SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURUSANT
SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-13100
COMMUNITY BANKSHARES INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia 54-1290793
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
200 North Sycamore Street, P. O. Box 2166, Petersburg, Virginia 23803
- ----------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number including area code: (804) 861-2320
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
Common Stock, $3.00 par value NASDAQ
Securities registered pursuant to Section 12(G) of the Act: None
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No __.
Indicate by a check mark if the 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 the registrant's knowledge, in definitive proxy or information
statements incorporate by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X).
State the aggregate market value of the voting stock held by non-affiliates of
the registrant:
$64,905,261 at March 24, 1999.
APPLICABLE TO CORPORATE ISSUERS: Indicate the number of shares outstanding of
each of the issuer's classes of common stock:
2,761,926 shares of Common Stock, $3.00 par value, as of December 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE. The following documents are incorporated by
reference in this Form 10-K in the Parts indicated:
1. Proxy Statement for 1999 Annual Meeting of Stockholders of the Company.
Total number of pages, including cover page - 61
1
COMMUNITY BANKSHARES INCORPORATED
Item 1. Business
GENERAL
COMMUNITY BANKSHARES INCORPORATED (CBI), THE COMMUNITY BANK, COMMERCE
BANK OF VIRGINIA AND COUNTY BANK OF CHESTERFIELD. Community Bankshares
Incorporated is a registered bank holding company headquartered in Petersburg,
Virginia, with assets of $329,912,000 at December 31, 1998. CBI's sole business
is to serve as a multi-bank holding company for its wholly-owned subsidiaries.
The Community Bank, Commerce Bank of Virginia and County Bank of Chesterfield.
CBI was incorporated as a Virginia corporation on January 24, 1984, and on
January 1, 1985, it acquired all of the issued and outstanding shares of The
Community Bank's capital stock. CBI acquired all of the outstanding stock of
Commerce Bank of Virginia through a share exchange agreement effective July 1,
1996. CBI acquired all of the outstanding stock of County Bank of Chesterfield
through a share exchange agreement effective July 1, 1997.
The Community Bank was incorporated in 1973 under the laws of the
Commonwealth of Virginia. Since The Community Bank opened for business on June
10, 1974, its main banking and administrative office has been located at 200
North Sycamore Street, Petersburg, Virginia.
The Community Bank operates branch offices in Colonial Heights, Virginia
and in the village of Chester in Chesterfield County, Virginia. Its primary
service area consisting of the Cities of Petersburg and Colonial Heights and
Chesterfield County. The bank is insured by the FDIC and is supervised and
examined by the Federal Reserve and the Virginia State Corporation Commission.
It engages in general commercial banking business and offers a range of banking
services that can be expected of a banking organization of its size. Total
assets of the bank were $104.016 million at December 31, 1998.
Commerce Bank of Virginia was incorporated in 1984 under the laws of the
Commonwealth of Virginia. Since Commerce Bank of Virginia opened for business on
August 28, 1984, its main banking and administrative office has been located at
11500 West Broad Street, Richmond, Virginia (Henrico County).
Commerce Bank of Virginia operates branch offices in the City of
Richmond and Hanover and Goochland Counties. The bank is insured by the FDIC and
is supervised and examined by the Federal Reserve and the Virginia State
Corporation Commission. It engages in general commercial banking business and
offers a range of banking services that can be expected of a banking
organization of its size. Total assets of the bank were $108.495 million at
December 31, 1998.
County Bank of Chesterfield was incorporated in 1985 under the laws of
the Commonwealth of Virginia. Since County Bank of Chesterfield opened for
business in September 1986, its main banking and administrative office has been
located at 10400 Hull Street Road, Richmond, Virginia (Chesterfield County).
County Bank of Chesterfield operates branch offices in Chesterfield
County. The bank is insured by the FDIC and is supervised and examined by the
Federal Reserve and the Virginia State Corporation Commission. It engages in
general commercial banking business and offers a range of banking services that
can be expected of a banking organization of its size. Total assets of the bank
were $117.318 million at December 31, 1998.
BANKING SERVICES. Through its network of banking facilities CBI provides
a wide range of commercial banking services to individuals and small and
medium-sized businesses. CBI conducts substantially all of the business
operations of a typical independent, commercial bank, including the acceptance
of checking and savings deposits, and the making of commercial real estate,
personal, home improvement, automobile, and other installment and term loans.
CBI also offers other related services, such as traveler's checks, safe deposit
boxes, lock box, depositor transfer, customer note payment, collection, notary
public, escrow, drive-in facilities and other customary banking services. Trust
services are not offered by CBI.
2
The accounts of CBI's depositors are insured up to $100,000 for each
account holder by the Federal Deposit Insurance Corporation, an instrumentality
of the United States Government. Insurance of accounts is subject to the
statutes and regulations governing insured banks, to examination by the FDIC,
and to certain limitations and restrictions imposed by that agency.
LENDING ACTIVITIES
LOAN PORTFOLIOS. CBI is a residential mortgage and residential
construction lender and also extends commercial loans to small and medium-sized
businesses within its primary service area. Consistent with its focus on
providing community-based financial services, CBI does not attempt to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.
The primary economic risk associated with each of the categories of
loans in CBI's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. In an effort to manage the risk, CBI's policy gives loan amount
approval limits to individual loan officers based on their level of experience.
The risk associated with real estate mortgage loans and installment loans to
individuals varies based upon employment levels, consumer confidence,
fluctuations and value of residential real estate and other conditions that
affect the ability of consumers to repay indebtedness. The risk associated with
commercial loans varies based upon the strength and activity o the local
economy. The risk associated with real estate construction loans varies based
upon the supply and demand for the type of real estate under construction. Most
of CBI's residential real estate construction loans are for pre-sold and
contract homes.
RESIDENTIAL MORTGAGE LENDING. CBI originates conventional fixed rate and
adjustable rate residential mortgage loans. All fixed rate loans are short term
usually three years or less, unless the loan is to be fully amortized over 60
monthly payments. In addition, CBI, through its subsidiary Commerce Bank of
Virginia, offers both conventional and government fixed rate and adjustable rate
residential mortgage loans primarily for resale in the secondary market.
Commerce Bank of Virginia is an approved seller/servicer for the Federal Home
Loan Mortgage Corporation(FHLMC) and the Federal National Mortgage Association
(FNMA).
RESIDENTIAL CONSTRUCTION LENDING. Because of attractive adjustable rates
available, CBI makes construction loans for residential purposes. These include
both construction loans to experienced builders and loans to consumers for
owner-occupied residences. BCI does not actively solicit loans to builders for
homes that are not pre-sold. Construction lending entails significant additional
risk as compared with residential mortgage lending. Construction loans to
builders can involve larger loan balances concentrated with single borrowers or
groups of related borrowers. Also, with construction loans, funds are advanced
upon the security of the home under construction, which is of uncertain value
prior to the completion of construction. Thus, it is more difficult to evaluate
accurately the total loan funds required to complete a project and related
loan-to-value ratios. Residential construction loans to customers, for which a
permanent loan commitment from another lender approved prior to loan closing is
required, are subject to the additional risk of the permanent lender failing to
provide the necessary funds at closing, either due to the borrower's inability
to fulfill the terms of the commitment or due to the permanent lender's
inability to meet its funding commitments. In addition to its usual credit
analysis of the borrowers, CBI seeks to obtain a first lien on the property as
security for its construction loans.
COMMERCIAL REAL ESTATE LENDING. CBI provides permanent mortgage
financing for a variety of commercial projects. In the normal course of
business, CBI will provide financing for owner occupied properties and for
income producing, non-owner occupied projects which meet all of the guidelines
established by loan policy. These loans generally do not exceed 65% of current
appraised or market value, whichever is lower, for unimproved land and 75% for
improved commercial real estate. Such loans are written on terms which provide
for a maturity of one to three years.
Construction loans for the purpose of constructing commercial projects
are provided for periods of not greater than one year, at floating rates of
interest and are convertible to permanent financing consistent with terms
outlined in CBI loan policy. When a construction loan agreement is entered into,
particular care is taken to govern the process of the loan and, both initial
project review and periodic inspections are conducted by competent personnel who
are independent o CBI. Advance ratios are closely monitored and appropriate
construction reserves are established.
3
CONSUMER LENDING. CBI currently offers most types of consumer demand,
time, and installment loans, including automobile loans.
COMMERCIAL BUSINESS LENDING. As a full service community bank, CBI makes
commercial loans to qualified small businesses in CBI' market area. Commercial
business loans generally have a higher degree of risk than residential mortgage
loans but have commensurately higher yields. To manage these risks, CBI
generally secures appropriate collateral and carefully monitors the financial
condition of it business borrowers and the concentration of such loans in the
portfolio. Most of CBI commercial loans are secured by real estate , which is
viewed by CBI as the principal collateral securing such loans. Residential
mortgage loans generally are made on the basis of the borrower's ability to make
repayment from his employment and other income and are secured by real estate
whose value tends to be easily ascertainable. In contrast, commercial business
loans typically are made on the basis of the borrower's ability to make
repayment from cash flow from its business and are either unsecured or secured
by business assets, such as real estate, accounts receivable, equipment and
inventory. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself. Further, the collateral for secured commercial business loans
may depreciate over time and cannot be appraised with as much precision as
residential real estate.
COLLECTION PRACTICES. Often CBI will not immediately proceed to
foreclose on real estate loans that become more than 90 days past due. Instead,
CBI will permit the borrower to market and sell the collateral in an orderly
manner. If the borrower does not sell the collateral within a reasonable time,
CBI will foreclose and sell the collateral. CBI's experience has been that
losses on well collateralized real estate loans are minimized when it works with
borrowers in this manner, although its practice of working with borrowers at
times results in relatively high balances of past due loans. CBI has also found
that its loan collection practices enable it to compete with larger and less
flexible institutions that are not based in the community. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Nonperforming Assets".
COMPETITION
CBI encounters strong competition for its banking services within its
primary market area. There are approximately 15 commercial banks actively
engaged in business in its market area, including major statewide and regional
banking organizations. Finance companies, credit unions, savings and loan
associations compete for loans and deposits. In addition, in some instances, CBI
must compete for deposits with money market funds that are marketed by brokerage
firms on a local and national level. CBI's competitors generally have
substantially greater resources than CBI.
EMPLOYEES
As of December 31, 1998, CBI had 137 full time equivalent employees.
Management considers its relations with employees to be excellent. No employees
are represented by a union or any similar group and CBI has never experienced
any strike or labor disputes.
SUPERVISION AND REGULATION
Banks and their holding companies are extensively regulated entities.
CBI is currently a holding company subject to supervision and regulation by the
Board of Governors of The Federal Reserve System (the Federal Reserve). CBI's
subsidiary banks are subject to supervision and regulation by the Federal
Reserve and the Bureau of Financial Institutions of the State Corporation
Commission of the Commonwealth of Virginia (the SCC).
The regulatory discussion is divided into two major subject areas.
First, the discussion addresses the general regulatory considerations governing
bank holding companies. This focuses on the primary regulatory considerations
applicable to CBI as a bank holding company. Second, the discussion addresses
the general regulatory provisions governing depository institutions. This
focuses on the regulatory considerations of The Community Bank, Commerce Bank of
Virginia and County Bank of Chesterfield.
4
This discussion is only a summary of the principal laws and regulations
that comprise the regulatory framework. The descriptions of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein, do not purport to be complete and are qualified in their entirety by
reference to applicable laws and regulations.
BANK HOLDING COMPANIES
The Bank Holding Company Act (BHC Act) generally limits the activities
of the bank holding company and its subsidiaries to that of banking managing or
controlling banks, or any other activity which is so closely related to banking
or to managing or controlling banks as to be a proper incident thereto.
Formerly the BHC Act prohibited the Federal Reserve from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the bank holding company's banking
subsidiaries are principally conducted, unless such an acquisition was
authorized by statute of the state where the bank whose shares were to be
acquired was located. However, under federal legislation enacted in 1994, the
restriction on interstate acquisitions was abolished, effective September 1995.
A bank holding company from any state now may acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
nationwide and state imposed concentration limits. Banks also are able to branch
across state lines by acquisition, merger or de novo, provided certain
conditions are met, including that applicable state law must expressly permit
such interstate branching.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries that are
designed to reduce potential loss exposure to the depositors of the depository
institutions and to the FDIC insurance fund. For example, under a policy of the
Federal Reserve with respect to bank holding company operations, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or
reasonably anticipated by the FDIC as a result of a default of a commonly
controlled insured depository or for any assistance provided by the FDIC to a
commonly controlled 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 Bank Insurance Fund (BIF). 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.
Banking laws also provide 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
assets of any bank subsidiaries.
CERTAIN REGULATORY CONSIDERATIONS
REGULATORY CAPITAL REQUIREMENTS. All financial institutions are required
to maintain minimum levels of regulatory capital. The federal bank regulatory
agencies have established substantially similar risk based and leverage capital
standards for financial institutions they regulate. These regulatory agencies
also may impose capital requirements in excess of these standards on a case by
case basis for various reasons, including financial condition or actual or
anticipated growth. Under the risk based capital requirements of these
regulatory agencies, The Community Bank, Commerce Bank of Virginia and County
Bank of Chesterfield are required to maintain a minimum ratio of total capital
to risk weighted assets of at least 8%. At least half of the total capital is
required to be "Tier 1 capital", which consists principally of common and
5
certain qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder ("Tier 2 capital") consists of a limited amount
of subordinated and other qualifying debt (including certain hybrid capital
instruments) and a limited amount of the general loan loss allowance. The Tier 1
and total capital to risk weighted asset ratios of The Community Bank as of
December 31, 1998 were 19.09% and 20.27%, exceeding the minimum required. The
Tier 1 and total capital to risk weighted asset ratios of Commerce Bank of
Virginia as of December 31, 1998 were 12.01% and 12.81%, exceeding the minimum
required. . The Tier 1 and total capital to risk weighted asset ratios of County
Bank of Chesterfield as of December 31, 1998 were 10.63% and 11.66%, exceeding
the minimum required. Based upon the applicable Federal Reserve regulations, at
December 31, 1997, all three banks would be considered "well capitalized".
In addition, the federal regulatory agency is required to revise its
risk capital standards to ensure that those standards take adequate amount of
interest rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as the actual performance and expected risk of on
multifamily mortgages. The Federal Reserve and FDIC have jointly solicited
comments on a proposed framework for implementing the interest rate risk
component of the risk based capital guidelines. Under the proposal, an
institutions assets, liabilities, and off-balance sheet positions would be
weighted by risk factors that approximate the instruments' price sensitivity to
a 100 basis point change in interest rates. Institutions with an interest rate
risk exposure in excess of a threshold level would be required to hold
additional capital proportional to that risk. In 1994 the, the federal bank
regulatory agencies solicited comments on a proposed revision to the risk based
capital guidelines to take account of concentration of credit and the risk of
nontraditional activities. The revision proposed to amend each agency's risk
based capital standards by explicitly identifying concentration of credit risk
and the risk arising from nontraditional activities, as well as an institutions
ability to manage those risks, as important factors to be taken into account by
the agency in assessing an institution's overall capital adequacy. The proposal
was adopted as a final rule by the federal bank regulatory agencies and
subsequently became effective on January 17, 1995. CBI does not expect the final
rule to have a material impact on its capital requirements; however, the federal
regulatory agencies may, as an integral part of their examination process,
require CBI to provide additional capital based on such agency's judgments of
information available at the time of examination.
