Item 1 - Business
General
ComSouth Bankshares, Inc. (the "Corporation") is a registered bank holding company incorporated on May 15, 1987 pursuant to the laws of the state of South Carolina. It presently conducts its business through its two bank subsidiaries (the "Banks"), Bank of Columbia, N.A. ("BOCL") and Bank of Charleston, N.A. ("BOC"). The Corporation employees 58 full-time employees.
The Banks
BOCL is a national bank chartered on July 12, 1988. BOCL is based in Columbia, South Carolina, and engages in the commercial banking business in the Columbia area. BOCL emphasizes local management and commitment to the industrial and business growth of Columbia and the central region of South Carolina. BOCL seeks to attract as customers small and mid-sized companies based in the central region of South Carolina as well as low to-moderate and high income individuals residing in BOCL's extended market area.
BOC is a national bank chartered on April 12, 1990. BOC is based in Charleston, South Carolina, and engages in the commercial banking business in the Charleston area. BOC seeks to attract as its primary customer base small and mid-sized companies based in the coastal region of South Carolina as well as low-to-moderate and high income individuals residing in BOC's extended market area.
Services. Both Banks offer a full range of deposit services, including checking accounts, NOW accounts, and savings and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time certificates are tailored to the principal market areas of the Banks at rates competitive with those offered in the areas. The Banks also offer individual retirement accounts. All deposit accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount permitted by law. Although the Banks are competitive in their efforts to attract deposit accounts, they do not aggressively seek jumbo certificates of deposit (certificates in amounts greater than $100,000) and do not accept brokered accounts.
The Banks each offer a full range of short-term and intermediate-term commercial and personal loans. The Banks originate variable-rate, residential and other mortgage loans and fixed-rate mortgage loans primarily for resale. The Banks also make personal loans directly to individuals for various other purposes, including purchases of automobiles, mobile homes, boats and other recreational vehicles, home improvements, education and personal investments. Commercial loans, secured and unsecured, are made primarily to individuals and small and mid-sized businesses operating in the central and coastal regions of South Carolina, principally Richland and Lexington Counties for BOCL, and Charleston, Colleton, Dorchester and Berkeley Counties for BOC. These loans are available for general operating purposes, acquisition of fixed assets, including real estate, purchases of equipment and machinery, financing of inventory and accounts receivable, and other business purposes. In order to stress high quality loans, the Boards of Directors of the Banks have each established lending authority for each loan officer, but each loan request exceeding a loan officer's authority must be approved by one or more senior officers. A loan committee of each of the Boards of Directors reviews larger loans for approval when the loan request exceeds established limits for the senior officers.
The Banks participate in a regional network of automated teller machines that may be used by bank customers in major cities throughout the Southeast. The Banks offer both Visa and Master Card together with related lines of credit. The lines of credit may be used for overdraft protection as well as a pre-authorized credit for personal purchases and expenses.
The Banks also provide safe deposit boxes, travelers checks, debit card services, direct deposit of payroll and social security checks, and automatic drafts for various accounts, but do not provide international or trust banking services.
Data Processing. During 1994 and early 1995, the Corporation upgraded its data processing equipment to an IBM AS 400 mainframe and a 3892 IBM sorter in preparation for anticipated growth. This equipment is owned jointly by BOC and BOCL and is operated by personnel of the Corporation through a service agreement between both Banks and the Corporation. The flexibility and capacity of this equipment is expected to be sufficient to service the current needs of BOC and BOCL.
Asset and Liability Management. The primary assets of each of the Banks consist of a loan portfolio and investment account. Efforts are made generally to match maturities and rates of loans in the investment portfolio with those of deposits, although exact matching is not possible. The majority of the Banks' securities investments are in marketable obligations of the United States government, federal agencies and state and municipal governments, generally with varied maturities.
Long-term loans are generally priced to be interest-rate sensitive with only a small portion of the Banks' portfolios of long-term loans at fixed rates. Presently, such fixed-rate loans do not have maturities longer than five years, except in exceptional cases.
