ITEM 1. BUSINESS.
Community Bankshares, Inc. (the "Company") was organized under the laws of Georgia in 1980 and commenced operations in 1981. The Company is a registered bank holding company. All of the Company's activities are currently conducted by or through its subsidiaries, Community Bank & Trust-Habersham ("Community-Habersham"), Community Bank & Trust-Alabama ("Community-Alabama"), Community Bank & Trust- Jackson ("Community-Jackson") and Community Bank & Trust-Troup ("Community - -Troup") (collectively, the "Community Banking Subsidiaries") and the non-bank subsidiary of Community-Habersham, Financial Supermarkets, Inc. ("Financial Supermarkets").
All references herein to the Company include Community Bankshares, Inc., the Community Banking Subsidiaries and Financial Supermarkets unless the context indicates a different meaning. Unless otherwise indicated, all information in this filing has been adjusted for the stock split effected on December 20, 1995, as a Common Stock dividend and the associated reduction in par value of the Common Stock.
Forward Looking Statements - --------------------------
The following appears in accordance with the Securities Litigation Reform Act. These financial statements and financial review include forward looking statements that involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, economic conditions, and competition in the geographic business areas in which the Company conducts its operations.
Business Description of Community Banking Subsidiaries - ------------------------------------------------------
GENERAL. Each of the Community Banking Subsidiaries is community-oriented and offers such customary banking services as consumer and commercial checking accounts, NOW accounts, savings accounts, certificates of deposit, lines of credit and money transfers. Each Community Banking Subsidiary finances commercial and consumer transactions, makes secured and unsecured loans, and provides a variety of other banking services.
DEPOSITS. Each Community Banking Subsidiary offers a full range of depository accounts and services to both consumers and businesses. At December 31, 1997, the Company's aggregate deposit base, totaling approximately $335.6 million, consisted of approximately $50.8 million in noninterest-bearing demand deposits (15.14%) of total deposits), approximately $72.9 million in interest-bearing demand deposits (including money market accounts) (21.72% of total deposits), approximately $16.3 million in savings deposits (4.86%) of total deposits, approximately $139.8 million in time deposits in amounts less than $100,000 (41.66% of total deposits), and approximately $55.8 million in time deposits of $100,000 or more (16.62% of total deposits).
LOANS. Each Community Banking Subsidiary makes both secured and unsecured loans to individuals, firms and corporations, and both consumer and commercial lending operations include various types of credit for customers. In addition, the Company operates a loan production office in Gainesville, Georgia through Community-Habersham. The Gainesville loan production office (the "LPO") funds and sells on the open market loans guaranteed by the Small Business Administration (the "SBA"). Secured loans include first and second real estate mortgage loans. Each Community Banking Subsidiary also makes direct installment loans to consumers on both a secured and unsecured basis. At December 31, 1997, consumer, real estate (including mortgage and construction loans) and commercial loans represented approximately 13.74%, 37.36% and 47.66%, respectively, of the Company's total loan portfolio. The real estate loans made by each Community Banking Subsidiary include residential real estate construction, acquisition and development loans, as well as loans for other purposes which are secured by real estate.
Commercial lending is directed principally toward businesses within the defined market area of the Community Banking Subsidiaries or which are existing or potential deposit customers of the Community Banking Subsidiaries. The Gainesville loan production office, however, makes a large portion of loans to individuals and businesses that are not located in its market area. A portion of loans categorized as commercial loans are not secured by real estate. Collateral includes marketable securities, certificates of deposit, accounts receivable, inventory and equipment. Commercial lending decisions are based upon a determination of the borrower's ability and willingness to repay the loan, which in turn are impacted by such factors as the borrower's cash flow, sales trends and inventory levels, as well as relevant economic conditions. This category includes loans made to individuals, partnership or corporate borrowers and obtained for a variety of purposes. Risks associated with these loans can be significant. Risks include, but are not limited to, fraud, bankruptcy, economic downturn, deteriorated or non-existing collateral, and changes in interest rates.
Loans secured by real estate which are made to businesses are categorized as real estate loans. Often, real estate collateral is deemed to be superior to other collateral available to small- to medium- sized businesses. The underwriting standards of and risks to the Community Banking Subsidiaries are described below with respect to real estate loans.
The Community Banking Subsidiaries offer traditional first mortgage loans to individuals for single-family structures. These loans are sold in the secondary market. Since the Community Banking Subsidiaries are originators of mortgages rather than investors, they sell them servicing-released. They offer loan-to-value amounts from 70% to 95%. Various types of fixed-rate and variable-rate products are available. Risks involved with residential mortgage lending include, but are not limited to, title defects, fraud, general real estate market deterioration, inaccurate appraisals, interest rate fluctuations and financial deterioration of the borrower.
The Community Banking Subsidiaries also make residential construction loans, generally for one-to-four unit structures. The Community Banking Subsidiaries require a first line position on the loans associated with construction projects and offer these loans only to bona fide professional building contractors. Loan disbursements require independent, on-site inspections to assure the project is on budget and that the loan proceeds are being used in accordance with the plans, specifications and survey for the construction project and not being diverted to other uses. The loan-to-value ratio for such loans is usually 75% to 85% of the as-built appraised value. Loans for construction can present a high degree of risk to the Community Banking Subsidiaries, depending on, among other things, whether the builder can sell the home to a buyer, whether the buyer can obtain permanent financing, whether the transaction produces income in the interim, and the nature of changing economic conditions.
Additionally, the Community Banking Subsidiaries make acquisition and development loans to approved developers for the purpose of developing acreage into single-family lots on which houses will be built. The loan-to-value ratio for such loans does not exceed 75% of the value as defined by an independent appraisal, or 100% of the cost, whichever is less. Loans for acquisition and development can present a high degree of risk to the Community Banking Subsidiaries, depending upon, among other things, whether the developer can find builders to buy the lots, whether the builders can obtain financing, whether the transaction produces income in the interim, and the nature of changing economic conditions.
In addition, the Community Banking Subsidiaries make consumer loans, consisting primarily of installment loans to individuals for personal, family and household purposes, including loans for automobiles, home improvements and investments. Consumer lending decisions are based on a determination of the borrower's ability and willingness to repay the loan, which in turn are impacted by such factors as the borrower's income, job stability, previous credit history and collateral for the loan. Risks associated with these loans include, but are not limited to, fraud, deteriorated or non-existing collateral, a general economic downturn, and consumer financial problems.
LENDING POLICY. The current lending strategy of each Community Banking Subsidiary is to offer consumer, real estate and commercial credit services to individuals and entities that meet the Company's credit standards. Each Community Banking Subsidiary provides its lending officers with written guidelines for lending activities. Lending authority is delegated by the Board of Directors of the particular Community Banking Subsidiary to loan officers, each of whom is limited in the amount of secured and unsecured loans which he or she can make to a single borrower or related group of borrowers.
LOAN REVIEW AND NONPERFORMING ASSETS. Each Community Banking Subsidiary reviews its loan portfolio to determine deficiencies and corrective action to be taken, and the Company reviews the loan portfolio of each Community Banking Subsidiary. Senior lending officers conduct periodic reviews of borrowers with total direct and indirect indebtedness of $75,000 or more and ongoing review of all past due loans. Past due loans are reviewed at least weekly by lending officers and a summary report is reviewed monthly by the particular Community Banking Subsidiary's Board of Directors. Each Board of Directors reviews all loans over $100,000, whether current or past due, at least once annually. In addition, each Community Banking Subsidiary maintains internal classifications of problem and potential problem loans.
ASSET/LIABILITY MANAGEMENT. Each Community Banking Subsidiary's Board of Directors is charged with establishing policies to manage the assets and liabilities of the bank. Each Board's task is to manage asset growth, net interest margin and liquidity and capital. The Board directs the bank's overall acquisition and allocation of funds. At its monthly meetings, the Board receives a report from the President of the bank with regard to the monthly asset and liability funds budget and income and expense budget in relation to the actual composition and flow of funds, the ratio of the amount of rate- sensitive assets to the amount of rate-sensitive liabilities, the amount of interest rate risk and equity market value exposure under varying rate environments, the ratio of loan loss reserve to outstanding loans and other variables, such as expected loan demand, investment opportunities, core deposit growth within specified categories, regulatory changes, monetary policy adjustments and the overall condition of the local and state economy.
INVESTMENT POLICY. The Company's investment portfolio policy is to maximize income consistent with liquidity, asset quality and regulatory constraints. The policy is reviewed from time to time by the Company's Board of Directors. Individual transactions, portfolio composition and performance are reviewed and approved monthly by the Board of Directors or a committee thereof. The President of each Community Banking Subsidiary implements the policy and reports to the bank's full Board of Directors on a monthly basis information concerning sales, purchases, resultant gains or losses, average maturity, federal taxable equivalent yields and appreciation or depreciation by investment categories.
Business Description of Non-Banking Subsidiary - ----------------------------------------------
Financial Supermarkets, formed as a Georgia corporation in 1984, is a wholly-owned subsidiary of Community-Habersham and has three divisions. Financial Supermarkets' primary division, The Supermarket Bank, provides various consulting and licensing services to financial institutions in connection with the establishment of bank branches in supermarkets. These services are marketed to interstate, regional and community financial institutions. Financial Supermarkets enters into agreements with major supermarket chains for the right to establish bank branches on particular sites. Financial Supermarkets then licenses such rights, along with the right to operate the "Supermarket Bank", to individual financial institutions, in addition to providing consulting services to such institutions ranging from providing alternative construction designs to coordinating employee training.
Since 1984, Financial Supermarkets has assisted clients with the development of Supermarket Bank facilities in grocery stores throughout the United States. Financial Supermarkets primarily competes in the in-store bank branch consulting business with International Banking Technologies of Atlanta and Memphis-based National Commerce Bank Services, Inc., a wholly-owned subsidiary of National Commerce Bancorporation.
Over its 13-year history, Financial Supermarkets has expanded the scope of its business beyond the supermarket bank industry. In 1988, it formed a consulting division for the financial services industry. The division is based in Atlanta and works with financial institutions across the United States with regard to state and federal regulatory compliance issues and other day-to-day operational matters.
In 1992, Financial Supermarkets formed a full-service marketing consulting firm to consult with financial institutions primarily in the Southeastern United States, in addition to working closely with Supermarket Bank clients to develop related advertising and marketing programs. In 1994, Financial Supermarkets formed a travel agency to provide customers with a full range of travel services.
Competition - -----------
The banking business is highly competitive. Community-Habersham competes with three institutions in Habersham County, Georgia, three institutions in White County, Georgia, and eleven institutions in Hall County, Georgia; Community-Jackson competes with five other depository institutions in Jackson County, Georgia; Community-Alabama competes with one other depository institution in Bullock County, Alabama, and six other depository institutions in Montgomery, Alabama, and Community-Troup competes with six other depository institutions in Troup County, Georgia. Each Community Banking Subsidiary also competes with other financial service organizations, including savings and loan associations, finance companies, credit unions and certain governmental agencies. To the extent that banks must maintain noninterest-earning reserves against deposits, they may be at a competitive disadvantage when compared with other financial service organizations that are not required to maintain reserves against substantially equivalent sources of funds. Further, the increased competition from investment bankers and brokers and other financial service organizations may have a significant impact on the competitive environment in which each Community Banking Subsidiary operates.
Employees - ---------
At December 31, 1997, the Company had 231 full-time employees and 36 part-time employees. Neither the Company nor any of its subsidiaries is a party to any collective bargaining agreement, and management of the Company believes that its employee relations are good.
Supervision and Regulation - --------------------------
GENERAL. The Company is a registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve (the "Federal Reserve") under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Act"). The Company is required to file financial information with the Federal Reserve periodically and is subject to periodic examination by the Federal Reserve.