The following table summarizes the minimum regulatory and current
capital ratios for CBI on a consolidated basis, at December 31, 1998.
CAPITAL RATIOS
Regulatory CBI
Minimum Current
---------- -------
Risk-based capital
Tier 1 (2) 4.00% 14.17%
Total (2) 8.00% 15.15%
Leverage (1) (2) 4.00% 11.52%
Total shareholder's equity to total assets N/A 10.34%
- ----------------------
(1) Leverage ratio is calculated by Tier 1 capital as a percentage of quarterly
period end assets
(2) Calculated in accordance with the Federal Reserve's capital rules, with
adjustments for net unrealized depreciation on securities available for sale
LIMITS ON DIVIDENDS AND OTHER PAYMENTS. Certain state law restrictions
are imposed on distributions of dividends to shareholders of CBI. CBI
shareholders are entitled to receive dividends as declared by the CBI Board of
Directors. However, no such distribution may be made if, after giving effect to
the distribution, it would not be able to pay its debts as they become due in
the normal course of business or its total assets would be less than its total
liabilities. There are similar restrictions with respect to stock repurchases ad
redemption's.
The Community Bank, Commerce Bank of Virginia and County Bank of
Chesterfield are subject to legal limitations on capital distributions including
payment of dividends, if after making such distribution, the institution would
become undercapitalized (as such term is used in the statute). For all state
member banks of the Federal Reserve seeking to pay dividends, the prior approval
6
of the applicable Federal Reserve Bank is required if the total of all dividends
in any calendar year will exceed the sum of the bank's net profits for that year
and its retained net profits for the preceding two calendar years. Federal law
also generally prohibits a depository institution from any capital distribution
(including payment of a dividend or payment of a management fee to its holding
company) if the depository institution would thereafter fail to maintain capital
above regulatory minimums. Federal Reserve Banks are also authorized to limit
the payment of dividends by any state member bank if such payment may be deemed
to constitute an unsafe or unsound practice. In addition, under Virginia law no
dividend may be declared or paid that would impair a Virginia chartered bank's
paid-in capital. The Virginia SCC has general authority to prohibit payment of
dividends by a Virginia chartered bank if it determines that the limitation is
in the public interest and is necessary to ensure the banks financial soundness.
Most of the revenues of CBI and CBI's ability to pay dividends to its
shareholders will depend on the dividends paid to it by it's subsidiary banks,
The Community Bank, Commerce Bank of Virginia and County Bank of Chesterfield.
Based on the subsidiary banks' current financial condition, CBI expects that the
above-described provisions will have no impact on its ability to obtain
dividends from the subsidiary banks or on CBI's ability to pay dividends to its
shareholders. At December 31, 1998, the subsidiary banks had $10.569 million of
retained earnings legally available for the payment of dividends to CBI.
In addition to the regulatory provisions regarding holding companies
addressed above, The Community Bank, Commerce Bank of Virginia and County Bank
of Chesterfield are subject to extensive regulation as well. The following
discussion addresses certain primary regulatory considerations affecting the
subsidiary banks.
The banks are regulated extensively under both federal and state laws.
The banks are organized as Virginia chartered banking corporations and are
regulated and supervised by the Bureau of Financial Institutions of the Virginia
SCC. As members of the Federal Reserve System as well, the banks are regulated
and supervised by the Federal Reserve Bank of Richmond. The Virginia SCC and the
Federal Reserve Bank of Richmond conduct regular examinations of the banks,
reviewing such matters as the adequacy of loan loss reserves, quality of loans
and investments, management practices, compliance with laws, and other aspects
of their operations. In addition to these regular examinations, the banks must
furnish the SCC and the Federal Reserve with periodic reports containing a full
and accurate statement of its affairs. Supervision, regulation and examination
of banks by these agencies are intended primarily for the protection of
depositors, rather than shareholders.
INSURANCE OF ACCOUNTS, ASSESSMENTS AND REGULATION BY THE FDIC. The
Community Bank, Commerce Bank of Virginia and County Bank of Chesterfield are
insured up to $100,000 per insured depositor (as defined by law and regulation)
through the BIF, which is administered and managed by the FDIC. As insurer, the
FDIC is authorized to conduct examinations of and to require reporting by BIF
insured institutions. The actual assessment to be paid by each BIF member is
based on the institution's assessment risk classification and whether the
institution is considered by its supervisory agency to be financially sound or
to have supervisory concerns.
The FDIC is authorized to prohibit any BIF insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC my terminate
the deposit insurance of any institution if it determines, after a hearing, that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed in writing by the
FDIC. It may also suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If deposit insurance is terminated, the deposits at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances that could result in
the termination of any of the bank's deposit insurance.
OTHER SAFETY AND SOUNDNESS REGULATIONS. The Federal banking agencies
have broad powers under 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, as such terms are defined under uniform regulations defining
such capital levels issued by each of the federal banking agencies.
7
In addition, FDIC regulations require that management report on the
institution's responsibility to prepare financial statements, and to establish
and maintain an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning safety
and soundness; and that independent auditors attest to and report separately on
assertions in management's reports concerning compliance with such laws and
regulations, using FDIC approved audit procedures.
Each of the federal banking agencies also must develop regulations
addressing certain safety and soundness standards for insured depository
institutions and depository institutions holding companies, including
compensation standards, operational and managerial standards, asset quality,
earnings and stock valuation. The federal banking agencies have issued a joint
notice of proposed rule making,, which requested comment on the implementation
of these standards. The proposed rule sets forth general operational and
management standards in the areas of internal control, information systems and
internal audit systems, loan documentation, credit underwriting interest rate
exposure, asset growth and compensation, fees, and benefits. The proposal
contemplates that each federal agency would determine compliance with these
standards through the examination process and, if necessary to correct
weaknesses, require an institution to file a written safety and soundness
compliance plan. CBI has not yet determined the effect that the proposed rule
would have on its depository institution subsidiaries if it is enacted
substantially as proposed.
COMMUNITY REINVESTMENT. The requirements of the Community Reinvestment
Act (CRA) affect the subsidiary banks. 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
efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. Each of the subsidiary banks maintains a satisfactory rating
in meeting its obligations under CRA.
Item 2. Properties
CBI's offices and The Community Bank's main office are located in two
3,500 square foot condominiums in a seven story masonry building located at 200
North Sycamore Street, Petersburg, Virginia. The Community Bank's branch office
at 2618 South Crater Road in Petersburg was opened in 1979. The branch office at
2000 Snead Avenue, Colonial Heights, was opened in 1984. The branch office at
4203 West Hundred Road, Chester was opened in 1985. The Community Bank owns the
land and buildings in which the Sycamore Street, South Crater Road and West
Hundred Road branches operate and leases the Snead Avenue facility.
The Community Bank's facilities and equipment are considered adequate
for its immediate needs and for foreseeable expansion.
Commerce Bank of Virginia's principal office is located at 11500 West
Broad Street in Henrico County, Virginia. The Hanover branch office at 10035
Sliding Hill Road, Ashland (Hanover County) opened in 1988 The Riverfront Tower
branch office at 901 East Byrd Street, Richmond, opened in 1992. The Goochland
Courthouse branch office at 3018 River Road West, Goochland County opened in
1993. The Centerville branch office at 27 Broad Street Road, Goochland County
opened in 1993.
Commerce Bank of Virginia holds the real property at its principal
office pursuant to a ground lease and owns the improvements that have been
constructed thereon. The Hanover branch is owned by the Atlee Station Co., of
which Sam T. Beale, a Director of CBI, is the principal shareholder. The bank
also leases the space where the Riverfront Towers branch is located. Commerce
Bank of Virginia owns the property for its two Goochland County branches.
Commerce Bank of Virginia's facilities and equipment are considered
adequate for its immediate needs and for foreseeable expansion.
County Bank of Chesterfield's principal office is located at 10400 Hull
Street Road, Midlothian (Chesterfield County). In 1988 the bank opened its
8
branch office at 6435 Ironbridge Road in Chesterfield County. A third branch
office located at 13241 River's Bend Blvd, Chesterfield County, was opened in
1997. The bank owns all three locations.
County Bank of Chesterfield's facilities and equipment are considered
adequate for its immediate needs and for foreseeable expansion.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to Vote of Security Holders.
None
Item 5. Market for Company's Common Stock and Related Stockholder Matters.
As of December 31, 1998 CBI had 1644 shareholders of record of its
Common Stock.
The following table sets forth, for the quarters indicated, the high and
low sale prices for CBI Common Stock. The company's common stock trades on The
Nasdaq Stock Market under the symbol CBIV. The stock began trading on Nasdaq on
July 1, 1997. Prior to that date the stock was traded on the OTC Bulletin Board.
CBI MARKET PRICE AND DIVIDENDS
Sales Price (1) Dividends (1)
--------------- -------------
High Low
---- ---
1996
1st quarter 15.500 12.250 12
2nd quarter 17.000 14.000
3rd quarter 18.500 15.500
4th quarter 19.500 17.000
1997
1st quarter 19.500 17.250
2nd quarter 19.000 16.250 .20
3rd quarter 22.250 17.750
4th quarter 28.000 21.750 .15
1998
1st quarter 30.000 25.000 .12
2nd quarter 31.000 27.250 .12
3rd quarter 28.750 24.500 .13
4th quarter 28.000 23.000 .15
- -----------
(1) All prices and dividends are adjusted for a 100% stock dividend paid on
August 31, 1995.
The Community Bank acts as the Transfer/Dividend Disbursing Agent for
Community Bankshares Incorporated.
DIVIDENDS
The Company declared total dividends of $1,444,000, $859,000 and
$279,000 on its Common Stock during 1998, 1997 and 1996, respectively.
9
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
As noted in Item 1., Business, The Community Bank, Commerce Bank of
Virginia and County Bank of Chesterfield are limited in the amount of dividends
it may pay to CBI in any given year. At December 31, 1998, the subsidiary banks
had $10.569 million of retained earnings legally available for the payment of
dividends to CBI.
Item 6. Selected Financial Data.
The following table presents a Comparative Summary of Earnings of the
Company for the five years ended December 31, 1998. These statements should be
read in conjunction with the Consolidated Financial Statements and Related Notes
appearing in Item 8 of this filing.
10
COMMUNITY BANKSHARES INCORPORATED
SELECTED HISTORICAL FINANCIAL INFORMATION
Years Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
(In thousands, except ratios and per share data)
INCOME STATEMENT DATA:
Net interest income . . . . . . . $ 14,165 $ 12,618 $ 11,712 $ 10,273 $ 9,044
Provision for loan losses . . . . 453 52 532 492 511
---------------------------------------------------------
Net interest income after
provision for loan losses . . . $ 13,712 $ 12,566 $ 11,180 $ 9,781 $ 8,533
Noninterest income . . . . . . . 2,273 1,666 1,683 1,603 1,665
Noninterest expense . . . . . . . 8,840 7,992 7,264 6,990 6,844
---------------------------------------------------------
Income before income taxes . . . $ 7,145 $ 6,240 $ 5,599 $ 4,394 $ 3,354
Income taxes . . . . . . . . . . 2,153 1,968 1,712 1,414 1,041
---------------------------------------------------------
Net income . . . . . . . . . . . $ 4,992 $ 4,272 $ 3,887 $ 2,980 $ 2,313
=========================================================
PER SHARE DATA (1):
Basic earnings per share . . . . $ 1.80 $ 1.54 $ 1.42 $ 1.23 $ 0.99
Diluted earnings per share . . . $ 1.76 $ 1.48 $ 1.36 $ 1.18 $ 0.96
Cash dividends . . . . . . . . . $ 0.52 $ 0.31 $ 0.10 $ 0.08 $ 0.07
Book value at period end . . . . $ 12.35 $ 11.17 $ 9.84 $ 8.75 $ 7.44
BALANCE SHEET DATA:
Total assets . . . . . . . . . . 329,912 270,237 251,011 234,645 202,426
Loans, net . . . . . . . . . . . 200,558 175,991 162,861 149,415 137,462
Securities . . . . . . . . . . . 71,885 57,660 55,615 56,711 42,070
Deposits . . . . . . . . . . . . 294,002 237,529 221,909 208,641 183,054
Stockholder's equity (1) . . . . 34,120 31,041 27,339 23,895 17,374
Shares outstanding (1) . . . . . 2,761,926 2,779,426 2,777,856 2,730,751 2,336,004
PERFORMANCE RATIOS:
Return on average assets . . . . 1.69% 1.66% 1.63% 1.35% 1.17%
Return on average equity . . . . 15.32% 14.62% 14.94% 14.92% 14.07%
Net interest margin (2) . . . . . 5.13% 5.27% 5.25% 5.01% 5.03%
Average loans to deposits . . . . 73.87% 76.68% 75.69% 73.95% 75.06%
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans . . . . . . . 1.16% 1.12% 1.21% 1.22% 1.21%
Allowance for loan losses to
nonaccrual loans . . . . . . . 3.12X 2.70X 2.00X 3.80X 19.31X
Nonperforming assets to period end
loans and other real estate owned 1.67% 2.30% 2.20% 1.90% 1.37%
Net chargeoffs
to average loans . . . . . . . 0.05% 0.04% 0.24% 0.20% 0.26%
- -----------------------------------
(1) All per share information has been restated to reflect a 2 for 1 stock split
effected in the form of a 100% stock dividend paid August 31, 1995.
(2) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the net yield on its
earning assets.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides information about the major components
of the results of operations and financial condition, liquidity and capital
resources of Community Bankshares Incorporated. This discussion and analysis
should be read in conjunction with the Consolidated Financial Statements and the
Notes to Consolidated Financial Statements.
OVERVIEW. Net income for the year ended December 31, 1998 of $4.992 million was
an increase of 16.9%, or $0.720 million over the year ended December 31, 1997.
The increase in net income during 1998 reflects primarily an increase in the
lending volume, as total net loans increased by $24.567 million. Earnings per
share for the year ended December 31, 1998 was $1.80 up from $1.54 for the year
ended December 31, 1997. CBI has shown an increase of 116% in net income over
the five years ended December 31, 1998, from $2.313 million in 1994 to $4.992
million during 1998. The increase in income over the past five years is
attributable to the 45% growth in the loan portfolio. As total assets grew from
$202.426 million in 1994 to $329,912 million as of December 31, 1998, net loans
grew from $137.462 million to $200.558 million.
The Company increased net income 9.01% or $0.385 million during 1997
over 1996. This increase was attributable to an increase in the net interest
income. Net income during 1996 of $3.887 million was a 30.4% increase over 1995.
On a per share basis, net income was $1.42 in 1996.
The Company's return on average equity has increased while the return on
average assets has remained fairly constant over the past three years. The
return on average equity was 15.32% for the year ended December 31, 1998. The
return on average equity was 14.62% in 1997, compared to 14.94% for 1996. The
return on average assets amounted to 1.69%, 1.66% and 1.63% for the three years
ended December 31, 1998, 1997, and 1996, respectively.
NET INTEREST INCOME. Net interest income represents the principal source of
earnings for Community Bankshares, Inc. Net interest income equals the amount by
which interest income exceeds interest expense. Changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, as well as their
respective yields and rates, have a significant impact on the level of net
interest income.
