------------------------- J. M. Guthrie, Director s/Richard L. Havekost - --------------------------------- Richard L. Havekost, Director s/ Phil P. Leventis - --------------------------------- Phil P. Leventis, Director s/Jess A. Nance - --------------------------------- Jess A. Nance, Director s/William H. Nock - --------------------------------- William H. Nock, Director s/ Samuel F. Reid, Jr. - --------------------------------- Samuel F. Reid, Jr., Director s/ J. Otto Warren, Jr. - --------------------------------- J. Otto Warren, Jr., Director s/ Wm. Reynolds Williams - --------------------------------- Wm. Reynolds Williams, Director s/ Michael A. Wolfe, II - --------------------------------- Michael A. Wolfe, II, Director 64 EXHIBIT INDEX Exhibit No. Description (from item 601 of S-K) 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 Statement on Form S-2, filed September 11, 1995, Commission File No. 33-96746). 10.1 1997 Stock Option Plan (incorporated by reference to Registrant's Form S-8, filed May 20, 1999, Commission File No. 333-78867). 10.2 Lease for site of Florence National Bank 10.3 Change of Control Agreements between the Registrant and each of E. J. Ayers, Jr., William W. Traynham, Michael A. Wolfe, William H. Nock and Jesse A. Nance (incorporated by reference to exhibits to Registrant's Form 10-QSB for the quarter ended June 30, 1999). 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 65 EX-10.2 2 AMENDMENT TO LEASE AND CONSENT AGREEMENT AMENDMENT TO LEASE AND CONSENT AGREEMENT THIS AMENDMENT TO LEASE AND CONSENT AGREEMENT ("Consent Agreement") is entered into this 30th of December, 1997 by and between KMART CORPORATION, a Michigan corporation, whose address is 3100 West Big Beaver Road, Troy, Michigan 48084 ("Kmart") and DAVID E. BAKER and JOANN S. BAKER, his wife, and LEE J. BAKER and PATRICIA M. BAKER, his wife, whose address is 1400 Pickens Street, 5th Floor, Columbia, South Carolina 29201 ("Landlord"), and COMMUNITY BANKSHARES, INC., a South Carolina Bank Holding Company, whose address is P.O. Box 6045, Florence, South Carolina 29502-6045 ("Tenant"). WITNESSETH: WHEREAS, by Lease dated July 1,1968 and amended January 27,1992 (the "Kmart Lease"), Kmart leased from Landlord the buildings and site improvements located on a certain parcel of land located in the City of Florence, County of Florence, State of South Carolina, more particularly described on Exhibit A and attached hereto and made a part of hereof (the "Kmart Demised Premises"); and WHEREAS, Landlord desires to lease to Tenant a certain parcel of land containing approximately 75,462 square feet located within the Kmart Demised Premises, said parcel described on Exhibit A-1 and shown on Exhibit B, both exhibits being attached hereto and made a part hereof ("Tenant's Demised Premises"); and WHEREAS, Tenant plans to construct a 7,500 sq. foot building and associated improvements, including 43 parking spaces, on Tenant's Demised Premises (collectively, the "Improvements"). NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto agree as follows: 1. Kmart's Acknowledement of Ground Lease. Kmart hereby consents to the lease between Landlord and Tenant attached hereto and made a part hereof, a copy of which lease is attached hereto as Exhibit C (the "Tenant Lease"). Landlord and Tenant agree to perform their respective obligations under the Tenant Lease. Kmart shall not be responsible for or obligated to perform any of the obligations of Landlord or Tenant under the Tenant Lease, or be liable for any default thereunder by Landlord or Tenant. Landlord hereby discharges and releases Kmart from all obligations under the Kmart Lease with respect to Tenant's Demised Premises, and the "common areas" as defined in Paragraph 9 of the Kmart Lease are herebv amended to exclude the Tenant's Demised Premises therefrom; provided, however, should the Tenant Lease terminate or be rejected in bankruptcy for any reason and the Kmart Lease continue, the Landlord shall be obligated to obtain Kmart's consent for any subsequent use of the Tenant's Demised Premises on terms consistent with the provisions and conditions of this Agreement. 2. Payment to Broker/Kmart. For so long as both the Tenant Lease and the Kmart Lease shall be in effect the Landlord shall receive and disburse the monthly rental payments as a fiduciary on behalf of Landlord and Kmart, in accordance with the terms hereof. Landlord shall pay directly to CB Commercial Real Estate Group, Inc. ("CB Commercial") at such place as CB Commercial shall designate in writing from time to time, an amount equal to one hundred percent (100%) of the monthly rent payable under the Tenant Lease on each date for payment of rent under the Tenant Lease until such time as CB Commercial has received Twenty-Two Thousand Three Hundred Twenty and No/100 Dollars ($22,320) in rent from Tenant (representing all commissions payable by Landlord and Kmart with respect to the Tenant Lease). After CB Commercial is fully paid, Landlord shall pay directly to Kmart, as consideration and compensation for this consent, at such place as Kmart shall designate in writing from time to time, an amount equal to fifty percent (50%) of the monthly rent payable under the Tenant Lease on each date for payment of rent under the Tenant Lease. Such compensation shall be paid to Kmart when due, without notice or demand. If any amount, as hereinabove provided, shall not be paid by Landlord, Landlord shall pay to Kmart, upon demand, interest at the rate of twelve percent (12%) per annum or the highest rate permitted by law, whichever is lower on such amount from the due date thereof until paid. Landlord shall not be entitled to any abatement, reduction, set-off, counterclaim, defense or deduction with respect to any payment due to Kmart hereunder. 