The Bank Holding Act requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of a bank; and (iii) it may merge or consolidate with any other bank holding company. In addition, a bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of any company engaged in non-banking activities. This prohibition does not apply to activities found by the Federal Reserve, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation or order to be so closely related to banking are: making or servicing loans and certain types of leases; performing certain data processing services; acting as fiduciary or investment or financial advisor; providing discount brokerage services; underwriting bank eligible securities; underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and making investments in corporations or projects designed primarily to promote community welfare.
The Company must also register with the Department of Banking and Finance of the State of Georgia (the "DBF") and file periodic information with the DBF. As part of such registration, the DBF requires information with respect to the financial condition, operations, management and intercompany relationships of the Company and Community-Habersham, Community-Jackson and Community-Troup and related matters. The DBF may also require such other information as is necessary to keep itself informed as to whether the provisions of Georgia law and the regulations and orders issued thereunder by the DBF have been complied with, and the DBF may examine the Company and each of the Georgia Community Banking Subsidiaries.
The Company is an "affiliate" of the Community Banking Subsidiaries under the Federal Reserve Act, which imposes certain restrictions on (i) loans by the Community Banking Subsidiaries to the Company, (ii) investments in the stock or securities of the Company by the Community Banking Subsidiaries, (iii) the Community Banking Subsidiaries' taking the stock or securities of an "affiliate" as collateral for loans by the Community Banking Subsidiaries to a borrower and (iv) the purchase of assets from the Company by the Community Banking Subsidiaries. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
Community-Habersham, Community-Jackson and Community-Troup, as Georgia banking associations, are subject to the supervision of, and are regularly examined by, the Federal Deposit Insurance Corporation (the "FDIC") and the DBF. Community-Alabama is subject to the supervision and examination of the Alabama State Banking Department (the "ABD") in addition to the FDIC. Both the FDIC and the DBF must grant prior approval of any merger, consolidation or other corporate reorganization involving Community-Habersham, Community-Jackson or Community-Troup. The ABD must grant prior approval of any merger, consolidation or other corporate reorganization involving Community-Alabama. A bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly-controlled institution.
PAYMENT OF DIVIDENDS. The Company is a legal entity separate and distinct from the Community Banking Subsidiaries. Most of the revenues of the Company result from dividends paid to it by the Community Banking Subsidiaries. There are statutory and regulatory requirements applicable to the payment of dividends by the Community Banking Subsidiaries, as well as by the Company to its shareholders.
The Community Banking Subsidiaries are each state-chartered banks regulated by the DBF or ABD, as applicable, and the FDIC. Under the regulations of the DBF, dividends may not be declared out of the retained earnings of a Georgia bank without first obtaining the written permission of the DBF unless such bank meets all of the following requirements:
(a) Total classified assets as of the most recent examination of the bank do not exceed 80% of equity capital (as defined by regulation);
(b) The aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the net profits after taxes but before dividends for the previous calendar year; and
(c) The ratio of equity capital to adjusted assets is not less than 6%.
Under the regulations of the ABD, dividends may be declared by a state bank without obtaining the prior written approval of the ABD only if (i) the bank's surplus (as defined by regulation) is equal to at least 20% of its capital (as defined by regulation) and (ii) the aggregate of all dividends declared or anticipated to be declared in the calendar year does not exceed the total of its net earnings (as defined by regulation) of that year combined with its retained net earnings of the preceding two year, less any required transfers to surplus. No dividends may be paid from an Alabama bank's surplus without the prior written approval of the ABD.
The payment of dividends by the Company and the Community Banking Subsidiaries may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the Community Banking Subsidiaries, could include the payment of dividends) such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FDIC has issued a policy statement providing that insured banks should generally only pay dividends out of current operating earnings. In addition to the formal statutes and regulations, regulatory authorities consider the adequacy of each of the Community Banking Subsidiary's total capital in relation to its assets, deposits and other such items. Capital adequacy considerations could further limit the availability of dividends to the Community Banking Subsidiaries. At December 31, 1997, retained earnings available from the Community Banking Subsidiaries to pay dividends totaled approximately $3 million. For 1997, the Company's cash dividend payout to shareholders was 5.38% of net income.
MONETARY POLICY. The results of operations of the Community Banking Subsidiaries are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Community Banking Subsidiaries.
CAPITAL ADEQUACY. The Federal Reserve and the FDIC have implemented substantially identical risk-based rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk. Banks and bank holding companies are required to have (1) a minimum level of total capital (as defined) to risk-weighted assets of eight percent (8%); (2) a minimum Tier One Capital (as defined) to risk-weighted assets of four percent (4%); and (3) a minimum stockholders' equity to risk-weighted assets of four percent (4%). In addition, the Federal Reserve and the FDIC have established a minimum three percent (3%) leverage ratio of Tier One Capital to total assets for the most highly-rated banks and bank holding companies. " Tier One Capital" generally consists of common equity not including unrecognized gains and losses on securities, minority interests in equity accounts of consolidated subsidiaries and certain perpetual preferred stock less certain intangibles. The Federal Reserve and the FDIC will require a bank holding company and a bank, respectively, to maintain a leverage ratio greater than three percent (3%) if either is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve. The Federal Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holding companies. The FDIC, the Office of the Comptroller of the Currency (the "OCC") and the Federal Reserve amended, effective January 1, 1997, the capital adequacy standards to provide for the consideration of interest rate risk in the overall determination of a bank's capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for the risk.
In addition, effective December 19, 1992, a new Section 38 to the Federal Deposit Insurance Act implemented the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the " 1991 Act" ). The " prompt corrective action" provisions set forth five regulatory zones in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank's financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank's capital leverage ratio reaches two percent (2%). Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.
The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, which place financial institutions in the following five categories based upon capitalization ratios: (1) A " well capitalized" institution has a total risk-based capital ratio of at least 10%, a Tier One risk-based ratio of at least 6% and a leverage ratio of at least 5%; (2) an " adequately capitalized" institution has a total risk-based capital ratio of at least 8%, a Tier One risk-based ratio of at least 4% and a leverage ratio of at least 4%; (3) an " undercapitalized" institution has a total risk-based capital ratio of under 8%, a Tier One risk-based ratio of under 4% or a leverage ratio of under 4%; (4) a " significantly undercapitalized" institution has a total risk-based capital ratio of under 6%, a Tier One risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a " critically undercapitalized" institution has a leverage ratio of 2% or less. Institutions in any of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions. The FDIC regulations also establish procedures for " downgrading" an institution to a lower capital category based on supervisory factors other than capital. Under the FDIC's regulations, all of the Community Banking Subsidiaries were " well capitalized" institutions at December 31, 1997.
Set forth below are pertinent capital ratios for the Company and the Community Banking Subsidiaries as of December 31, 1997.
RECENT LEGISLATIVE AND REGULATORY ACTION. On April 19, 1995, the four federal bank regulatory agencies adopted revisions to the regulations promulgated pursuant to the Community Reinvestment Act (the "CRA"), which are intended to set distinct assessment standards for financial institutions. The revised regulation contains three evaluation tests: (i) a lending test which compares the institution' s market share of loans in low- and moderate-income areas to its market share of loans in its entire service area and the percentage of a bank's outstanding loans to low- and moderate-income areas or individuals, (ii) a services test which evaluates the provisions of services that promote the availability of credit to low- and moderate-income areas, and (iii) an investment test, which evaluates an institution's record of investments in organizations designed to foster community development, small- and minority-owned businesses and affordable housing lending, including state and local government housing or revenue bonds. The regulation is designed to reduce some paperwork requirements of the current regulations and provide regulators, institutions and community groups with a more objective and predictable manner with which to evaluate the CRA performance of financial institutions. The rule became effective on January 1, 1996, at which time evaluation under streamlined procedures began for institutions with assets of less than $250 million that are owned by a holding company with total assets of less than $1 billion. These regulations had no appreciable impact on the Company and the Community Banking Subsidiaries.
Congress and various federal agencies (including, in addition to the Community Banking Subsidiaries' regulatory agencies, the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice) (collectively the "Federal Agencies") responsible for implementing the nations fair lending laws have been increasingly concerned that prospective home buyers and other borrowers are experiencing discrimination in their efforts to obtain loans. In recent years, the Department of Justice has filed suit against financial institutions, which it determined had discriminated, seeking fines and restitution for borrowers who allegedly suffered from discriminatory practices. Most, if not all, of these suits have been settled (some for substantial sums) without a full adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what constitutes lending discrimination and specify the factors the agencies will consider in determining if lending discrimination exists, announced a joint policy statement detailing specific discriminatory practices prohibited under the Equal Opportunity Act and the Fair Housing Act. In the policy statement, three methods of proving lending discrimination were identified: (1) overt evidence of discrimination, when a lender blatantly discriminates on a prohibited basis, (2) evidence of disparate treatment, when a lender treats applicants differently based on a prohibited factor even where there is no showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person, and (3) evidence of disparate impact, when a lender applies a practice uniformly to all applicants, but the practice has a discriminatory effect, even where such practices are neutral on their face and are applied equally, unless the practice can be justified on the basis of business necessity.
On September 23, 1994, President Clinton signed the Reigle Community Development and Regulatory Improvement Act of 1994 (the "Regulatory Improvement Act"). The Regulatory Improvement Act contained funding for community development projects through banks and community development financial institutions and also numerous regulatory relief provisions designed to eliminate certain duplicative regulations and paperwork requirements.
On September 29, 1994, President Clinton signed the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Federal Interstate Bill") which amended federal law to permit bank holding companies to acquire existing banks in any state effective September 29, 1995, and any interstate bank holding company is permitted to merge its various bank subsidiaries into a single bank with interstate branches after May 31, 1997. States had the authority to authorize interstate branching prior to June 1, 1997, or alternatively, to opt out of interstate branching prior to that date. The Georgia Financial Institutions Code was amended in 1994 to permit the acquisition of a Georgia bank or bank holding company by out-of-state bank holding companies beginning July 1, 1995. On September 29, 1995, the interstate banking provisions of the Georgia Financial Institutions Code were superseded by the Federal Interstate Bill.
On January 26, 1996, the Georgia legislature adopted a bill (the "Georgia Intrastate Bill") to permit, effective July 1, 1996, any Georgia bank or group of affiliated banks under one holding company to establish up to an aggregate of three new or additional branch banks anywhere within the State of Georgia, excluding any branches established by a bank in a county in which the bank is already located. After July 1, 1998, all restrictions on state-wide branching will be removed. Prior to adoption of the Georgia Intrastate Bill, Georgia only permitted branching within a county, via merger or consolidation with an existing bank or in certain other limited circumstances.
FDIC INSURANCE ASSESSMENTS FOR THE COMMUNITY BANKING SUBSIDIARIES. The Community Banking Subsidiaries are subject to FDIC deposit insurance assessments for the Bank Insurance Fund (the "BIF"). In the first six months of 1995, the Community Banking Subsidiaries were assessed $.23 per $100 of deposits, except for Community-Troup which was assessed $.26 per $100 of deposits, based upon a risk-based system whereby banks were assessed on a sliding scale depending upon their placement in nine separate supervisory categories, from $.23 per $100 of deposits for the healthiest banks (those with the highest capital, best management and best overall condition) to as much as $.31 per $100 of deposits for the less-healthy institutions, for an average $.259 per $100 of deposits.
On August 8, 1995, the FDIC lowered the BIF premium for healthy banks 83% from $.23 per $100 in deposits to $.04 per $100 in deposits, while retaining the $.31 level for the riskiest banks. The average assessment rate therefore ranges from $.232 to $.044 per $100 of deposits. The new rate took effect on September 29, 1995. On September 15, 1995, the FDIC refunded $142,498 to the Community Banking Subsidiaries for premium overpayments in the second and third quarter of 1995. On November 14, 1995, the FDIC again lowered the BIF premium for healthy banks from $.04 per $100 of deposits to zero for the highest rated institutions (92% of the industry). As a result, each of the Community Banking Subsidiaries has paid only the legally required annual minimum payment of $2,000 per year for insurance for the 1996 year. Had the current rates been in effect for all of 1995, the annual FDIC insurance premiums paid by the Community Banking Subsidiaries collectively would have been reduced by $185,000.