Net interest income increased 12.26% to $14.165 million in 1998. This
increase was attributable to an 15.43% growth in average earning assets. The
increase in interest-earning assets was due primarily to increases in the
securities and lending volume. During the five years ended December 31, 1998,
the Company has had a consistent increase in loan demand. It is management's
belief that the increase in the lending volume is a result of competitive
pricing and, most importantly, responsiveness to loan demands. The ability to
make a timely loan decision is an operating characteristic that often allows CBI
the opportunity to meet the needs of borrowers before their competitors. Rates
earned on average earning assets were 8.73% during 1998 as compared to8.98% one
year earlier. The Company is competitive with rates and origination fees charged
on loans. However, since 66.79% of the Company's loan portfolio may be repriced
in one year or less, the Company may respond quickly to market changes in rates.
Interest expense for the year ended December 31, 1998 increased by
11.64%, to $9.657 million from $8.650 million for the year ended December 31,
1997. This increase was due to an increase of 17.89% in average interest bearing
liabilities from $182.472 million during 1976 to $215.125 million in 1998. The
interest rate paid on interest-bearing liabilities declined for the year, to
4.49% for 1998 compared to 4.74% in 1997.
Net interest income was $12.618 million for the year ended December 31,
1997, an increase of 7.74% over the $11.712 million reported in 1996. This
increase was partially due to the 6.04% increase in average interest-earning
assets. Again, the increase in the lending volume was the most significant
portion of the increase in average interest earning assets with a 8.33%
increase. During 1997 interest expense increased by $0.302 million to $8.650
million. This increase was a result of an increase deposit volume.
The following table sets forth CBI's average interest-earning assets (on a tax
equivalent basis) and average interest-bearing liabilities, the average yields
earned on such assets and rates paid on such liabilities, and the net interest
margin, for the periods indicated:
12
AVERAGE BALANCE SHEETS, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
Years Ended December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance(6) Interest Rate(1) Balance(6) Interest Rate(1) Balance(6) Interest Rate(1)
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Interest-earning assets:
Securities $ 62,679 $ 4,116 6.57% $ 55,974 $ 3,772 6.74% $ 55,612 $ 3,731 6.71%
Federal funds sold 20,282 1,055 5.20% 9,091 479 5.27% 6,797 374 5.50%
Loans (5) 192,778 18,921 9.81% 173,384 17,181 9.91% 160,030 16,101 10.06%
Interest-bearing deposits
in other banks 493 27 5.48% 863 50 5.79% 855 53 6.20%
--------------------------------------------------------------------------------------------------
Total
interest-earning
assets $ 276,232 $24,119 8.73% $239,312 $21,482 8.98% $223,294 $20,259 9.07%
------- ------- -------
Noninterest-earning
assets:
Cash and due
from banks 11,791 10,762 9,218
Premises and
equipment 4,816 4,800 4,218
Other assets 4,576 4,334 4,066
Less allowance for
loan losses (2,127) (2,087) (1,924)
---------- ---------- ---------
Total $295,288 $257,121 $238,872
========== ========== =========
Liabilities and
Stockholders' Equity
Interest-bearing
liabilities:
Money market
and NOW
accounts $ 61,348 $ 1,812 2.95% $ 46,565 $ 1,623 3.49% $ 50,530 $ 1,536 3.04%
Savings deposits 42,846 1,608 3.75% 33,790 1,245 3.68% 29,396 1,057 3.60%
Time deposits 93,064 5,150 5.53% 86,610 4,818 5.56% 80,951 4,707 5.81%
Large denomination deposits 17,867 1,087 6.08% 15,381 959 6.23% 17,757 1,043 5.87%
Federal funds
purchased - - - 126 5 3.97% 617 5 0.81%
--------------------------------------------------------------------------------------------------
$ 215,125 $ 9,657 4.49% $182,472 $ 8,650 4.74% $179,251 $ 8,348 4.66%
------- ------- -------
Noninterest-bearing
liabilities:
Demand deposits 45,842 43,766 32,287
Other liabilities 1,738 1,664 1,323
--------- -------- --------
$ 262,705 $227,902 $212,861
Stockholders' Equity 32,583 29,219 26,011
--------- -------- --------
Total $ 295,288 $257,121 $238,872
========= ======== ========
Net interest earnings $14,462 $12,832 $11,911
Less tax equivalent adjustment 297 214 199
------- ------- -------
Net Interest income/
yield (2) (3) $14,165 5.13% $12,618 5.27% $11,712 5.25%
======= ======= =======
Interest Spread (4) 4.24% 4.24% 4.41%
- ---------------
(1) Computed on an annualized fully taxable equivalent basis.
(2) Net interest income is the difference between income from earning assets
and interest expense.
(3) Net interest yield is net interest income divided by total average
earning assets.
(4) Interest spread is the difference between the average interest rate
received on earning assets and the average interest rate paid for
interest-bearing liabilities.
(5) Average loan balances include non-accrual loans.
(6) Average balances are computed on monthly balances and management believes
such balances are representative of the operations of the Bank.
13
Interest income and interest expense are affected by changes in both
average interest rates and average volumes of interest-earning assets and
interest-bearing liabilities. The following table analyzes changes in net
interest income attributable to changes in the volume of interest-bearing assets
and liabilities compared to changes in interest rates. Nonaccruing loans are
included in average loans outstanding. The change in interest due to both rate
and volume has been allocated to change due to volume and change due to rate in
proportion to the relationship of the absolute dollar amounts of the change in
each.
VOLUME AND RATE ANALYSIS
Years Ended December 31,
------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
Increase (decrease) Increase (decrease) Increase (decrease)
Due to changes in: Due to changes in: Due to changes in:
----------------------------------------------------------------------------
Volume Rate Total(1) Volume Rate Total(1) Volume Rate Total(1)
----------------------------------------------------------------------------
(Dollars in thousands)
Increase (decrease) in:
Interest income:
Investment securities,
taxable $ 441 $ (97) $ 344 $ 24 $ 17 $ 41 $ 468 $159 $ 627
Federal funds sold 582 (6) 576 122 (17) 105 (96) (65) (161)
Interest-bearing
deposits in other banks (20) (3) (23) 0 (3) (3) 4 2 6
Loans 1,914 (174) 1,740 1,323 (243) 1,080 1,262 150 1,412
----------------------------------------------------------------------------
$2,917 $(280) $2,637 $1,469 $(246) $1,223 $1,638 $246 $1,884
----------------------------------------------------------------------------
Interest expense:
Savings and time
deposits $1,489 $(476) $1,013 $ 175 $ 127 $ 302 $ 491 $(34) $ 457
Federal funds
purchased (3) (3) (6) (7) 7 0 3 (15) (12)
----------------------------------------------------------------------------
$1,486 $(479) $1,007 $ 168 $134 $ 302 $ 494 $(49) $445
----------------------------------------------------------------------------
Net interest
earnings $1,431 $ 199 $1,630 $1,301 $(380) $921 $1,144 $295 $1,439
============================================================================
(1) Computed on an annualized fully taxable equivalent basis.
INTEREST SENSITIVITY. An important element of both earnings performance and the
maintenance of sufficient liquidity is management of the interest sensitivity
gap. The interest sensitivity gap is the difference between interest-sensitive
assets and interest-sensitive liabilities in a specific time interval. The gap
can be managed by repricing assets or liabilities, by replacing an asset or
liability at maturity or by adjusting the interest rate during the life of an
asset or liability. Matching the amounts of assets and liabilities repricing in
the same interval helps to hedge the risk and minimize the impact on net
interest income in periods of rising or falling interest rates.
The objective of interest sensitivity management is to provide
flexibility in controlling the response of both rate-sensitive assets and
liabilities to wide and frequent fluctuations in market rates of interest so
that the effect of such swings on net interest income is minimized. The most
important part of this objective is to maximize earnings while keeping risks
within defined limits. To reduce the impact of changing interest rates as much
as possible, CBI attempts to keep a large portion of its interest-sensitive
assets and liabilities in generally shorter maturities, usually one year or
less. This allows CBI the opportunity to adjust interest rates as needed to
react to the loan and deposit market conditions.
Management evaluates interest sensitivity through the use of a static
gap model on a monthly basis and then formulates strategies regarding asset
generation and pricing, funding sources and pricing, and off-balance sheet
commitments in order to decrease sensitivity risk. These strategies are based on
management's outlook regarding interest rate movements, the state of the
14
regional and national economies and other financial and business risk factors.
In addition, the Company establishes prices for deposits and loans based on
local market conditions and manages its securities portfolio with policies set
by itself.
The following tables present CBI's Interest Rate Sensitivity Analysis as
of December 31, 1998:
INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1998
--------------------------------------------------------------------
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
--------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets:
Federal funds sold $ 34,657 $ - $ - $ - $ 34,657
Investment securities 2,522 3,563 12,729 53,071 71,885
Interest-bearing deposits 95 99 95 - 289
Loans 58,598 76,926 62,461 4,918 202,903
--------------------------------------------------------------------
Total interest-earning assets $ 95,872 $ 80,588 $ 75,285 $ 57,989 $ 309,734
--------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Demand $ 70,276 $ - $ - $ - $ 70,276
Savings 48,973 - - - 48,973
Time deposits, $100,000
and over 5,448 12,156 7,376 - 24,980
Other time deposits 16,305 50,795 28,316 - 95,416
--------------------------------------------------------------------
Total interest-bearing
liabilities $ 141,002 $ 62,951 $ 35,692 $ - $ 239,645
--------------------------------------------------------------------
Period gap $ (45,130) $ 17,637 $ 39,593 $ 57,989 $ 70,089
====================================================================
Cumulative gap $ (45,130) $ (27,493) $ 12,100 $ 70,089
======================================================
Ratio cumulative gap to total
interest-earning assets -14.57% -8.88% 3.91% 22.63%
======================================================
The December 31, 1998 results of the rate sensitivity analysis show CBI
had $45.130 million more in liabilities than assets subject to repricing within
three months or less and was, therefore, in a liability-sensitive position. The
cumulative gap at the end of one year was a negative $27.493 million, and,
therefore is a liability-sensitive position. The one year negative gap position
reflects a loan portfolio that is weighted predominantly in shorter maturities.
Approximately $135.524 million, or 66.79% of the total loan portfolio, matures
or reprices within one year or less. An asset-sensitive institution's net
interest margin and net interest income generally will be impacted favorably by
rising interest rates, while that of a liability-sensitive institution generally
will be impacted favorably by declining rates.
15
NONINTEREST INCOME. For the year ended December 31, 1998 noninterest income
increased by $0.607 million, or 36.43% to $2.273 million. This increase was
attributed mainly to an increase in service charges of $181,000 and gains on the
sale of securities of $164,000.
Noninterest income for the year ended December 31, 1997 was $1.666
million, an decrease of $17,000 from 1996. This decrease is primarily
attributable to a "one time" loss on the sale of other real estate in the amount
of $32,000.
Noninterest income for 1996 increased 4.9% or $80,000 from 1995. This
increase is primarily attributable to a "one time" gain on the sale of other
real estate in the amount of $55,000.
NONINTEREST EXPENSE. Noninterest expense of $8.840 million for the year ended
December 31, 1998 was an increase of 10.61%. Salaries and employee benefits, the
largest single component of noninterest expense, had an increase of 15.23% for
the year
For 1997, noninterest expense increased by $0.728 million or 10.02% over
1996. Salaries and employee benefits increased by $0.447 million or 11.31%.
During the year ended December 1996, noninterest expenses increased by
3.92% or $0.274 million from $6.990 million during 1995 to $7.264 million in
1996. The majority of the increase was due to an increase in salaries and
employee benefits of 8.27% or $0.302 million from $3.651 million to $3.953
million. This increase was largely associated with the continuation of various
incentive and bonus plans adopted by the Company during prior years.
INCOME TAXES. The provision for income taxes for the year ended December 31,
1998 was $2.153 million a 9.40% increase from the previous year. The increase in
the provision was due to the increase in taxable income.
The income tax provision for the year ended December 31, 1997 was $1.968
million, up from $1.712 million for the year ended December 31, 1996.
LOAN PORTFOLIO. CBI's loan portfolio is comprised of commercial loans, real
estate loans, home equity loans, consumer loans, participation loans with other
financial institutions, and other miscellaneous types of credit. The primary
markets in which CBI makes loans are generally in areas contiguous to its branch
locations in the Cities of Petersburg and Colonial Heights, and Chesterfield
County. The philosophy is consistent with CBI's focus on providing
community-based financial services.
16
LOAN PORTFOLIO
December 31,
------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------
% to % to % to
Total Total Total
Amount Loans Amount Loans Amount Loans
------------------------------------------------------------
(Dollars in thousands)
Commercial $ 62,213 30.61% $ 49,487 27.71% $ 43,883 26.47%
Real estate construction 17,100 8.41% 13,926 7.80% 11,097 6.69%
Real estate mortgage:
Residential (1-4 family) 46,944 23.11% 47,530 26.61% 47,205 28.47%
Multifamily 2,741 1.35% 2,834 1.59% 3,667 2.21%
Nonfarm, nonresidential 46,792 23.02% 42,337 23.70% 40,517 24.44%
------------------------------------------------------------
Real estate mortgage,
subtotal 96,477 47.48% 92,701 51.90% 91,389 55.12%
------------------------------------------------------------
Real estate, total 113,577 55.89% 106,627 59.70% 102,486 61.81%
------------------------------------------------------------
Credit card 1,189 0.59% 1,006 0.56% 830 0.50%
Consumer installment 20,047 9.86% 16,356 9.16% 14,906 9.00%
Other 6,205 3.05% 5,127 2.87% 3,688 2.22%
------------------------------------------------------------
Total loans 203,231 100.00% 178,603 100.00% 165,793 100.00%
Less unearned income 328 621 932
--------- ------- -------
$202,903 $177,982 $164,861
========= ======== ========
The following table shows the maturity of loans, net of unearned income,
outstanding as of December 31, 1998. Also provided are the amounts due after one
year classified according to the sensitivity to changes in interest rates. Loans
are classified based upon the period in which the payments are due.
LOAN MATURITY SCHEDULE
December 31, 1998
-----------------------------------------
Maturing
-----------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-----------------------------------------
(Dollars in thousands)
Commercial $ 39,979 $ 23,131 $ 1,534 $ 64,644
Installment 2,701 14,361 539 17,601
Real estate 65,515 32,143 16,403 114,061
Credit card 1,189 - - 1,189
Other 4,040 1,368 - 5,408
-----------------------------------------
Total $ 113,424 $ 71,003 $ 18,476 $202,903
=========================================
Loans maturing after one year with:
Fixed interest rates $ 49,157 $ 4,730
Variable interest rates 21,846 13,746
---------------------
Total $ 71,003 $ 18,476
=====================
17
As of December 31, 1998, the loan portfolio was $202.903 million, net of
unearned income, an increase from the prior year of 14.00% or $24.921 million.
Real estate lending continues to be the bulk of the portfolio with loans secured
by real estate comprising 55.89% of total loans. Commercial loans comprise
30.61% of total loans.
Loans, net of unearned income, were $177.982 million at December 31,
1997, up $13.121 million or 7.96% from $164.861 million at December 31, 1996.
The growth in commercial loans of $5.604 million and in real estate loans, which
increased $4.141 million accounted for 74.27% of the growth.
Loans secured by real estate comprise 59.70% of total loans at December
31, 1997 and 61.81% at December 31, 1996.
