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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1995
Commission file number: 0-18460
COMMUNITY CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
South Carolina 57-0866395
- -------------------------------------------------- ---------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
109 Montague Avenue
Greenwood, South Carolina 29646
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (803) 941-8200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $1.00 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
There is presently no established public trading market for shares of
the Registrant's common stock, $1.00 par value, and trading in such shares has
been limited. Accordingly, trading activity in the voting stock of the
Registrant does not currently represent a reliable indicator of the aggregate
market value of the voting stock of the Registrant held by non-affiliates of the
Registrant and the Registrant is unable to estimate such value.
The number of shares outstanding of the Registrant's common stock as of
March 1, 1996 was 1,160,227.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its 1996 Annual
Meeting of Stockholders (Part III).
PART I
Item 1. Business.
General
Community Capital Corporation (the "Company") is a bank holding company
incorporated under the laws of the State of South Carolina on April 8, 1988.
Until May 26, 1994, the Company operated under the name Greenwood National
Bancorporation. The Company is based in Greenwood, South Carolina and
substantially all of its operations are conducted through two wholly-owned
subsidiaries, Greenwood Bank & Trust, a state chartered Federal Reserve member
bank (the "Greenwood Bank"), and Clemson Bank & Trust, a state-chartered
nonmember bank (the "Clemson Bank"). (The Greenwood Bank and the Clemson Bank
are referred to collectively herein as the "Banks.")
The Greenwood Bank engages in a general commercial banking business,
emphasizing the banking needs of individuals and small to medium-sized
businesses in the Greenwood Bank's primary service area of Greenwood County,
South Carolina. On September 26, 1994, the Greenwood Bank converted from a
national banking association to a South Carolina state bank. The conversion did
not result in any material change in the nature of the operations of the
Greenwood Bank or the scope of the commercial banking services it offers. The
Greenwood Bank continues to be a member of the Federal Reserve System and the
Federal Deposit Insurance Corporation (the "FDIC").
The Clemson Bank engages in a general commercial banking business in
its primary service area of Pickens County, South Carolina. The Clemson Bank is
newly organized, having received final state and federal regulatory approvals
for the commencement of operations in June 1995. At that time, the Company
acquired all of the common stock of the Clemson Bank using $4,500,000 in
proceeds from the Company's 1995 public offering of common stock. The public
offering commenced February 27, 1995 and raised approximately $6,250,000 gross
proceeds prior to its expiration in September 1995.
Bank Services
The Greenwood Bank
The Greenwood Bank engages in a general commercial banking business,
emphasizing the banking needs of individuals and small to medium-sized
businesses in the Greenwood Bank's primary service area of Greenwood County,
South Carolina. The Greenwood Bank has three banking locations, one of which is
its principal office, located at 109 Montague Street, Greenwood, South Carolina.
The Greenwood Bank has two branch locations, one of which is located on
Greenwood's Highway 72 By-Pass and the other in Ninety Six, South Carolina. The
Ninety Six branch commenced banking activities in February 1995.
The Greenwood Bank offers a full range of commercial banking functions.
Some of the major services provided include checking and savings accounts, NOW
accounts, IRA accounts, other savings and time deposits of various types ranging
from daily money market and super money market accounts, to long-term
certificates of deposit. All deposit accounts are insured by the FDIC up to the
maximum amount permitted by law. The Greenwood Bank's transaction accounts and
time certificates are tailored to its principal market area at competitive
rates.
The Greenwood Bank also offers a full range of consumer credit and
short-term and intermediate term commercial and personal loans. Among the
Greenwood Bank's personal credit services are loans to individuals for the
purchase of automobiles, mobile homes, boats and other recreational vehicles, as
well as for home improvements, agricultural purposes, business needs and
education. The Greenwood Bank conducts residential mortgage loan origination
activities pursuant to which first mortgage loans are sold to investors in the
secondary markets, subject to pre-existing commitments from such investors.
Servicing of such loans is not retained by the Greenwood Bank. Commercial credit
services offered by the Greenwood Bank consist of secured and unsecured loans
primarily to
individuals and small to medium-sized businesses in the Greenwood
County, South Carolina area. These loans are available for general
operating purposes, acquisitions of fixed assets, including real
estate, purchases of equipment and machinery, financing of equipment
and accounts receivable, and for other business purposes. The
Greenwood Bank offers VISA(R) credit card accounts together with related
lines of credit. The lines of credit may be used for overdraft
protection as well as a pre-authorized credit for personal
purchases and expenses.
The Greenwood Bank also provides safe deposit boxes, wire transfer
services, travelers checks, and direct deposit of payroll and social security
checks. Discount securities brokerage services are available through a
third-party brokerage service. In addition, the Greenwood Bank participates in a
regional network of automated teller machines that may be used by Greenwood Bank
customers in major cities throughout the Southeast. In January 1995, the
Greenwood Bank obtained regulatory approvals for the commencement of trust and
related fiduciary services by a newly-formed trust department. The Greenwood
Bank does not provide international banking services.
The Clemson Bank
The Clemson Bank engages in a general commercial banking business in
the Clemson, South Carolina community, providing personalized banking services
with emphasis on the individual financial needs and objectives of individuals
and small to medium-sized businesses. Substantially all credit and related
decisions are made locally, facilitating prompt response. The Clemson Bank
emphasizes a commitment to the industrial and business growth of the Clemson
community and Pickens County area. The principal operating facility for the
Clemson Bank is at 528 Old Greenville Highway within the city limits of Clemson,
South Carolina on property the Clemson Bank leases from the Company.
The principal business of the Clemson Bank is the acceptance of
deposits from the public and the making of loans and other investments. The
Clemson Bank offers the same full range of deposit and other services that are
offered by the Greenwood Bank. See "The Greenwood Bank." The principal sources
of funds for the Clemson Bank's loans and investments are demand, time, savings
and other deposits, amortization loans or participations in loans, fees received
from other lenders or institutions for servicing loans sold to such lenders or
institutions, and borrowings. In addition, a portion of the funds used to
capitalize the Clemson Bank have been used by the Clemson Bank to fund loans.
The principal sources of income for the Clemson Bank are the servicing of loans
sold to other lenders or institutions and, to a lesser extent, interest and
dividends collected on other investments. The principal expenses of the Clemson
Bank are interest paid on savings and other deposits (including NOW accounts),
interest paid on other borrowings by the Clemson Bank, employee compensation,
office expenses and other overhead expenses.
Through December 1995, the Clemson Bank used facilities of the
Greenwood Bank for data processing, resulting in significant monetary savings
for the Clemson Bank. In January 1996, the Greenwood Bank's data processing
facilities, including certain of its computer and item-sorting equipment, were
transferred to the Company. As a result, the Company now performs data
processing functions for the Banks upon terms that the managements of both Banks
believe is competitive with those offered by unaffiliated third-party service
bureaus. The Company also administers certain operating functions for the Banks
where cost savings can be achieved. Included in such operations are regulatory
compliance, personnel and internal audit functions. The Company's costs
associated with the performance of such services are allocated between the Banks
based on each Bank's total assets.
Competition
Banks generally compete with other financial institutions through the
selection of banking products and services offered, the pricing of services, the
level of service provided, the convenience and availability of services and the
degree of expertise and the personal manner in which services are offered. South
Carolina law permits statewide branching by banks and savings institutions, and
many financial institutions in the state have branch networks. Consequently,
commercial banking in South Carolina is highly competitive. South Carolina law
also permits regional interstate banking whereby bank holding companies in
certain southeastern states are allowed to acquire depository institutions
within South Carolina. Many large banking organizations currently operate in the
market areas of both the Greenwood Bank and the Clemson Bank, several of which
are controlled by out-of-state ownership. In addition, competition between
commercial banks and thrift institutions (savings institutions and credit
unions) has been intensified significantly by the elimination of many previous
distinctions between the various types of financial institutions and the
expanded powers and increased activity of thrift institutions in areas of
banking which
3
previously had been the sole domain of commercial banks. Recent legislation,
together with other regulatory changes by the primary regulators of the various
financial institutions, has resulted in the almost total elimination of
practical distinctions between a commercial bank and a thrift institution.
Consequently, competition among financial institutions of all types is largely
unlimited with respect to legal ability and authority to provide most financial
services. Furthermore, as a consequence of legislation recently enacted by the
United States Congress, national banks not previously allowed to operate in
South Carolina will be allowed to commence operations and compete in the Banks'
primary service areas if the South Carolina legislature does not elect to limit
the reach of such federal legislation within South Carolina. See "Government
Supervision and Regulation -- Interstate Banking."
Each of the Banks faces increased competition from both
federally-chartered and state-chartered financial and thrift institutions, as
well as credit unions, consumer finance companies, insurance companies and other
institutions in the Banks' respective market areas. Some of these competitors
are not subject to the same degree of regulation and restriction imposed upon
the Banks. Many of these competitors also have broader geographic markets and
substantially greater resources and lending limits than the Banks and offer
certain services such as trust banking that the Banks do not currently provide.
In addition, many of these competitors have numerous branch offices located
throughout the extended market areas of the Banks that the Company believes may
provide these competitors with an advantage in geographic convenience that the
Banks do not have at present. Such competitors may also be in a position to make
more effective use of media advertising, support services and electronic
technology than can either of the Banks.