On September 29, 1996, the Economic Growth and Regulatory Paperwork Reduction Act of 1996 was enacted (the "1996 Act"). The 1996 Act's chief accomplishment was to provide for the recapitalization of the Savings Association Insurance Fund ("SAIF") by levying a one-time special assessment of SAIF deposits to bring the fund to a reserve ratio equal to $.25 per $100 of insured deposits and to provide that beginning in 1997, BIF assessments would be used to help pay off the $780 million in annual interest payments on the $8 billion Financing Corporation ("FICO") bonds issued in the late 1980s as part of the government rescue of the thrift industry. The law provides that BIF assessments for FICO bond payments must be set at a rate equal to 20% of the SAIF rates for such assessments in for 1997, 1998 and 1999. After 1999, all FDIC insured institutions will pay the same assessment rates. For the first six months of 1997, the assessment for the FICO bond payments were $.0132 per $100 of deposits for BIF deposits and $.0648 per $100 of deposits for SAIF deposits. The FDIC announced on November 26, 1996, that the premium for the first six months for deposit insurance assessments would range from zero to $.27 per $100 of deposits with 94% of banks paying nothing for deposit insurance. One of the provisions of the 1996 Act was to eliminate the minimum $2,000 per year charge for deposit insurance. As a result, the Community Banking Subsidiaries will pay no premium for deposit insurance in the first six months of 1998 and will pay a first quarter FICO bond assessment of $6,640 in the aggregate. The Bill also provided for certain limited regulatory relief and modifications to certain out-of-state regulations.
ITEM 2.
ITEM 2. PROPERTIES.
Community-Habersham's main office is located at 448 North Main Street, Cornelia, Georgia. Community-Jackson's main office is located at 117 North Elm Street, Commerce, Georgia. Community-Alabama's main office is located at 202 N. Powell Street, Union Springs, Alabama. Community-Troup's main office is located at 201 Broad Street, LaGrange, Georgia. Community-Habersham has eleven branch offices (two owned and nine leased, seven of which are operated in supermarkets) located in Cornelia, Clarkesville, Cleveland, Demorest, and Gainesville, Georgia. Community-Jackson has four branch offices (all leased, three of which are operated in supermarkets) located in Commerce and Jefferson, Georgia. Community-Alabama has one branch (leased and operated in a supermarket) in Montgomery, Alabama. Financial Supermarkets leases its main office located in Cornelia, Georgia, as well as a division office in Atlanta, Georgia. Community-Habersham leases the property occupied by the loan production office in Gainesville and two offices located in supermarkets in Gainesville. Management of the Company believes that all of its properties are adequately covered by insurance.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the subject of, any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company during the fourth quarter of its fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Common Stock. As of January 1, 1998, there were 459 holders of record of the Common Stock. Management is aware of 9 and 16 trades of Company stock during 1997 and 1996, respectively. During 1997, trades were made in blocks of 100 shares to 2,850 shares at prices ranging from $20.00 to $26.50 per share. During 1996 trades were made in blocks of 25 shares to 7,500 shares at prices ranging from $18.50 to $20.00 per share.
In 1997, the Company paid cash dividends of $.14 per share. In addition, the Company had a thirty-for-one stock split effected as a stock dividend on December 28, 1995. The Company paid cash dividends of $.14 in 1996. The Company intends to continue to pay cash dividends. However, the amount and frequency of dividends will be determined by the Company's Board of Directors in light of the earnings, capital requirements and the financial condition of the Company, and no assurances can be given that dividends will be paid in the future. The Company's ability to pay dividends will also be dependent on cash dividends paid to it by the Community Banking Subsidiaries. The ability of the Community Banking Subsidiaries to pay dividends to the Company is restricted by applicable regulatory requirements. See " ITEM 1 -- BUSINESS -- Supervision and Regulation."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The following is a discussion and analysis of the Company's financial condition at December 31, 1997 and the results of operations for the three year period ended December 31, 1997. The purpose of the discussion is to focus on information about the Company's financial condition and results of operations which are not otherwise apparent from the audited consolidated financial statements included in this annual report. This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and the selected financial information and statistical data presented elsewhere in this Annual Report.
BALANCE SHEET REVIEW. The Company experienced significant growth during 1997. For the year ended December 31, 1997, consolidated assets grew $61.5 million, or 19.49%, up from 1996 growth of $45.6 million or 16.88%. During 1997, the Company's average assets were $342.1 million, compared with $289.3 million during 1996. This represents an 18.24% increase in average assets during 1997 compared with a 12.75% increase during 1996.
Total earning assets, which include investment securities, loans, Federal Funds sold, and interest-bearing deposits in banks increased $53.5 million or 19.09% during 1997. During 1996, earning assets increased $34.0 million, or 13.78%. Average earning assets for 1997 were $309.5 million, an increase of 17.58% over average earning assets in 1996 which were $263.3 million or an increase of 12.18% over 1995.
Total investments increased by $15.9 million or 24.11% over 1996. Average investments were $76.2 million for 1997, a 27.30% increase over average investments for 1996. This increase occurred mainly in the held to maturity portfolio and it was represented by increased investments in bank qualified municipals in an attempt to increase the yield and lower tax liabilities of the Company.
Total loans grew by $39.4 million during 1997 for an increase of 19.36% over 1996. During 1997 average loans were $223.2 million or an increase of 16.73% over 1996 compared to an increase during 1996 of 12.11% to 191.2 million. The increase in loans is primarily the result of loan growth in the new markets into which the Company entered in Hall and White Counties, along with the continued growth of the Loan Production Office (LPO).
As a result of increased investing and lending activities Federal Funds sold decreased by $2.4 million or 28.5% from year end 1996 to 1997. Average Federal Funds for 1997 were $9.7 million or an 18.2% decrease. During 1996, average Federal Funds sold had shown an increase of $2.7 million or 29.7% over 1995.
The growth in assets for the year ended December 31, 1997 was funded mainly by growth in deposits. Consolidated deposits grew $56.8 million or 20.4% as compared to $36.3 million or 14.96% in 1996. This growth was aided by the purchase and assumption of a branch of SunTrust Bank in Clarkesville, Georgia, which added approximately $12.4 in deposits to the Company's consolidated deposits. Deposit growth was fairly evenly spread over every deposit product offered by the Company as stable interest rates did little to influence deposit movement during 1997.
As shown in Table 2 of the Selected Statistical Data, the average yields on interest earning assets and interest bearing liabilities showed very little change from 1996 to 1997 due to a fairly stable interest rate environment. The net interest spread was down 4 basis points from 1996 to 1997, and the net interest margin was down 1 basis point from 1996 to 1997.
At December 31, 1997, the Company reported net unrealized gains of approximately $217,000 in the securities available for sale portfolio as compared to net unrealized losses of approximately $124,000 at December 31, 1996. Net unrealized losses represent the difference in the amortized cost of those securities compared to the fair value at those dates and are included in shareholders' equity, net of the deferred tax effect. Management sells securities to meet liquidity needs and may sell securities in rising interest-rate environments to take advantage of higher returns in the long run. In 1997 the Company sold $10.7 million of securities classified as available for sale, realizing net losses of $3,992 on a consolidated basis. The held to maturity securities portfolio included net unrealized gains of approximately $839,000 at December 31, 1997. Table 4 of the Selected Statistical Data summarizes the combined investment portfolios by types of securities. U.S. Treasury and other U.S. Government agencies and corporations represent 35.5% of the total portfolio, which typically provide reasonable returns with limited risk. The remaining portfolio is comprised of municipal securities, mortgage-backed securities, and other investments which provide, in general, higher returns on a tax equivalent basis, with greater risk elements. Management regularly monitors the Company's investment portfolios and utilizes forecasting models to project the Company's net interest margin in various rising, flat, and falling interest-rate scenarios. In a changing interest rate environment, management would act to change the Company's asset or liability composition and interest sensitivity in response to a definitive change in the direction of interest rates. The Company actively manages the mix of asset and liability maturities to control the effects of changes in the general level of interest rates on net interest income. Except for the effect of inflation on interest rates, inflation does not have a material impact on the Company due to variability and short-term maturities of its earning assets repriced or matured within one year.
LIQUIDITY AND CAPITAL RESOURCES. The liquidity and capital resources of the Company and the Community Banking Subsidiaries are monitored by management and on a periodic basis by state and federal regulatory authorities. The individual Community Banking Subsidiaries' liquidity ratios at December 31, 1997 were considered satisfactory under their own guidelines as well as regulatory guidelines. At that date, the Community Banking Subsidiaries' short-term investments were adequate to cover any reasonably anticipated immediate need for funds.
The purpose of liquidity management is to ensure that cash flow is sufficient to satisfy demands for credit, withdrawals, and other needs of the Company. Traditional sources of liquidity include asset maturities and growth in core deposits. A company may achieve its desired liquidity objectives from the management of assets and liabilities, and through funds provided by operations. Funds invested in short-term marketable instruments and the continuous maturing of other earning assets are sources of liquidity from the asset perspective. The liability base provides sources of liquidity through deposit growth and accessibility to market sources of funds.
Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows are influenced by interest rates, general economic conditions and competition and may fluctuate significantly. The Company attempts to price its deposits to meet its asset/liability objectives consistent with local market conditions.
Cash flows for the Company are of three major types. Cash flows from operating activities consist primarily of interest and fees received on loans, interest received on investment securities, federal funds sold, and interest bearing deposits less cash paid for interest and operating expenses. Investing activities use cash for the purchase of interest- bearing deposits, investment securities, fixed assets and to fund loans. Investing activities also generate cash from the proceeds of matured interest-bearing deposits, matured investment securities, sales of investment securities, loan repayments and principal prepayments of securities. Cash flows from financing activities generate cash from a net increase in deposit accounts, the increases in other borrowed funds and the issuance of common stock. Financing activities use cash for the payment of cash dividends and the repayment of other borrowed funds.
For the year ended December 31, 1997, $28.7 million in cash flows from operating activities were provided by interest and fees received from loans, securities and federal funds. Approximately $12.4 million in cash flows were provided by service charges, nonbank subsidiary income, sale of loans and other income. Cash flows used in operating activities consisted of $12.9 million of interest paid on deposits and borrowings, $10.5 million paid for salaries and other personnel benefits and $11.8 million paid for occupancy and equipment expenses, income taxes and other operating payments. Cash flows of $21.1 million were provided by the proceeds of sales and maturities of investment securities. Cash flows provided by financing activities consisted of $56.8 million in net increases in deposits and were primarily used to fund the $40.2 million in et increase in loans. The net increase in cash and due from banks for the year ended December 31, 1997 was $4.5 million.
For the year ended December 31, 1996, $23.9 million in cash flows from operating activities were provided by interest and fees received from loans, securities and federal funds. Approximately $8.3 million in cash flows were provided by service charges, nonbank subsidiary income, sale of loans and other income. Cash flows used in operating activities consisted of $10.8 million of interest paid on deposits and borrowings, $8.3 million paid for salaries and other personnel benefits and $8.5 million paid for occupancy and equipment expenses, income taxes and other operating payments. Cash flows of $17.2 million were provided by the proceeds of sales and maturities of investment securities. Cash flows provided by financing activities consisted $36.3 million in net increases in deposits and were primarily used to fund the $27.0 million net increase in loans. The net increase in cash and due from banks for the year ended December 31, 1996 was $5.8 million.
At December 31, 1997, the Company's and Community Banking Subsidiaries' capital ratios were considered adequate based on minimum capital requirements of the FDIC and applicable state regulatory agencies. During 1997, the Company increased capital, by retaining net earnings of $5.3 million ;and issuing $.9 million of common stock, compared to an increase in 1996 of $3.8 million in retained net earnings and $1.0 million in common stock. Management believes that the liquidity and capital ratios of the Company and the Community Banking Subsidiaries are adequate based on regulatory requirements.