The Company's unfunded loan commitments amounted to $34.553 million as
of December 31, 1998, down from $36.775 million at December 31, 1997.. Fixed
rate committments were $9.964 million and $11.192 million as of December 31,
1998 and 1997, respectively. The average rates charged on the fixed rate
committments were 8.0% - 10.5% for the years then ended.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an
estimate of an amount adequate to provide for potential losses in the loan
portfolio of the Bank. The level of loan losses is affected by general economic
trends, as well as conditions affecting individual borrowers. The allowance is
also subject to regulatory examinations and determinations as to adequacy, which
may take into account such factors as the methodology used to calculate the
allowance and the size of the allowance in comparison to peer companies
identified by regulatory agencies.
The provision for loan losses for the year ended December 31, 1998 was
$453,000, an increase of $401,000 over the previous year. Management charged
income for the provision deemed necessary based on its analysis of the loan
portfolio. After reviewing the nonperforming loans and specifically nonaccrual
loans, management feels the current year provision increases the allowance for
loan losses to the desired level to cover potential losses. The Company had
charge-offs, net of recoveries, of $99,000 during 1998, an increase of $38,000
over the previous year. This increase was the result of normal changes in the
loan portfolio and local economic conditions. Management does not anticipate any
abnormal changes in the delinquency rates or charge-offs and recoveries in
connection with it's normal loan operations procedures. It is management's
opinion that the allowance for loan losses is adequate to absorb any future
losses that may occur.
The provision for loan losses totaled $52,000 for the year ended
December 31, 1997, a decrease of $480,000 from the previous year. The Company
had charge-offs, net of recoveries, of $61,000 during 1997, a decrease of
$321,000 over the previous year. After consideration of these factors,
management recorded a provision for loan losses that would provide coverage for
potential losses.
The provision in 1996 increased to $532,000 as compared to $492,000 in
1995. This increase of $40,000 reflected management's review of the loan
portfolio and the amount needed to maintain the reserve at acceptable levels to
cover potential losses.
As of December 31, 1998, the allowance for loan losses was $2.345
million up from $1.991 million at December 31, 1997 The allowance as of December
31, 1997 was down $9,000 from the $2.000 million at December 31, 1996. The ratio
of the allowance for loan loss to total loans, net of unearned income, has
remained relatively constant over the last three years; 1.16% at December 31,
1998, 1.12% at December 31, 1997, and 1.21% at December 31, 1996.
The multiple of the allowance for loan losses to nonperforming assets
was .69x at December 31, 1998, .48x at December 31, 1997 and .55x at December
31, 1996. Management continually evaluates nonperforming loans relative to their
collateral value and makes appropriate reductions in the carrying value of those
loans based on that review.
18
The allowance for loan losses related to loans identified as impaired is
primarily based on the excess of the loan's current outstanding principal
balance over the estimated fair market value of the related collateral. For a
loan that is not collateral-dependent, the allowance is recorded at the amount
by which the outstanding principal balance exceeds the current best estimate of
the future cash flows on the loan discounted at the loan's effective interest
rate. At December 31, 1998 and 1997, the Corporation had loans totaling
approximately $1.104 million and $0.883 million, respectively, for which
impairment had been recognized. Of the total loans impaired, $37,215 and
$79,000, respectively, were valued on the present value of future cash flows and
$1.067 million and $0.754 million, respectively, were valued according to the
underlying collateral. The average balance of the impaired loans amounted to
approximately $1.274 million and $1.122 million for the years ended December 31,
1998 and 1997, respectively. The allowance for loan losses related to these
loans totaled approximately $372,000 and $225,000 at December 31, 1998 and 1997,
respectively.
19
The following table summarizes changes in the allowance for loan losses:
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31,
---------------------------------
1998 1997 1996
---------------------------------
(Dollars in thousands)
Allowance for loan losses at beginning of year $ 1,991 $ 2,000 $ 1,850
---------------------------------
Loans charged off:
Commercial $ 25 $ 126 $ 290
Credit card 3 31 24
Installment 24 79 72
Real estate 180 58 303
---------------------------------
Total $ 232 $ 294 $ 689
---------------------------------
Recoveries of loans previously charged off:
Commercial $ 66 $ 64 $ 200
Credit card 4 1 5
Installment 11 14 23
Real estate 52 154 79
---------------------------------
Total $ 133 $ 233 $ 307
---------------------------------
Net loans charged off $ (99) $ (61) $ (382)
Provision for loan losses 453 52 532
---------------------------------
Allowance for loan losses at end of year $ 2,345 $ 1,991 $ 2,000
=================================
Average total loans (net of unearned income) $192,778 $173,384 $160,030
Total loans (net of unearned income) $202,903 $177,982 $164,861
Selected Loan Loss Ratios:
Net charge-offs to average loans 0.05% 0.04% 0.24%
Provision for loan losses to average loans 0.23% 0.03% 0.33%
Provision for loan losses to net charge-offs 458% 85% 139%
Allowance for loan losses to year-end loans 1.16% 1.12% 1.21%
20
A breakdown of the allowance for loan losses is provided in the
following table; however, such a breakdown has not historically been maintained
by the Bank and management does not believe that the allowance can be fragmented
by category with any precision that would be useful to investors. The entire
amount of the allowance is available to absorb losses occurring in any category.
The allowance is allocated below based on the relative percentage in each
category to total loans.
COMPOSITION OF ALLOWANCE FOR LOAN LOSSES
December 31,
-------------------------------------------------------------
Balance at End of 1998 1997 1996
Period Applicable to: -------------------------------------------------------------
% of % of % of
Loans Loans Loans
in each in each in each
category category category
to to to
total total total
Amount loans Amount loans Amount loans
-------------------------------------------------------------
(Dollars in thousands)
Commercial $ 718 30.61% $ 552 27.71% $ 529 26.47%
Credit card 14 0.59% 11 0.56% 10 0.50%
Installment 231 9.86% 182 9.16% 180 9.00%
Real estate 1,311 55.89% 1,188 59.70% 1,236 61.81%
Other 71 3.05% 58 2.87% 45 2.22%
-------------------------------------------------------------
$ 2,345 100.00% $ 1,991 100.00% $ 2,000 100.00%
=============================================================
Management has allocated the allowance according to the amount deemed to
be reasonably necessary to provide for the possibility of losses being incurred.
The allocation of the allowance as shown in the table above should not be
interpreted as an indication that loan losses in future years will occur in the
same proportions or that the allocation indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for future losses that might occur within such categories since the
total allowance is a general allowance applicable to the entire portfolio.
21
NONPERFORMING ASSETS. Total nonperforming assets, which consist of nonaccrual
loans, restructured loans, loans 90 days or more past due, and other real estate
owned were $3.392 million at December 31, 1998 a decrease of $0.734 million from
one year earlier. Total nonperforming assets were $4.126 million at December 31,
1997, an increase of $0.476 million over December 31, 1996.
NONPERFORMING ASSETS
December 31,
-------------------------------
1998 1997 1996
-------------------------------
Nonaccrual loans $ 752 $ 737 $ 996
Loans contractually past due 90 days
or more
and still accruing
1,649 2,176 1,324
Troubled debt restructuring
- - -
-------------------------------
Total nonperforming loans $ 2,401 $ 2,913 $ 2,320
Other real estate owned 991 1,213 1,330
-------------------------------
Total nonperforming assets $ 3,392 $ 4,126 $ 3,650
===============================
Nonperforming assets to period-end total
loans, gross, and other real estate 1.66% 2.30% 2.20%
===============================
Foregone interest income on nonaccrual
loans $ 95 $ 65 $ 50
===============================
Interest income recorded on nonaccrual
loans during the year $ 17 $ 16 $ 4
===============================
The following table summarizes all nonperforming loans, by loan type as of
December 31, 1998:
Number
of Principal
(Dollars in thousands) Loans Balance
- --------------------------------------------------------------
Residential mortgage 26 $1,802
Installment loans 19 200
Commercial loans 13 399
Credit cards - -
-----------------
58 $ 2,401
=================
22
Loans, including impaired loans, are generally placed in nonaccrual
status when loans are delinquent in principal and interest payments greater than
90 days and the loan is not well secured and in process of collection. Accruals
of interest are discontinued until it becomes certain that both principal and
interest can be repaid. As shown in the above table, the Company does have loans
that are contractually past due greater than 90 days that are not in nonaccrual
status, however, those loans are still accruing because they are well secured
and in the process of collection. A loan is well secured if collateralized by
liens on real or personal property, including securities, that have a realizable
value sufficient to discharge the debt in full or by the guarantee of a
financially responsible party.
As of December 31, 1998, total nonperforming loans have decreased by
$0.512 million, to $2.401 million from $2.913 million on December 31, 1997.
If foreclosure of property is required, the property is generally sold
at a public auction in which CBI may participate as a bidder. If the CBI is the
successful bidder, the acquired real estate property is then included in the
CBI's real estate owned account until it is sold.
INVESTMENT SECURITIES. The securities portfolio is maintained to manage excess
funds in order to provide diversification and liquidity in the overall asset
management policy. The maturity of securities purchased are based on the needs
of the Company and current yields and other market conditions.
Securities are classified as held-to-maturity when management has the
positive intent and the CBI has the ability at the time of purchase to hold them
until maturity. These securities are carried at, cost adjusted for amortization
of premium and accretion of discount.
Securities to be held for indefinite periods of time and not intended to
be held-to-maturity or on a long-term basis are classified as available-for-sale
and accounted for at fair market value on an aggregate basis. Unrealized gains
or losses are reported as increases or decreases in stockholders' equity, net of
the related deferred tax effect. CBI does not buy with the intent of trading
and, accordingly, does not maintain a Trading Account. Gains and losses on the
sale of securities are determined by the specific identification method.
The book value of the investment portfolio as of December 31, 1998 was
$71.734 million compared to $57.508 million at December 31, 1997.
23
The following tables show the amortized cost, fair market value,
maturity distribution, and yield of the investment portfolio as of December
31,1998 and 1997:
SECURITIES PORTFOLIO
December 31, 1998
------------------------------------------
Held -to-Maturity Available-for-Sale
Cost Market Cost Market
------------------------------------------
(Dollars in thousands)
U.S. Treasury and agency securities $ 900 $ 841 $15,152 $15,113
Mortgage-backed securities:
Guaranteed or issued by GNMA, FNMA or
FHLMC 8,066 8,103 24,835 24,809
Securities issued by states and
political subdivisions 612 645 14,204 14,453
Other securities
100 101 7,865 7,832
-----------------------------------------
$ 9,678 $ 9,690 $62,056 $62,207
=========================================
December 31, 1997
-----------------------------------------
Held -to-Maturity Available-for-Sale
Cost Market Cost Market
-----------------------------------------
(Dollars in thousands)
U.S. Treasury and agency securities $ 1,949 $ 1,877 $16,091 $16,058
Mortgage-backed securities:
Guaranteed or issued by
GNMA, FNMA or FHLMC 10,874 10,924 16,608 16,564
Securities issued by states and
political subdivisions 702 732 8,491 8,654
Other securities 100 102 2,693 2,759
-----------------------------------------
$ 13,625 $13,635 $43,883 $44,035
=========================================
The maturity distribution, book value, market value, and yield of the total
investment securities portfolio at December 31, 1998 and 1997 are presented as
follows:
December 31, 1998
------------------------------------------------------------
Held-to-Maturity Available-for-Sale
Book Market Book Market
Value Value Yield Value Value Yield
------------------------------------------------------------
(Dollars in thousands)
Within 12 months $ 684 $ 676 5.57% $ 5,648 $ 5,622 5.79%
Over 1 year through 5 years 500 452 4.93% 10,676 10,750 5.86%
Over 5 years through 10 years 2,620 2,625 6.32% 19,279 19,318 6.29%
Over 10 years 5,874 5,937 6.93% 26,453 26,517 6.54%
------------------------------------------------------------
$ 9,678 $ 9,690 6.56% $62,056 $62,207 6.28%
============================================================
December 31, 1997
------------------------------------------------------------
Held -to-Maturity Available-for-Sale
Book Market Book Market
Value Value Yield Value Value Yield
------------------------------------------------------------
(Dollars in thousands)
Within 12 months $ 340 $ 337 3.24% $ 2,245 $ 2,301 5.43%
Over 1 year through 5 years 1,248 1,248 5.79% 7,829 7,815 6.53%
Over 5 years through 10 years 1,943 1,900 6.27% 16,459 16,557 6.71%
Over 10 years 10,094 10,150 6.94% 17,350 17,362 6.98%
------------------------------------------------------------
$13,625 $13,635 6.97% $43,883 $44,035 6.63%
============================================================
24
DEPOSITS. Deposits at December 31, 1998 were $294.002 million, up $56.473
million from 1997, an increase of 23.78%. The growth in deposits was led by the
21.89% increase in interest-bearing deposits, which increased from $196.615
million at December 31, 1997 to $239.645 million at December 31, 1998.
Noninterest-bearing deposits were 18.49% of total deposits at December 31, 1998.
At December 31, 1998, savings deposits had grown by $14.335 million, an increase
of 41.39% over December 31, 1997 levels.
Deposits at December 31,1997 were $237.529 million, a7.04% increase from
1996. Noninterest-bearing deposits were 17.22% of total deposits at December 31,
1997 compared to 17.62% at December 31, 1996.
DEPOSITS ANALYSIS
December 31,
--------------------------------------------------------
1998 1997 1996
--------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
Paid Paid Paid
--------------------------------------------------------
(Dollars in thousands)
Noninterest-bearing demand deposits $ 54,357 $ 40,914 $ 39,111
---------- ---------- ----------
Interest-bearing
liabilities:
Money market and NOW accounts 70,276 2.95% 55,778 3.49% 52,063 3.04%
Savings deposits 48,973 3.75% 34,638 3.68% 31,270 3.60%
Time deposits 95,416 5.53% 85,546 5.56% 80,401 5.79%
Large denomination deposits 24,980 6.08% 20,653 6.23% 19,064 5.87%
-------------------------------------------------------
Total interest-bearing accounts $ 239,645 4.49% $ 196,615 4.74% $ 182,798 4.66%
-------------------------------------------------------
Total deposits $ 294,002 $ 237,529 $ 221,909
========== ========== ==========
MATURITY OF CDS OF $100,000 AND OVER
Within Three Six to Over Percent
Three to Six Twelve One of Total
Months Months Months Year Total Deposit
------ ------ ------ ---- ----- -------
(Dollars in thousands)
December 31, 1998 $ 5,448 $ 4,340 $ 7,816 $ 7,376 $ 24,980 8.50%
25
CAPITAL RESOURCES. The adequacy of the CBI's capital is reviewed by management
on an ongoing basis with reference to the size, composition and quality of the
Company's asset and liability levels and consistency with regulatory
requirements and industry standards. Management seeks to maintain a capital
structure that will assure an adequate level of capital to support anticipated
asset growth and absorb potential losses.