The management of each of the Banks believes that each Bank's ability
to compete with other financial institutions in its respective market area is
enhanced by its posture as a locally-managed bank with a broad base of local
ownership and by its relatively small size which permits it to offer what it
believes to be more personalized service than many of its competitors. The
competitive strategy of the Banks consists of competing against savings
institutions by offering more competitive mortgage products, supplying
commercial lending services that savings institutions generally have not
offered, and offering professionals and high income customers the opportunity to
conduct personal and commercial banking business in one institution. The
competitive strategy against the other major commercial banks and savings
institutions in the Banks' respective market areas consists of approving loan
requests more quickly with a local loan committee, operating with more flexible,
but equally prudent, lending policies, personalizing service by establishing a
long-term banking relationship with the customer, having a higher ratio of
employees to customers to ensure a higher level of service, and offering special
services for area businesses and professions such as arranging borrowings from
institutional investors and providing conduits to equity markets, venture
capital and possibly institutional investors. Although some of these services
are offered by the other major banks and savings institutions doing business in
the Banks' respective market areas, management believes that all of these
services are generally not combined in an effective, personalized package for
the benefit of the Banks' target customers, primarily consisting of individual
consumers, professionals and small businesses.
Currently there are six other commercial banks, one savings institution
and approximately six credit unions operating in the Greenwood Bank's primary
service area, and four other commercial banks, one savings institution and one
credit union operating in the Clemson Bank's primary service area.
Employees
The Company currently has eighteen full-time employees and three
part-time employees. The Greenwood Bank currently employs twenty-nine full-time
employees and no part-time employees. The Clemson Bank currently employs nine
full-time employees and no part-time employees.
Government Supervision and Regulation
General
The Company and the Banks are subject to an extensive collection of
state and federal banking laws and regulations which impose specific
requirements and restrictions on, and provide for general regulatory oversight
with respect to, virtually all aspects of the Company's and the Banks'
operations. The Company and the Banks are also
4
affected by government monetary policy and by regulatory measures affecting the
banking industry in general. The actions of the Federal Reserve System affect
the money supply and, in general, the Banks' lending abilities in increasing or
decreasing the cost and availability of funds to the Banks. Additionally, the
Federal Reserve System regulates the availability of bank credit in order to
combat recession and curb inflationary pressures in the economy by open market
operations in United States government securities, changes in the discount rate
on member bank borrowings, changes in the reserve requirements against bank
deposits and limitations on interest rates which banks may pay on time and
savings deposits.
During 1989 and 1991, the United States Congress enacted two major
pieces of banking legislation: The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). The FIRREA and FDICIA have significantly
changed the commercial banking industry through, among other things, revising
and limiting the types and amounts of investment authority, significantly
increasing minimum regulatory capital requirements, and broadening the scope and
power of federal bank and thrift regulators over financial institutions and
affiliated persons in order to protect the deposit insurance funds and
depositors. These laws, and the resulting implementing regulations, have
subjected the Banks and the Company to extensive regulation, supervision and
examination by the FDIC. This has resulted in increased deposit insurance
premiums and increased administrative, professional and compensation expenses in
complying with a substantially increased number of new regulations and policies.
The regulatory structure created by these laws gives the regulatory authorities
extensive authority in connection with their supervisory and enforcement
activities and examination policies.
The following is a brief summary of certain statutes, rules and
regulations affecting the Company and the Banks. This summary is qualified in
its entirety by reference to the particular statutory and regulatory provisions
referred to below and is not intended to be an exhaustive description of the
statutes or regulations applicable to the business of the Company and the Banks.
Any change in applicable laws or regulations may have a material adverse effect
on the business and prospects of the Company and the Banks.
The Company
The Company is a bank holding company within the meaning of the Federal
Bank Holding Company Act of 1956, as amended (the "BHCA"), and the South
Carolina Bank Holding Company Act, as amended (the "South Carolina Act"). The
Company is registered with both the Federal Reserve System and the State Board.
The Company is required to file with both of these agencies annual reports and
other information regarding its business operations and those of its
subsidiaries. It is also subject to the supervision of, and to regular
examinations by, these agencies.
The BHCA requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before (i) it or any of its subsidiaries
(other than a bank) acquires substantially all of the assets of any bank, (ii)
it acquires ownership or control of any voting shares of any bank if after such
acquisition it would own or control, directly or indirectly, more than 5% of the
voting shares of such bank, or (iii) it merges or consolidates with any other
bank holding company. Under the South Carolina Act, it is unlawful without the
prior approval of the South Carolina Board for any South Carolina bank holding
company (i) to acquire direct or indirect ownership or control of more than 5%
of the voting shares of any bank or any other bank holding company, (ii) to
acquire all or substantially all of the assets of a bank or any other bank
holding company, or (iii) to merge or consolidate with any other bank holding
company.
The BHCA and the Federal Change in Bank Control Act, together with
regulations promulgated by the Federal Reserve Board, require that, depending on
the particular circumstances, either the Federal Reserve Board's approval must
be obtained or notice must be furnished to the Federal Reserve Board and not
disapproved prior to any person or company acquiring control of a bank holding
company, such as the Company, subject to certain exemptions for certain
transactions.
Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in, nonbanking activities, unless the
Federal Reserve Board, by order or regulation, has found those activities 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
5
Board has determined by regulation to be proper incidents to the business of a
bank holding company include making or servicing loans and certain types of
leases, engaging in certain insurance and discount brokerage activities,
performing certain data processing services, acting in certain circumstances as
a fiduciary or investment or financial adviser, owning savings associations and
making investments in certain corporations or projects designed primarily to
promote community welfare. The Company is also restricted in its activities by
the provisions of the Glass-Steagall Act of 1933, which prohibits the Company
from owning subsidiaries that are engaged principally in the issue, flotation,
underwriting, public sale or distribution of securities. The regulatory
requirements to which the Company is subject also set forth various conditions
regarding the eligibility and qualifications of its directors and officers.
The Greenwood Bank
Prior to September 26, 1994, the Greenwood Bank operated as a national
banking association incorporated under the laws of the United States. Pursuant
to the Certificate of Conversion filed with the South Carolina Secretary of
State and a notice forwarded to the Office of the Comptroller of the Currency
(the "OCC"), the Greenwood Bank was converted as of September 26, 1994 from a
national banking association to a South Carolina chartered banking corporation.
The Greenwood Bank remains a member of the Federal Reserve System and the FDIC.
The operations of the Greenwood Bank are subject to various statutory
requirements and rules and regulations promulgated and enforced primarily by the
State Board, the Federal Reserve System and the FDIC. The State Board and the
FDIC regulate or monitor all areas of the Greenwood Bank's operations, including
security devices and procedures, adequacy of capitalization and loss reserves,
loans, investments, borrowings, deposits, mergers, issuances of securities,
payment of dividends, interest rates payable on deposits, interest rates or fees
chargeable on loans, establishment of branches, corporate reorganizations,
maintenance of books and records, and adequacy of staff training to carry on
safe lending and deposit gathering practices.
The Federal Reserve System also requires the Greenwood Bank to maintain
certain capital ratios (see "Federal Capital Regulations"), and the provisions
of the Federal Reserve Act require the Greenwood Bank to observe certain
restrictions on any extensions of credit to the Company, or with certain
exceptions, other affiliates, on investments in the stock or other securities of
other banks, and on the taking of such stock or securities as collateral on
loans to any borrower. In addition, the Greenwood Bank is prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, or the providing of any property or service. The regulatory requirements
to which the Greenwood Bank are subject also set forth various conditions
regarding the eligibility and qualification of its of directors and officers.
The Clemson Bank
As a South Carolina-chartered banking corporation and a member of the
FDIC, the Clemson Bank is subject to various statutory requirements and rules
and regulations promulgated and enforced primarily by the State Board and the
FDIC. The State Board and the FDIC regulate and monitor all areas of the Clemson
Bank's operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rates payable
on deposits, interest rates or fees chargeable on loans, establishment of
branches, corporate mergers, sales and similar reorganizations, maintenance of
books and records, and adequacy of staff training to carry on safe lending and
deposit gathering practices. In addition, the Clemson Bank is prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, or the providing of any property or service. The regulatory requirements
to which the Clemson Bank is subject also set forth various conditions regarding
the eligibility and qualification of its directors and officers.
Dividends
Although the Company is not presently subject to any direct legal or
regulatory restrictions on dividends (other than the South Carolina state
business corporation law requirements that dividends may be paid only if such
payment would not render the Company insolvent or unable to meet its obligations
as they come due), the Company's ability to pay cash dividends will depend
entirely upon the amount of dividends paid by each of the Banks and any other
subsequently acquired entities. The Banks are subject to regulatory restrictions
on the payment of dividends, including the prohibition of payment of dividends
from each Bank's capital. All dividends of the Banks must be paid out of the
respective undivided profits then on hand, after deducting expenses, including
losses and bad debts. In
6
addition, as a member of the Federal Reserve System, the Greenwood Bank is
prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital, unless there has been transferred to surplus
no less than one-tenth of such bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend) and the
approval of the Federal Reserve Board is required if the total of all dividends
declared by the Greenwood Bank in any calendar year exceeds the total of its net
profits for that year combined with the Greenwood Bank's retained net profits
for the preceding two years, less any required transfers to surplus. The Banks
are subject to various other federal and state regulatory restrictions on the
payment of dividends, including receipt of the approval of the South Carolina
Commissioner of Banking prior to paying dividends to the Company.