Deposit accounts represent the majority of the liabilities of the Banks. These include transaction accounts, time deposits and certificates of deposit. The maturities of the majority of interest-sensitive accounts are six months or less.
Competition. South Carolina law permits state-wide branching by banks and savings and loan associations, and many financial institutions have branch networks. South Carolina law also permits regional interstate banking, and six of the larger commercial banks in the Columbia Metropolitan Statistical Area ("CMSA") are affiliated with regional banking groups. Approximately thirty financial institutions are represented in the CMSA, including banks, savings institutions and credit unions. Six of the larger commercial banks in the Charleston area are also affiliated with regional banking groups. Approximately twenty-three financial institutions are represented in the Charleston area, including banks, savings institutions and credit unions.
Banks generally compete with other financial institutions through the banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and personal concern with which services are offered. The Banks encounter strong competition from most of the financial institutions in their respective extended market areas. In the conduct of certain areas of their banking business, the Banks also compete with credit unions, consumer finance companies, insurance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation and restriction imposed upon the Banks. Many of these competitors have substantially greater resources and lending limits than the Banks and offer certain services, such as international banking services and trust services, that the Banks do not provide. Moreover, most of these competitors have numerous branch offices located throughout the extended market area, a competitive advantage that the Banks do not have at present. The Banks each believe, however, that their relatively small sizes permit them to offer more personalized service than many of their competitors, which may provide a competitive advantage.
Anticipated Growth. BOCL's initial capitalization was $5.5 million. Although its capital has been reduced somewhat by costs of opening and initial operations, BOCL's capital is expected to be adequate to support assets of approximately $103 million, based on normal bank regulatory guidelines and asset mix. BOCL's growth is expected to come primarily from within its market area through loan and deposit business generated at BOCL's main office and drive-through facility, both located in downtown Columbia. BOC's initial capitalization was $5.5 million. BOC's capital is expected to be adequate to support assets of approximately $158 million, based on current bank regulatory guidelines and asset mix. Initially, BOC's growth is expected to come primarily from within the Charleston area through loan and deposit business generated at BOC's main office and drive-through facility, both located in downtown Charleston.
Future possibilities for loan and deposit growth include branching beyond the Banks' respective immediate market areas, and beyond the larger market areas through merger, purchase of existing banks or establishment of new branches.
Premises. The principal operating facility for BOCL is located in the Barringer Building, a National Place of Historic Interest, at the corner of Washington and Main Streets in downtown Columbia, South Carolina. BOCL has leased approximately 9,300 square feet of space consisting of the street floor and two other floors in the building. The main banking lobby is situated on the street floor with access from both Washington and Main Streets. The initial lease term commenced on December 1, 1987. The term of the lease is five years with options to renew for two consecutive five-year periods. During 1996, the lease was amended to add an additional 2,700 square feet of space on the street and second floors. An option to renew for a third five-year period was also included in the amendment. BOCL exercised the first five-year option period during 1996.
The principal operating facility for BOC is located at 276 East Bay Street in downtown Charleston, South Carolina. BOC has leased approximately 9,310 square feet of space consisting of the street floor in the building. The main banking lobby is accessed from East Bay Street. The initial lease term commenced on December 29, 1989. The term of the lease is ten years with options to renew for two consecutive five-year periods.
The Corporation has leased a drive-up facility located at 1313 Lady Street, three blocks from the Main Street premises. The Corporation and BOCL are currently leasing this facility on a three-year lease which commenced on October 1, 1994.
Employees. BOCL employs 20 full-time employees and BOC employs 24 full-time employees. To the extent possible, the Banks employ people experienced in the banking profession. Efforts are also made to employ people who are knowledgeable about the Columbia and Charleston areas.
Federal and State Laws and Regulations
Bank holding companies and banks are extensively regulated under federal and state law. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to such statutes and regulations. Any change in applicable law or regulation may have a material effect on the business of the Corporation and its subsidiaries.