66 3. Remedies. In the event of Landlord's default in payment of the sums due Kmart hereunder, Kmart shall have (i) the right to deduct any past due sums owing to Kmart by Landlord from the rent payable by Kmart to Landlord under the Kmart Lease, and (ii) all other remedies available to Kmart in law or in equity as a result of Landlord's default hereunder. 4. Access. Tenant shall establish and maintain on Tenant's Demised Premises (independent of parking available on any other portion of the property depicted on Exhibit B) parking of at least the minimum requirement as established by applicable governmental authority for a building of the size and use to be constructed by Tenant on Tenant's Demised Premises, and as approved in writing by Kmart. Both Tenant and Kmart covenant and agree that each party shall prohibit their respective employees from parking on the other party's property. 5. Construction of Improvements. No buildings or improvements shall be constructed on Tenant's Demised Premises except in accordance with: (i) the site plan, elevation and exterior detail plans therefor approved by Kmart in writing prior to the commencement of construction and (ii) the terms and conditions of all matters of record as set forth in the Title Report, as defined in Paragraph 11. No construction activity on Tenant's Demised Premises shall interfere with the operation or use of Kmart's Demised Premises. No signs or exterior lighting may be erected or placed on Tenant's Demised Premises except as have been previously approved by Kmart in writing, which approval shall not be unreasonably withheld, and as are in conformance with all the requirements of all laws, ordinances, codes, orders, rules and regulations of all governmental authorities having jurisdiction over Tenant's Demised Premises ("Government Regulations"). Tenant shall submit to Kmart, for Kmart's approval complete plans and specifications for the Improvements, including, without limitation, dimensions for the Tenant's proposed building, the placement, size and configuration of signs and satisfactory evidence that Tenant's Demised Premises can accommodate a 7,500 square foot building with adequate parking and information concerning Tenant's procedure for mobilization, phasing and storage of materials and equipment, sufficient for Landlord to ascertain any interference with customary operations of the site which may occur as a result of Tenant's construction activities ("Tenant's Plans and Specifications"). If Kmart disapproves Tenant's Plans and Specifications, Kmart shall provide Tenant with a detailed statement as to the changes required for approval. Tenant shall have fifteen days after Tenant's receipt of Kmart's disapproval to either: (i) submit revised plans and specifications to Kmart that comply with Kmart's detailed statement of required changes, or (ii) terminate this Consent Agreement and the Tenant Lease by written notice thereof to Kmart. If Tenant's Plans and Specifications are accompanied by written notice stating the deadline for response and the consequence for failure to timely respond, Kmart's failure to give notice to Tenant of its approval or disapproval within forty-five (45) days of its receipt of Tenant's Plans and Specifications, when required to do so, shall be deemed Kmart's approval. Notwithstanding anything herein to the contrary, no building or other structure to be constructed by Tenant or to be caused to be constructed by Tenant on any portion of Tenant's Demised Premises shall exceed one (1) story or twenty four (24) feet in height, whichever is smaller, and shall contain no more than 7,500 square feet. Notwithstanding the foregoing, Tenant shall have the right to construct one (1) clear tower extending to a height of thirty-seven (37) feet on Tenant's Demised Premises and the pitch of the roof may extend to a height of twenty-nine (29) feet. 6. Structural Changes or Alterations. Tenant shall not make any structural changes or alterations to the exterior of the building or to the Improvements, without Kmart's prior written approval of the engineering, architectural and exterior detail plans therefor, which approval shall not be unreasonably withheld, conditioned or delayed. 