FIRREA
The FIRREA was enacted on August 9, 1989 and has had a significant
impact on the operations of all financial institutions, including the Banks.
FIRREA, among other things, abolished the Federal Savings and Loan Insurance
Corporation and established two new insurance funds under the jurisdiction of
the FDIC: the Savings Association Fund and the Bank Insurance Fund (see "FDIC
Regulations"). FIRREA also imposed, with certain exceptions, a "cross guaranty"
on the part of commonly controlled depository institutions such as the Banks.
Under this provision, if one depository institution subsidiary of a multi-bank
holding company fails or requires FDIC assistance, the FDIC may assess a
commonly controlled depository institution for the estimated losses suffered by
the FDIC. Consequently, each of the Banks is subject to assessment by the FDIC
related to any loss suffered by the FDIC arising out of the operations of the
other Bank. The FDIC's claim is junior to the claims of nonaffiliated
depositors, holders of secured liabilities, general creditors and subordinated
creditors but is superior to the claims of shareholders.
FDIC Regulations
The FDIC establishes rates for the payment of premiums by federally
insured banks and thrifts for deposit insurance. Deposits in the Banks are
insured by the FDIC up to a maximum amount (generally $100,000 per depositor,
subject to aggregation rules). A separate Bank Insurance Fund (the "BIF") is
maintained for commercial banks with insurance premiums from the industry used
to offset losses from insurance payouts when banks fail. The Banks pay premiums
to the BIF on their deposits. Due to the high rate of bank failures in recent
years, the fees that commercial banks pay to the BIF have increased. Beginning
in 1993, the FDIC adopted a rule which establishes a risk-based deposit
insurance premium system for all insured depository institutions, including the
Banks.
Federal Capital Regulations
In an effort to achieve a measure of capital adequacy that is more
sensitive to the individual risk profiles of financial institutions, pursuant to
the provisions of the FDICIA, the Federal Reserve Board, the FDIC and other
federal banking agencies have adopted risk-based capital adequacy guidelines for
banking organizations insured by the FDIC, including each of the Banks. These
guidelines redefine traditional capital ratios to take into account assessments
of risks related to each balance sheet category, as well as off-balance sheet
financing activities. The guidelines define a two-tier capital framework. Tier 1
capital consists of common and qualifying preferred stockholders' equity, less
goodwill and other adjustments. Tier 2 capital consists of mandatory
convertible, subordinated and other qualifying term debt, preferred stock not
qualifying for Tier 1, and the allowance for credit losses up to 1.25% or
risk-weighted assets. Under the guidelines, institutions must maintain a
specified minimum ratio of "qualifying" capital to risk-weighted assets. At
least 50% of an institution's qualifying capital must be "core" or "Tier 1"
capital, and the balance may be "supplementary" or "Tier 2" capital. The
guidelines imposed on the Company and the Banks include a minimum leverage ratio
standard of capital adequacy. The leverage standard requires top-rated
institutions to maintain a minimum Tier 1 capital to assets ratio of 3%, with
institutions receiving less than the highest rating required to maintain a
minimum ratio of 4% or greater, based upon their particular circumstances and
risk profiles. As of December 31, 1995, the guidelines require achievement of a
minimum ratio of total capital to risk-weighted assets of 8% and a minimum ratio
of Tier 1 capital risk-weighted assets of 4%.
Both the Company's and the Banks' leverage and risk-based capital
ratios at December 31, 1995 exceeded their respective fully phased-in minimum
requirements.
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Other Regulations
Interest and certain other charges collected or contracted for by the
Banks are subject to state usury laws and certain federal laws concerning
interest rates. The Banks' loan operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Community
Reinvestment Act of 1977 requiring financial institutions to meet their
obligations to provide for the total credit needs of the communities they serve,
including investing their assets in loans to low- and moderate-income borrowers,
the Home Mortgage Disclosure Act of 1975 requiring financial institutions to
provide information to enable the pubic and public officials to determine
whether a financial institution is fulfilling its obligations to help meet the
housing needs of the community it serves, the Equal Credit Opportunity Act
prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act governing the manner
in which consumer debts may be collected by collection agencies, and the rules
and regulations of the various federal agencies charged with the responsibility
of implementing such federal laws. The deposit operations of the Banks also are
subject to the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and the Electronic
Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that Act, which govern automatic deposits to and withdrawals from
deposit accounts and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking services.
Interstate Banking
In 1986, South Carolina adopted legislation which permits banks and
bank holding companies in certain southern states to acquire banks in South
Carolina to the extent that such other states have reciprocal legislation which
is applicable to South Carolina banks and bank holding companies, and to the
extent the South Carolina banking organization to be acquired has continually
operated as a bank for a period of five years. This legislation resulted in a
number of South Carolina banks being acquired by large out-of-state bank holding
companies. Size gives the larger banks certain advantages in competing for
business from large corporations. These advantages include higher lending limits
and the ability to offer services in other areas of South Carolina and the
region. As a result, the Company does not generally attempt to compete for the
banking relationships of large corporations, but concentrates its efforts on
small to medium-sized businesses and on individuals. The Company believes it has
competed effectively in this market segment by offering quality, personal
service.
On September 29, 1994, the federal government enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "1994 Act"). The
provisions of the 1994 Act became effective on September 29, 1995, at which time
eligible bank holding companies in any state were permitted, with Federal
Reserve Board approval, to acquire banking organizations in any other state. As
such, all existing regional compacts (such as the Southeastern Regional banking
compact recognized by the South Carolina Act) and substantially all existing
regional limitations on interstate acquisitions of banking organizations have
been eliminated, although the provisions of the South Carolina Act limiting
acquisition targets to those organizations with five years of continuous
operations in South Carolina will continue to be given effect.
The 1994 Act also removed substantially all of the existing
prohibitions on interstate branching by national banks. On and after June 1,
1997, a national bank operating in any state may establish one or more branches
within any other state without, as currently required, the establishment of a
separate banking structure within the other state. Interstate branching is
allowed earlier than the automatic phase-in date of June 1, 1997 as long as the
legislatures of both states involved have adopted statutes expressly permitting
such branching to take place at an earlier date. The 1994 Act allows state
legislatures to opt-out of these interstate branching provisions prior to the
June 1, 1997 phase-in date. If a state opts-out of interstate branching,
national banks operating outside of such state will be prohibited from
establishing a separate bank structure in such state, and national banks
operating inside such state likewise will be prohibited from establishing
branches outside of such state. States that do not opt-out will retain the right
to require out-of state bank holding companies and national banks to comply with
certain permitted state rules governing entry. Although the 1994 Act has the
potential to increase the number of competitors in the marketplace of each of
the Banks, the Company cannot predict the actual impact of such legislation on
the competitive position of either of the Banks.
8
As of the date of this report, legislation responding to the opt-out
provision of the 1994 Act or addressing the ability of state banks to engage in
interstate branching has not been adopted by the South Carolina legislature.
Item 2. Properties.
The Company and the Greenwood Bank own approximately two acres of land
comprised of several parcels in Greenwood, South Carolina. The Company's
executive offices are located in the Greenwood Bank's 8,200 square foot
headquarters building at 109 Montague Street on land owned by the Greenwood
Bank. The Greenwood Bank also operates a branch location of approximately 2,000
square feet on Greenwood's Highway 72 by-pass. The land and building housing
this branch are owned by the Company and are leased to the Greenwood Bank. The
Company leases approximately two-thirds of an acre of land in Ninety Six, South
Carolina from John S. Drummond, a director of the Company and the Greenwood
Bank, and owns a 715 square foot building located on such leased land. The
Company has subleased the building and land in Ninety Six to the Greenwood Bank
for its branch location in that community. The Clemson Bank operates out of a
1,000 square foot building located on approximately one and a half acres of land
at 528 Old Greenville Highway in Clemson, South Carolina. The building is leased
by the Clemson Bank from an unaffiliated third-party. The land on which the
building is located is owned by the Company and is leased by it to the Clemson
Bank.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.
There is presently no established public trading market for shares of
the Common Stock and trading activity in such shares has been limited. Price
information for the Common Stock is available from Edgar M. Norris Co., Inc.,
Interstate/Johnson Lane Corporation and J.C. Bradford & Co. with respect to
stock trades executed by such companies. There is no available composite index
of trading and pricing of the Common Stock. Occasionally, trading transactions
have been effected through the efforts of officers of the Company in matching
interested purchasers with shareholders who have expressed an interest in
selling their shares. Substantially all private trading has occurred without any
participation of officers of the Company other than to record the transfer in
the Company's shareholder records. Accordingly, management is not aware of the
prices at which all shares of Common Stock have traded. The range of share
prices in the limited number of arm's length Common Stock transactions known to
management are $8.50 to $9.00 in 1991, $7.50 to $10.00 in 1992, $8.00 to $10.00
in 1993, $10.25 to $10.50 in 1994 and $10.50 to $13.00 in 1995. These
transactions may not, however, be representative of all transactions in the
Common Stock and are not necessarily indicative of the price at which shares of
Common Stock could be bought or sold. Five percent Common Stock dividends were
paid by the Company to shareholders of record in September 1993, April 1994 and
April 1995. If an active trading market had existed for the Common Stock, such
stock dividends could have been expected to generate a proportionate decrease in
the market price of the Common Stock. In the absence of an active or otherwise
established trading market for the Common Stock, the actual effect, if any, of
these stock dividends on share prices is not determinable. As of December 31,
1995 there were approximately 1,153,060 shares of Common Stock outstanding held
by approximately 1,339 shareholders of record.