Bank Holding Company Regulation
The Corporation is registered as a "bank holding company" with the Board of Governors of the Federal Reserve System ("Federal Reserve"), and is subject to supervision by the Federal Reserve under the Bank Holding Corporation Act ("BHC Act"). The Corporation is required to file with the Federal Reserve periodic reports and such additional information as the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve examines the Corporation, and may examine the subsidiary Banks.
The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the Federal Reserve has determined by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The Corporation is also registered under the bank holding company laws of South Carolina. Accordingly, the Corporation is subject to regulation and supervision by the South Carolina State Board of Financial Institutions (the "State Board").
A registered South Carolina bank holding company must provide the State Board with information with respect to the financial condition, operations, management and inter-company relationships of the holding company and its subsidiaries. The State Board also may require such other information as is necessary to keep itself informed about whether the provisions of South Carolina law and the regulations and orders issued thereunder by the State Board have been complied with, and the State Board may examine any bank holding company and its subsidiaries.
Under the South Carolina Bank Holding Company Act (the "SCBHCA"), it is unlawful without the prior approval of the State Board for any South Carolina bank holding company (i) to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank or any other bank holding company, (ii) to acquire all or substantially all of the assets of a bank or any other bank holding company, or (iii) to merge or consolidate with any other bank holding company.
As stated above, the Corporation is a legal entity separate and distinct from the subsidiary Banks. Various legal limitations place restrictions on the ability of the subsidiary Banks to lend or otherwise supply funds to the Corporation or its non-bank subsidiaries. The Corporation, BOC and BOCL are subject to Section 23A of the Federal Reserve Act. Section 23A defines "covered transactions", which include extensions of credit, and limits a bank's covered transactions with any affiliate to 10% of such bank's capital and surplus. All covered transactions with all affiliates cannot in the aggregate exceed 20% of a bank's capital and surplus. All covered and exempt transactions between a bank and its affiliates must be on terms and conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets from the bank's affiliates. Finally, Section 23A requires that all of a bank's extensions of credit to an affiliate be appropriately secured by acceptable collateral, generally United States government or agency securities. The Corporation, BOC and BOCL also are subject to Section 23B of the Federal Reserve Act, which generally limits covered and other transactions among affiliates to terms and circumstances, including credit standards, that are substantially the same or at least as favorable to a bank holding company, a bank or a subsidiary of either as prevailing at the time for transactions with unaffiliated companies.
In July 1994, South Carolina enacted legislation which effectively provides that, after June 30, 1996, out-of-state bank holding companies (including bank holding companies in the Southern Region, as defined under the statute) may acquire other banks or bank holding companies having offices in South Carolina upon the approval of the State Board and compliance with certain other conditions, including that the effect of the transaction not lessen competition and that the laws of the state in which the out-of-state bank holding company filing the applications has its principal place of business permit South Carolina bank holding companies to acquire banks and bank holding companies in that state. Although such legislation may increase takeover activity in South Carolina, the Corporation does not believe that such legislation will have a material impact on its competitive position. However, no assurance of such fact may be given.
Congress has enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which will increase the ability of bank holding companies and banks to operate across state lines. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the existing restrictions on interstate acquisitions of banks by bank holding companies will be repealed one year following enactment, such that the Corporation and any other bank holding company located in South Carolina would be able to acquire a bank located in any other state, and a bank holding company located outside South Carolina could acquire any South Carolina-based bank, in either case subject to certain deposit percentage and other restrictions. The legislation also provides that, unless an individual state elects beforehand either (i) to accelerate the effective date or (ii) to prohibit out-of-state banks from operating interstate branches within its territory, on or after June 1, 1997, adequately capitalized and managed bank holding companies will be able to consolidate their multistate bank operations into a single bank subsidiary and to branch interstate through acquisitions. De novo branching by an out-of-state bank would be permitted only if it is expressly
permitted by the laws of the host state. The authority of a bank to establish and operate branches within a state will continue to be subject to applicable state branching laws. South Carolina law was amended, effective July 1, 1996, to permit such interstate branching but not de novo branching by an out-of-state bank. The Corporation believes that this legislation may result in increased takeover activity of South Carolina financial institutions by out-of-state financial institutions. However, the Corporation does not presently anticipate that such legislation will have a material impact on its operations or future plans.