7. Construction Activity. Tenant covenants and agrees that the Improvements shall be constructed without cost or expense to Landlord, Kmart or Landlord's mortgagee and, in accordance with all Government Regulations. Such construction shall be performed in a manner that will not interfere with the business and use of Kmart's Demised Premises by Kmart and any other owners or occupants thereof. Throughout the duration of this Consent Agreement, Tenant agrees that the Improvements, including, but notlimited to all plumbing, electrical, heating, air conditioning and ventilation equipment and systems, and all other equipment, will be installed, operated and maintained in accordance with all laws, regulations and requirements of any and all Government Regulations, at Tenant's sole cost and expense. 67 8. Real Estate Taxes. (a) Tenant shall pay or cause to be paid, as and when same shall become due, all real property taxes, assessments, use and occupancy taxes, development fees, impact fees, fees in lieu of taxes, water and sewer charges, rates and rents, charges for public utilities, excises, license and permit fees and other charges, real and personal, general and special, ordinary and extraordinary, foreseen and unforeseeable, of any kind and nature whatsoever, which shall or may during the term of the Tenant Lease be assessed, levied, charged, confirmed, or imposed upon or become payable out of or become a lien on Tenant's Demised Premises, the Improvements or Tenant's property or any part thereof (the "Impositions"). (b) Landlord shall notify Tenant, in writing, as to the amount of Impositions Tenant shall be required to pay in accordance with the foregoing provisions of this Paragraph 8, and Tenant will pay such Impositions directly to Landlord providing notice within twenty (20) days of Tenant's receipt of the notification. Such written notification from Landlord shall be accompanied by a copy of the tax bill and such information as may be required to show how Tenant's portion of such Imposition was calculated. 9. Insurance. (a) Tenant shall, at its sole cost and expense, obtain and maintain, commencing with the Effective Date (as defined in the Tenant Lease) and continuing throughout the term of the Tenant Lease, insurance policies providing the following coverages: (i) All-risk or fire and extended coverage insurance against fire, vandalism, malicious mischief, sprinkler leakage and such additional perils as now are or hereafter may be included in a standard extended coverage endorsement from time to time in general use in the State within which Tenant's Demised Premises are located (the "State"), insuring Tenant's Demised Premises, and all fixtures and equipment pertaining thereto, in an amount equal to not less than the full replacement value thereof (exclusive of the cost of excavations, foundations and footings) and, in any event, in at least such an amount as will prevent the Tenant from becoming a co-insurer under the terms of such insurance policy; (ii) A comprehensive policy of general liability insurance, protecting against any liability occasioned on or about any part of Tenant's Demised Premises or appurtenances thereto, or arising from any of the acts set forth in Paragraph 10 hereof against which the Tenant is required to indemnify Kmart and Landlord, with such policy to be in the minimum amount of Three Million Dollars ($3,000,000.00) single limit coverage; (iii) Workmen's compensation insurance having such limits, and under such terms and conditions, as are required by applicable law; (iv) During the period of any construction, reconstruction or alteration of any Improvements upon the Demised Premises, builder's risk insurance in an amount equal to the completed value of such Improvements; and (v) Contractual liability insurance insuring the Tenant's obligations set forth in the Tenant Lease with a minimum limit of not less than Three Million Dollars ($3,000,000.00) or such higher limit as the Landlord may reasonably require from time to time. (b) All insurance policies required to be procured and maintained hereunder by Tenant shall: (i) be issued by financially responsible insurance companies authorized to do business in the State; (ii) be written as primary policy coverage and not contributing with or in excess of any coverage which the Landlord or Kmart may carry; (iii) insure and name the Landlord, Kmart and any mortgagee of the shopping center as additional insureds as their respective interests may appear; and (iv) contain an express waiver of any right of subrogation by the insurance company against the Landlord, Kmart and their agents and employees. Neither the issuance of any insurance policy required hereunder, nor the minimum limits specified herein with respect to any insurance coverage, shall be deemed to limit or restrict in any way the liability of Tenant (and/or its contractors or subcontractors) arising under or out of the Tenant Lease. Any insurance required to be carried hereunder may be carried under a blanket policy covering Tenant's Demised Premises and other locations of the Tenant, provided that the policy does not include a so-called "pro rata 68 distribution" clause, and provided that the amount of insurance required to be provided hereunder shall not be diminished thereby. Each and every insurance policy required to be carried hereunder by or on behalf of the Tenant shall provide (and any certificate evidencing the existence of each such insurance policy shall certify) that, unless the Landlord and Kmart shall first have been given ten (10) days' prior written notice thereof: (i) such insurance policy shall not be canceled and shall continue in full force and effect, (ii) the insurance carrier shall not, for any reason whatsoever, fail to renew such insurance policy, and (iii) no material changes may be made in such insurance policy (which shall also require the Landlord's and Kmart's approval). 