The primary source of capital for CBI is internally generated retained
earnings. Stockholders' equity increased 9.96% in 1998 over 1997. Similarly,
stockholders' equity increased 12.09% in 1997 over 1996. The following table
highlights certain ratios for the periods indicated:
RETURN ON EQUITY AND ASSETS
Years Ended December 31,
-----------------------------
1998 1997 1996
-----------------------------
Income before securities gains and losses to:
Average total assets 1.64% 1.66% 1.62%
Average stockholders' equity 14.82% 14.62% 14.91%
Net income to:
Average total assets 1.69% 1.66% 1.63%
Average stockholders' equity 15.32% 14.62% 14.94%
Dividend payout ratio (dividends declared
per share divided by net income per share) 29.55% 20.95% 7.35%
Average stockholders' equity to average
total assets ratio 11.03% 11.36% 10.89%
The FDIC has adopted capital guidelines to supplement the existing
definitions of capital for regulatory purposes and to establish minimum capital
standards. Specifically, the guidelines categorize assets and off-balance sheet
items into four risk-weighted categories. The minimum ratio of qualifying total
capital to risk-weighted assets is 8.0% of which at least 4.0% must be Tier 1
capital, composed of common equity, retained earnings and a limited amount of
perpetual preferred stock, less certain goodwill items. CBI had a ratio of total
capital to risk-weighted assets of 15.15% at December 31, 1998 and a ratio of
Tier 1 capital to risk-weighted assets of 14.17%. Both of these exceed the
capital requirements adopted by the federal regulatory agencies.
26
ANALYSIS OF CAPITAL
December 31,
---------------------------------
1998 1997 1996
---------------------------------
(Dollars in thousands)
Tier 1 Capital:
Common stock $ 8,286 $ 8,338 $ 8,334
Surplus 4,915 5,425 5,657
Retained earnings 20,820 17,268 13,852
Unearned ESOP shares - (91) (239)
---------------------------------
Total Tier 1 Capital $ 34,021 $ 30,940 $ 27,604
---------------------------------
Tier 2 Capital
Allowance for loan losses 2,345 1,991 2,000
---------------------------------
Total Tier 2 Capital $ 2,345 $ 1,991 $ 2,000
---------------------------------
Total risk-based capital $ 36,366 $ 32,931 $ 29,604
=================================
Risk weighted assets $ 240,036 $188,945 $176,617
Capital Ratios:
Tier 1 risk-based capital 14.17% 16.38% 15.63%
Total risk based capital 15.15% 17.43% 16.76%
Tier 1 capital to average total assets 11.52% 12.03% 11.56%
LIQUIDITY. Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
Liquid assets include cash, interest-bearing deposits with banks, federal funds
sold, investment in Treasury securities, and loans maturing within one year. As
a result of the Company's management of liquid assets and the ability to
generate liquidity through liability funding, management believes that the
Company maintains overall liquidity sufficient to satisfy its depositors'
requirements and meet its customers' credit needs.
For the year ended December 31, 1998 the Company provided cash or
liquidity from operations in the amount of $5.398 million. This increase in
funds in addition to a $56.473 million increase in deposits has given the
Company approximately $61.941 million in funds available for investment during
1998. In determining investment strategies management considers objectives for
the composition of the loan and investment portfolio, such as type, maturity
distribution, and fixed or variable interest rate characteristics of investment
opportunities. Management's use of funds has included the funding of a $25.092
million increase in net loans and the net purchase of $14.055 million of
securities. With 66.79% of the loan portfolio repricing or maturing in the next
twelve months the Company has enough asset liquidity to meet the needs of
maturing deposits.
IMPACT OF INFLATION AND CHANGING PRICES. The consolidated financial statements
and related data presented have been prepared in accordance with generally
accepted accounting principles, which require the measurement of the financial
position and operating results of CBI in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
27
Virtually all of the assets of CBI are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or with the same magnitude as prices
of goods and services.
CURRENT ACCOUNTING DEVELOPMENTS. In June 1998, FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either assets or liabilities
measured at fair value. FASB No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specfic hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains or losses to offset related changes in value of the hedged item in the
income statment and requires that a company document, designate, and assess the
effectiveness of transactions that qualify for hedge accounting. FASB No. 133 is
effective for fiscal years beginning after June 15, 1999. A company may also
implement the Statement as of the beginning of any fiscal quarter after its
issuance (thet is, fiscal quarters beginning June 16, 1998 and thereafter). FASB
No. 133 cannot be applied retroactively; it must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the company's election, before January 1, 1998). CBI has not yet
quantified nor determined the extent to which the Statement will alter its use
of certain derivatives in the future and the impact on its financial position or
results of operations.
YEAR 2000 ISSUES. The Year 2000 Issue (commonly referred to as "Y2K") is the
result of computer programs being written using two digits, rather than four
digits, to define the applicable year. The Y2K issue, which is common to most
corporations, including banks, concerns the inability of information systems,
primarily (but not exclusively) computer software programs, to properly
recognize and process date-sensitive information as the Year 2000 approaches and
beyond. The following constitutes CBI's Y2K readiness disclosure under the Year
2000 Information and Readiness Disclosure Act.
Since CBI's subsidiary bank's information systems functions are either
outsourced to service providers or processed on in-house computer systems using
programs developed by third-party vendors, the direct effort to correct Y2K
issues will be undertaken largely by third parties and will therefore not be
totally within CBI's direct control. CBI expects to bring all of its mission
critical operating systems into compliance with Y2K requirements through the
installation of updated or replacement programs developed by third parties.
CBI began addressing the Y2K issue in the fall of 1997 when its subsidiary banks
formed Y2K project teams comprised of financial, operations, data processing and
loan servicing personnel. A Y2K Plan of Action was developed by each bank and
approved by the respective Boards of Directors and by the Board of Directors of
CBI in 1997. The Board of Directors receive quarterly Year 2000 status reports
on all mission critical systems and their related testing details.
The Y2K Project Teams have completed an assessment, identified all mission
critical systems and created a tracking system which identifies all third party
vendors and their Y2K compliance status and their Y2K compliant version of all
bank installed systems. Mission critical systems include hardware, software
programs, program interfaces, operating systems along with other mechanical or
computer-generated requirements that are beyond CBI's main central processing
systems. Based on the results of the assessments, CBI's subsidiary banks have
established internal time frames to upgrade or replace its existing hardware and
software systems. The subsidiary banks will utilize internal and external
resources to test the software and systems for Year 2000 modifications and
compliance. CBI has completed approximately 75% of the planned upgrades as of
December 31, 1998, and expects to be 100% complete by March 31, 1999. All of
CBI's subsidiary banks expect to be fully Y2K compliant before September 31,
1999.
CBI's plan to resolve the Y2K issue was developed along the five phase project
management process outlined in the Federal Financial Institutions Examination
Council (FFIEC) Year 2000 statement dated May 5, 1997 which consisted of:
1. Awareness. This phase defined the Y2K issue for all CBI Directors, Officers
and employees and made them aware of the potential challenges associated
with the century date change. This phase has been completed.
2. Assessment. This phase consisted of an extensive evaluation of the size and
complexity of the Y2K issue and an identification of all systems software
and hardware that had Y2K implications on continuing operations. During this
phase all mission critical vendors were identified and an ongoing monitoring
process was initiated. This phase has been completed and the vendor
monitoring process is ongoing.
3. Renovation. This phase consisted of upgrading, repairing or replacing all
mission critical systems and hardware, along with the installation of
upgraded and enhanced computer software provided by third party vendors. All
28
mission critical third party systems have either been replaced or upgraded
with a Y2K compliant product or are scheduled for completion by March 31,
1999. All non critical software applications that are effected by the Y2K
problem have been identified and will be upgraded to compliant systems by
June 30, 1999.
4. Validation. This is the testing phase of the Y2K project. The Y2K Project
Teams have developed and implemented test plans for all mission critical
systems and will document the test results for review and certification
before any new or upgraded system will be released into daily operations.
This phase of the plan will be completed by June 30, 1999.
5. Implementation. This is the phase that involves incorporating all Y2K
compliant systems into the daily operating environment and is ongoing.
CBI's subsidiary banks have also developed contingency plans that outline
emergency response procedures that meet federal guidelines and protect the
company's ability to continue to operate. Existing contingency procedures
attempt to cover every aspect of the date change transition. The goal of
contingency planning is to facilitate the resumption of business in the event
there is a disruption of critical systems necessary for regular operations.
Although CBI' Project Teams are monitoring the progress of the Y2K Plan, outside
regulators and auditors continue to examine our Year 2000 readiness programs.
The chief components of CBI's expense related to the Y2K issue are currently
believed to be the replacement of personal computer equipment and the purchase
or upgrade of third party software. External maintenance and internal
modification costs will be expensed as incurred. Costs of new hardware and
software will be capitalized and depreciated in accordance with existing
policies. Management expects to incur costs in the range of $75,000 to $150,000
on its Y2K readiness effort. Through December 31, 1998, CBI has expended
approximately $55,000. Costs of the Y2K project are based on current estimates
and actual results could vary significantly once detailed testing is completed.
If the Y2k Plan is unsuccessful, it may have a material, adverse effect on CBI's
future operating results and financial condition.
Recognizing the importance of customer awareness, CBI's subsidiary banks have
undertaken communications projects with all of its deposit and loan customers by
including information about the Year 2000 issues in regular statement mailings.
Also, letters have been sent to major commercial loan customers informing them
of the Year 2000 issue and how it can impact businesses. An overall assessment
of Y2K readiness of CBI's commercial loan customers has been completed, with an
overall assessment of low risk. CBI will continue to monitor its large
commercial loan relationships through assigned account officers. Also, new and
renewed commercial credits greater than $100,000 include a Y2K analysis as part
of the normal underwriting decision process.
To date, CBI has not identified any system which presents a material risk of not
being Year 2000 ready in a timely fashion or for which a suitable alternative
cannot be implemented. However, as the company progresses with its Y2K Plan, it
may identify systems which do present a material risk of Year 2000 disruption.
Such disruption could include, among other things, the inability to process and
underwrite loan applications, to credit deposits and withdrawals from customer
accounts, to credit loan payments or track delinquencies, to properly reconcile
and record daily activity or to engage in normal banking activities.
Additionally, if CBI's commercial customers are not Year 2000 compliant and
suffer adverse effects on their operations, their ability to meet their
obligations to CBI could be adversely affected. The failure of CBI to identify
systems which require Year 2000 hardware or software upgrades that are critical
to ongoing operations or the failure of CBI or others with which CBI does
business to become Year 2000 ready in a timely manner could have a material
adverse impact on CBI's financial condition and results of operations. In
addition, to the extent that the risks poised by the Year 2000 problem are
pervasive in data processing and transmission and communications services
worldwide, CBI cannot predict with any certainty that its operations will remain
materially unaffected after January 1, 2000.
29
FORWARD LOOKING STATEMENTS
The preceding "Business", "Legal Proceeding" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections of this Form
10-K contain various "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represents CBI's expectations and
beliefs concerning future events including, without limitation, the following:
the Company's efforts in retaining and expanding its customer base and
differentiating it from its competition; the FDIC insurance premium assessments
for 1999; the impact from liabilities arising from legal proceedings on its
financial condition; the impact of certain securities sales, and interest rates
in general, on the volatility of its net interest income; the impact of policy
guidelines and strategies on net interest income based on future interest rate
projections; the ability to provide funding sources for both the Bank and the
Parent Company; the benefits of 1998 merger activity on future years' overhead
expense; the impact of portfolio diversification and the outplacement of high
risk loans on future levels on loan losses; the reversal in the trend of
competition for real estate-commercial loans and the effect of loan growth
generally on the improvement in net interest income; the assessment of its
provision and reserve for loan loss levels based upon future changes in the
composition of its loan portfolio, loan losses, collateral value and economic
conditions; and Management's assessment of the impact of the Year 2000 on the
financial condition, results of operations and liquidity of the Company.
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those set
forth in the forward looking statements due to market, economic and other
business-related risks and uncertainties affecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitations, the following: dynamics of the
markets served in terms of competition from traditional and nontraditional
financial service providers can affect both the funding capabilities of the
Company in terms of deposit garnering as well as the ability to compete for
loans and generate the higher yielding assets necessary to improve net interest
income; future legislation and actions by the Federal Reserve Board may result
in the imposition of costs and constraints on the Company through higher FDIC
insurance premiums, significant fluctuations in market interest rates and
operational limitations; significant fluctuations in market interest rates may
affect the ability to reinvest proceeds from the maturities and prepayments
on certain categories of securities and affect the overall yield of the
portfolio; business expansion activities and other efforts to retain customers
may increase the need for staffing and the resulting personnel expense in
future periods; deviations from the assumptions used to evaluate the
appropriate level of the reserve for loan losses as well as future purchases
and sales of loans may affect the appropriate level of the reserve for loan
losses and thereby affect the future levels of provisioning; the steps
necessary to address the Year 2000 Issue include ensuring that not only CBI's
automated systems, but also those of vendors and customers, can become Year
2000 compliant.
Accordingly, results actually achieved may differ materially from expected
results in these statements. CBI does not undertake, and specifically
disclaims, any obligation to update any forward looking statements to reflect
events or circumstances occurring after the date of such statements.
30
Item 8. Financial Statements and Supplementary Data.
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
INDEPENDENT AUDITORS' REPORT
Board of Directors
Community Bankshares Incorporated
Petersburg, Virginia
We have audited the accompanying consolidated balance sheets of Community
Bankshares Incorporated and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the 1996 financial
statements of Commerce Bank of Virginia or County Bank of Chesterfield,
wholly-owned subsidiaries of Community Bankshares Incorporated. Those statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for Commerce Bank of
Virginia and County Bank of Chesterfield as of December 31, 1996, and for the
two years then ended, is based solely on the reports of the other auditors.
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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to in the first paragraph present
fairly, in all material respects, the financial position of Community Bankshares
Incorporated and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Mitchell, Wiggins & Company, LLP
Certified Public Accountants
Petersburg, Virginia
January 15, 1999
31
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------
Cash and due from banks $ 12,661 $ 11,723
Federal funds sold 34,657 14,606
------------------------
TOTAL CASH AND CASH EQUIVALENTS 47,318 26,329
Interest-bearing deposits in other depository
institutions 289 675
Securities available for sale 62,207 44,035
Securities held to maturity (approximate market value,
$9,690 in 1998 and $13,635 in 1997) 9,678 13,625
Loans, net
200,558 175,991
Bank premises and equipment, net 4,672 4,824
Other real estate owned 991 1,213
Accrued interest
receivable 1,950 1,805
Other assets
2,249 1,740
------------------------
$ 329,912 $ 270,237
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 54,357 $ 40,914
Interest-bearing demand deposits 70,276 55,778
Savings deposits 48,973 34,638
Time deposits, $100,000 and over 24,980 20,653
Other time deposits 95,416 85,546
------------------------
294,002 237,529
Accrued interest payable 755 834
Other liabilities 1,035 742
Guaranteed debt of Employee Stock Ownership Trust - 91
------------------------
295,792 239,196
------------------------
Commitments and Contingencies
(Note 14)
Stockholders' Equity
Capital stock, $3.00 par value; 1998, 20,000,000 shares
authorized; 2,761,926 shares issued and outstanding;
1997, 4,000,000 shares authorized; 2,779,426 shares
issued and outstanding 8,286 8,338
Surplus 4,915 5,425
Retained earnings 20,820 17,268
Accumulated other comprehensive income,
net of tax 99 101
------------------------
34,120 31,132
Unearned ESOP shares - (91)
------------------------
34,120 31,041
------------------------
$ 329,912 $ 270,237
========================
See Notes to Consolidated Financial Statements.