Obligations of Holding Corporation to its Subsidiary Banks
Under the policy of the Federal Reserve, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("1991 Banking Law"), to avoid receivership of its insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended ("FDIA"), require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the Savings Association Insurance Fund or the Bank Insurance Fund of the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or stockholder. This provision would give depositors a preference over general and subordinated creditors and stockholders in the event a receiver is appointed to distribute the assets of the Banks.
Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is impaired by losses or otherwise, the Office of the Comptroller of the Currency ("OCC") is authorized to require payment of the deficiency by assessment upon the bank's shareholders', pro rata, and to the extent necessary, if any such assessment is not paid by any shareholder after three months notice, to sell the stock of such shareholder to make good the deficiency.
Capital Adequacy
The various federal bank regulators, including the Federal Reserve and the OCC, have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define what qualifies as capital and establish minimum capital standards in relation to assets and off-balance-sheet exposures, as adjusted for credit risks. Capital is classified into two tiers. For bank holding companies, Tier 1 or "core" capital consists primarily of common shareholders' equity, perpetual preferred stock (subject to certain limitations) and minority interests in the common equity accounts of consolidated subsidiaries, and is reduced by goodwill and certain investments in other corporations ("Tier 1 Capital"). Tier 2 capital consists of the allowance for possible loan losses (subject to certain limitations), and certain subordinated debt, "hybrid capital instruments", subordinated and perpetual debt and intermediate term and other preferred stock ("Tier 2 Capital"). A minimum ratio of total capital to risk- weighted assets of 8.00% is required and Tier 1 capital must be at least 50% of total capital. The Federal Reserve also has adopted a minimum leverage ratio of Tier 1 Capital to total assets (not risk-weighted) of 3%. The 3% Tier 1 Capital to total assets ratio constitutes the leverage standard for bank holding companies and national banks, and will be used in conjunction with the risk-based ratio in determining the overall capital adequacy of banking organizations.
The Federal Reserve and the OCC have emphasized that the foregoing standards are supervisory minimums and that an institution would be permitted to maintain such levels of capital only if it had a composite rating of "1" under the regulatory rating systems for bank holding companies and banks. All other bank holding companies are required to maintain a leverage ratio of 3% plus at least 1% to 2% of additional capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The Federal Reserve continues to consider a "tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital less all intangibles, to total assets, less all intangibles. The Federal Reserve has not advised the Corporation of any specific minimum leverage ratio applicable to it. As of December 31, 1996, the Corporation, BOC and BOCL had leverage ratios of 9.3%; 11.0%; and 7.4% respectively, and total risk-adjusted capital ratios of 12.8%; 14.8%; 10.8%, respectively.
Payment of Dividends
If a national bank's surplus fund equals the amount of its capital stock, the directors may declare quarterly, semi-annual or annual dividends out of the bank's net profits, after deduction of losses and bad debts. If the surplus fund does not equal the amount of capital stock, a dividend may not be paid until one-tenth of the bank's net profits of the preceding half year, in the case of quarterly or semi-annual dividends, or the preceding two years, in the case of an annual dividend, are transferred to the surplus fund.
The approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year will exceed the total of its retained net profits of that year combined with its retained net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. OCC regulations provide that provisions for possible credit losses cannot be added back to net income and charge-offs cannot be deducted from net income in calculating the level of net profits available for the payment of dividends.
The payment of dividends by the Banks may also be affected or limited by other factors, such as the requirements to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the OCC, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the OCC may require, after notice and hearing, that such bank cease and desist from such practice. The OCC has indicated that paying dividends that deplete a national bank's capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve, the OCC and the FDIC have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
Bank Regulation
BOC and BOCL are subject to supervision and examination by the OCC. The OCC regulates and monitors all areas of the Banks' operations, including loans, mortgages, issuance of securities, capital adequacy, payment of dividends, and establishment of branches. Interest and certain other charges collected or contracted for by the Banks are also subject to state usury laws and certain federal laws concerning interest rates. BOC and BOCL are members of the Federal Reserve System, and their deposits are insured by the FDIC up to the maximum permitted by law.