The Company is capable of meeting its debt service requirements related to existing long-term and other borrowings through dividends available from its subsidiaries and current operations. At December 31, 1997, approximately $3 million was available to be paid as dividends to the Company from the Community Banking Subsidiaries. Although the Company considers that it has adequate capital to meet it short-term needs, the Company, at times, may seek additional capital to support its long-term business goals, including expansion of its fixed asset base, and for general corporate purposes.
For a tabular presentation of the Community Banking Subsidiaries' capital ratios at December 31, 1997 see "SUPERVISION AND REGULATION".
The Company is not aware of any other trends, events or uncertainties that will have or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or operations. The Company is not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have such an effect.
EFFECTS OF INFLATION. Inflation impacts banks differently than non- financial institutions. Banks, as financial intermediaries, have assets which are primarily monetary in nature and which tend to fluctuate with inflation. A bank can reduce the impact of inflation by managing its rate sensitivity gap, which represents the difference between rate- sensitive assets and rate-sensitive liabilities. The Company, through its asset-liability committee, attempts to structure the assets and liabilities and manage the rate-sensitivity gap, thereby seeking to minimize the potential effects of inflation. See "ASSET/LIABILITY MANAGEMENT".
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET INTEREST INCOME. The Company's results of operations are influenced by management's ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate non- interest income and to control operating expenses. Because interest rates are determined by market forces and economic conditions beyond the control of the Company, the Company's ability to generate net interest income is dependent upon its ability to obtain an adequate net interest spread between the rate paid on interest-bearing liabilities and the rate earned on interest-earning assets. The Company's net interest income increased by $2.3 million for the year ended December 31, 1997 as compared to an increase of $1.2 million for the same period in 1996. The increase in net interest income is attributable to increases in earning assets, particularly loans. The yield on interest-earning assets declined 2 basis points in 1997 from 1996. This decrease combined with the increase in average interest earning assets of $46.3 million, net of the increase in average interest-bearing liabilities of $38.4 million, accounts for the 17.3% increase in net interest income. Net interest income increased for all Community Banking Subsidiaries as shown below:
The 4 basis point decrease in the net interest spread in Table 2 is indicative of the changes in the interest rate environment. The increase in rates on time deposits slightly outpaced the increase in rates on loans which was the main cause for the decrease in net interest spread. The Company will continue to actively monitor and maintain the net interest spread to counter act the current market trends. Net interest income for 1996 increased $1.2 million over 1995. The increase is mainly attributable to growth in earning assets outpacing the growth in interest bearing liabilities as shown in Table 1.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year ended December 31, 1997 increased by $178,954 from $757,262 at December 31, 1996. This increase is associated with loan growth, as management maintains an allowance for loan losses based on the evaluation of potential problem loans as well as minimal reserves for all loans based on past net charge-off experience. The provision for loan losses decreased $91,538 in 1996 compared to 1995 mainly due to improved loan quality. The guaranteed portion of loans generated by the LPO are subsequently sold. Because most loans generated by the LPO are out-of market, the loans generated by the LPO require additional allowances due to the greater risk of loss in the event of a default. These loans, however, are subjected to the same underwriting standards and periodic loan review procedures as other loans made by the Community Banking Subsidiaries.
As shown in Table 8 of the Selected Statistical Data, nonperforming loans, which includes nonaccrual and restructured loans, decreased $508,000 from December 31, 1996 compared to a $346,000 decrease over 1995. Management has reviewed these loans and determined that the likelihood of any loss in principal is minimal because the loans are adequately collateralized. The ratio of the allowance for loan losses to nonperforming loans increased from 207% at December 31, 1996 to 327% at December 31, 1997. In 1995, the Company adopted FASB 114 and 118, which requires that impaired loans be measured based on the present value of expected future cash flows, the loan's observable market price or at the fair value of the collateral if collateral dependent. At December 31, 1997, impaired loans included all restructured loans, as were all nonaccrual loans. However, the Company determined that no reserves were required because of the Company's collateral positions.
The allowances for loan losses as a percentage of total loans outstanding at December 31, 1997 and 1996 was 1.64% and 1.75%, respectively. Net charge-offs in 1997 increased by $280,000 from $225,000 in 1996, and the net charge-off ratio increased from .12 in 1996 to .23 in 1997. Based on management's evaluation of the loan portfolio, including a review of past loan losses, current conditions which may affect borrowers' ability to repay and the underlying collateral value of the loans, management considers the allowance for loan losses to be adequate.
The Company continues to have a concentration in real estate loans, representing 37.4% and 32.9%, respectively, of total loans at December 31, 1997 and 1996. Management has implemented policies to limit extensions of credit to one borrower and its affiliates. By this method, along with proper underwriting standards, a fully implemented loan review system and geographic diversification, management attempts to minimize the risk associated with the concentrations of credit.
OTHER INCOME. Other operating income consists of income from operations of the Community Banking Subsidiaries and Financial Supermarkets (not including Holding Company other income). Traditional non-interest income of the Community Banking Subsidiaries accounts for only 29.0%, or $3.6 million of total other income for 1997, 33.8% in 1996, and 39.2% in 1995.
The majority of the increase in other operating income of the Community Banking Subsidiaries is related to the growth in deposits. Service charges on deposit accounts increased by $ 473,000 and $205,000, respectively, for the years ended December 31, 1997 and 1996. These increases normally have a direct relationship with the change in demand deposit and savings accounts. Average noninterest-bearing demand deposit and savings accounts increased $10.7 million in 1997 compared to $6.0 million increase in 1996 over 1995. Included in other operating income of the Community Banking Subsidiaries are gains on sale of loans recognized by Community-Habersham and Jackson of $273,000 and $341,000, respectively. This represents an increase from 1996 of $233,000.
The allocation of services as a percentage of total income for Financial Supermarkets is shown below:
FINANCIAL SUPERMARKETS
Consulting Services provided for Supermarket bank installation and opening 74% Supermarket consulting and ancillary services 22 Other Miscellaneous Consulting Services 4 --- 100%
The primary business of Financial Supermarkets(R) "FSI" is services offered in connection with the establishment and operation of a Supermarket Bank(R) service center. In 1997, Financial Supermarkets had net consulting revenue of $6.6 million compared to $4.2 million in 1996, an increase of $2.4 million or 56%. The increase in net consulting revenues in 1996 over 1995 was $1.8 million, or 73%.
In 1997, FSI entered into a contract with NationsBanc Services, Inc. ("NationsBank") to provide services with respect to construction and installation of Supermarket Bank units in the State of Florida. This contract significantly increased net income as well as other expenses in 1997. During 1997 FSI provided agency and consulting services with respect to a total of 46 banking center units, of which 15 were part of the NationsBank contract. Income related to the NationsBank contract began to be recognized in the fourth quarter of 1996 with the commencement of the first phase of the project to open 40 banking units. In 1997 NationsBank restructured the contract to provide that FSI would not be providing services with respect to the opening of any additional banking center units after the first 40 units.
The contract provides, however, that FSI will receive monthly ongoing consulting fees in connection with any supermarket bank units opened by NationsBank in Winn-Dixie Stores located in the state of Florida. These consulting fees will continue for 15 years after the date the supermarket branch is opened, decreasing gradually after each five year period. Currently the FSI is collecting consulting fees on 80 supermarket branches in operation under this agreement.
While the NationsBank contract accounted for a significant extraordinary increase in consulting revenue in 1996 and 1997, which will not be repeated in 1998, FSI continues to increase its number of units completed for each of the last three years and this trend is expected to continue.
NON-INTEREST EXPENSE. Other expenses increased for the year ended December 31, 1997 by $3.8 million compared to the $2.0 million increase in 1996. This represented a 25.2% increase in expenses for 1997 and 15.27% increase in 1996. Most significant in both years was the increase in salaries and benefits which is directly related to the growth in the banking subsidiaries. For the years ended 1997, 1996, and 1995 the Company had total employees (F.T.E.) of 249, 216, and 172, respectively. Other expenses increased by 1.1 million in 1997 and 1.3 million in 1996 primarily due to growth and increased activity of FSI.
Equipment and occupancy expenses increased by approximately $383,000 in 1997 over 1996 and approximately $211,000 in 1996 over 1995 due to the increased number of facilities operated by the Community banking subsidiaries. The Company operated 23, 18, and 16 locations at year ends 1997, 1996, and 1995, respectively. As 1997 closed, preparations were being made to open three additional facilities in the first quarter of 1998. Management expects those locations to add to the continued growth and profitability of the Company.
INCOME TAXES. The Company incurred income tax expenses of $ 2.6 million in 1997 which represented an effective tax rate of 32%, compared to tax expense of $1.9 million in 1996, or an effective tax rate of 32%. Income tax expense increased $ 1.3 million from 1995 to $1.9 million in 1996. The effective tax rate at December 31, 1995 was 29%. The increase in the effective tax rate is related to the increased income of Financial Supermarkets, which does not have a portion of its income tax-free as do the Community Banking Subsidiaries.
NET INCOME. The Company's net income for 1997 was $5.6 million, as compared to $4.0 million in 1996, an increase of 39%. The increase in net income between 1997 and 1996 is primarily attributable to the additional interest and fees on loans related to growth and the performance of Financial Supermarkets. Net income for 1996 increased to $4.0 million or 29% over 1995's net income of $3.1 million.
ASSET/LIABILITY MANAGEMENT. The Company's objective is to manage assets and liabilities to maintain satisfactory and consistent profitability. Officers of each Community Banking Subsidiary are charged with monitoring policies and procedures designed to ensure an acceptable asset/liability mix. Management's philosophy is to support asset growth primarily through growth of core deposits within the Community Banking Subsidiaries' market areas.
The Company's asset/liability mix is monitored regularly with a report reflecting the interest rate sensitive assets and interest rate sensitive liabilities is prepared and presented to the Board of Directors of each Community Banking Subsidiary monthly. Management's objective is to monitor interest rate sensitive assets and liabilities so as to minimize the impact on earnings of substantial fluctuations in interest rates. An asset or liability is considered to be interest rate-sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within the relevant period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If the Company's assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, the Company also evaluates how changes in interest rates impacts the repayment of particular assets and liabilities. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may significantly effect net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as "interest rate caps and floors") which limit changes in interest rates. Also, prepayments and early withdrawal levels could deviate significantly from those assumed in calculating the interest rage gap. The ability of many borrowers to service their debts may decrease in the event of an interest rate increase. Changes in interest rates also effect the Company's liquidity position, if deposits are not priced in response to market rates, a loss of deposits could occur which would negatively effect the Company's liquidity position. The Company prepares a report monthly that measures the potential impact on net interest margin by rising or falling rates. This report is reviewed monthly by the Asset/Liability Committee and quarterly by each Board of Directors. (See "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK")
At December 31, 1997, the Company's cumulative one year interest rate sensitivity gap ratio was 95%. The Company was cumulatively within its targeted range of 80% to 120% for all time horizons.
The following table sets forth the distribution of the repricing of the Company's earning assets and interest-bearing liabilities as of December 31, 1997, the interest rate sensitivity gap, the cumulative interest rate-sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative interest rate-sensitivity gap ratio. The table also sets forth the time periods in which earning assets and liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Company's customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact, reprice at different times within such period and at different rates.
YEAR 2000 COMPLIANCE
The "year 2000 issue" arises from the widespread use of computer programs that rely on two-digit codes to perform computations or decision-making functions. Many of these programs may fail due to an inability to properly interpret date codes beginning January 1, 2000. For example, such programs may misinterpret "00" as the year 1900 rather than 2000. In addition, some equipment, being controlled by microprocessor chips, may not deal appropriately with the year "00". The Bank is evaluating its computer systems to determine which modifications and expenditures will be necessary to make its systems compatible with year 2000 requirements. The Company believes that their systems will be year 2000-compliant upon implementation of such modifications.