10. Indemnification. Tenant and Landlord, jointly and severally, agree to defend, indemnify and hold harmless Kmart, its successors and assigns, from and against (i) any and all claims, actions, damages, liability, cost and expense, including reasonable attorney's fees, in connection with loss of life, personal injury and/or damage arising from or out of any occurrence in, upon or at Tenant's Demised Premises, or in connection with the construction of any improvements, use, occupation, possession or management of Tenant's Demised Premises, (ii) any and all Impositions owing on Tenant's Demised Premises, and (iii) all expenses, liens or claims incurred or asserted by reason of or with respect to any construction activity and any environmental investigations on or for the benefit of Tenant's Demised Premises. 11. Evidence of Title. Prior to the execution of this Consent Agreement, Tenant, at its sole cost and expense, shall furnish to Kmart a preliminary title report or other evidence of title satisfactory to Tenant and Kmart (the "Title Report"). Such report or evidence of title shall show the legal description of Tenant's Demised Premises and any easements, encumbrances or other matters affecting Tenant's Demised Premises. Within thirty (30) days following the full execution of this Consent Agreement, Tenant, at its sole cost and expense, shall also furnish to Kmart a survey of Tenant's Demised Premises by a duly licensed surveyor which shall show the location, area boundaries, and dimensions and total area of the Tenant's Demised Premises, its relative location with respect to streets or highways, the location of utilities, building setbacks, easements or reservations (including, the recording information of each item), and that there are not encroachments of any improvements adjoining Tenant's Demised Premises. 12. Amendment. Assignment or Subletting. No amendment, modification, assignment or sublease under the Tenant Lease, or leasing or re-leasing of the Tenant's Demised Premises, shall be effective against Kmart in the event it adversely affects, infringes upon or reduces the rights of Kmart. If the Tenant Lease terminates, any new lease shall be subject to the terms and conditions of this Agreement, including but not limited to payment to Kmart of fifty percent (50%) of the renal revenue. Tenant agrees not to assign or in any manner transfer the Tenant Lease or any estate or interest therein, or sublet any portion of Tenant's Demised Premises without the prior written consent of Kmart, which shall not be unreasonably withheld. Kmart's consent shall be contingent upon receipt of proof acceptable to Kmart that the proposed subtenant or assignee (a) has a net worth which is at least equal to that of Tenant at the time of (i) execution or (ii) assignment or subleasing, whichever is greater, and (b) has at least five years business experience operating in the same use as proposed for its use of the Tenant's Demised Premises. The making of any assignment, transfer, subletting, leasing or re-leasing, in whole or in part, with Kmart's consent shall not operate to relieve Tenant of its obligations hereunder, and shall not constitute a waiver of Kmart's rights to approve any further leasing or re-leasing of the Tenant's Demised Premises by Landlord. Notwithstanding the foregoing, Tenant shall have the right to assign the lease to an affiliate or a subsidiary corporation of Tenant provided such assignment does not operate to relieve the Tenant of its obligations hereunder. 13. Eminent Domain. (a) If the Tenant Lease is terminated as a result of all or substantially all of Tenant's Demised Premises being taken by any public authority under the power of eminent domain, then the term of this Consent Agreement shall cease as of the day such possession shall be taken by such public authority and all amounts due hereunder shall be paid up to the day of such possession. All amounts paid hereunder in advance and pertaining to a period beyond the date of such possession shall be proportionately refunded by Kmart. 