Under present law, the Banks currently may establish and operate branches throughout the State of South Carolina, subject to the maintenance of adequate capital for each branch and the receipt of OCC approval.
Insurance of Deposits
As FDIC-insured institutions, the Banks are subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by FDIC-insured institutions shall be as specified in a schedule required to be issued by the FDIC that specifies, at semi-annual intervals, target reserve ratios designed to increase the FDIC insurance fund's reserve ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC may determine in accordance with the statute) in 15 years. Further, the FDIC is authorized to impose one or more special assessments in any amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United States Department of the Treasury.
Effective December 11, 1996, the FDIC implemented a risk-based assessment schedule, having assessments ranging from 0.00% to 0.27% of an institution's average assessment base. The actual assessment to be paid by each FDIC-insured institution is based on the institution's assessment risk classification, which is determined based on whether the institution is considered "well capitalized," "adequately capitalized" or "undercapitalized", as such terms have been defined in applicable federal regulations, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. Under uniform regulations defining such capital levels issued by each of the federal banking agencies, a bank is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" bank is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMEL rating of 1). A bank is considered "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a composite CAMEL rating of 1). As a result of the current provisions of federal law, the assessment rates on deposits could increase over present levels. Based on the current financial condition and capital levels of the Banks, the Corporation does not expect that the current FDIC risk-based assessment schedule will have a material adverse effect on the Banks' earnings. The Banks' risk-based insurance assessments are set at 0.00% for the first half of 1997. The FDIC may increase or decrease the new assessment rates semiannually up to a maximum increase or decrease of 5 basis points.
Legislation
In 1989 and again in 1991, Congress enacted comprehensive legislation affecting the commercial banking and thrift industries: the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA") and the 1991 Banking Law. FIRREA, among other things, abolished the Federal Savings and Loan Insurance Corporation and established two new insurance funds under the jurisdiction of the FDIC: the Bank Insurance Fund ("BIF"), which insures most commercial banks, including BOC and BOCL, and the Savings Association Insurance Fund ("SAIF"), which insures most thrift institutions.
FIRREA permitted bank holding companies to acquire savings associations subject to appropriate regulatory approvals. The entities acquired may be operated as separate savings associations, converted into banks or, if certain conditions are satisfied, merged into existing bank affiliates.
FIRREA also imposed, with certain limited exceptions, a "cross-guarantee" on the part of commonly controlled depository institutions, as discussed above under "Obligations of Holding Corporation to its Subsidiary Banks."
The 1991 Banking Law supplements the federal banking agencies' broad powers to take corrective action to resolve problems of insured depository institutions, generally authorizing earlier intervention in the affairs of a particular institution and imposing express requirements that are tied to the institution's level of capital. If a depository institution fails to meet regulatory capital requirements specified in the 1991 Banking Law, regulatory agencies can require submission and funding of a capital restoration plan by the institution, place limits on its activities, require the raising of additional capital and, ultimately, require the appointment of a conservator or receiver for the institution. Where a capital restoration plan is required, the regulatory agency may require a bank holding company to guarantee as a condition of approval of the plan the lower of 5% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements. If the controlling bank holding company fails to fulfill its obligations with respect to such a plan and files (or has filed against it) a petition under the federal Bankruptcy Code, the claim would be entitled to a priority in such bankruptcy proceeding over third party creditors of the bank holding company.