Prior to the emergence of the year 2000 issue, management had made a decision to install a new data processing system along with a wide area network. Currently the installation is under way with an estimated conversion date of November 1999. This new data processing system along with a wide area network are both certified year 2000 compliant. In addition to the $1,500,000 estimated cost of this installation, the Company anticipates expenses of approximately $500,000 will be necessary to modify other data systems prior to the Year 2000. However, there can be no assurance that all necessary modifications will be identified and corrected or that unforeseen difficulties or costs will not arise. In addition, there can be no assurance that the systems of other companies on which the Company depends will be modified on a timely basis, or that the failure by another company to properly modify its systems will not negatively impact the systems or operations of the Bank.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed only to U.S. dollar interest rate changes and accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of the investment portfolio as held for trading. The Company does not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage backed securities which are commonly pass through securities. Finally, the Company has no exposure to foreign currency exchange rate risk, commodity price risk, and other market risks.
Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as "interest rate risk." The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of the Company's asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap management. It is the policy of the Company to maintain Gap ratio in the one-year time horizon of .80 to 1.20. See " ASSET/LIABILITY MANAGEMENT" .
GAP management alone is not enough to properly manage interest rate sensitivity, because interest rates do not respond at the same speed or at the same level to market rate changes. For example, savings and money market rates are more stable than loans tied to a "Prime" rate and thus respond with less volatility to a market rate change.
The Company uses a simulation model to monitor changes in net interest income due to changes in market rates. The model of rising, falling and stable interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net interest margins as well as market value of equity over a twelve month period is subjected to a 200 basis point increase and decrease in rate. The February model reflects an increase of 5% in net interest income and a 6% decrease in market value equity for a 200 basis point increase in rates. The same model shows a 5% decrease in net interest income and a 5% increase in market value equity for a 200 basis point decrease in rates. The Company's policy is to allow no more than +- 8% change in net interest income and no more than +- 25% change in market value equity for these scenarios. Therefore, the Company is within its policy guidelines and is protected from any significant impact due to market rate changes.
SELECTED STATISTICAL INFORMATION
The tables and schedules on the following pages set forth certain significant financial information and statistical data with respect to the distribution of assets, liabilities and shareholders' equity of the Company; the interest rates and interest differentials experienced by the Company; the investment portfolio of the Company; the loan portfolio of the Company, including types of loans, maturities and sensitivity to changes in interest rates and information on nonperforming loans; summary of the loan loss experience and reserves for loan losses of the Company; types of deposits of the Company and the return on equity and assets for the Company.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIALS
TABLE 1 AVERAGE BALANCES
The condensed average balance sheets for the periods indicated are presented below.
1997 1996 1995 -------------------------------- ASSETS
Cash and due from banks $ 16,260 $ 13,539 $ 10,844 Interest-bearing deposits in banks 488 364 293 Taxable securities 50,957 43,337 43,506 Nontaxable securities 25,223 16,520 11,206 Unrealized losses on securities available for sale (93) (130) (256) Federal Funds Sold 9,704 11,864 9,146 Loans 223,170 191,180 170,525 Allowance for loan losses (3,873) (3,368) (2,944) Other assets 20,243 16,013 14,271 --------------------------------
342,079 289,319 256,591 ===============================+
Total interest-earning assets $ 309,542 $ 263,265 $ 234,676 ================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: Noninterest-bearing demand $ 41,472 $ 33,052 $ 28,031 Interest-bearing demand 61,638 57,240 53,498 Savings 15,387 13,145 12,141 Time 185,936 153,814 135,493 --------------------------------
Total deposits 304,433 257,251 229,163
Other borrowings 545 885 2,205 Other liabilities 6,894 6,489 4,389 --------------------------------
Total liabilities 311,872 264,625 235,757 --------------------------------
Shareholders' equity 30,207 24,694 20,834 --------------------------------
$ 342,079 $ 289,319 $ 256,591 ================================
Total interest-bearing liabilities $ 263,506 $ 225,084 $ 203,337 ================================
TABLE 2 INTEREST INCOME AND INTEREST EXPENSE
The following tables set forth the amount of the Company's interest income and interest expense for each category of interest-earning asset and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets.
TABLE 3 RATE AND VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and expense during the year indicated. For each category of interest- earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) change in volume (change in volume multiplied by old rate); (2) change in rate (change in rate multiplied by old volume); and (3) a combination of change in rate and change in volume. The changes in interest income and interest expense attributable to both volume and rate have been allocated proportionately to the change due to volume and the change due to rate.
INVESTMENT PORTFOLIO
TABLE 4 TYPES OF INVESTMENTS
The carrying amounts of securities at the dates indicated are summarized as follows :
The Community Banking Subsidiaries' mortgage-backed portfolio consists of fifty-two U.S. Government corporation collateralized mortgage obligations. The actual maturity of these securities will differ from the contractual maturity because borrowers on the underlying loans may have the right to prepay obligations with or without prepayment penalties. Decreases in interest rates will generally cause prepayments to increase while increases in the interest rates will have the opposite effect on prepayments. Prepayments of the underlying loans may shorten the life of the security, thereby adversely affecting the yield to maturity. In an increasing interest rate, the Community Banking Subsidiaries may have an obligation yielding a return less than the current yields on securities. However, because the majority of these in mortgage-backed securities have adjustable rates, negative effects of changes in interest rates on earnings and carrying values of these securities are somewhat mitigated.
The amounts of securities in each category as of December 31, 1997 are shown in the following table according to maturity classifications of one year or less, after one year through five years, after five years through ten years, and after ten years.
LOAN PORTFOLIO
TABLE 6 Types of Loans
The amount of loans outstanding at the indicated dates are in the following table according to the type of loan.
See "Business Description of the Community Banking-Loans" for a description of the composition of each loan, the underwriting criteria and risks that are unique to each.
TABLE 7 MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Total loans as of December 31, 1997 are shown in the following table according to maturity classifications one year or less, after one year through five years and after five years.
December 31, 1997 (Dollars in Thousands)
Maturity: One year or less: Commercial, financial and agricultural $ 80,511 Real estate-construction 21,234 All other loans 35,171 --------- $ 136,916 --------- After one year through five years: Commercial, financial $ 16,929 Real estate-construction - All other loans 46,246 --------- $ 63,175 --------- After five years: Commercial, financial and agricultural $ 20,936 Real estate-construction - All other loans 24,194 --------- $ 45,130 ---------
$ 245,221 =========
The following table summarizes loans at December 31, 1997 with due dates after one year which have predetermined and floating or adjustable interest rates.
December 31, 1997 (Dollars in Thousands)
Predetermined interest $ 60,145 Floating or adjustable 48,160 --------- $ 108,305 ---------
Records were not available to present the above information in each loan category listed in the first paragraph above and could not be reconstructed without undue burden and cost to the Company. TABLE 8 Nonaccrual, Past Due and Restructured Loans
Information with respect to nonaccrual past due and restructured loans at the indicated dates is as follows:
The reduction in interest income associated with nonaccrual and renegotiated loans as of December 31, 1997 is as follows:
December 31, 1997 ----------------- Interest income that would have been recorded on nonaccrual and restructured loans under original terms $83,000 =======
Interest income that was recorded on nonaccrual and restructured loans $36,000 =======
The Community Banking Subsidiaries' policy is to discontinue the accrual of interest income when, in the opinion of management, collection of such interest becomes doubtful. This status is accorded such interest when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected and (2) the principal or interest is more than ninety days past due, unless the loan is both well-secured and in the process of collection. Accrual of interest on such loans is resumed, in management's judgment, the collection of interest and principal become probable. Loans classified for regulatory purposes as loss, substandard, or special mention that have not been included in the table above do not represent or result from trends or uncertainties which management reasonably expects will materially effect future operating results, liquidity or capital resources. These classified loans do not represent material credits about which management is aware and which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
COMMITMENTS AND LINES OF CREDIT
The Community Banking Subsidiaries will, in the normal course of business, commit to extend credit in the form of letters of credit or lines of credit. The amount of outstanding loan commitments and letters of credit at December 31, 1997 and 1996 were $23,665,522 and $17,131,200, respectively. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
SUMMARY OF LOAN LOSS EXPERIENCE
TABLE 9
The following table summarizes average loan balances for each year determined using the daily average balances during the year; changes in the reserve for possible loan losses arising from loans charged off and recoveries on loans previously charged off; additions to the reserve which have been charged to operating expense; and the ratio of net charge-offs during the year to average loans.
DEPOSITS
TABLE 10
The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 1997 are shown below by category, which is based on time remaining until maturity of (1) three months or less, (2) over three through six months, (3) over six through twelve months and (4) over twelve months.
December 31, 1997 (Dollars in Thousands) ------------------------
Three months or less $20,867 Over three through six months 9,718 Over six through twelve months 12,066 Over twelve months 13,198 ------- $55,849 =======
RETURN ON ASSETS AND SHAREHOLDERS'' EQUITY
TABLE 11
The following rate of return information for the years is presented below.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the report of independent public accountants are included in this report beginning at page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
During the Company's two most recent fiscal years, the Company did not change accountants and had no disagreement with its accountants on any matters of accounting principles or practices or financial statement disclosure.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a brief description, as of December 31, 1997, of the business experience of each of the directors and executive officers of the Company who, except as otherwise indicated, has been or was engaged in his or her present of last principal employment, in the same or a similar position, for more than five years:
Steven C. Adams Mr. Adams has been an attorney with the firm (49) of Adams, Ellard P.C. since 1973 and president of Chatham Transport Company, a trucking company, since 1994. He has been a director of the Company, Community - Habersham, and Financial Supermarkets since 1990.
Edwin B. Burr Mr. Burr has served as a director of the Company (64) since April of 1995 and Financial Supermarkets since 1992. Mr. Burr has been president of Financial Solutions, a bank consulting firm, since 1988.
Elton S. Collins Mr. Collins has been the President and Chief (54) Executive Officer of Community - Jackson since 1982.
Annette R. Fricks Mrs. Fricks has been an Executive Vice President (53) and Corporate Secretary of the Company and Community - Habersham since 1992 and 1967, respectively, and has also served as Corporate Secretary of Financial Supermarkets since 1984.
Charles M. Miller Mr. Miller has served as an Executive Vice (56) President of Company, the President and Chief Operating Officer and director of Community - Habersham and the Executive Vice President and director of Financial Supermarkets since 1990. Mr. Miller has served as a director of Community - Troup since November 1994. Mr. Miller previously was president and a director of the LaGrange, Georgia branch of Citizens and Southern National Bank (now known as NationsBank, N.A.) from 1980 - 1990.
Harry H. Purvis Mr. Purvis is a retired executive of Johnson & (91) Johnson, Inc., a textile manufacturer, and has been a director of the Company since 1981 and Community - Habersham since 1956. Mr. Purvis has also served as a director of Financial Supermarkets since 1984.
Harry L. Stephens Mr. Stephens has been an Executive Vice President (51) and the Chief Financial Officer of the Company and Community - Habersham since 1992 and has served as Treasurer of Financial Supermarkets since 1986. He was Senior Vice President of Community - Habersham from 1986 to 1992.
H. Calvin Stovall, Mr. Stovall, who is retired, was the president and Jr. (82) treasurer of Stovall Tractor Company, a retail farm equipment dealer, from 1948 until November 1995. He has served as the Chairman of the Company's Board of Directors since 1981. Mr. Stovall has also served as a director of Community - Habersham, Community - Jackson, Financial Supermarkets and Community - Troup since 1963, 1982, 1984 and November 1994, respectively.
Dean C. Swanson Mr. Swanson is president of the Standard Group, a (66) telecommunications company, and is a director of Independent Telecommunications Network. Mr. Swanson has served as a director of the Company, Community - Habersham and Financial Supermarkets since 1981, 1972, and 1984, respectively.