The Company has not declared or distributed any cash dividends to its
shareholders since its organization in 1988, and it is not likely that any cash
dividends will be declared in the foreseeable future. If declared, it is not
known what the amount of such dividends would be or whether such dividends would
continue for future periods. The Board of Directors of the Company intends to
follow a policy of retaining any earnings to provide funds to operate and expand
the businesses of the Company and the Banks for the foreseeable future. The
future dividend policy of the Company is subject to the discretion of the Board
of Directors and will depend upon a number of factors, including future
earnings, financial condition, cash need, and general business conditions. The
Company's ability to distribute
9
cash dividends will depend entirely upon the Banks' abilities to distribute
dividends to the Company. As state-chartered banks, the Banks are subject to
legal limitations on the amount of dividends each is permitted to pay. In
particular, the Banks must receive the approval of the South Carolina
Commissioner of Banking prior to paying dividends to the Company. Furthermore,
neither of the Banks nor the Company may declare or pay a cash dividend on any
of their capital stock if they are insolvent or if the payment of the dividend
would render them insolvent or unable to pay their obligations as they become
due in the ordinary course of business. See "Item 1. Business. --
Government Supervision and Regulation -- Dividends."
Item 6. Selected Financial Data.
The following table sets forth certain selected financial data concerning
the Company. The selected financial data has been derived from the audited
consolidated financial statements of the Company which, have been audited by
Tourville, Simpson & Henderson, independent accountants. This information should
be read in conjunction with "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations."
1995 1994 1993 1992 1991
---- ------- -------- -------- ------
Income Statement Data: (Dollars in thousands, except for share amounts)
Interest income........................................ $ 6,147 $ 4,340 $ 3,794 $ 3,315 $ 3,159
Interest expense....................................... 2,948 1,693 1,600 1,642 1,930
Net interest income.................................... 3,199 2,647 2,194 1,673 1,229
Provision for loan losses.............................. 122 14 80 227 173
Net interest income after provision for loan losses.... 3,087 2,633 2,114 1,446 1,056
Other income........................................... 777 514 776 631 447
Other expense.......................................... 3,069 2,261 2,121 1,787 1,462
Income tax expense..................................... 261 301 255 102 7
Income (loss) before extraordinary credit and
accounting change................................... 534 585 513 187 34
Extraordinary credit................................... -0- -0- -0- 102 7
Accounting change...................................... -0- -0- 47 -0- -0-
Net income (loss)...................................... 534 585 560 289 41
Weighted average common shares outstanding (2)......... 1,019,176 729,997 676,322 675,984 675,984
Net income (loss) per share (2)........................ $ .58 $ .88 $ .83 $ .43 $ .06
Balance Sheet Data:
Assets................................................. $ 96,100 $ 65,071 $ 58,970 $ 49,281 $ 39,302
Net loans.............................................. 62,532 49,985 44,067 33,993 28,080
Securities held for sale............................... 22,446 5,932 7,949 7,466 5,174
Investment securities.................................. -0- 1,684 -0- -0- -0-
Deposits:
Interest bearing.................................... 63,691 42,178 41,017 36,350 31,223
Non-interest bearing................................ 9,447 6,968 4,974 4,620 3,022
Stockholders equity (1)................................ 12,932 6,079 5,419 4,844 4,554
- ---------------------
(1) Cash dividends have not been paid or declared since inception of the
Company in 1988.
(2) Restated for the effects of 5% Stock dividends in 1995, 1994 and 1993.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of the Company
and the Banks. This commentary should be read in conjunction with the
consolidated financial statements of the Company and the related notes and the
other statistical information set forth elsewhere in this Report on Form 10-K.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
For the year ended December 31,1995, net income was $533,868 or $.58 per share,
a decrease of $50,988 or $.26 per share when compared to 1994 net income. The
organization of the Clemson Bank was the main contributing factor for the
decrease in net income as the Company incurred one-time charges and increased
overhead which negatively impacted 1995 earnings. Non-interest expenses were
$3,069,283 in 1995 compared to $2,260,748 in 1994, an increase of $808,535 or
35.8%. The negative effects of the increase in other expenses were partially
offset by the $552,142, or 20.9%, increase in net interest income over the 1994
amount of $2,646,587. Volume increases in all major categories of
interest-earning assets and interest-bearing liabilities were the main factors
contributing to the improvement in net interest income.
1994 COMPARED TO 1993
Net income for the year ended December 31, 1994 was $584,856, or $.84 per share,
compared to $560,322, or $.79 per share, for the year ended December 31, 1993.
Among the more significant factors contributing to the improvement was an
increase in net interest income of $452,617, or 20.6%, mitigated in part by a
decrease in other operating income of $262,491, or 33.9%. Also, in 1993 the
Company recorded a benefit of $46,730 from a change in the method of accounting
for income taxes which did not recur in 1994.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
The following table presents the percentage relationships of significant
components of the Company's average balance sheets for the last two fiscal
years.
11
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY -continued
Balance Sheet Categories as a Percent of Average Total Assets
December 31,
1995 1994
-------- -------
Assets:
Interest earning assets
Federal funds sold 2.27% 1.78%
Deposits with other banks .27
Investment securities, net 18.42 12.88
Loans 70.26 76.42
------ ------
Total interest earning assets 90.95 91.35
------ ------
Cash and due from banks 3.52 3.31
Allowance for loan losses (.77) (.94)
Premises and equipment 2.92 2.90
Other assets 3.38 3.38
------ ------
Total assets 100.00% 100.00%
====== ======
Liabilities and stockholders' equity:
Interest bearing transaction accounts 7.84% 9.24%
Savings accounts 18.76 19.48
Certificates of deposit 38.38 38.80
Federal funds purchased and repurchase agreements 3.06 1.13
Notes payable .11
Federal Home Loan Bank advances 8.50 10.74
------ ------
Total interest bearing liabilities 76.65 79.39
------ ------
Non-interest bearing deposits 10.54 10.28
Accrued interest and other liabilities .82 .87
------ ------
Total liabilities 88.01 90.54
------ ------
Stockholders' equity 11.99 9.46
------ ------
Total liabilities and stockholders' equity 100.00% 100.00%
====== ======
NET INTEREST INCOME
Earnings are dependent, to a large degree, on net interest income. It represents
the difference between gross interest earned on earning assets, primarily loans
and investment securities, and interest incurred on deposits and borrowed funds.
Net interest income is affected by the interest rates earned or paid and by
volume changes in loans, investment securities, deposits and borrowed funds.
Net interest income for the year ended December 31, 1995 was $3,198,729 compared
to $2,646,587 in 1994, an increase of $552,142 or 20.9%. The interest rate
spread decreased to 3.72% in 1995 from 4.32% in 1994, and the net yield on
earning assets, commonly referred to as net interest margin, fell to 4.49% in
1995 compared to 4.78% in 1994. These key ratios were significantly affected by
strategies to improve liquidity and reduce the loans-to-funds and
loans-to-assets ratios recommended by the Board of Directors and to attract
customers dissatisfied with recent mergers and acquisitions of larger state and
regional banks which moved corporate headquarters and operations out of South
Carolina. This was accomplished by management's implementation of a competitive
pricing program on certificates of deposit and other interest bearing deposit
accounts.
The higher volume of earning assets, particularly real estate loans and
investment securities, contributed significantly to the improvements in net
interest income. Average interest earning assets in 1995 were approximately
$71,214,000, an increase of 28.7% over 1994. The increase in earning assets,
coupled with a 79 basis point increase in the yield
12
on earning assets due to a higher overall interest rate environment, resulted in
a $1,807,345 improvement in gross interest income. The cost of interest bearing
liabilities increased from 3.52% in 1994 to 4.91% in 1995, a 139 basis point
increase. The increase in interest expense from $1,693,049 in 1994 to $2,948,252
in 1995, represented a 74% increase. Other factors contributing to growth in
interest earning assets, interest bearing liabilities, and net interest income
were the opening of a new branch in February 1995, the opening of the Clemson
Bank in June 1995, and trust activities which began in January 1995.
For the year ended December 31, 1994, net interest income was $2,646,587, an
increase of $452,617, or 20.6%, over the amount recorded in 1993. Interest
earned on real estate loans increased $567,865, or 29.3%, during 1994 and was a
result of both higher interest rates earned and a higher volume of real estate
loans in the portfolio. Although interest rates increased during 1994, increases
in the prime lending rate had not, at December 31, 1994, translated into
proportionate market pressure to increase interest rates paid on deposit
accounts. As a result, for the year ended December 31, 1994, the Company
benefitted from an 8 basis point overall reduction in the cost of funds from
that paid in 1993. When compared to the year ended December 31, 1993, net
interest spread increased 33 basis points to 4.32% and net yield on earning
assets increased 61 basis points to 4.78% during the year ended December 31,
1994.
COMPARATIVE AVERAGE BALANCES, YIELDS AND RATES
The following tables, "Comparative Average Balances, Yields and Rate" and
"Rate/Volume Analysis", provide information on specific factors affecting the
Company's net interest income.