The 1991 Banking Law required each federal banking agency, including the Federal Reserve, to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities, as well as reflect the actual performance and expected risk of loss on multi-family mortgages. The Federal Reserve, the FDIC and the OCC have issued a joint rule amending the capital standards to specify that the banking agencies will include in their evaluations of a bank's capital adequacy an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The agencies have also issued a joint policy statement that provides bankers guidance on sound practices for managing interest rate risk. The policy statement identifies the key elements of sound interest rate risk management and describes prudent principles and practices for each element, emphasizing the importance of adequate oversight by a bank's board of directors and senior management and of a comprehensive risk management process. The policy statement also outlines the critical factors that will affect the agencies' evaluation of a bank's interest rate risk when making a determination of capital adequacy. In adopting the policy statement, the agencies have asserted their intention to continue to place significant emphasis on the level of a bank's interest rate risk exposure and the quality of its risk management process when evaluating a bank's capital adequacy.
The Federal Reserve, the FDIC, the Office of the Comptroller of the Currency and the Office of Thrift Supervision have also issued a joint rule amending the risk-based capital guidelines to take account of concentration of credit risk and the risk of non- traditional activities. The rule amends each agency's risk-based capital standards by explicitly identifying concentration of credit risk and the risk arising from other sources, as well as an institution's ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy.
The 1991 Banking Law also restricts the acceptance of brokered deposits by insured depository institutions and contains a number of consumer banking provisions, including disclosure requirements and substantive contractual limitations with respect to deposit accounts.
The 1991 Banking Law also required each of the federal banking agencies to develop regulations addressing certain safety and soundness standards for insured depository institutions and depository institution holding companies, including operational and managerial standards, asset quality, earnings and stock valuation standards, as well as compensation standards (but not dollar levels of compensation). On September 23, 1994, the Riegle Community Development and Regulatory Improvement Act of 1994 amended the 1991 Banking Law to authorize the agencies to establish safety and soundness standards by regulation or by guideline. Accordingly, the federal banking agencies have issued Interagency Guidelines Establishing Standards for Safety and Soundness, which set forth general operational and managerial standards in the areas of internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. The
Guidelines also prohibit payment of excessive compensation as an unsafe and unsound practice. Compensation is defined as excessive if it is unreasonable or disproportionate to the services actually performed. Bank holding companies are not subject to the Guidelines. The Guidelines contemplate that each federal agency will determine compliance with these standards through the examination process, and if necessary to correct weaknesses, require an institution to file a written safety and soundness compliance plan. The Corporation does not expect the Guidelines to materially change current operations of the Banks.
Enforcement Policies and Actions
FIRREA significantly increased the enforcement powers of the OCC, the Federal Reserve and the other federal depository institution regulators, and authorizes the imposition of civil money penalties of from $5,000 per day up to $1,000,000 per day for violations of federal banking laws and regulations. Persons who are affiliated with depository institutions and are found to have violated federal banking laws and regulations can be removed from any office held in such institution and banned for life from participating in the affairs of such an institution. The banking regulators have not hesitated to use the new enforcement authorities provided them under FIRREA.
Community Reinvestment Act
The Banks are subject to the requirements of the Community Reinvestment Act (the "CRA"). The CRA requires that financial institutions have an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's efforts in meeting the community credit needs are evaluated as part of the examination process pursuant to twelve assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility. Both Banks received ratings of satisfactory in their most recent evaluations.
The federal banking agencies, including the OCC, have issued a joint rule that changes the method of evaluating an institution's CRA performance. The new rule evaluates institutions based on their actual performance (rather than efforts) in meeting community credit needs. Subject to certain exceptions, the OCC assesses the CRA performance of a bank by applying lending, investment and service tests. The lending test evaluates a bank's record of helping to meet the credit needs of its assessment area through its lending activities by considering a bank's home mortgage, small business, small farm, community development, and consumer lending. The investment test evaluates a bank's record of helping to meet the credit needs of its assessment area through qualified investments that benefit its assessment area or a broader statewide or regional area that includes the bank's assessment area. The service test evaluates a bank's record of helping to meet the credit needs of its assessment area by analyzing both the availability and effectiveness of a bank's systems for delivering retail banking services and the extent and innovativeness of its community development services. The OCC assigns a rating to a bank of "outstanding," satisfactory," "needs to improve," or "substantial noncompliance" based on the bank's performance under the lending, investment and service tests. To evaluate compliance with the tests, subject to certain exceptions, banks will be required to collect and report to the OCC extensive demographic and loan data.