George D. Telford Mr. Telford is a retired bank executive and has (77) served as a director of the Company and Community - Habersham since 1981 and 1965, respectively, as well as of Financial Supermarkets since 1993.
J. Alton Wingate Mr. Wingate has served as a director and the (58) President and Chief Executive Officer of the Company, Community - Habersham and Financial Supermarkets since 1981, 1977 and 1984, respectively. Mr. Wingate has also been the chairman of the Board of Directors and a director of Community - Jackson, Community - Alabama, and Community - Troup since 1982, 1990, and November 1994, respectively. Mr. Wingate is a director of Ingles Markets, Inc.
Directors are elected at each annual meeting of shareholders and hold office until the next annual meeting and until their successors are elected and qualified. The executive officers are elected by the Board of Directors and serve at the will of the Board. There are no family relationships between executive officers and directors of the Company.
The company is not subject to Section 16(a) of the Securities Exchange Act of 1934.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the annual and long-term compensation paid by the Company to the Chief Executive Officer of the Company and the three other most highly compensated officers of the Company whose salary and bonus exceeded $100,000 during the last fiscal (the "Named Executive Officers").
DIRECTOR'S COMPENSATION. The Chairman of the Board of the Company currently receives a fee of $2,250 per month for service as the Chairman of the Board and other directors of the Board of the Company receive $2,000 a year for service on the Company's Board of Directors. The directors of Community - Habersham, Community - Jackson, Community - Alabama, Community - Troup and Financial Supermarkets currently receive fees of $10,000, $3,600, $3,000, $3,600, and $4,000 per year, respectively.
AGREEMENTS WITH OFFICERS. In 1990, Community - Habersham entered into an employment agreement with Mr. Miller pursuant to which the parties agreed that Mr. Miller would serve as the President, Chief Operating Officer and General Manager of Community - Habersham. The initial term of the agreement was one year, subject to successive automatic renewals of one year each unless (i) either party gives written notice at least 60 days prior to the annual renewal date of the desire to terminate, or (ii) Community - Habersham terminates for cause (as defined in the agreement).
The agreement provides for Mr. Miller to receive an annual salary of $125,000 plus certain benefits and perquisites. The agreement also entitles Mr. Miller to certain severance payments following a change of control (as defined in the agreement) of Community - Habersham. Further, Mr. Miller agrees that he will not compete with or solicit certain customers from Community - Habersham within Habersham or Jackson County (or any contiguous county) for a period of three years after termination of Mr. Miller's employment with Community - Habersham.
In 1987, Community - Habersham and Mr. Wingate entered into a change-in-control agreement for a three year term, renewable for an additional one year period annually thereafter in the sole discretion of the compensation committee of the Board of Directors of Community - Habersham. In the event of a change in control (as defined in the agreement) of Community - Habersham and Mr. Wingate's employment is involuntarily terminated other than for cause, disability or retirement or is voluntarily terminated as a result of a material reduction of duties, compensation or benefits or a forced relocation, the agreement provides for the payment of certain severance benefits to Mr. Wingate. Such benefits include the continuation of salary payments to Mr. Wingate for a period of 36 months from the date of termination, the payment of certain bonuses for the year in which his employment is terminated and the following two calendar years, the continuation of health and life insurance coverage and the continued participation by Mr. Wingate in all employee retirement plans.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the percent and number of shares of the Common Stock beneficially owned as of January 1, 1998 by (i) each of the Named Executive Officers, (ii) each of the directors of the Company, (iii) each shareholder who owns greater than five percent (5%) of the Company's securities and (iv) all executive officers and directors of the Company as a group, without naming such individuals. There were 2,169,830 shares outstanding as of that date.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Each of the Community Banking Subsidiaries has had, and expects to have in the future, banking transactions in the ordinary course of business with directors and officers of the particular bank and the Company and their associates, including corporations in which such officers or directors are shareholders, directors and/or officers, on the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Such transactions have not involved more than the normal risk of collectibility or presented other unfavorable features.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements.
The following financial statements and notes thereto of the Registrant are included in the Report:
Independent Auditor's Report on the Financial Statement
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statement of Income for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholder's Equity for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(b) Exhibits.
The following exhibits are required to be filed with this Report by Item 601 of Regulation S-K:
Exhibits - --------
3.1 Articles of Incorporation of the Registrant, as amended (included as Exhibit 3.1 to the Registrant's Form 10-K for the year ended December 31, 1995, previously filed with the Commission and incorporated herein by reference).
3.2 By-Laws of the Registrant (included as Exhibit 3.3 to the Registrant's Form S-4 Registration Statement, Commission File No. 33-81890, previously filed with the Commission and incorporated herein by reference).
4.1 See exhibits 3.1 and 3.2 for provisions of Articles of Incorporation and Bylaws as amended, which define the rights of the holders of Common Stock of the Registrant (included as Exhibit 4.1 to the Registrant's Form S-4 Registration Statement, Commission File No. 33-81890, previously filed with the Commission and incorporated herein by reference).
10.1 Incentive Stock Option Plan, as adopted August 17, 1987 (included as Exhibit 10.1 to the Registrant's Form S-4 Registration Statement, Commission File No. 33-81890, previously filed with the Commission and incorporated herein by reference).
10.2 Employment Agreement between Charles M. Miller and Community - Habersham, dated March 31, 1990 (included as Exhibit 10.2 to the Registrant's Form S-4 Registration Statement, Commission File No. 33-81890, previously filed with the Commission and incorporated herein by reference).
10.3 Agreement Regarding Change in Control between J. Alton Wingate and Community - Habersham, dated August 17, 1987 (included as Exhibit 10.3 to the Registrant's Form S-4 Registration Statement, Commission File No. 33-81890, previously filed with the Commission and incorporated herein by reference).
10.4 Profit Sharing Plan, dated September 30, 1993 (included as Exhibit 10.4 to the Registrant's Form S-4 Registration Statement, Commission File No.33-81890, previously filed with the Commission and incorporated herein by reference).
10.5 Amended and Restated Revolving Credit/Term Loan Agreement between the Registrant and SunTrust Bank dated July 21, 1997
10.6 Master Consulting Agreement between Financial Supermarkets, Inc. and NationsBanc Services, Inc. (included as Exhibit 10.1 to the Registrant's Form 10-QSB for the period ended March 31, 1996 and incorporated herein by reference).
10.7 Amendment No. 2 to Master Consulting Agreement between Financial Supermarkets, Inc. and NationsBanc Services, Inc. dated July 3, 1997.
21 List of Subsidiaries of Registrant (included as Exhibit 21 to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994, previously filed with the Commission and incorporated herein by this reference).
27.1 Financial Data Schedule (for SEC use only)
27.2 Restated Financial Data Schedule (year ended Dec. 31, 1996)
27.3 Restated Financial Data Schedule (quarters ended June 30, 1996 and September 30, 1996)
27.4 Restated Financial Data Schedule (quarters ended March 31, 1997, June 30, 1997 and September 30, 1997)
99 Proxy materials
(c) No reports on Form 8-K were filed during the last quarter of 1997.
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT DECEMBER 31, 1997
________________________________________________________________________
-----------------
Page ----
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS
Consolidated balance sheets. . . . . . . . . . . . . . . . Consolidated statements of income. . . . . . . . . . . . . Consolidated statements of shareholders' equity. . and Consolidated statements of cash flows. . . . . . . and Notes to consolidated financial statements . . . . to
-i-
INDEPENDENT AUDITOR'S REPORT ________________________________________________________________________
To the Board of Directors Community Bankshares, Inc. and Subsidiaries Cornelia, Georgia
We have audited the accompanying consolidated balance sheets of Community Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Mauldin & Jenkins, LLC - ----------------------------- MAULDIN & JENKINS, LLC
Atlanta, Georgia January 9, 1998
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ===============================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Community Bankshares, Inc. (the Company) is a multi-bank holding company whose business is presently conducted by its wholly- owned subsidiaries: Community Bank & Trust - Habersham located in Cornelia, Georgia; Community Bank & Trust - Jackson located in Commerce, Georgia; Community Bank & Trust - Alabama located in Union Springs, Alabama; and Community Bank & Trust - Troup located in LaGrange, Georgia. Financial Supermarkets, Inc. is a wholly-owned subsidiary of Community Bank & Trust - Habersham which provides a variety of bank related products and services to the financial institution industry.
The banking subsidiaries are commercial banks operating independently of one another in their respective market areas. The banking subsidiaries in Georgia have identified their primary market areas to be the county in which they are located and all surrounding counties. The Georgia banking subsidiaries are all located approximately 85 miles from the metropolitan Atlanta area. Community Bank & Trust - Alabama is located approximately 50 miles from Montgomery, Alabama. Financial Supermarkets, Inc. currently provides products and services primarily in the southeastern United States; however, their products and services are marketed internationally. The Banks provide a full range of banking services to individual and corporate customers in their primary market areas and surrounding counties.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and accounts are eliminated in consolidation.
The accounting and reporting policies of the Company conform to generally accepted accounting principles and general practices within the financial services industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the year. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash on hand, cash items in process of collection, and amounts due from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may exceed Federally insured limits. The Company has not experienced any losses in such accounts.
SECURITIES
Securities are classified based on management's intention on the date of purchase. Securities which management has the intent and ability to
maturity and reported at amortized cost. All other securities are classified as available- for-sale and carried at fair value with net unrealized gains and losses included in shareholders' equity, net of tax. Equity securities without a readily determinable fair value are carried at cost.
Interest and dividends on securities, including amortization of premiums and accretion of discounts, are included in interest income. Realized gains and losses from the sales of securities are determined using the specific identification method.
LOANS HELD FOR SALE
Loans held for sale include mortgage and other loans and are carried at the lower of aggregate cost or fair value.
LOANS
Loans are carried at their principal amounts outstanding less unearned income and the allowance for loan losses. Interest income on loans is credited to income based on the principal amount outstanding.
Loan origination fees and certain direct costs of most loans are recognized at the time the loan is recorded. Loan origination fees and costs incurred for other loans are deferred and recognized as income over the life of the loan. Because net origination loan fees and costs are not material, the results of operations are not materially different than the results which would be obtained by accounting for all loan fees and costs in accordance with generally accepted accounting principles.
The allowance for loan losses is maintained at a level that management believes to be adequate to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, composition of the loan portfolio, and other risks inherent in the portfolio. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Company's allowance for loan losses, and may require the Company to record additions to the allowance based on their judgment about information available to them at the time of their examinations.
The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. Interest income is subsequently recognized only to the extent cash payments are received.
A loan is impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the terms of the loan agreement. Individually identified impaired loans are measured based on the present value of payments expected to be received, using the contractual loan rate as the discount rate. Alternatively, measurement may be based on observable market prices or, for loans that are solely dependent on the collateral for repayment, measurement may be based on the fair value of the collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED
Other real estate owned represents properties acquired through foreclosure. Other real estate owned is held for sale and is carried at the lower of the recorded amount of the loan or fair value of the properties less estimated selling costs. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Subsequent gains or losses on sale and any subsequent adjustment to the value are recorded as other expenses.
INCOME TAXES
Income tax expense consists of current and deferred taxes. Current income tax provisions approximate taxes to be paid or refunded for the applicable year. Deferred tax assets and liabilities are recognized on the temporary differences between the bases of assets and liabilities as measured by tax laws and their bases as reported in the financial statements. Deferred tax expense or benefit is then recognized for the change in deferred tax assets or liabilities between periods. Recognition of deferred tax balance sheet amounts is based on management's belief that it is more likely than not that the tax benefit associated with certain temporary differences, tax operating loss carryforwards and tax credits will be realized. A valuation allowance is recorded for those deferred tax items for which it is more likely than not that realization will not occur.
The Company and subsidiaries file a consolidated income tax return. Each entity provides for income taxes based on its contribution to income taxes (benefits) of the consolidated group.