1995 1994
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- -----
Assets:
Federal funds sold $ 1,777 $ 107 6.02% $ 1,077 $ 42 3.90%
Deposits with other banks 161 6 3.73%
Investment securities, net 14,419 895 6.21% 7,801 382 4.90%
Loans(1) 55,018 5,146 9.35% 46,305 3,910 8.44%
------ ----- ------ -----
Total interest earning assets 71,214 6,148 8.63% 55,344 4,340 7.84%
------ ----- ------ -----
Cash and due from banks 2,758 2,006
Allowance for loan losses (601) (569)
Premises and equipment 2,288 1,760
Other assets 2,646 2,053
----- -----
Total assets $ 78,305 $ 60,594
====== ======
Liabilities and Stockholders' Equity:
Transaction accounts $ 6,136 113 1.84% $ 5,597 103 1.84%
Savings accounts 14,693 590 4.02% 11,805 324 2.74%
Certificates of deposit 30,053 1,719 5.72% 23,518 937 3.98%
Federal funds purchased and repos 2,393 137 5.73% 683 31 4.54%
Notes payable 86 8 9.30%
FHLB advances 6,655 381 5.73% 6,501 298 4.58%
----- --- ----- ---
Total interest bearing liabilities 60,016 2,948 4.91% 48,104 1,693 3.52%
------ ----- ----- -----
Non-interest bearing accounts 8,258 6,228
Accrued interest and other liabilities 643 530
Stockholders' equity 9,388 5,732
----- -----
Total liabilities and
stockholders' equity $ 78,305 $ 60,594
====== ======
Net interest income $3,200 $ 2,647
===== =====
Interest rate spread 3.72% 4.32%
==== ====
Net interest margin 4.49% 4.78%
==== ====
(1) The effects of loans in non-accrual status and fees collected are not
significant to the computations.
13
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in the volume of earning assets and interest bearing liabilities have
affected the Company's interest income and interest expense during the periods
indicated. Information is provided on changes in each category attributable to
(a) change due to volume (change in volume multiplied by prior period rate), (b)
change due to rates (change in rates multiplied by prior period volume) and (c)
change in rate and volume (change in rate multiplied by the change in volume).
1995 compared to 1994
Due to increase (decrease) in
(Dollars in thousands) Volume Rate Volume/Rate Total
Interest income:
Loans $ 736 $ 421 $ 79 $ 1,236
Deposits in other banks - - (6) (6)
Investment securities, net 324 102 87 513
Federal funds sold 27 23 15 65
-- -- -- --
Total interest income $ 1,087 $ 546 $ 175 $ 1,808
===== === === =====
Interest expense:
Interest bearing deposits $ 332 $ 585 $ 141 $ 1,058
Federal funds purchased and
repurchase agreements 78 8 20 106
Notes payable 8 8
FHLB advances 7 74 2 83
- -- - --
Total interest expense $ 417 $ 667 $ 171 $ 1,255
=== === ==== =====
Net interest income $ 670 $ (121) $ 4 $ 553
=== ==== = ===
1994 compared to 1993
Due to increase (decrease) in
(Dollars in thousands) Volume Rate Volume/Rate Total
Interest income:
Loans $ 560 $ 12 $ 6 $ 578
Deposits in other banks (13) (2) 1 (14)
Investment securities, net (19) 10 (9)
Federal funds sold (19) 15 (5) (9)
--- -- --- --
Total interest income $ 509 $ 35 $ 2 $ 546
=== == = ===
Interest expense:
Interest bearing deposits $ 57 $ (78) $ (4) $ (25)
Federal funds purchased and
repurchase agreements 6 8 3 17
FHLB advances 76 19 6 101
-- -- - ---
Total interest expense $ 139 $ (51) $ 5 $ 93
=== === = ==
Net interest income $ 370 $ 86 $ (3) $ 453
=== == == ===
RATE SENSITIVITY
Interest rates paid on deposits and borrowed funds and interest rates earned on
loans and investments have generally followed the fluctuations in market rates
in 1995 and 1994. However, fluctuations in market interest rates do not
necessarily have a significant impact on net interest income, depending on the
Company's sensitivity position. A rate sensitive asset or liability is one that
can be repriced either up or down in interest rate within a certain time
interval. When a proper balance exists between rate sensitive assets and rate
sensitive liabilities, market interest rate fluctuations should not have a
significant impact on liquidity and earnings. The larger the imbalance, the
greater the
14
interest rate risk assumed and the greater the positive or negative impact of
interest rate fluctuations on liquidity and earnings.
Interest rate sensitivity management is concerned with the management of both
the timing and the magnitude of repricing characteristics of interest earning
assets and interest bearing liabilities and is an important part of
asset/liability management. The objectives of interest rate sensitivity
management are to ensure the adequacy of net interest income and to control the
risks to net interest income associated with movements in interest rates. The
following table, "Interest Rate Sensitivity Analysis," indicates that, on a
cumulative basis through twelve months, rate sensitive liabilities exceeded rate
sensitive assets, resulting in a liability sensitive position at the end of 1995
of $19,226,000. For comparison purposes, at the end of 1994, the cumulative
negative gap was $21,584,000. For a bank with a liability sensitive position, or
negative gap, falling interest rates would generally be expected to have a
positive effect on net interest income and rising interest rates would generally
be expected to have the opposite effect.
The Company's management is responsible for asset/liability management. This
responsibility includes establishing various interest rate risk measures,
setting strategies to control interest rate risk, implementing tactics to
achieve objectives and assuring adequate and stable earnings. During 1995, the
Company directed its attention to improving liquidity and reducing the
loan-to-funds and loans-to-assets ratios without sacrificing earnings. This was
accomplished by competitively pricing deposit accounts while continuing its
lending emphasis toward variable and callable fixed rate terms, limiting the
amount of long-term fixed rate loans, and investing in quality debt securities,
particularly securities of U.S. government agencies and corporations. While this
strategy had the effect of decreasing the interest rate spread and net interest
margin, it also increased net interest income and improved the interest
sensitivity gap and gap ratio by shortening the repricing frequency of the
Company's assets. Other factors contributing to improvements in the ratios used
to measure rate sensitivity were the $2,479,095, or 35.6%, increase in
non-interest bearing demand deposits which were available to invest in interest
earning assets, and the overall increase in the interest rate environment, which
encouraged customers to open certificates of deposit maturing in more than one
year.
In 1996, management expects interest rates to remain moderately stable, with
only minor adjustments in the prime rate throughout the year. In a stable
interest rate environment, management expects to continue to emphasize variable
rate lending and renew borrowings from the FHLB as a method of managing the
negative gap position. Management also expects to actively attempt to decrease
the sensitivity position of its liabilities by lengthening their repricing
and/or maturity schedules. Management believes the likelihood of substantial
interest rate increases or decreases in the immediate future is not great.
The following table presents the Company's rate sensitivity at each of the time
intervals indicated as of December 31, 1995. The table may not be indicative of
the Company's rate sensitivity position at other points in time.
Interest Rate Sensitivity Analysis
Less than 4-6 7-12 1-5 Over 5
3 months months months years years Total
Interest earning assets:
Federal funds sold $ 2,330 $ $ $ $ $2,330
Securities held-to-maturity
Securities available-for-sale 306 1,091 3,273 8,279 9,497 22,446
Loans 31,312 4,896 5,992 20,327 677 63,204
------ ----- ----- ------ --- ------
Total 33,948 5,987 9,265 28,606 10,174 87,980
====== ===== ===== ====== ====== ======
Interest bearing liabilities:
Demand deposit accounts 8,028 8,028
Savings accounts 17,419 17,419
Certificates of deposit 14,390 11,912 8,589 3,336 16 38,243
Federal funds purchased 3,034 3,034
FHLB advances 4,351 234 469 1,190 6,244
----- --- --- ----- == -----
Total 47,222 12,146 9,058 4,526 16 72,968
====== ====== ===== ===== == ======
Interest sensitivity gap (13,274) (6,159) 207
Cumulative interest sensitivity gap (13,274) (19,433) (19,226)
Gap ratio .72 .49 1.02
Cumulative gap ratio .72 .67 .72
The above table reflects the balances of interest earning assets and interest
bearing liabilities at the earlier of their repricing or maturity dates.
Scheduled payment amounts of amortizing fixed rate loans are reflected at each
scheduled payment date. Variable rate amortizing loans reflect scheduled
repayments at each scheduled payment date until the
15
loan may be repriced contractually; the unamortized balance is reflected at that
point. Debt securities are reflected at each instrument's ultimate maturity date
except for the mortgage-backed security which will be repriced in October 1996.
Overnight federal funds are reflected at the earliest pricing interval due to
the immediately available nature of the instruments. Interest bearing
liabilities with no contractual maturity, such as savings deposits and interest
bearing transaction accounts, are reflected in the earliest repricing period due
to contractual arrangements which give the Company the opportunity to vary the
rates paid on those deposits within a thirty-day or shorter period. Fixed rate
time deposits, principally certificates of deposit, are reflected at their
contractual maturity date. Variable rate time deposits are reflected at the
earlier of their next repricing or maturity date.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents charges to earnings based upon
management's evaluation of specific loans and general economic conditions and
trends in the marketplace. The 1995 and 1994 provisions for loan losses and
their related effect of increasing the allowance for loan losses is related to
the improved quality of the loan portfolio, favorable net chargeoff experience
and a favorable trend in customer delinquency and default. Please refer to the
section "Loan Portfolio" for a discussion of management's evaluation of the
adequacy of the allowances for loan losses. In 1995 and 1994, the provisions for
loan losses were $112,000 and $14,000, respectively.