69 In the event of a taking of the whole or substantially all of Tenant's Demised Premises, Kmart shall be entitled to receive the award for the taking of its interest in Tenant's Demised Premises including, without limitation, Kmart's lost interest in rental income but such award for Kmart's interest shall not preclude Tenant from any reward for the value of its leasehold interest. (b) In the event of a taking that does not result in a termination of the Tenant Lease, Tenant, at its sole cost and expense, shall proceed with reasonable diligence to repair, alter and restore the improvements constructed on Tenant's Demised Premises to their former condition to the extent that the same may be feasible, subject to such changes or alterations as Tenant may elect to make in conformity with Paragraph 6 hereof. Upon completion of the repair or restoration of Tenant's Demised Premises and the improvements constructed on Tenant's Demised Premises, Tenant shall deliver to Landlord and Kmart a copy of the certificate of occupancy for Tenant's Demised Premises and the improvements constructed on Tenant's Demised Premises. If a certificate of occupancy is not provided by the local governmental entity, Tenant will deliver to Landlord and Kmart such other evidence from the local governmental entity in a form reasonably satisfactory to Landlord and Kmart which shall permit Tenant to occupy Tenant's Demised Premises. 14. Use, Operation and Maintenance of Premises. (a) Tenant shall use and occupy Tenant's Demised Premises during the continuance of the Tenant Lease solely for the purpose of the operation of a Community Bank branch facility and for no other purpose or purposes without the prior written consent of Kmart, which consent may be withheld for any or no reason, in Kmart's sole and unfettered discretion. Tenant agrees to operate Tenant's business from the entire building located on Tenant's Demised Premises during the entire term of the Tenant Lease unless prevented from doing so because of fire, accidents, strikes or acts of God, and to conduct its business in a high class and reputable manner. Tenant shall promptly comply with all laws and ordinances and lawful orders and regulations affecting Tenant's Demised Premises and the cleanliness, safety, occupancy and use of same. Tenant shall keep Tenant's Demised Premises orderly, neat, safe and clean and free from rubbish and dirt at all times, shall store all merchandise, supplies and equipment within the building or other structures located on Tenant's Demised Premises from time to time, and shall store all trash and garbage outside said building or other structures in a dumpster within an enclosure adjacent to said building or structures. Tenant shall not burn any trash or garbage at any time on Tenant's Demised Premises. (b) Tenant's rights and interests in Tenant's Demised Premises will be subject to (i) all taxes, assessments, easements, agreements and other matters affecting Tenant's Demised Premises whether of record or not, and (ii).alI applicable zoning rules, restrictions, regulations, resolutions, and ordinances and building restrictions and governmental regulations now or hereinafter in effect. (c) In the event of destruction or damage from fire or any casualty to the Improvements, Tenant shall promptly, but in no event later than one hundred and eighty (180) days from the date of such destruction or damage, either: (a) rebuild and repair the same to at least substantially the same size and condition as such was in immediately preceding such fire or casualty; or (b) at its own expense, raze and remove the Improvements, pave, stripe, light and maintain Tenant's Demised Premises for use as part of the common areas of the Shopping Center, in which event the owners, occupants, customers and employees of the Shopping Center shall have and are hereby granted by Tenant a non-exclusive easement for ingress, egress and parking over and upon Tenant's Demised Premises. (d) Tenant's Demised Premises shall not be used for (i) entertainment or recreational purposes, which for purposes hereof include without limitation a bowling alley, skating rink, health studio or gym, billiard room, game arcade or amusement center, theater, bar or tavern, (except where incidental to the operation of a restaurant or delicatessen), dance hall or disco (except where incidental to the operation of a restaurant or delicatessen), or massage parlor, (ii) a "training or educational facility", which for purposes hereof shall include without limitation a beauty school, barber college, reading room, place of instruction or any other operation catering primarily to students or trainees 70 rather than to customers, (iii) a pharmacy, (iv) a discount shoe store, (v) a business specializing in the sale of automobile accessories or automobile service and repair, (vi) a restaurant whose primary menu item is pizza, (vii) any sale of meat, dairy products, baked goods or other food for off-premises consumption, (viii) any non-retail operation; or (ix) any use inconsistent with the operation of a family-type retail shopping center. 