For banks with total assets of less than $250 million that are affiliates of a holding company with banking and thrift assets of less than $1 billion, such as the Banks and Corporation, the OCC evaluates the bank's record of helping to meet the credit needs of its assessment area pursuant to the following criteria: (1) the bank's loan-to-deposit ratio, adjusted for seasonal variation and, as appropriate, other lending-related activities, such as loan originations for sale to the secondary markets, community development loans, or qualified investments; (2) the percentage of loans and, as appropriate, other lending-related activities located in the bank's assessment area; (3) the bank's record of lending to and, as appropriate, engaging in other lending-related activities for borrowers of different income levels and businesses and farms of different sizes; (4) the geographic distribution of the bank's loans; and (5) the bank's record of taking action, if warranted, in response to written complaints about its performance in helping to meet credit needs in its assessment area. Small banks may also elect to be assessed under the generally applicable standards of the rule, but to do so a small bank must collect and report extensive data.
A bank may also submit a strategic plan to the OCC and be evaluated on its performance under the plan.
Other Laws and Regulations
Interest and certain other charges collected or contracted for by the Banks are subject to state usury laws and certain federal laws concerning interest rates. The Banks' operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers, CRA requiring financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low- and moderate-income borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, the Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit, the Fair Credit Reporting Act of 1978 governing the use and provision of information to credit reporting agencies, the Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies, and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of the Banks also are subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services.
From time to time, bills are pending before the United States Congress which contain wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. Among such bills are proposals to prohibit banks and bank holding companies from conducting certain types of activities, to subject banks to increased disclosure and reporting requirements, to alter the statutory separation of commercial and investment banking, and to further expand the powers of banks, bank holding companies and competitors of banks. It cannot be predicted whether or in what form any of these proposals will be adopted or to the extent to which the business of the Corporation and its subsidiaries may be affected thereby.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank's earnings. Thus, the earnings and growth of the Corporation will be subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various means, including open-market dealings in United States government securities, the discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits. The nature and timing of any changes in such policies and their impact on the Corporation cannot be predicted.
Item 2
Item 2 - Properties
The principal operating facility for the Corporation is currently located at 1136 Washington Street, Suite 200, Columbia, South Carolina. The Corporation has leased approximately 5,700 square feet of space at that address on a five-year lease commencing on February 1, 1995 with one five-year renewal option. Information relating to the premises leased by the Banks is set forth under Item 1 - "Business - General - The Banks - "Premises." The Corporation considers all properties leased by the Banks suitable and adequate for their intended purpose.
Item 3
Item 3 - Legal Proceedings
Incorporated by reference to Note 2 to Consolidated Financial Statements on page 24 of the Registrant's 1996 Annual Report to Shareholders (the "Annual Report").
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth quarter of 1996.
PART II
Item 5
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
Incorporated by reference to information set forth under the caption "Stock Data and Dividends" on page 15 of the Annual Report.
During 1996, the Registrant issued shares of its common stock to the following persons upon exercise of options issued pursuant to the Registrant's Incentive Stock Option Plan. The securities were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933 because the issuance did not involve a public offering by the issuer.
Item 6
Item 6 - Selected Financial and Other Data
Incorporated by reference to information set forth under the caption "Financial Summary" on page 5 of the Annual Report.
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation.
Incorporated by reference to information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 5 through 17 of the Annual Report.
Item 8
Item 8 - Financial Statements and Supplemental Data
Incorporated by reference to the Registrant's Consolidated Financial Statements and Notes thereto and Report of Independent Accountants set forth on pages 18 through 35 of the Annual Report.
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Incorporated by reference to information set forth under the caption "Changes in Independent Auditors" on page 17 of the Annual Report.