Management is of the opinion that the banking industry and its regulators may
have, in some cases, overreacted to the crisis in the thrift industry through
establishing industry-wide norms for the allowance for loan losses at
unnecessarily high levels. Management has concluded that the quality of its loan
underwriting process, its loan monitoring and administration mechanisms, and the
Bank's historical chargeoff experience warrant reducing the level of its
allowance for loan losses as a percentage of loans outstanding. Management will
maintain the target percentage between 1.05% and 1.15%, adjusted for changes in
the economy, loan mix, and other relevant factors. The allowance for loan losses
as a percentage of outstanding loans was 1.06% as of December 31, 1995 compared
to 1.16% as of December 31, 1994.
OTHER INCOME
For the year ended December 31, 1995, other income was $777,242 compared to
$513,592 for the year ended December 31, 1994. The $263,650, or 51.3%, increase
was significantly affected by the $87,550 increase in service charges on deposit
accounts resulting from deposit growth from the new branch, the opening of the
Clemson Bank, and pricing strategies discussed earlier. The amount of loss
recognized from the sale of securities available-for-sale was $21,527 in 1995
compared to $78,723 in 1994, resulting in a $57,196 increase in income before
taxes. The Company has an investment holding strategy whereby securities are
sold when approximately one year remains until maturity. During periods of
rising interest rates, this investment strategy results in losses on the sales
of securities. However, this negative impact is mitigated, to some extent, by
the reinvestment of sales proceeds in investments with higher interest rates.
The Greenwood Bank also established a discount brokerage department in 1995
which generated $49,286 in investment fees income. Other categories of
noninterest income were positively affected by Company growth.
For the year ended December 31, 1994, other income was $513,592, a decrease of
$262,491, or 33.9%, from $776,083 recognized during the previous year. This
decrease is primarily attributable to a decrease of $222,605 in the amount of
fees earned on the sale of residential mortgage loans. During 1993, the
Company's marketplace experienced an extraordinary amount of mortgage
refinancings, based primarily on record low residential lending rates. In early
1994, rates began to rise and continued to do so through the third quarter of
1994. By the end of 1994, refinancing activity had substantially ceased. Also
contributing significantly to the decrease in other operating income were losses
on the sales of investment securities available-for-sale. In 1994, the Company
realized losses aggregating $78,723, whereas in 1993 the Company realized net
gains of $22,327. Service charges on deposit accounts increased during 1994 by
$34,329 over 1993. This increase is due primarily due to volume increases in the
deposit accounts.
OTHER EXPENSES
In 1995, non-interest expense increased 35.8% to $3,069,283 from $2,260,748 in
1994. The main component of noninterest expense is salaries and employee
benefits which increased $303,667, or 27.4%, when compared to the 1994 amount of
$1,107,692. The $170,987 cost of salaries for the Clemson Bank, the addition of
employees to manage the trust department and discount brokerage department, and
cost of living salary increases contributed to the increase in salaries and
employee benefits. Net occupancy expense was $422,032 and $237,251 for the years
ended December 31, 1995 and 1994, respectively. The $184,781, or 77.9%, increase
was primarily due to an increase in
16
depreciation expense resulting from additions to premises and equipment totaling
$996,716 in preparation for opening the new branch in Ninety Six, South Carolina
and the Clemson Bank. Categories of other operating expenses which significantly
contributed to the increase in non-interest expense were as follows: banking and
ATM supplies, $90,389 increase; computer supplies, $73,346 increase; and postage
and freight, $39,449 increase. The increase in professional fees and other
nonrecurring fees from the organization of the Clemson Bank and increases due to
Company growth also contributed to the increase in other operating expenses.
The industry wide reduction in the rate charged for federal deposit insurance
had a $49,590 positive impact on other operating expenses. Management does not
expect the assessment for 1996 to exceed $5,000.
For the year ended December 31, 1994, other expense increased $139,445, or 6.6%,
to $2,260,748, when compared to $2,121,303 for the year ended December 31, 1993.
Salaries and benefits increased $206,604, or 22.9%, when compared to the 1993
amount of $901,088. During 1994, the Bank hired an entry level management
employee in a loan administration capacity. Also, four persons who operate the
new branch in Ninety Six, South Carolina were added. In 1994, bonuses to
employees and the management group were earned based on the achievement of
certain performance criteria of the banking subsidiary. This plan was in effect
in 1993 only during the fourth quarter. Net occupancy expense decreased modestly
in 1994 to $237,251 and was a result of fully depreciating certain premises and
equipment purchased during 1989, the Bank's first year of operations. In
recognition of the decrease in mortgage loan origination fees, discussed in the
previous section "Other Income", certain employees assigned to the mortgage loan
department were either assigned additional duties in other areas or left the
employ of the Company. As a result, the expenses of the mortgage loan department
decreased $55,837, or 58.1%, from the prior year amount.
INCOME TAXES
The Company's income tax expense attributable to operations for 1995 was
$260,820, a decrease of $39,755 from 1994 expense of $300,575.
The Company files a consolidated federal income tax return. Accordingly, the
Company was able to benefit from the $222,336 pretax loss recorded by the
Clemson Bank in 1995. Income tax expense (benefit) is allocated to the
subsidiaries based on their pro-rata share of the total income tax expense
(benefit). In 1994, the Company's income tax expense was $300,575, an increase
of $45,262, or 17.7%, over the 1993 provision. Changes in the income tax expense
results primarily from changes in the income before taxes. The Company's
effective tax rates for the years ended December 31, 1995, 1994 and 1993 were
32.8% , 33.9% and 33.2%, respectively.
Effective January 1, 1993, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes"(FASB
109). In adopting the new standard, the Company recorded a benefit of $46,730.
At the date of adoption and at December 31, 1995, 1994 and 1993, management
considered whether a valuation allowance was necessary. Since the total tax
payments made during the carryback period and management's budgeted expectations
of continued profitable operations in the future years substantially exceeded
the net deferred tax asset, management concluded that it was more likely than
not the entire deferred tax asset would be realized and a valuation allowance
was not required. Accordingly, at the date of adoption and December 31, 1995,
1994 and 1993, the valuation allowance account is reported as $0.
LIQUIDITY
Liquidity is the ability of the Company to meet its cash obligations through
asset maturities or acquisition of liabilities. The Company manages liquidity at
the banking subsidiary level. Adequate liquidity is necessary to meet the
requirements of customers for loans and deposit withdrawals in the most timely
and economical manner. Some liquidity is ensured by maintaining assets which may
be converted into cash at minimal cost, such as amounts due from banks and
federal funds sold. Some liquidity is provided from securities available for
sale, particularly those maturing within two years. In addition, liquidity is
provided from maturing loans. However, the most manageable source of liquidity
is liabilities, with the primary focus of liquidity management being on the
ability to obtain deposits within the Company's market areas. Core deposits,
which include all deposits except certificates of deposit in excess of $100,000,
are a relatively stable source of liquidity. Certificates of deposit in excess
of $100,000 are a less stable source of liquidity because they are more
sensitive to interest rate changes than other deposit accounts. Management has
available to it additional sources of liquidity which include federal funds
purchased from correspondent banks and further advances from the Federal Home
Loan Bank. In order to maximize earnings, the Company has historically managed
liquidity at the lower range of its peers, and maintains credit agreements with
other financial institutions to meet short-term liquidity requirements. However
during 1995, the Company implemented strategies to strengthen
17
liquidity by decreasing the loan-to-funds and loan-to-assets ratios and by
expanding the Company's portfolio of securities available-for-sale, which is a
more liquid investment option than loans. Unused line of credit agreements
totaled $9,250,000 at December 31, 1995. Significant liquidity is also available
from the Federal Home Loan Bank under agreements in place with the agency. At
December 31, 1995, management believes the Company's liquidity sources
adequately meet its operational needs.
The banking subsidiaries are required by regulation to maintain an average cash
reserve balance computed as a percentage of deposits. The requirement is met by
vault and teller cash, and amounts due from the Federal Reserve Bank which are
reported as cash equivalents on the Company's balance sheet.
As a bank holding company, the Company's ability to pay cash dividends and meet
its cash obligations is primarily dependent upon the earnings of the banking
subsidiaries. Banking subsidiary dividends are subject to the prior approval of
the South Carolina Commissioner of Banking and are paid from undivided profits.
At December 31, 1995, the Company does not plan to pay cash dividends for the
foreseeable future. The Company has paid stock dividends in the past and may do
so in the future.
CAPITAL RESOURCES
The Company uses several ratios as indicators of capital strength. The most
commonly used measure is average common equity to average assets which was
11.99% for 1995 compared to 9.49% for 1994. The change from 1994 resulted from
equity growth from the $6,009,860 net proceeds from the stock offering, stock
sales to the employee stock ownership plan and 1995 net income outpacing the
growth in assets.
The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance sheet exposures, adjusted for
risk weights ranging from 0% to 100%. Under the risk-based standard, capital is
classified into two tiers. Tier I capital of the Company consists of common
stockholders' equity, excluding the unrealized gain (loss) on securities
available-for-sale, minus certain intangible assets. Tier II capital consists of
general reserve for loan losses subject to certain limitations. A bank holding
company's qualifying capital base for purposes of its risk-based capital ratio
consists of the sum of its Tier I and Tier II capital. The regulatory minimum
requirements are 4% for Tier I and 8% for total risk-based capital.