32
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE INFORMATION)
1998 1997 1996
- ----------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 18,921 $ 17,168 $ 16,095
Interest on investment securities:
U. S. Government agencies and corporations 3,118 3,095 3,039
Other securities 164 136 153
States and political subdivisions 564 390 399
Interest on federal funds sold and securities
purchased under agreements to resell 1,055 479 374
---------------------------------------
TOTAL INTEREST INCOME 23,822 21,268 20,060
---------------------------------------
Interest expense:
Interest on deposits 9,657 8,645 8,343
Interest on federal funds purchased and securities
sold under agreements to repurchase - 5 5
---------------------------------------
TOTAL INTEREST EXPENSE 9,657 8,650 8,348
---------------------------------------
NET INTEREST INCOME 14,165 12,618 11,712
Provision for loan losses 453 52 532
---------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 13,712 12,566 11,180
---------------------------------------
Other income:
Service charges, commissions and fees 1,698 1,517 1,467
Security gains 164 - 9
Gain (loss) on sale of other real estate 26 (32) 55
Other operating income 385 181 152
---------------------------------------
TOTAL OTHER INCOME 2,273 1,666 1,683
---------------------------------------
Other expenses:
Salaries, wages and employee benefits 5,070 4,400 3,953
Net occupancy 513 503 452
Furniture and equipment 597 617 592
Other operating 1,597 1,425 1,302
Professional fees 197 246 271
Stationery and supplies 279 268 213
Taxes 587 533 481
---------------------------------------
TOTAL OTHER EXPENSES 8,840 7,992 7,264
---------------------------------------
INCOME BEFORE INCOME TAXES 7,145 6,240 5,599
Income taxes 2,153 1,968 1,712
---------------------------------------
NET INCOME $ 4,992 $ 4,272 $ 3,887
=======================================
Basic earnings per share $ 1.80 $ 1.54 $ 1.42
=======================================
Diluted earnings per share $ 1.76 $ 1.48 $ 1.36
=======================================
See Notes to Consolidated Financial Statements.
33
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
Accumulated
Unearned Other
Capital Retained ESOP Comprehensive
Stock Surplus Earnings Shares Income Total
- ------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 $8,192 $5,633 $10,238 $(330) $160 $23,893
---------
Comprehensive income:
Net income for the year ended
December 31, 1996 3,887 3,887
Other comprehensive income, net of tax:
Unrealized holding losses on available-for-sale
securities arising during the period, net of
deferred income tax benefit of $224 (431) (431)
Less reclassification adjustment for gains included
in net income, net of income tax expense of $3 - 6 6
---------
Comprehensive income 3,462
---------
Issuance of common stock pursuant to
exercise of stock options 131 79 210
Cash settlement of options (124) (124)
Proceeds from sale of stock to ESOP 11 29 40
Purchase of fractional shares (1) (1)
Cash dividends declared (279) (279)
Release of ESOP shares 41 6 91 138
----------------------------------------------------------------------------------
Balance, December 31, 1996 8,334 5,657 13,852 (239) (265) 27,339
---------
Comprehensive income:
Net income for the year ended
December 31, 1997 - - 4,272 - - 4,272
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale
securities arising during the period, net of
deferred income tax expense of $189 - - - - 366 366
---------
Comprehensive income 4,638
---------
Issuance of common stock pursuant to
exercise of stock options 31 44 - - - 75
Cash settlement of options - (271) - - - (271)
Common stock repurchased (27) (130) - - - (157)
Purchase of fractional shares - (2) - - - (2)
Cash dividends declared - - (859) - - (859)
Release of ESOP shares - 127 3 148 - 278
-----------------------------------------------------------------------------------
Balance, December 31, 1997 8,338 5,425 17,268 (91) 101 31,041
---------
Comprehensive income:
Net income for the year ended
December 31, 1998 - - 4,992 - - 4,992
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale
securities arising during the period, net of
deferred income tax expense of $64 - - - - 106 106
Less reclassification adjustment for gains included
in net income, net of income tax expense of $56 - - - - (108) (108)
---------
Comprehensive income 4,990
---------
Issuance of common stock pursuant to
exercise of stock options 10 14 - - - 24
Cash settlement of options - (208) - - - (208)
Common stock repurchased (62) (441) - - - (503)
Cash dividends declared - - (1,444) - - (1,444)
Release of ESOP shares - 125 4 91 - 220
---------------------------------------------------------------------------------
Balance, December 31, 1998 $8,286 $4,915 $20,820 $- $99 $34,120
=================================================================================
See Notes to Consolidated Financial Statements.
34
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
- -------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $4,992 $4,272 $3,887
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 504 502 508
Deferred income taxes (223) (137) (148)
Provision for loan losses 453 52 532
Provision for losses on other real estate owned 13 9 33
Amortization and accretion of investment securities (7) 33 116
Gain on sale of securities (164) - (9)
(Gain) loss on sale of other real estate (26) 32 (55)
Gain on sale of bank premises and equipment (6) - -
Release of ESOP shares 129 130 47
Changes in operating assets and liabilities:
Increase in accrued interest receivable (145) (159) (88)
Increase (decrease) in accrued expenses 47 (20) (121)
Net change in other operating assets and liabilities (169) 39 (332)
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,398 4,753 4,370
--------------------------------
INVESTING ACTIVITIES
Proceeds from maturity and redemptions of securities
held to maturity 3,748 4,210 8,746
Proceeds from maturity of interest-bearing deposits 190 - 295
Proceeds from maturity, redemptions and sales of
securities available for sale 37,032 18,552 12,154
Proceeds from sales of interest-bearing deposits 195 - -
Purchase of investment securities held-to-maturity - - (2,026)
Purchase of interest-bearing deposits - (5) (95)
Purchase of investment securities available for sale (54,835) (24,285) (18,442)
Net increase in loans (25,092) (13,508) (14,237)
Proceeds from the sale of bank premises and equipment 20 - -
Proceeds from the sale of other real estate 333 676 725
Capital expenditures (356) (858) (820)
Increase in other assets 39 (39) (10)
Purchase of other real estate (25) (274) (234)
--------------------------------
NET CASH USED IN INVESTING ACTIVITIES (38,751) (15,531) (13,944)
--------------------------------
FINANCING ACTIVITIES
Net increase in deposits 56,473 15,620 13,268
Cash settlement of options (208) (271) (124)
Payment for fractional shares - (2) (2)
Proceeds from sale of stock to ESOP - - 40
Dividends paid (1,444) (859) (279)
Common stock repurchased (503) (157) -
Net proceeds from issuance of common stock 24 75 209
--------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 54,342 14,406 13,112
--------------------------------
(Continued)
35
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
- -------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 20,989 3,628 3,538
Cash and cash equivalents, beginning 26,329 22,701 19,163
---------------------------------
Cash and cash equivalents, ending $ 47,318 $ 26,329 $ 22,701
=================================
Supplemental Disclosure Of Cash Flow Information
Interest paid $ 9,736 $ 8,591 $ 8,334
=================================
Income taxes paid $ 2,405 $ 1,936 $ 2,067
=================================
Supplemental Disclosure Of Noncash Investing
Activities
Acquisition of other real estate:
Purchase price $ 623 $ 884 $ 1,213
Reduction of loans (598) (610) (979)
---------------------------------
CASH PAID TO ACQUIRE OTHER REAL ESTATE $ 25 $ 274 $ 234
=================================
Sale of other real estate:
Sales price, net of closing cost $ 859 $ 960 $ 1,279
Increase in loans (526) (284) (554)
---------------------------------
CASH PROCEEDS FROM SALE OF OTHER REAL ESTATE $ 333 $ 676 $ 725
=================================
See Notes to Consolidated Financial Statements.
36
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: Community Bankshares Incorporated is a bank holding
company headquartered in Petersburg, Virginia. The Corporation's subsidiaries,
The Community Bank, Commerce Bank of Virginia, and County Bank of Chesterfield,
provide a variety of financial services to individuals and corporate customers
from its branches located throughout the Richmond Metropolitan Area and
Southside Virginia.
Consolidation and basis of financial statement presentation: The accompanying
consolidated financial statements include the accounts of Community Bankshares
Incorporated, and its subsidiaries, The Community Bank, Commerce Bank of
Virginia, and County Bank of Chesterfield. All significant intercompany
transactions and balances have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management uses estimates and assumptions. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. A substantial portion of the Corporation's loans is
secured by real estate in local markets. In addition, foreclosed real estate is
located in this same market. Accordingly, the ultimate collectibility of a
substantial portion of the Corporation's loan portfolio and the recovery of a
substantial portion of the carrying amount of foreclosed real estate are
susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Corporation's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Corporation to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
Cash and cash equivalents: For purposes of reporting the consolidated statements
of cash flows, the Corporation includes cash on hand, amounts due from banks,
federal funds sold and all highly liquid debt instruments purchased with a
maturity of three months or less as cash and cash equivalents on the
accompanying consolidated balance sheets. Cash flows from deposits and loans are
reported net.
The Corporation maintains amounts due from banks which, at times, may exceed
federally insured limits. The Corporation has not experienced any losses in such
accounts.
The Corporation is required to maintain reserve funds in cash or on deposit with
the Federal Reserve Bank. The required reserve at December 31, 1998 was
$2,201,000.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment securities: Securities are classified as held to maturity when
management has the positive intent and the Corporation has the ability at the
time of purchase to hold them until maturity. These securities are carried at
cost adjusted for amortization of premium and accretion of discount, computed by
the interest method over their contractual lives. Gains and losses on the sale
of such securities are determined by the specific identification method.
Securities to be held for indefinite periods of time and not intended to be held
to maturity or on a long-term basis are classified as available for sale and
accounted for at market value on an aggregate basis. These include securities
used as part of the Corporation's asset/liability management strategy and may be
sold in response to changes in interest rates, prepayment risk, the need or
desire to increase capital, to satisfy regulatory requirements and other similar
factors. Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect. Realized gains and
losses of securities available for sale are included in net securities gains
(losses) based on the specific identification method.
Trading securities, which are generally held for the short term in anticipation
of market gains, are carried at fair value. Realized and unrealized gains and
losses on trading account assets are included in interest income on trading
account securities. The Corporation held no trading securities during the years
ended December 31, 1998, 1997, and 1996.
Loans and allowance for loan losses: Loans are stated at the amount of unpaid
principal, reduced by unearned discount and fees and an allowance for possible
loan losses.
Unearned interest on discounted loans is amortized to income over the life of
the loans, using the interest method. For all other loans, interest is accrued
daily on the outstanding balances.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Corporation makes periodic credit reviews of the loan portfolio
and considers current economic conditions, historical loss experience, review of
specific problem loans and other factors in determining the adequacy of the
allowance balance.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loan's yield. The Corporation is generally amortizing these amounts over the
average contractual life of the related loans.
Impaired loans are measured on the present value of expected future cash flows
discounted at the loan's effective interest rate or as an expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. A loan is impaired when it is probable the creditor
will be unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement.
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well secured and in the process of
collection. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual if repayment in full of principal
and/or interest is in doubt. Loans may be returned to accrual status when all
principal and interest amounts contractually due are reasonably assured of
repayment.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
When a loan is classified as nonaccrual, all interest receivable on that
particular loan is charged back to income at that time. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. On charged-off loans, cash receipts in excess of the
amount charged to the allowance for loan losses are recognized as income on the
cash basis.
Bank premises and equipment: Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Expenditures for
betterments and major renewals are capitalized and ordinary maintenance and
repairs are charged to operations as incurred.
Foreclosed properties: Foreclosed properties represent real estate held for
resale acquired through foreclosure or other proceedings. Foreclosed properties
are held for sale and are recorded at the lower of the recorded amount of the
loan or fair value of the properties less estimated costs of disposal. Any
write-down to fair value at the time of foreclosure is charged to the allowance
for loan losses. Property is evaluated regularly to ensure the recorded amount
is supported by its current fair value and valuation allowances to reduce the
carrying amount to fair value less estimated costs to dispose are recorded as
necessary and are charged to expense.
Income taxes: The provision for income taxes relates to items of revenue and
expenses recognized for financial accounting purposes during each of the years.
The actual current tax liability may be more or less than the charge against
earnings due to the effect of deferred income taxes.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Earnings per share: In February 1997, the Financial Accounting Standards Board
issued its Statement of Financial Accounting Standards No. 128 (SFAS 128)
"Earnings per Share". This Statement specifies the computation, presentation and
disclosure requirements for earnings per share for entities with publicly held
common stock or potential common stock. The Statement's objective is to simplify
the computation of earnings per share and to make the U. S. standard for
computing earnings per share more compatible with the EPS Standards of other
countries and with that of the International Accounting Standards Committee.
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. After the effective date, all prior
period EPS data presented has been restated to conform with the provisions of
this Statement.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following data show the amounts used in computing earnings per share and the
effect on income and the weighted average number of shares of dilutive potential
common stock.
1998 1997 1996
------------------------------------------------------
(Dollars in thousands, except number of shares)
Income available to common stockholders
used in basic EPS $ 4,992 $ 4,272 $ 3,887
======================================================
Weighted average number of common
shares used in basic EPS 2,774,563 2,766,630 2,742,640
Effect of dilutive securities:
Stock options 62,027 113,869 119,708
------------------------------------------------------
Weighted number of common shares and
dilutive potential stock used in diluted
EPS 2,836,590 2,880,499 2,862,348
======================================================
Comprehensive income: In June 1997, the Financial Accounting Standards Board
issued its Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income". This Statement defines comprehensive income as
the change in an institution's equity during a period from transactions and
other events, except those resulting from investments by investors and
distributions to those investors. Comprehensive income includes net income and
other changes in assets and liabilities that are not reported in net income, but
instead reported as a separate component of stockholders' equity. SFAS 130 is
effective for financial statements for both interim and annual periods beginning
after December 15, 1997.
Reclassifications: Various items in the consolidated statements of income and
cash flows for the years ended December 31, 1997 and 1996 have been reclassified
to conform to the classifications used at December 31, 1998. These
reclassifications have no effect on net income.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES
A summary of the amortized cost and estimated market values of investment
securities is as follows:
December 31, 1998
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------
(Dollars in thousands)
Available for Sale
U. S. Treasury and agency securities $ 15,152 $ 49 $ (88) $ 15,113
Mortgage-backed securities 24,835 67 (93) 24,809
State and County Municipal Bonds 14,204 300 (51) 14,453
Other 7,865 99 (132) 7,832
---------------------------------------------------------
$ 62,056 $ 515 $ (364) $ 62,207
=========================================================
Held to Maturity
U. S. Treasury and agency securities $ 900 $ 1 $ (60) $ 841
Mortgage-backed securities 8,066 63 (26) 8,103
Corporate securities 100 1 - 101
State and County Municipal Bonds 612 33 - 645
---------------------------------------------------------
$ 9,678 $ 98 $ (86) $ 9,690
=========================================================
The amortized cost and estimated market values at December 31, 1998, by
contractual maturity, are as follows:
Estimated
Amortized Market
Cost Value
-------------------------
(Dollars in thousands)
Available for Sale
Due in one year or less $ 5,648 $ 5,622
Due after one year but less than five years 10,676 10,750
Due after five years but less than ten years 19,279 19,318
Due after ten years 26,453 26,517
-------------------------
$62,056 $62,207
=========================
Held to Maturity
Due in one year or less $ 684 $ 676
Due after one year but less than five years 500 452
Due after five years but less than ten years 2,620 2,625
Due after ten years 5,874 5,937
-------------------------
$ 9,678 $ 9,690
=========================
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES (CONTINUED)
The amortized cost and fair market value of mortgage-backed securities are
presented in the available-for-sale and held-to-maturity categories by
contractual maturity in the preceding table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
repay obligations without call or prepayment penalties.