PART III
Item 10
Item 10 - Directors and Executive Officers of the Registrant
The information required by this item is set forth under "Election of Directors" on pages 4 through 7 of the Registrant's Proxy Statement filed in connection with the 1997 Annual Meeting of Shareholders (the "1997 Proxy Statement"), which information is incorporated herein by reference.
Item 11
Item 11 - Executive Compensation
The information required by this item is set forth under "Executive Officers" on pages 7 through 11 of the 1997 Proxy Statement, which information is incorporated herein by reference.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under "Security Ownership of Certain Beneficial Owners and Management" on pages 2 through 4 of the 1997 Proxy Statement, which information is incorporated herein by reference.
Item 13
Item 13 - Certain Relationships and Related Transactions
The information required by this item is set forth under "Certain Relationships and Related Transactions" on page 11 of the 1997 Proxy Statement, which information is incorporated herein by reference.
Part IV
Item 14
Item 14 - Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Financial Statements and Exhibits
1. See item 8 for a listing of all financial statements and supplementary data.
2. Financial Statement Schedules are included in the consolidated financial statements referenced in Item 14(a)1 above.
3. Exhibits
3(a) Articles of Incorporation of the Registrant (incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1, File No. 33- 29091)
3(b) Bylaws of the Registrant (incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1993, File No. 0-19045)
4 Specimen Stock Certificate (incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1, File No. 33-29091)
10(a)Lease Agreement dated May 15, 1987 (incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1, File No. 33-29091)
10(d)Lease Agreement dated May 19, 1987 (incorporated by reference to exhibits filed with Registrant's Registration Statement on Form S-1, File No. 33-29091)
10(e)Incentive Stock Option Plan (incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1, File No. 33-29091)
10(f)1995 Stock Option Plan (incorporated by reference to exhibits filed with proxy statement relating to Registrant's 1995 Annual Meeting of Shareholders).
10(g)Employment Agreement between Registrant and Arthur M. Swanson (incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1, File No. 33-29091)
10(h)Employment Agreement between Bank of Columbia, NA. and Michael Kapp (incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1993, File No. 0-19045)
10(i)Lease Agreement dated November 10, 1994 (incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1994, File No. 0-19045)
13 Portions of 1996 Annual Report to Shareholders
21 List of Subsidiaries (incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1993, File No. 0-19045)
24 Power of Attorney
27 Financial Data Schedule
(b) No current Reports on Form 8-K were filed during the fourth quarter of 1996
(c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this Item.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Columbia, State of South Carolina, on the 26th day of March, 1997.
COMSOUTH BANKSHARES, INC.
*/s/Arthur M. Swanson By:---------------------------------- Arthur M. Swanson President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Titles Date
*/s/Arthur M. Swanson - ---------------------------- President and Director March 26, 1997 Arthur M. Swanson (Principal Executive Officer)
/s/Harry R. Brown - --------------------------- Chief Financial Officer March 26, 1997 Harry R. Brown & Chief Operating Officer (Principal Financial and Accounting Officer)
*/s/Mason R. Chrisman Chairman of the Board March 26, 1997 - ---------------------------- Mason R. Chrisman and Director
*/s/W. Carlyle Blakeney, Jr. Director March 26, 1997 - ---------------------------- W. Carlyle Blakeney, Jr.
*/s/R. Lee Burrows, Jr. - ---------------------------- Director March 26, 1997 R. Lee Burrows, Jr.
*/s/Charles R. Jackson Director March 26, 1997 - ---------------------------- Charles R. Jackson
*/s/J. Michael Kapp Director March 26, 1997 - ---------------------------- J. Michael Kapp
*/s/LaVonne N. Phillips Director March 26, 1997 - ---------------------------- LaVonne N. Phillips
*/s/John C. B. Smith, Jr. Director March 26, 1997 - ---------------------------- John C. B. Smith, Jr.
*/s/Arthur P. Swanson Director March 26, 1997 - ---------------------------- Arthur P. Swanson
/s/Harry R. Brown March 26, 1997
Harry R. Brown * By: (Attorney in Fact for each of the persons indicated)
INDEX TO EXHIBITS