The holding company and banking subsidiaries are also required to maintain
capital at a minimum level based on total assets, which is known as the leverage
ratio. Only the strongest bank holding companies and banks are allowed to
maintain capital at the minimum requirement. All others are subject to
maintaining ratios 100 to 200 basis points above the minimum.
At December 31, 1995, the Company's and banking subsidiaries risk-based capital
and regulatory minimums are as follows:
Tier I Total Capital Leverage
Community Capital Corporation 14.79% 15.57% 14.09%
Greenwood Bank & Trust 10.56% 11.60% 8.13%
Clemson Bank & Trust 51.69% 52.54% 33.88%
Minimum Requirement 4.00% 8.00% 3.00%
Management anticipates relocating the Company's operations and bookkeeping
departments from its banking centers during 1996. In anticipation of this, the
Company purchased a commercial lot and building on January 29, 1996 from an
unrelated party for approximately $450,000. Management expects an additional
$70,000 to $90,000 of costs to be incurred for renovations.
Management also plans to begin construction on a permanent facility for the
Clemson Bank during 1996. The costs of all premises and equipment are expected
to approximate $1,300,000, not to exceed $1,500,000. As of December 31, 1995,
the Company was not committed to any party for expenditures relating to the
construction of the new Bank.
18
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
virtually all of the assets and the liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than does the effect
of inflation.
While the effect of inflation on a bank is normally not as significant as its
influence on those businesses that have large investments in plant and
inventories, it does have an effect. Interest rates generally increase as the
rate of inflation increases, but the magnitude of the change in rates may not be
the same. While interest rates have traditionally moved with inflation, the
effect on income is diminished because both interest earned on assets and
interest paid on liabilities vary directly with each other. Also, general
increases in the price of goods and services will result in increased operating
expenses.
PORTFOLIO OF INVESTMENT SECURITIES
The following tables summarize the carrying values of securities classified as
available-for-sale and held-to-maturity by the Company as of the indicated
dates, and the maturities and weighted average yields at December 31, 1995.
Yields on tax-exempt securities are shown at their nominal rates and have not
been tax-effected.
Investment Securities Portfolio Composition
Available-for-Sale Held-to-Maturity
------------------------------------- ----------------
1995 1994 1994
--------------- --------------- ------------
U.S. Treasury Securities $ 5,951,516 $ 4,888,384 $
Securities of other U.S. Government
agencies and corporations 11,546,355 1,044,029
Obligations of state and political subdivisions 4,550,252 1,628,334
Mortgage-backed securities 397,802 _________ _________
-------
$ 22,445,925 $ 5,932,413 $ 1,628,334
========== ========= =========
Maturities of Securities and Average Yields
Carrying
U.S. Treasury and U.S. Government Agencies Amount Yield
------------- -------------
Due in one year or less $ 3,875,641 6.37%
Due after one year but within five years 6,643,779 6.50%
Due after five years but within ten years 6,978,451 7.19%
---------
Total 17,497,871 6.75%
----------
Obligations of States and Local Governments
Due in one year or less 396,268 5.48%
Due after one year but within five years 1,635,533 6.21%
Due after five years but within ten years 321,645 4.92%
Due after ten years 2,196,806 5.84%
---------
Total 4,550,252 5.87%
---------
Total Securities
Due in one year or less 4,271,909 6.29%
Due after one year but within five years 8,279,312 6.44%
Due after five years but within ten years 7,300,096 7.09%
Due after ten years 2,196,806 5.84%
Mortgage-backed securities 397,802 6.88%
-------
Total securities $ 22,445,925 6.70%
==========
19
LOAN PORTFOLIO
Credit Risk Management
Credit risk entails both general risk, which is inherent in the process of
lending, and risk that is specific to individual borrowers. The management of
credit risk involves both the process of loan underwriting and loan
administration. The Company manages credit risk through a strategy of making
loans within the Company's primary marketplace and within the Company's limits
of expertise. Although management seeks to avoid concentrations of credit by
loan type or industry through diversification, a substantial portion of the
borrowers' ability to honor the terms of their loans is dependent on the
business and economic conditions in Greenwood and Pickens Counties and the
surrounding areas comprising the Company's marketplace. Additionally, since real
estate is considered by the Company as the most desirable nonmonetary
collateral, a significant portion of the banking subsidiaries loans are
collateralized by real estate. Even though a substantial portion of the
Company's loans are collateralized by real estate, the cash flow of the borrower
or the business enterprise is generally considered as the primary source of
repayment. Generally, the value of real estate is not considered by the Company
as the primary source of repayment for performing loans. The Company also seeks
to limit total exposure to individual and affiliated borrowers. The Company
manages risk specific to individual borrowers through the loan underwriting
process and through an ongoing analysis of the borrower's ability to service the
debt as well as the value of the pledged collateral.
The Company's loan officers and loan administration staff are charged with
monitoring the Company's loan portfolio and identifying changes in the economy
or in a borrower's circumstances which may affect the ability to repay the debt
or the value of the pledged collateral. In order to assess and monitor the
degree of risk in the Company's loan portfolio, several credit risk
identification and monitoring processes are utilized. The Company assesses
credit risk initially through the assignment of a risk grade to each loan based
upon an assessment of the borrower's financial capacity to service the debt and
the presence and value of any collateral. Credit grading is subject to
adjustment during the life of the loan. The Company's Compliance Officer and an
external reviewer both perform periodic independent reviews of the loan
portfolio. Finally, the senior loan administration official administers an
internal review mechanism in which adversely graded loans are monitored more
closely and become the basis for analysis of the adequacy of the loan loss
reserve.
Lending Activities
The Banks extend credit primarily to consumers and small businesses in Greenwood
and Clemson and, to a limited extent, customers in contiguous counties.
The Company's service area is mixed in nature. The home office and branch
offices of the Greenwood Bank are located in Greenwood County, South Carolina.
The economy of Greenwood is a regional business center whose economy contains
elements of medium and light manufacturing, higher education, regional
healthcare, and distribution facilities. The Clemson Bank office is a temporary
facility located in Clemson, South Carolina. Due to its proximity to a major
interstate and Clemson University, a state-supported university, management
expects the area to remain stable with continued growth. Outside the
incorporated city limits of Greenwood and Clemson, the economy includes
manufacturing, agriculture, timber, and recreational activities. No particular
category or segment of the economies previously described are expected to grow
or contract disproportionately in 1996.
Loan Portfolio Description
The Company believes the loan portfolio is adequately diversified. There are no
foreign loans and agricultural lending is limited. Real estate loans are
primarily construction loans and loans secured by real estate. Commercial loans
are spread across a variety of industries with no significant concentrations
existing by industry or customer type. As of December 31, 1995, the ten largest
loans, including lines of credit, totaled $5,263,687, or 8.3% of outstanding
loans.
In January 1995, the Company changed its target ratio of loans to funds from 85%
to 80% and of loans to assets from 75% to 70%. Although loan growth remains
strong as evidenced by an increase in the loan portfolio for 1995 and 1994 of
$12,638,706 and $5,930,943, respectively, the deposit base has outpaced the
growth in loans. At December 31, 1995 and 1994, the loan-to-borrowed funds ratio
was 76.7% and 86.5%, respectively, and the loan-to-assets ratio was 65.8% and
77.7%, respectively. The loan to total borrowed money ratio is used to monitor
the financial institution's potential profitability and efficiency of asset
distribution and utilization. Generally, a higher loan to borrowings ratio is
indicative of higher interest income since loans yield a higher return than
alternative investment vehicles.
20
In 1995 and 1994, the Banks earned fees from the origination of residential
mortgages sold on the secondary market totaling $114,596 and $113,065,
respectively. The Banks accept residential mortgage loan applications, qualifies
potential borrowers to standards established by investors and funds loans of
qualified borrowers. Funded loans are held temporarily and sold to investors
under the terms of pre-existing commitments. The Banks do not fund or sell
residential mortgages having market or interest rate risk. The Banks do not
service residential mortgages for the benefit of others.
Loan Portfolio Composition
December 31,
1995 1994
------------- --------------
Commercial and agricultural $ 13,349,226 $ 12,231,392
Real estate 38,295,636 29,386,734
Home equity 6,593,037 4,795,981
Consumer and other 4,666,890 4,014,176
Residential mortgages held for sale 299,000 136,800
------- -------
$ 63,203,789 $ 50,565,083
========== ==========
Commercial and agricultural loans increased $1,117,834, or 9.1%, in 1995 to
$13,349,226. The increase was generally attributable to the addition of a new
lending officer in 1993 who successfully obtained new business relationships
from competitors. Management also successfully expanded existing customer loan
volume in 1995. Commercial and agricultural loans are made on either a secured
or unsecured basis. Collateral for commercial loans may consist of receivables,
inventories or equipment. Unsecured loans are generally for short-term periods
to borrowers evaluated as having satisfactory net worth and repayment history.
Real estate loans include construction loans and any loan collateralized by real
estate. Real estate loans increased $8,908,902, or 30.3% in 1995 to $38,295,636.