15. Environmental Matters. Tenant represents and warrants that it will not use, store, generate or permit, in, on, about or under Tenant's Demised Premises in any form any material defined as a hazardous, radioactive or toxic substance or a pollutant or contaminant by any law, ordinance, rule or regulation of any governmental authority ("Hazardous Substance") in violation of any law, ordinance, rule or regulation of any governmental authority regarding the use, control, regulation or prohibition of any Hazardous Substance ("Environmental Law"). Tenant shall immediately provide Kmart with copies of any order, notice, permit, application or any other communication from or to any entity or person, including governmental agencies, regarding the environmental condition of Tenant's Demised Premises. Tenant shall defend, indemnify and hold Kmart harmless from and against all claims, loss, damage, liabilities, judgments, penalties, fines, costs or expenses, whatsoever, including attorneys' fees and costs, from Hazardous Materials existing, or caused by Tenant, its employees, agents, representatives, contractors, or invitees to be on, in, at, under, or about Tenant's Demised Premises. The terms of this Paragraph 15 will survive the expiration or earlier termination of this Consent Agreement. Tenant may perform a standard ASTM Phase I Environmental Site Assessment on the Demised Premises. However, Tenant may not perform any Phase II environmental investigation without Kmart's and Landlord's prior written consent. 16. Conflict. In the event of any inconsistency or conflict between the terms and provisions of this Consent Agreement and the Tenant Lease, the terms and provisions of this Consent Agreement shall govern and be binding. 17. Notices. Any notices, consents, approvals or demands given under this Consent Agreement or pursuant to any law or governmental regulation, by or to Kmart, Landlord or Tenant shall be in writing. Unless otherwise required by law or governmental regulation, any such notice, consent, approval or demand shall be deemed given if sent by a recognized overnight courier service, United States certified mail, return receipt requested, postage prepaid or by facsimile provided that a copy of such notice, consent, approval or demand is sent by certified mail as hereinabove provided: (i) to Kmart to the attention of the Vice President, Real Estate Department, at the address of Kmart as hereinabove set forth or such other address as Kmart may designate by notice to the other parties hereto (ii) to Landlord at the address of Landlord as hereinabove set forth or such other address as Landlord may designate by notice to the other parties hereto; or (iii) to Tenant at the address of Tenant hereinabove set forth or such other address as Tenant may designate by notice to the other parties hereto. Any notice, consent, approval or demand sent as hereinabove provided shall be deemed to have been received on the day following the date of sending if sent by overnight courier service, on the third day following the mailing thereof if sent by United States certified mail, and on the date of sending if sent by facsimile and the receipt thereof is confirmed. 18. Complete Agreement. This Consent Agreement and the Exhibits attached hereto and made a part hereof, set forth the entire agreement and understanding of the parties hereto with respect to the subject matter hereof. This Consent Agreement may not be modified orally or in any manner other than an agreement in writing signed by the parties hereto or their respective successors and assigns. 71 19. Successors and Assigns. This Consent Agreement shall bind and inure to the benefit of the parties hereto and to their respective successors and assigns and the agreements and the covenants herein contained are intended to run with and bind all lands affected thereby. 20. Governing Law. This Consent Agreement shall be construed and enforced in accordance with the laws of the State where Tenant's Demised Premises is located. 21. No Relationship. The foregoing provisions of this Consent Agreement are not intended to create, nor shall they be in any way interpreted to create a joint venture, partnership or any other similar relationship among the parties hereto. 22. Recording. No party shall record this Agreement. Kmart, Landlord and Tenant shall, however, simultaneously herewith, enter into a short form memorandum of this Agreement, in suitable form for recording under the laws of the State where Tenant's Demised Premises are located, the same to be recorded at the expense of Tenant. 23. Counterparts. This Consent Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same instrument. 72 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. [SIGNATURES OMITTED] 73 EX-23 3 AUDITOR'S CONSENT 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 31, 2000, relating to the consolidated balance sheets of Community Bankshares, Inc. and subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report appears in the December 31, 1999, annual report on Form 10-K of Community Bankshares, Inc. J. W. Hunt and Company, LLP Columbia, South Carolina March 22, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheet at December 31, 1999, and the Consolidated Statement of Income for the Year Ended December 31, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1999 DEC-31-1999 12,275 788 8,040 0 30,566 13,369 12,919 157,089 1,936 228,030 184,364 2,782 1,219 19,420 0 0 14,207 6,038 228,030 12,406 2,488 656 15,550 6,113 6,958 8,592 612 0 6,066 3,231 3,231 0 0 2,182 0.68 0.68 4.46 90 6 0 96 1,459 180 45 1,936 1,936 0 0
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