SALE OF LOANS
The Banks originate and sell participations in certain loans. Gains are recognized at the time the sale is consummated. The amount of gain recognized on the sale of a specific loan is equal to the percentage resulting from determining the fair value of the portion of the loan sold relative to the fair value of the entire loan including servicing rights. Any material unrecognized gain is deferred and amortized into income over the term of the portion of the loan not sold. Losses are recognized at the time the loan is identified as held for sale and the loan's carrying value exceeds its market value.
TRUST DEPARTMENT
Trust income is recognized on the cash basis in accordance with established industry practices. Reporting of such fees on the accrual basis would have no material effect on reported income.
NONBANK SUBSIDIARY REVENUE RECOGNITION
Financial Supermarkets, Inc., a wholly-owned subsidiary of Community Bank & Trust - Habersham, recognizes revenue and costs on its installation contracts on the completed-contract method of accounting. Under this method, billings and costs are accumulated during the period of installation, but no profits are recorded before the completion of the work. Provisions for estimated losses on uncompleted contracts are made at the time such losses are identified. The results of operations are not materially different than the results which would be obtained by accounting for these contracts in accordance with generally accepted accounting principles. Operating expenses, including indirect costs and administrative expenses, are charged as incurred to periodic income and not allocated to contract costs. Income from other consulting services is recognized as services are provided and costs and expenses are incurred for each individual contract.
EARNINGS PER COMMON SHARE
Basic earnings per common share are computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per share would be computed by dividing net income minus the income effect of potential common shares that are dilutive by the sum of the weighted-average number of shares of common stock outstanding and potential common shares. Potential common shares consist of stock options.
RECENT DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued, and the Bank has adopted, Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 was amended by SFAS No. 127, which defers the effective date of certain provisions of SFAS No. 125 until January 1, 1998. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of this statement did not have a material effect on the Company's financial statements.
The FASB has issued, and the Bank has adopted, SFAS No. 128, "Earnings Per Share". SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 "Earnings Per Share" and
specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential issuable common stock. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS and fully diluted EPS with diluted EPS. It also requires dual presentation of basic and diluted EPS on the face of the statement of income for all entities with complex capital structures and requires a reconciliation of the numerator and denominator for the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. The adoption of this statement did not have a material effect on the Company's financial statements.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed in equal prominence with the other financial statements. The term "comprehensive income" is used in the SFAS to describe the total of all components of comprehensive income including net income. "Other comprehensive income" refers to revenues, expenses, gains and losses that are included in comprehensive income but excluded from earnings under current accounting standards. Currently, "other comprehensive income" for the Company consists of items previously recorded directly in equity under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 130 is effective for financial statements beginning after December 15, 1997.
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as follows:
The amortized cost and fair value of securities as of December 31, 1997 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities and equity securities are not included in the categories in the following maturity summary.
Securities with a carrying value of $36,160,837 and $28,814,848 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits and for other purposes.
Gains and losses on sales of securities available-for-sale consist of the following:
DECEMBER 31, ---------------------------------- 1997 1996 1995 --------- --------- ----------
Gross gains $ 47,843 $ 21,143 $ 28,109
Gross losses (51,835) (34,892) (93,356) --------- --------- ---------
Net realized losses $ (3,992) $ (13,749) $ (65,247) ========= ========= =========
Under special provisions adopted by the Financial Accounting Standards Board in October 1995, the Banks transferred $29,644,758 from securities held-to-maturity to securities available-for-sale on December 31, 1995, resulting in a net unrealized loss of $189,519 which was included in shareholders' equity at $113,711 net of related taxes of $75,808.
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
DECEMBER 31, ------------------------------ 1997 1996 ------------- ------------
Commercial, financial, and agricultural $ 115,815,084 $ 99,746,883 Real estate - construction 21,234,000 9,506,000 Real estate - mortgage 69,541,000 57,566,000 Consumer 33,378,000 28,659,000 Other 3,011,992 8,139,791 ------------- ------------ 242,980,076 203,617,674 Unearned income (319,494) (316,134)
Allowance for loan losses (4,024,171) (3,591,958) ------------- ------------
Loans, net $ 238,636,411 $199,709,582 ============= ============
Changes in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 were as follows:
The total recorded investment in impaired loans was $1,418,094 and $1,739,091 at December 31, 1997 and 1996, respectively. None of these loans had a specific allowance for loan losses at December 31, 1997 and 1996 determined in accordance with generally accepted accounting principles. The average recorded investment in impaired loans for 1997 and 1996 was $1,577,977 and $1,966,092, respectively. There was no significant reduction or recognition of interest income on impaired loans.
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The Banks have granted loans to certain related parties, including directors, executive officers and their related entities. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan involved. Changes in related party loans for the year ended December 31, 1997 are as follows:
BALANCE, BEGINNING OF YEAR $ 3,204,173 Advances 6,218,328 Repayments (2,017,368) Changes in directors (5,535) ------------ BALANCE, END OF YEAR $ 7,399,598 ============
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31, --------------------------- 1997 1996 ------------ -----------
Land $ 1,966,267 $ 1,488,621 Buildings 7,080,247 5,040,830 Equipment 9,362,724 6,754,619 Construction in process ($758,000 estimated cost to complete) 1,392,330 1,652,390 ------------ ----------- 19,801,568 14,936,460 Accumulated depreciation (7,686,542) (6,821,458) ------------ ----------- $ 12,115,026 $ 8,115,002 ============ ===========
NOTE 5. OTHER BORROWINGS
Other borrowings consist of the following:
DECEMBER 31, --------------------------- 1997 1996 ------------ -----------
Note payable to bank, due in quarterly installments of $38,526 with interest of 7.50% at December 31, 1997, collateralized by 50,000 shares of common stock of Community Bank & Trust -Habersham. Matures December 31, 2000. $ 462,299 $ 616,399 ============ ===========
NOTE 5. OTHER BORROWINGS (CONTINUED)
Aggregate maturities required on other borrowings at December 31, 1997 are as follows:
1998 $ 154,100 1999 154,100 2000 154,099 --------- $ 462,299 =========
NOTE 6. EMPLOYEE BENEFIT PLANS
Incentive Stock Option Plan
The Company has an Incentive Stock Option Plan in which the Company can grant to key personnel options for an aggregate of 225,000 shares of the Company's common stock at not less than the fair market value of such shares on the date the option is granted. If the optionee owns shares of the Company representing more than 10% of the total combined voting power, then the price shall not be less than 110% of the fair market value of such shares on the date the option is granted. Also, the option period will not exceed ten years from date of grant. Other pertinent information related to the options is as follows:
NOTE 6. EMPLOYEE BENEFIT PLANS (CONTINUED)
INCENTIVE STOCK OPTION PLAN (CONTINUED)
UNDER OPTION AND EXERCISABLE, END OF YEAR ------------------------------------------------ WEIGHTED- WEIGHTED- AVERAGE AVERAGE REMAINING EXERCISE CONTRACTUAL NUMBER PRICE PRICE LIFE -------- -------- ---------- ------------
39,000 $ 9.85 $ 9.85 7
As permitted by Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company recognizes compensation cost for stock-based employee compensation awards in accordance with APB Opinion No. 25, ("Accounting for Stock Issued to Employees"). The Company recognized no compensation cost for stock-based employee compensation awards for the years ended December 31, 1997, 1996, and 1995. The expense related to the grant of options for the years ended December 31, 1997, 1996, and 1995 was immaterial.
401(K) PLAN
The Company has a contributory 401(K) retirement plan covering substantially all employees. Contributions to the plan charged to expense for the years ended December 31, 1997 and 1996 amounted to $77,799 and $26,237, respectively. There were no contributions for the year ended December 31, 1995.
PROFIT-SHARING PLAN
The Company had a noncontributory profit-sharing plan covering all employees, subject to certain minimum age and service requirements. The amount of the annual contribution to the plan is at the discretion of the Company's Board of Directors. The amount charged to expense was $386,482 for the year ended December 31, 1995. The plan was terminated effective January 1, 1996.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1996 the Company established an Employee Stock Ownership Plan (ESOP) for the benefit of employees who meet certain eligibility requirements. The Plan was established on January 1, 1996 in connection with the termination of the Company's Profit Sharing Plan. Contributions to the Plan are determined by the Board of Directors of the Company taking into consideration the financial condition and fiscal requirements of the Company and such other factors as the Board of Directors may deem pertinent and applicable under the circumstances. For the years ended December 31, 1997 and 1996, the Company made cash contributions of $644,133 and $488,500, respectively, to the Plan.
NOTE 6. EMPLOYEE BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
In accordance with the Plan, the Company is expected to honor the rights of certain participants to diversify their account balances or to liquidate their ownership of the common stock in the event of distribution. The purchase price of the common stock would be based on the fair market value of the Company's common stock as of the annual valuation date which precedes the date the put option is exercised. No participant has exercised these rights since the inception of the Plan, and no significant cash outlay is expected during 1998. However, since the redemption of common stock is outside the control of the Company, the Company's maximum cash obligation based on the approximate market prices of common stock as of the reporting date has been presented outside of shareholders' equity. The amount presented as redeemable common stock held by the ESOP in the consolidated balance sheet represents the Company's maximum cash obligation and has been reflected as a reduction of retained earnings.
At December 31, 1997, the ESOP held 308,870 allocated shares and 35,661 of committed-to-be-released shares. Shares held by the ESOP are considered outstanding for purposes of calculating the Company's earnings per share.
NOTE 7. INCOME TAXES
The income tax expense consists of the following:
December 31, -------------------------------------- 1997 1996 1995 ----------- ----------- ------------ Current $ 2,865,339 $ 2,112,253 $ 1,327,665 Deferred (195,033) (197,515) (33,852) Current tax effect of net operating (45,509) (45,509) (29,202) loss carryforward ----------- ----------- ----------- Income tax expense $ 2,624,797 $ 1,869,229 $ 1,264,611 =========== =========== ===========
NOTE 7. INCOME TAXES (CONTINUED)
The Company's income tax expense differs from the amounts computed by applying the Federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:
The components of deferred income taxes are as follows:
At December 31, 1997, the Company has available net operating loss carryforwards of approximately $544,000 for Federal income tax purposes. If unused, the carryforwards will expire in 2009.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 8. EARNINGS PER COMMON SHARE
Earnings per common share and common equivalent share were computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. The number of common shares was increased by the number of shares issuable upon the exercise of the stock options described in Note 6. This theoretical increase in the number of common shares was reduced by the number of common shares which are assumed to have been repurchased for the treasury with the proceeds from the exercise of the options; these purchases were assumed to have been made at the price per share that approximates market value. The treasury stock method for determining the amount of dilution of stock options is based on the concept that common shares which could have been purchased with the proceeds of the exercise of common stock options at market value are not actually outstanding common shares. The weighted average number of shares of common stock and common stock equivalents outstanding at December 31, 1997, 1996 and 1995 was 2,160,133, 2,091,419 and 2,034,494, respectively.
Effective December 20, 1995, the Company recapitalized by reducing the par value of its common stock from $10 to $1 and declaring a 30 for 1 stock split. This transaction increased the number of shares outstanding at December 31, 1995 to 1,954,500. In accordance with generally accepted accounting principles, the weighted average number of shares for 1995 was adjusted to reflect the stock split.
The following is a reconciliation of net income (the numerator) and weighted-average shares outstanding (the denominator) used in determining basic and diluted earnings per common share (EPS):
YEAR ENDED DECEMBER 31, 1997 -------------------------------------------- WEIGHTED- NET AVERAGE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ------------ ------------- ---------
Basic EPS $ 5,646,766 2,065,908 $ 2.73 ====== Effect of Dilutive Securities Stock options - 107,203 ----------- --------- Diluted EPS $ 5,646,766 2,173,111 $ 2.60 =========== ========= ======
NOTE 8. EARNINGS PER COMMON SHARE (CONTINUED)
Year Ended December 31, 1996 --------------------------------------------- Weighted- Net Average Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------
Basic EPS $ 4,044,195 1,961,597 $ 2.06 Effect of Dilutive Securities ====== Stock options - 129,822 ----------- --------- Diluted EPS $ 4,044,195 2,091,419 $ 1.93 =========== ========= ======
Year Ended December 31, 1995 -------------------------------------------- Weighted- Net Average Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------
Basic EPS $ 3,125,070 1,944,373 $ 1.61 Effect of Dilutive Securities ====== Stock options - 90,121 ----------- --------- Diluted EPS $ 3,125,070 2,034,494 $ 1.54 =========== ========= ======
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into off- balance-sheet financial instruments which are not reflected in the financial statements. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are disbursed or the instruments become payable. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet.