The increase in real estate lending was attributable to the addition of the
Clemson Bank, which had $4,277,399 of real estate loans as of December 31, 1995,
increases in commercial real estate volume and increases in residential
construction lending. In 1993, several first home residential subdivisions were
started in the Greenwood marketplace and influenced the Greenwood Bank's 1994
construction lending activity. This growth continued in 1995 and is expected to
continue throughout the next year. The Banks were also able to compete favorably
for residential mortgage loans with other financial institutions by offering
fixed rate products having three and five year call provisions. Generally, the
Banks limit loan-to-value ratios to 80%. Currently, loans for the construction
of homes having no contract for sale are available to only the most credit
worthy contractors. Residential real estate loans consist of first and second
mortgages on single or multifamily residential dwellings.
The origination of residential mortgages held for sale continued in 1995;
however, the volume has not approached the levels attained during the
refinancing boom in 1992 and 1993. The origination of residential mortgages held
for sale is considered to be a component of the Company's overall marketing
strategy and not a primary segment of business activity in future periods.
Maturities and Sensitivity of Loans to Changes in Interest Rates:
The following table summarizes the loan maturity distribution, by type, at
December 31, 1995 and related interest rate characteristics:
Less One After
than one year to five years five years Total
Commercial loans $ 9,869,045 $ 3,480,181 $ $ 13,349,226
Real estate loans 18,787,898 18,550,005 957,732 38,295,636
Home equity loans 6,593,037 6,593,037
Consumer and other loans 3,342,534 1,311,532 12,825 4,666,890
Residential mortgages held for sale 299,000 299,000
------- ------- ------- -------
$ 38,891,514 $ 23,341,718 $ 970,557 $ 63,203,789
========== ========== ======= ==========
Predetermined rate
maturing greater than one year $ 20,583,193 $ 970,557 $ 21,553,750
========== ======= ==========
Variable rate or maturing
within one year $ 38,891,514 $ 2,758,525 $ $ 41,650,039
========== ========= ==========
21
Potential Problem Loans
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for the Impairment of a Loan", and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" as of January 1, 1995. These
statements identify how creditors should measure and account for impaired loans.
Under SFAS 114 and 118, impairment of loans should be measured at the present
value of the expected future cash flows discounted at the loan's effective
interest rate or at fair value of the collateral if the loan is collateral
dependent.
Loans are defined as impaired when "based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement." All loans are subject to this
criteria except for: "smaller-balance homogeneous loans that are collectively
evaluated for impairment" and loans "measured at fair value or at the lower of
cost or fair value." The Company considers its consumer installment portfolio,
credit cards and home equity lines as meeting this criteria. Therefore, the real
estate and commercial loan portfolios are primarily affected by these
Statements.
The Company identifies impaired loans through its normal internal loan review
process. Loans on the Company's problems loan watch list are considered
potentially impaired loans. These loans are evaluated in determining whether all
outstanding principal and interest are expected to be collected. Loans are not
considered impaired if a minimal delay occurs and all amounts due including
accrued interest at the contractual interest rate for the period of delay are
expected to be collected.
The Company relies on its internal loan review process to identify loans on
which full collection of principal or interest under the original terms may be
questionable. Criticized and classified loans have not historically resulted in
loss of principal or interest.
At December 31, 1995, the Company did not consider the affects of loan
impairment, if any, to be material to the consolidated financial statements and
has not established a valuation account. The Company had discontinued the
accrual of interest on loans totaling $13,213 and $3,076 as of December 31, 1995
and 1994, respectively.
At December 31, 1995 and 1994, the Company's internal review mechanism had
identified $2,947,072 and $4,019,549, respectively, of criticized loans which
included $1,894,397 and $2,144,233, respectively, of classified loans. The above
listed loans in nonaccrual status were included. The results of this internal
review process is the primary determining factor in management's assessment of
the adequacy of the allowance for loan losses. There were no loans in the
portfolio excluded from the internal review process. Please refer to the section
"Summary of Loan Loss Experience." Except for the information used by management
in its internal review process, management is not aware of any further
information about any material credits which causes management to have serious
doubts as to the ability of borrowers' ability to comply with the loan repayment
terms.
Other Real Estate Owned
At December 31, 1995, the Company had no Other Real Estate Owned recorded, and
there were no loans which management considered in-substance foreclosures of
property.
At December 31, 1994, Other Real Estate Owned consisted of a single piece of
residential rental property having a fair value of $19,457. Management does not
anticipate significant expenses to be associated with holding or disposing of
the property. There are no loans at December 31, 1994 which management considers
in-substance foreclosures of property.
22
Summary of Loan Loss Experience
1995 1994
--------------- -------------
Net loans outstanding at the end of year $ 62,532,451 $ 49,984,555
========== ==========
Average amount of loans outstanding $ 54,417,254 $ 45,736,180
========== ==========
Allowance for loan losses
Balance, beginning of year 580,528 566,810
Loans charged off:
Commercial 17,127
Real estate
Consumer 4,348 4,714
----- -----
Total loans charged off 21,475 4,714
------ -----
Recoveries of loans previously charged off 285 4,432
--- -----
Net charge offs 21,190 282
Provision charged to operations 112,000 14,000
------- ------
Balance, end of year $ 671,338 $ 580,528
======= =======
Ratios:
Net charge-offs to average loans outstanding .03% (1)
Net charge-offs to loans at end of year .03% (1)
Allowance for loan losses to average loans 1.22% 1.27%
Allowance for loan losses to loans, end of year 1.07% 1.16%
Net charge-offs to allowance for loan losses 3.16% (1)
Net charge-offs to provisions to loan losses 18.92% .02%
(1) - actual percentage is less than 1 hundredth of one percent
The following table presents management's allocation of the allowance for loan
losses. The allocation is based upon estimates and selective judgment and is not
necessarily indicative of the specific amounts or loan categories in which
losses may ultimately occur.
1995 1994
----------------------------- ---------------------------
Reserve % of Reserve % of
Amount Loans Amount Loans
Commercial and agricultural loans $ 315,000 21.1% $272,000 24.2%
Real estate loans 242,000 60.6% 209,000 58.2%
Consumer and other loans 114,338 7.4% 99,528 7.9%
Home equity loans 10.4% 9.5%
Residential mortgages held for sale .5% .2%
Unallocated N/A N/A
------- ----- ------- ----
$ 671,338 100.0% $ 580,528 100.0%
======= ===== ======= =====
The reserve for loan losses is maintained at a level determined by management to
be adequate to provide for probable losses inherent in the loan portfolio
including commitments to extend credit. The reserve is maintained through
provision for loan losses which is a charge to operations. The potential for
loss in the portfolio reflects the risks and uncertainties inherent in the
extension of credit.
The Company's provision and allowance for loan losses is subjective in nature
and relies on judgments and assumptions of risk elements in the portfolio,
future economic conditions and other factors affecting borrowers. The process
includes identification and analysis of loss potential in various portfolio
segments utilizing a credit risk grading process and specific reviews and
evaluations of significant problem credits. In addition, management monitors the
overall portfolio quality through observable trends in delinquency, chargeoffs,
and general and economic conditions in the service area. Management is not aware
of any trends, material risks or uncertainties affecting the loan portfolio nor
is management aware of any information about any significant borrowers which
causes serious doubts as to the ability of the borrower to comply with the loan
repayment terms. It should be noted however that no assurances can
23
be made that future charges to the allowance for loan losses or provisions for
loan losses may not be significant to a particular accounting period. At
December 31, 1995 and 1994, management considers the allowances for loan losses
adequate based on their judgments, evaluations and analysis of the loan
portfolio.
AVERAGE DAILY DEPOSITS
The following table summarizes the Bank's average daily deposits for the years
ended December 31, 1995 and 1994. The 1995 totals include certificates of
deposit over $100,000 which at December 31, 1995 totaled $12,082,348. Of this
total, $5,415,039 had scheduled maturities within three months, $4,509,270
within three to six months, $1,363,039 within six to twelve months and $795,000
maturing thereafter.
1995 1994
------------------------- -----------------------------
Average Average
Amount Rate Paid Amount Rate Paid
Non-interest bearing demand $ 8,258,045 $6,227,199
Interest bearing transaction accounts 6,135,859 1.84% 5,597,266 1.84%
Savings accounts 14,692,883 4.02% 11,805,003 4.02%
Certificates of deposit 30,053,453 5.72% 23,518,216 5.72%
---------- ----------
$ 59,140,240 $ 47,147,684
========== ==========
RETURN ON EQUITY AND ASSETS
The following table shows the return on average assets (net income divided by
average total assets), return on average equity (net income divided by average
equity), and equity to assets ratio (average equity divided by average total
assets) for the period indicated. Since its inception, the Company has not paid
cash dividends.
1995 1994
----------- --------
Return on average assets .68% .97%
Return on average equity 5.69% 10.17%
Equity assets ratio 11.99% 9.49%
SHORT-TERM BORROWINGS
At December 31, 1995 and 1994, the Banks had purchased federal funds and
securities sold under agreements to repurchase totaling $3,034,000 and
$3,386,000, respectively. During 1995 and 1994, the maximum amounts outstanding
at any month-end was $5,900,000 and $3,386,000, respectively. The average
interest rates paid on these short-term borrowings were 5.73% and 4.54% in 1995
and 1994, respectively. The weighted average interest rate being paid on federal
funds at December 31, 1995 and 1994 was 5.55% and 5.98%, respectively.
ACCOUNTING AND FINANCIAL REPORTING ISSUES
Newly-Issued Accounting Standards - In October 1995, the Financial Accounting
Standards Board issued FASB statement No. 123, "Accounting