A summary of the amortized cost and estimated market values of investment
securities is as follows:
December 31, 1997
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------
(Dollars in thousands)
Available for Sale
U. S. Treasury and agency securities $ 16,091 $ 33 $ (66) $ 16,058
Mortgage-backed securities 16,608 55 (99) 16,564
State and County Municipal Bonds 8,491 179 (16) 8,654
Other 2,693 71 (5) 2,759
---------------------------------------------------------
$ 43,883 $ 338 $ (186) $ 44,035
=========================================================
Held to Maturity
U. S. Treasury and agency securities $ 1,949 $ 6 $ (78) $ 1,877
Mortgage-backed securities 10,874 95 (45) 10,924
Corporate securities 100 2 - 102
State and County Municipal Bonds 702 30 - 732
---------------------------------------------------------
$ 13,625 $ 133 $ (123) $ 13,635
=========================================================
Proceeds from sales of securities available for sale were $21,130,319,
$8,070,865 and $7,119,663 during 1998, 1997 and 1996, respectively, resulting in
gross gains of $169,365, $6,251 and $51,231 and gross losses of $5,268, $6,105
and $42,206 in 1998, 1997 and 1996, respectively.
Securities with an amortized cost of $10,429,255 and $6,128,223 and a market
value of $10,440,782 and $6,063,779 as of December 31, 1998 and 1997,
respectively, were pledged as collateral to secure public funds as required by
law.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS
Major classifications of loans are summarized as follows:
December 31,
---------------------------
1998 1997
---------------------------
(Dollars in thousands)
Commercial $ 62,213 $ 49,487
Consumer 21,236 17,362
Real estate:
Construction 17,100 13,926
Mortgage 96,477 92,701
Other 6,205 5,127
---------------------------
203,231 178,603
Less unearned discount (328) (621)
---------------------------
202,903 177,982
Allowance for loan losses (2,345) (1,991)
---------------------------
Loans, net $ 200,558 $ 175,991
===========================
An analysis of the transactions in the allowance for loan losses is given below:
December 31,
----------------------------------------
1998 1997 1996
----------------------------------------
(Dollars in thousands)
Balance, beginning of year $ 1,991 $ 2,000 $ 1,850
Loans charged off (232) (294) (689)
Recoveries credited to reserve 133 233 307
Provision charged to operations 453 52 532
----------------------------------------
Balance, end of year $ 2,345 $ 1,991 $ 2,000
========================================
At December 31, 1998 and 1997, the Corporation had loans
totaling approximately $1,104,061 and $883,353, respectively, for which
impairment had been recognized. Of the total loans impaired, $37,215 and
$79,000, respectively, were valued on the present value of future cash flows and
$1,066,846 and $754,353, respectively, were valued according to the underlying
collateral. The average balance of the impaired loans amounted to approximately
$1,274,000 and $1,122,000 for the years ended December 31, 1998 and 1997,
respectively. The allowance for loan losses related to these loans totaled
approximately $372,000 and $225,000 at December 31, 1998 and 1997, respectively.
The following is a summary of cash receipts on these loans and how they were
applied for the years ended December 31:
1998 1997
--------------------------
(Dollars in thousands)
Cash receipts applied to reduce principal balance $ 473 $ 145
Cash receipts recognized as interest income 20 50
--------------------------
Total cash receipts $ 493 $ 195
==========================
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS (CONTINUED)
At December 31, 1998 and 1997, the Corporation had nonaccrual loans of $752,495
and $736,874, respectively. If interest on these loans had been recognized at
the original interest rates, interest income would have increased approximately
$95,000 and $65,000 in 1998 and 1997, respectively.
NOTE 4. BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows:
December 31,
--------------------------
1998 1997
--------------------------
(Dollars in thousands)
Land $ 1,085 $ 1,085
Bank premises 4,305 4,284
Furniture and equipment 4,480 4,275
--------------------------
9,870 9,644
Less accumulated depreciation 5,198 4,820
--------------------------
$ 4,672 $ 4,824
==========================
NOTE 5. MATURITIES OF CERTIFICATES OF DEPOSITS
The scheduled maturities of certificates of deposits at December 31, 1998 are as
follows:
Year Ended December 31,
- -----------------------
(Dollars in thousands)
1999 $ 79,762
2000 18,090
2001 10,878
2002 3,889
2003 7,777
--------------
$ 120,396
==============
NOTE 6. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1998, 1997 and 1996 are as follows:
1998 1997 1996
-------------------------------------
(Dollars in thousands)
Currently payable $ 2,376 $ 2,092 $ 1,787
Deferred (223) (124) (75)
-------------------------------------
$ 2,153 $ 1,968 $ 1,712
=====================================
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
A reconciliation of the expected income tax expense computed at 34 percent to
the income tax expense included in the consolidated statements of income is as
follows:
Years Ended
December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
(Dollars in thousands)
Tax provision computed by applying current Federal
income tax rates to income before income taxes $ 2,432 $ 2,122 $ 1,904
Cash settlement of nonstatutory stock options (70) (92) (42)
Exercise of nonstatutory stock options (17) - (72)
Municipal bond interest (197) (141) (104)
Other 5 79 26
--------------------------------------
$ 2,153 $ 1,968 $ 1,712
======================================
The deferred income taxes result from timing differences in the recognition of
certain income and expense items for tax and financial reporting purposes. The
sources of these timing differences and their related tax effect are as follows:
1998 1997 1996
-------------------------------------
(Dollars in thousands)
Difference between the depreciation methods
used for financial statements and for income
tax purposes $ (17) $ (66) $ (8)
Difference between loan loss provision charged
to operating expense and the bad debt deduction
taken for income tax purposes (109) (90) (39)
Accretion of discount recognized on financial
statements but not recognized for income tax
purposes until realized 1 (3) 1
Difference between accrual method used for
financial statement and cash method used
for income tax purposes (46) (47) 1
Deferred compensation (42) (15) 14
Interest related to non-accrual loans (13) 95 (35)
Other 3 2 (9)
-------------------------------------
$ (223) $ (124) $ (75)
=====================================
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
Net deferred tax assets consist of the following components as of December 31:
1998 1997
---------------- -------------------
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses $ 549 $ 439
Deferred compensation 132 95
Property and equipment 1 -
Interest on non-accrual loans 71 50
Debt cancellation reserve 11 9
Other 2 -
---------------- -------------------
$ 766 $ 593
---------------- -------------------
Deferred tax liabilities:
Accrual to cash basis adjustment $ 46 $ 92
Unrealized gain on available-for-sale
securities 50 52
Investment securities 7 7
---------------- -------------------
$ 103 $ 151
---------------- -------------------
Deferred tax assets, net $ 663 $ 442
---------------- -------------------
NOTE 7. DEFERRED COMPENSATION AGREEMENTS
The Corporation has a Deferred Compensation Plan for the benefit of certain
directors. Contributions amounted to approximately $13,400, $13,400 and $23,700
for the years ended December 31, 1998, 1997 and 1996, respectively. The Plan
provides each director with an annual benefit payment upon attaining 70 years of
age. In addition, benefit payments are available upon early retirement,
termination and death as defined by the Plan document.
The Corporation has Deferred Compensation Plans for the benefit of certain
officers. Benefits will be funded by the Corporation. The cost of these benefits
is being charged to expense and accrued using a present value method over the
expected term of employment. The Plan provides each covered officer an annual
benefit payment upon retirement. Contributions were approximately $55,700,
$45,600 and $45,200 for the years ended December 31, 1998, 1997 and 1996,
respectively.
The lives of the officers and directors for which deferred compensation
agreements have been adopted have been insured for amounts sufficient to
discharge the obligations thereunder.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Corporation through its subsidiary, The Community
Bank, established an Employee Stock Ownership Plan with 401(k) provisions by
restating, amending and consolidating the Employee Stock Ownership Plan
originally effective January 1, 1987, and the Profit-Sharing and Thrift Plan
originally effective December 31, 1981. All participants of the pension plans
are eligible to participate. Thereafter, each employee will become eligible to
participate in the plan on the first anniversary date, December 31, following
their initial date of service. The employee must be at least 18 years old and be
employed in a full-time position requiring at least 1,000 hours of service for
the plan year ending on that anniversary date. The Corporation matches 75% of
employee contributions up to 5% of the participant's compensation. Annual
contributions to the ESOP are made at the discretion of the Board of Directors.
During the year ended December 31, 1995, the ESOP purchased additional shares
through the proceeds of a $365,500 direct bank loan. The shares purchased were
pledged as collateral for its debt. As the debt is repaid, shares are released
and allocated to participants. The Company accounts for its ESOP in accordance
with Statement of Position 93-6. Accordingly, the shares pledged are reported as
unearned ESOP shares in the balance sheet. As shares are released, the Company
reports compensation expense equal to the current market price of the shares,
and the shares then become outstanding for earnings per share (EPS) computation.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings. Dividends on unallocated ESOP shares are recorded as a reduction of
debt and interest.
Compensation expense for the 401(k) match and the ESOP was $182,992, $261,236
and $143,600 for the three years ended December 31, 1998, 1997 and 1996,
respectively. The ESOP shares as of December 31 were as follows:
1998 1997
----------------------------
Allocated shares 171,538 165,216
Unreleased shares - 8,045
----------------------------
171,538 173,261
============================
Fair value of unreleased shares $ - $ 223,249
============================
In addition, the Corporation through its subsidiary, Commerce Bank of Virginia,
sponsors a non-contributory Employee Stock Ownership Plan (ESOP) covering
substantially all employees. Contributions to the ESOP, which are recorded as
compensation expense and can be cash or stock at fair value, are at the
discretion of the Board of Directors and amounted to $66,800, $60,000 and
$50,000 for the years ended December 31, 1998, 1997 and 1996, respectively. At
December 31, 1998, there were 21,817 shares allocated to participants which are
considered outstanding for purposes of computation of earnings per share.
Effective June 1, 1992, the Commerce Bank of Virginia adopted a 401(k)
profit-sharing plan (the Plan) covering substantially all employees.
Participants may contribute up to 15% of their compensation to the Plan. The
Bank contributes 50% of the participant's contribution, up to 6% of the
participant's compensation, as a matching contribution. Contributions to the
Plan by the Bank were approximately $40,500, $22,500 and $23,500 for the years
ended December 31, 1998, 1997 and 1996, respectively.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. EMPLOYMENT AGREEMENTS
The Corporation has entered into employment agreements with certain officers
which expire at dates through June 30, 1999. These agreements, which contain
continual self-renewing terms of one year subject to cancellation by the
Corporation, provide minimum salaries during the terms of the agreements and
certain severance benefits if a change of control and termination occurs as
defined in the agreements. The maximum severance benefits payable, if such a
termination upon change in control occurred at December 31, 1998, would have
been approximately $1,775,811.
NOTE 10. INCENTIVE COMPENSATION PLANS
The Corporation, through its subsidiaries, maintains various cash incentive and
bonus plans for certain employees and directors of the individual subsidiaries.
Awards through the various plans are determined based on management discretion
or through predetermined award criteria for each group of participants. The
level of the bonus or award is based on management discretion or the subsidiary
attaining certain returns on average assets, or attaining targeted income levels
for the year. The amounts awarded under the plans for the years ended December
31, 1998, 1997 and 1996 were $318,498, $213,616 and $294,594, respectively.
NOTE 11. INCENTIVE STOCK OPTION AND NONSTATUTORY STOCK OPTION PLAN
The Corporation has a Stock Plan that provides for the grant of Incentive Stock
Options and the grant of Nonstatutory Stock Options and Stock Appreciation
Rights. This Plan was adopted to encourage key officers and directors to acquire
or to increase their acquisition of the Corporation's common stock, thus
increasing their personal and proprietary interest in the Corporation's
continued success. The options were granted at the market value on the date of
each grant. Options may be exercised from date of grant through periods ending
July 20, 2003 through October 18, 2004.
The following table presents a summary of options under the Plan at December 31:
Shares Under Options
---------------------------------------
Option Price 1998 1997 1996
----------------------------------------------------------
Outstanding, beginning of year $6.25 - $8.37 221,317 249,486 283,294
Options granted 12.21 - - 19,897
Options exercised 6.25 - 12.12 (3,064) (10,469) (43,705)
Cash settlement of options 6.25 (9,927) (17,700) (10,000)
----------------------------------------------------------
Outstanding, end of year $6.25 - $ 8.46 208,326 221,317 249,486
----------------------------------------------------------
The Corporation applies APB Opinion 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Corporation's stock option plan been determined based
on the fair value at the grant date consistent with the methods of FASB
Statement 123, the Corporation's net income and net income per share would have
been reduced to the pro forma amounts indicated below. In accordance with the
transition provisions of FASB Statement 123, the pro forma amounts reflect
options with grant dates subsequent to January 1, 1995. There were no options
granted during the years ended December 31, 1997 or December 31, 1998.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. INCENTIVE STOCK OPTION AND NONSTATUTORY STOCK OPTION PLAN (CONTINUED)
Year Ended
December 31, 1996
---------------------------------
(Dollars in thousands,
except per-share information)
Net income:
As reported $3,887
Pro forma 3,839
Net income per share:
As reported 1.36
Pro forma 1.35
For purposes of computing the pro forma amounts indicated above, the fair value
of each option on the date of grant is estimated using the Black-Scholes
option-pricing model with the following assumptions for the grant in 1996:
dividend yield of 2%, expected volatility of 30%, risk-free interest rate of
5.8% and an expected option life of 5 years. The fair value of each option
granted during 1996 was $3.62.
NOTE 12. LIFE INSURANCE
The Corporation is owner and designated beneficiary on life insurance in the
face amount of $4,324,000 maintained on certain of its officers and directors.
At December 31, 1998 and 1997, the cash surrender value of these policies was
$637,000and $635,000, respectively, which is included in other assets.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
corporations to disclose the fair value of its financial instruments, whether or
not recognized in the balance sheet, where it is practical to estimate that
value.
Fair value estimates made as of December 31, 1998 are based on relevant market
information about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Corporation's entire holding of a particular financial instrument. In cases
where quoted market prices are not available, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the consolidated
balance sheets for cash and short-term instruments approximate those assets'
fair values.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Securities available for sale and investment securities: Fair values were based
on quoted market prices, where available. If quoted market prices were not
available, fair values were based on quoted market prices of comparable
instruments.
Loans: The carrying values, reduced by estimated inherent credit losses, of
variable-rate loans and other loans with short-term characteristics were
considered fair values. For other loans, the fair market values were calculated
by discounting scheduled future cash flows using current interest rates offered
on loans with similar terms adjusted to reflect the estimated credit losses
inherent in the portfolio.
Accrued interest receivable and accrued interest payable: The carrying amounts
reported in the consolidated balance sheets for accrued interest receivable and
accrued interest payable approximate their fair values.
Deposit liabilities: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW, savings, and money market deposits,
was, by definition, equal to the amount payable on demand as of December 31,
1998. The fair value of certificates of deposit was based on the discounted
value of contractual cash flows, calculated using the discount rates that
equaled the interest rates offered at the valuation date for deposits of similar
remaining maturities.