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company'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. A summary of the Company's commitments is as follows:
DECEMBER 31, -------------------------- 1997 1996 ------------ ------------
Commitments to extend credit $ 20,312,022 $ 13,890,000 Standby letters of credit 3,353,500 3,241,200 ------------ ------------ $ 23,665,522 $ 17,131,200 ============ ============
Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to customers. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. 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 Company deems necessary.
In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management of the Company, any liability resulting from such proceedings would not have a material effect on the Company's financial statements.
The Company has leased thirteen various properties and telephone equipment under various noncancelable agreements which expire between January 1, 1998 to January 8, 2011 and require various minimum annual rentals. The leases related to properties also require the payment of property taxes, normal maintenance and insurance.
The total minimum rental commitment at December 31, 1997 is due as follows:
During the year ending December 31: 1998 $ 415,539 1999 386,025 2000 325,209 2001 250,421 2002 140,266 Due thereafter 100,159 ----------- $ 1,617,616 ===========
The total rental expense for the years ended December 31, 1997, 1996 and 1995 was $512,293, $360,978 and $235,783, respectively.
NOTE 10. CONCENTRATIONS OF CREDIT
The banking subsidiaries originate primarily commercial, residential, and consumer loans to customers in their local communities and surrounding counties. The ability of the majority of the Banks' customers to honor their contractual loan obligations is dependent on their local economy as well as the economy in the metropolitan Atlanta and Montgomery areas.
Thirty-seven percent of the Company's loan portfolio is concentrated in loans secured by real estate. A substantial portion of these loans is in the Banks' primary market areas. In addition, a substantial portion of the real estate owned is located in those same markets. Accordingly, the ultimate collectibility of the Company's loan portfolio and the recovery of the carrying amount of other real estate owned is susceptible to changes in market conditions in the Banks' primary market areas.
The Company's loan portfolio also includes a concentration, 48% of the total portfolio, of commercial, financial, and agricultural loans. These loans represent loans made primarily to local businesses in the Banks' market areas. A portion of these loans are small business loans and residential loans originated by the loan production office, a division of Community Bank & Trust - Habersham, which are outside the Banks' primary market areas. The Company's lending policies require loans of all types to be adequately collateralized and supported by adequate cash flows.
Other significant concentrations of credit by type of loan are set forth in Note 3. The Banks, as a matter of policy, do not generally extend credit to any single borrower or group of related borrowers in excess of 25% of each individual Bank's statutory capital, or approximately $2,750,000, $762,500, $500,000, and $987,500 for Community Bank & Trust - Habersham; Jackson; Alabama; and Troup; respectively.
NOTE 11. REGULATORY MATTERS
The Banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 1997, approximately $3,320,000 of retained earnings were available for dividend declaration without regulatory approval.
The Company and Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and Tier I capital to average assets. Management believes, as of December 31, 1997, the Company and the Banks meet all capital adequacy requirements to which they are subject.
NOTE 11. REGULATORY MATTERS (CONTINUED)
As of December 31, 1997, the most recent notification from the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Banks' category.
The Company and Banks' actual capital amounts and ratios are presented in the following tables.
NOTE 11. REGULATORY MATTERS (CONTINUED)
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow methods. Those methods are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented herein are based on pertinent information available to management as of December 31, 1997 and 1996. Such amounts have not been revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN BANKS, AND FEDERAL FUNDS SOLD:
The carrying amounts of cash, due from banks, interest-bearing deposits in banks, and Federal funds sold approximate their fair value.
SECURITIES:
Fair values for securities are based on quoted market prices. The carrying values of equity securities with no readily determinable fair value approximate fair values.
LOANS:
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For other loans, the fair values are estimated using discounted cash flow methods, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow methods or underlying collateral values.
DEPOSITS:
The carrying amounts of demand deposits, savings deposits, and variable-rate certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow methods, using interest rates currently being offered on certificates.
OTHER BORROWINGS:
The fair values of the Company's other borrowings are estimated using discounted cash flow methods based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximate their fair values.
REDEEMABLE COMMON STOCK:
The fair values of the Company's redeemable common stock approximates the recorded amounts.
OFF-BALANCE SHEET INSTRUMENTS:
Fair values of the Company's off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit and standby letters of credit do not represent a significant value to the
Company until such commitments are funded. The Company has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.
The estimated fair values of the Company's financial instruments were as follows:
NOTE 13. SEGMENT INFORMATION
The Company's operations have been classified into two business segments, banking and bank consulting services. The banking segment involves traditional banking services offered Through its four wholly- owned bank subsidiaries. Financial Supermarkets, Inc. provides various consulting and licensing services to financial institutions in connection with the establishment of bank branches in supermarkets. In connection with the establishment of a Supermarket Bank, Financial Supermarkets provides consulting services ranging from providing alternative construction designs to coordinating employee training. Financial Solutions, a division of Financial Supermarkets, Inc. was formed to provide various consulting services to the financial institution industry including compliance, operational, advertising, marketing and travel related services.
Total revenue by industry segment includes revenues from unaffiliated customers and affiliates. Revenues from affiliates are eliminated in consolidation. Interest income, interest expenses, data processing fees, management fees and other various revenues and expenses between affiliates are recorded on the accrual basis of accounting consistent with similar transactions with customers outside the consolidated group. In 1996, Financial Supermarkets, Inc. sold Supermarket Banks to affiliates recognizing gross profits of $128,113 which were eliminated in consolidation. The current depreciation expense related to the gross profit for each purchase was eliminated in consolidation and the remaining amount will be eliminated over their estimated useful lives.
Selected segment information by industry segment for the years ended December 31, 1997, 1996 and 1995 is as follows:
NOTE 14. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following information presents the condensed balance sheets as of December 31, 1997 and 1996 and the statements of income and cash flows as of and for the years ended December 31, 1997, 1996 and 1995:
CONDENSED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ------------ ------------
Assets Cash $ 104,201 $ 442,471 Investment in subsidiaries 32,379,558 27,341,295 Equipment 1,162,677 123,395 Other assets 788,717 634,706 ------------ ------------
Total assets $ 34,435,153 $ 28,541,867 ============ ============
Liabilities Other borrowings $ 462,299 $ 616,399 Other liabilities 197,515 543,432 ------------ ------------
Total liabilities 659,814 1,159,831 ------------ ------------
Redeemable common stock 10,621,891 6,177,400 ------------ ------------
Shareholders' equity 23,153,448 21,204,636 ------------ ------------
Total liabilities, redeemable common stock, and shareholders' equity $ 34,435,153 $ 28,541,867 ============ ============
NOTE 14. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- -----------
Income Dividends from subsidiaries $ 1,120,000 $ 800,000 $ 1,000,000 Interest 7,515 4,641 5,779 Other income 1,447,282 1,208,703 1,031,682 ----------- ----------- ----------- 2,574,797 2,013,344 2,037,461 ----------- ----------- -----------
Expense Interest 42,086 63,365 61,218 Salaries and employee benefits 1,174,798 1,109,826 933,871 Equipment expense 306,851 213,985 278,547 Other expense 425,565 367,183 261,758 ----------- ----------- ----------- 1,949,300 1,754,359 1,535,394 ----------- ----------- -----------
Income before income tax benefits and equity in undistributed 625,497 258,985 502,067 earnings of subsidiaries
Income tax benefits (100,000) (152,680) (120,000) ----------- ----------- ----------
Income before equity in undistributed income of subsidiaries 725,497 411,665 622,067
Equity in undistributed income of subsidiaries 4,917,273 3,754,367 2,503,003 ----------- ----------- -----------
Net income $ 5,642,770 $ 4,166,032 $ 3,125,070 =========== =========== ===========
NOTE 14. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- -----------
OPERATING ACTIVITIES Net income $ 5,642,770 $ 4,166,032 $ 3,125,070 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 65,836 61,172 50,662 Undistributed earnings of subsidiaries (4,917,273) (3,754,367) (2,503,003) Other operating activities (518,268) 60,433 (30,183 ----------- ----------- -----------
Net cash provided by operating activities 273,065 533,270 642,546 ----------- ----------- -----------
INVESTING ACTIVITIES Purchases of premises and equipment (1,115,771) (61,207) (264,036) Investment in subsidiary - (1,000,000) (500,000) Disposal of premises and equipment 19,564 167,979 - ----------- ----------- -----------
Net cash used in investing activities (1,096,207) (893,228) (764,036) ----------- ----------- -----------
FINANCING ACTIVITIES Advances on other borrowings - 1,616,399 428,415 Repayment of other borrowings (154,100) (1,786,939) (336,280) Dividends paid (285,728) (261,023) (246,035) Proceeds from the issuance of common stock 924,700 1,003, 795 253,292 ----------- ------------ ----------
Net cash provided by financing activities 484,872 572,232 99,392 ----------- ------------ ----------
Net increase (decrease) in cash (338,270) 212,274 (22,098)
Cash at beginning of year 442,471 230,197 252,295 ----------- ------------ ----------
Cash at end of year $ 104,201 $ 442,471 $ 230,197 =========== ============ ==========
SUPPLEMENTAL DISCLOSURE Cash paid during the year for interest $ 42,086 $ 63,365 $ 61,218
NONCASH TRANSACTIONS Unrealized gains on securities available-for-sale $ (204,562) $ (9,262) $ (336,478)
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 on Form 10-K to be signed on its behalf by the, thereunto duly authorized, in the City of Cornelia, State of Georgia, on the 25th of March, 1998.
COMMUNITY BANKSHARES, INC.
By: /s/ J. Alton Wingate J. Alton Wingate President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints J. Alton Wingate or Harry L. Stephens and either of them (with full power in each to act alone), as true and lawful attorneys-in-fact, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of, this Registration Statement has been signed by the following persons in the capacities indicated on the 25th day of March, 1998.
Signature Title
/s/ J. Alton Wingate President and Chief Executive - -------------------------- Officer (Principal Executive J. Alton Wingate Officer) and Director
/s/ Steven C. Adams Director - -------------------------- Steven C. Adams
Director - -------------------------- Edwin B. Burr
/s/ Harry H. Purvis Director - -------------------------- Harry H. Purvis
/s/ H. Calvin Stovall, Jr. Director - -------------------------- H. Calvin Stovall, Jr.
Director - -------------------------- Dean C. Swanson
Director - -------------------------- George D. Telford
/s/ Harry L. Stephens Executive Vice President and - -------------------------- Chief Financial Officer Harry L. Stephens (Principal Financial and Accounting Officer)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Registrant has furnished annual reports and proxy material to security holders, and copies of such documents have been furnished to the Commission for its information.
EXHIBIT INDEX -------------
Exhibit No. Description of Exhibit - ----------- ----------------------
10.5 Amended and Restated Revolving Credit/Term Loan Agreement between the Registrant and SunTrust Bank dated July 21, 1997
10.7 Amendment No. 2 to Master Consulting Agreement between Financial Supermarkets and NationsBank dated July 3, 1997
27.1 Financial Data Schedule (for SEC use only)
27.2 Restated Financial Data Schedule (year ended Dec. 31, 1996)
27.3 Restated Financial Data Schedule (quarters ended June 30, 1996 and September 30, 1996)
27.4 Restated Financial Data Schedule (quarters ended March 31, 1997, June 30, 1997 and September 30, 1997)
99 Proxy Materials