The following is a summary of the carrying amounts and estimated fair values of
the Corporation's financial assets and liabilities to include off-balance sheet
financial instruments as December 31:
1998 1997
-----------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------------------
(Dollars in thousands)
Financial assets:
Cash and due from banks, noninterest bearing $ 12,661 $ 12,661 $ 11,723 $ 11,723
Federal funds sold and other short-term
investments 34,657 34,657 14,606 14,606
Interest-bearing deposits in other depository
institutions 289 289 675 675
Securities available for sale 62,207 62,207 44,035 44,035
Investment securities 9,678 9,690 13,625 13,635
Loans, net of reserve for credit losses 200,558 200,542 175,991 176,402
Accrued interest receivable 1,950 1,950 1,805 1,805
Financial liabilities:
Deposits 237,529 238,994 237,529 238,185
Accrued interest payable 755 755 834 834
At December 31, 1998, the Corporation had outstanding standby letters of credit
and fixed and variable rate commitments to extend credit. For fair value, the
fixed rate loan commitments were considered based on committed rates versus
market rates for similar transactions. Due to market constraints, rates have
remained relatively unchanged on these products, therefore, management has
determined fair value to be the same as the committed value. Standby letters of
credit and variable rate commitments are generally exercisable at the market
rate prevailing at the date the underlying transaction will be completed, and
therefore, they were deemed to have no current fair market value.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance-sheet risk:
The Corporation is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as they do for on-balance-sheet instruments. A
summary of the Corporation's commitments at December 31, 1998 and 1997 is as
follows:
1998 1997
---------------------------
(Dollars in thousands)
Commitments to extend credit $ 30,409 $ 33,185
Standby letters of credit 4,144 3,590
---------------------------
$ 34,553 $ 36,775
===========================
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. The
Corporation evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the party.
Collateral held varies, but may include accounts receivable, inventory, property
and equipment, and residential and commercial real estate.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. 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 credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Corporation deems
necessary.
Fixed-rate commitments were $9,964,000 and $11,192,000 as of December 31, 1998
and 1997, respectively. The average rates charged on the fixed-rate commitments
were 8.0% - 10.5% for the years then ended.
All of the Corporation's loans, commitments to extend credit, and standby
letters of credit have been granted to customers within the state and, more
specifically, its local geographic area of Virginia. The concentrations of
credit by type of loan are set forth in Note 3.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lease commitments:
The Corporation leases land, tenant space and certain equipment under operating
leases expiring at various dates to 2008. Total rental expense amounted to
approximately $103,000, $108,000 and $101,300 for the years ended December 31,
1998, 1997 and 1996, respectively. At December 31, 1998, minimum annual lease
payments in the aggregate were as follows:
Year Ended December 31,
- ------------------------------
(Dollars in thousands)
1999 $ 214
2000 167
2001 163
2002 166
2003 168
Thereafter 561
-----------------
$ 1,439
-----------------
The Hanover branch facility is owned by a company whose principal shareholder is
the Corporation's Chairman. The base annual rent as of December 31, 1998 is
$40,800 per year through 2005 and increases three percent annually.
NOTE 15. RELATED PARTY TRANSACTIONS
At December 31, 1998, loans to officers and directors and corporations in which
officers and directors own a significant interest totaled $12,102,154. All such
loans were made in the normal course of business on substantially the same
terms, including interest and collateral, as those prevailing at the time for
comparable transactions.
An analysis of these related party transactions is as follows:
Balance Balance
December 31, December 31,
1997 Additions Repayments 1998
--------------------------------------------------------------
(Dollars in thousands)
Directors $ 10,065 $ 13,002 $ 12,763 $ 10,304
Officers and Emloyees 1,680 841 723 1,798
--------------------------------------------------------------
$ 11,745 $ 13,843 $ 13,486 $ 12,102
--------------------------------------------------------------
NOTE 16. CAPITAL STOCK
On June 11, 1998, the Corporation changed its authorized capital from 4,000,000
shares of $3 par value stock to 20,000,000 shares of $3 par value common stock.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by its primary federal regulator, the Federal Reserve Bank. Failure
to meet minimum capital requirements can initiate certain mandatory -- and
possibly additional discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of the Corporation's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporation's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios as set forth in
the table below of total and Tier I capital as defined in the regulations to
risk-weighted assets as defined, and of Tier I capital as defined to average
assets as defined. Management believes, as of December 31, 1998, that the
Corporation meets all capital
As of December 31, 1998, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Corporation
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------
(Dollars in Thousands)
As of December 31, 1998:
Total Capital $ 36,366 15.15% $ 19,203 8.00% $ 24,004 10.00%
(to Risk Weighted Assets)
Tier I Capital 34,021 14.17% 9,601 4.00% 14,402 6.00%
(to Risk Weighted Assets)
Tier I Capital 34,021 11.52% 11,812 4.00% 14,764 5.00%
(to Average Assets)
As of December 31, 1997:
Total Capital $ 32,931 17.43% $ 15,116 8.00% $ 18,895 10.00%
(to Risk Weighted Assets)
Tier I Capital 30,940 16.38% 7,558 4.00% 11,337 6.00%
(to Risk Weighted Assets)
Tier I Capital 30,940 12.03% 10,285 4.00% 12,856 5.00%
(to Average Assets)
Banking laws and regulations limit the amount of dividends that may be paid
without prior approval of the Corporation's regulatory agency. Under that
limitation, the Corporation's subsidiaries could have declared additional
dividends of approximately $10,569,000 in 1998 without regulatory approval.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly operating results for each of
the four quarters in fiscal years 1998 and 1997:
(In thousands, except per share data) March 31 June 30 September 30 December 31
- --------------------------------------- -------------- ------------- -------------- -------------
1998
Total interest income $ 5,576 $ 5,864 $ 6,123 $ 6,259
Total interest expense 2,268 2,362 2,468 2,559
Net interest income 3,308 3,502 3,655 3,700
Provision for loan losses 52 58 198 145
Noninterest income 515 511 815 432
Noninterest expense 2,119 2,160 2,267 2,294
Earnings before income tax expense 1,652 1,795 2,005 1,693
Income tax expense 515 592 630 416
Net earnings $ 1,137 $ 1,203 $ 1,375 $ 1,277
Basic earnings per share $ 0.41 $ 0.43 $ 0.50 $ 0.46
Diluted earnings per share $ 0.40 $ 0.42 $ 0.49 $ 0.45
1997
Total interest income $ 5,088 $ 5,260 $ 5,399 $ 5,521
Total interest expense 2,009 2,151 2,188 2,212
Net interest income 2,989 3,109 3,211 3,309
Provision for loan losses 15 10 5 22
Noninterest income 415 422 443 386
Noninterest expense 2,026 2,155 1,907 1,904
Earnings before income tax expense 1,363 1,366 1,742 1,769
Income tax expense 481 495 575 417
Net earnings $ 882 $ 871 $ 1,167 $ 1,352
Basic earnings per share $ 0.32 $ 0.32 $ 0.41 $ 0.49
Diluted earnings per share $ 0.31 $ 0.30 $ 0.40 $ 0.47
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION
Financial statements for Community Bankshares Incorporated (not consolidated)
are presented below.
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Balance Sheets
December 31, 1998 and 1997
(Dollars in thousands)
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------------------
Cash $ 1,749 $ 1,331
Investment in subsidiaries 32,069 29,467
Securities available for sale 75 129
Other assets 227 225
--------------------------
Total assets $ 34,120 $ 31,152
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Guaranteed debt of Employee Stock Ownership Trust $ - $ 91
Deferred income taxes - 20
--------------------------
- 111
--------------------------
Stockholders' equity:
Capital stock, $3.00 par value; 1998, 20,000,000 shares
authorized; 2,761,926 shares issued and outstanding;
1997, 4,000,000 shares authorized; 2,779,426 shares
issued and outstanding 8,286 8,338
Surplus 4,915 5,425
Retained earnings 20,820 17,268
Accumulated other comprehensive income of
subsidiaries, net of taxes 122 61
Accumulated other comprehensive income (loss)
of parent corporation, net of tax (23) 40
--------------------------
34,120 31,132
Unearned ESOP shares - (91)
--------------------------
Total stockholders' equity 34,120 31,041
--------------------------
Total liabilities and stockholders' equity $ 34,120 $ 31,152
==========================
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION (CONTINUED)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
1998 1997 1996
- -------------------------------------------------------------------------------------------------
Income:
Dividends from subsidiaries $ 2,372 $ 2,168 $ 929
Gain on sale of securities 85 - -
Other 2 - -
---------------------------------------
2,459 2,168 929
---------------------------------------
Expenses:
Professional fees 34 108 88
Stationary and supplies 19 14 17
Taxes, miscellaneous 1 1 1
Other 1 3 8
---------------------------------------
Total expenses 55 126 114
---------------------------------------
Income taxes (credits) 8 (20) (13)
---------------------------------------
Income before equity in
undistributed income
of subsidiaries 2,396 2,062 828
Equity in undistributed income of subsidiaries 2,596 2,210 3,059
---------------------------------------
Net income $ 4,992 $ 4,272 $ 3,887
=======================================
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION (CONTINUED)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
Accumulated
Unearned Other
Capital Retained ESOP Comprehensive
Stock Surplus Earnings Shares Income Total
- ------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 $8,192 $5,633 $10,238 $(330) $160 $23,893
---------
Comprehensive income:
Net income for the year ended
December 31, 1996 3,887 3,887
Other comprehensive income, net of tax:
Unrealized holding losses on available-for-sale
securities arising during the period, net of
deferred income tax benefit of $224 (431) (431)
Less reclassification adjustment for gains included
in net income, net of income tax expense of $3 - 6 6
---------
Comprehensive income 3,462
---------
Issuance of common stock pursuant to
exercise of stock options 131 79 210
Cash settlement of options (124) (124)
Proceeds from sale of stock to ESOP 11 29 40
Purchase of fractional shares (1) (1)
Cash dividends declared (279) (279)
Release of ESOP shares 41 6 91 138
----------------------------------------------------------------------------------
Balance, December 31, 1996 8,334 5,657 13,852 (239) (265) 27,339
---------
Comprehensive income:
Net income for the year ended
December 31, 1997 - - 4,272 - - 4,272
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale
securities arising during the period, net of
deferred income tax expense of $189 - - - - 366 366
---------
Comprehensive income 4,638
---------
Issuance of common stock pursuant to
exercise of stock options 31 44 - - - 75
Cash settlement of options - (271) - - - (271)
Common stock repurchased (27) (130) - - - (157)
Purchase of fractional shares - (2) - - - (2)
Cash dividends declared - - (859) - - (859)
Release of ESOP shares - 127 3 148 - 278
-----------------------------------------------------------------------------------
Balance, December 31, 1997 8,338 5,425 17,268 (91) 101 31,041
---------
Comprehensive income:
Net income for the year ended
December 31, 1998 - - 4,992 - - 4,992
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale
securities arising during the period, net of
deferred income tax expense of $64 - - - - 106 106
Less reclassification adjustment for gains included
in net income, net of income tax expense of $56 - - - - (108) (108)
---------
Comprehensive income 4,990
---------
Issuance of common stock pursuant to
exercise of stock options 10 14 - - - 24
Cash settlement of options - (208) - - - (208)
Common stock repurchased (62) (441) - - - (503)
Cash dividends declared - - (1,444) - - (1,444)
Release of ESOP shares - 125 4 91 - 220
---------------------------------------------------------------------------------
Balance, December 31, 1998 $8,286 $4,915 $20,820 $- $99 $34,120
=================================================================================
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION (CONTINUED)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 4,992 $ 4,272 $ 3,887
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of securities (85) - -
Release of ESOP shares 129 129 49
Undistributed earnings of subsidiary (2,596) (2,210) (3,059)
Changes in operating assets and liabilities:
(Increase) decrease in other assets 65 (46) (111)
Increase (decrease) in other liabilities - (67) 31
----------------------------------------
Net cash provided by operating activities 2,505 2,078 797
----------------------------------------
Investing Activities
Proceeds from sale of investment securities 154 - -
Purchase of investment securities (110) (69) -
----------------------------------------
Net cash provided by (used in) investing activities 44 (69) -
----------------------------------------
Financing Activities
Cash settlement of options (208) (271) (124)
Payment of fractional shares - (2) (1)
Dividends paid (1,444) (859) (279)
Net proceeds from issuance of common stock 24 75 61
Common stock repurchased (503) (157) -
----------------------------------------
Net cash used in financing activities (2,131) (1,214) (343)
----------------------------------------
Increase in cash 418 795 454
Cash, beginning 1,331 536 82
----------------------------------------
Cash, ending $ 1,749 $ 1,331 $ 536
========================================
58
Item 9. Disagreements on Accounting and Financial Disclosure.
None
Item 10. Directors and Executive Officers of The Company.
The information required by Item 10 of Form 10-K appears in the
Company's Proxy Statement for the 1999 Annual Meeting and is incorporated herein
by reference.
Item 11. Executive Compensation.
The information required by Item 11 of Form 10-K appears in the
Company's Proxy Statement for the 1999 Annual Meeting and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 of Form 10-K appears in the
Company's Proxy Statement for the 1999 Annual Meeting and is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 of Form 10-K appears in the
Company's Proxy Statement for the 1999 Annual Meeting and is incorporated herein
by reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) None
(a) (2) None
(a) (3) Exhibits included herein:
21 - Subsidiaries of the Registrant
(b) Reports on Form 8-K: None
59
Exhibit 21
Subsidiaries of the Registrant
The Community Bank
200 North Sycamore Street
P .O. Box 2166
Petersburg, Virginia 23804
Commerce Bank of Virginia
11500 West Broad Street
P. O. Box 29569
Richmond, Virginia 23242
County Bank of Chesterfield
10400 Hull Street Road
Midlothian, Virginia 23112
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) Of the Securities
Exchange Act of 1934, COMMUNITY BANKSHARES INCORPORATED has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized:
COMMUNITY BANKSHARES INCORPORATED
s/ Nathan S. Jones, 3rd s/ Thomas H. Caffrey, Jr.
- ----------------------- ---------------------------------
Nathan S. Jones, 3rd Thomas H. Caffrey, Jr.
President and Chief Executive Officer Senior Vice President and Chief Financial Officer
Date: March 30, 1999 Date: March 30, 1999
- ------------------------ ------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
COMMUNITY BANKSHARES INCORPORATED and in the capacities and on the date
indicated:
s/ Sam T. Beale Date: March 30, 1999
- -------------------------------------- ------------------------
Sam T. Beale, Director
s/ David E. Hudgins Date: March 30, 1999
- -------------------------------------- ------------------------
David E. Hudgins, Director
s/ Richard C. Huffman Date: March 30, 1999
- -------------------------------------- ------------------------
Richard C. Huffman, Director
s/ Nathan S. Jones, 3rd Date: March 30, 1999
- -------------------------------------- ------------------------
Nathan S. Jones, 3rd, Director
s/ Vernon E. LaPrade, Jr. Date: March 30, 1999
- -------------------------------------- ------------------------
Vernon E. LaPrade, Jr., Director
s/ Elinor B. Marshall Date: March 30, 1999
- -------------------------------------- ------------------------
Elinor B. Marshall, Director
s/ Jack W. Miller, Jr. Date: March 30, 1999
- -------------------------------------- ------------------------
Jack W. Miller, Jr., Director
s/ H. E. Richeson Date: March 30, 1999
- -------------------------------------- ------------------------
H. E. Richeson, Director
s/ Alvin L. Sheffield Date: March 30, 1999
- -------------------------------------- ------------------------
Alvin L. Sheffield, Director
s/ Harold L. Vaughan Date: March 30, 1999
- -------------------------------------- ------------------------
Harold L. Vaughan, Director
61