Filed Pursuant to Rule 424(b)(3)
Registration No. 333-819000
PROXY STATEMENT PROXY STATEMENT / PROSPECTUS
RIDGEWAY BANCSHARES, INC. COMMUNITY BANKSHARES, INC.
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The boards of directors of Ridgeway Bancshares, Inc., and Community
Bankshares, Inc., have agreed that Community Bankshares will acquire Ridgeway
Bancshares in a merger. If the merger is completed, each outstanding share of
Ridgeway Bancshares common stock will be exchanged for 25 shares of Community
Bankshares common stock plus $100.00 cash, subject to the right of Ridgeway
Bancshares shareholders to make an election to receive more or less stock or
cash.
Based on the $14.32 closing price per share of Community Bankshares
common stock on March 1, 2002, the value of 25 shares of Community Bankshares
common stock was $358. Because the number of shares Ridgeway Bancshares
shareholders will receive in the merger is fixed, the value of the shares of
Community Bankshares common stock to be received in the merger will fluctuate as
the price of Community Bankshares common stock changes. We encourage you to
obtain current market price quotations for Community Bankshares common stock.
Community Bankshares common stock is traded on the American Stock Exchange under
the symbol "SCB." Ridgeway Bancshares common stock is not traded on an
established public trading market.
The merger cannot be completed unless the shareholders of Ridgeway
Bancshares and the shareholders of Community Bankshares approve the agreement
and plan of merger. Ridgeway Bancshares and Community Bankshares have each
scheduled a special meeting for their shareholders to vote on these matters.
The board of directors of Ridgeway Bancshares unanimously recommends
that the holders of Ridgeway Bancshares common stock vote for approval of the
Agreement and Plan of Merger.
The board of directors of Community Bankshares unanimously recommends
that the holders of Community Bankshares common stock vote for approval of the
Agreement and Plan of Merger.
Whether or not you plan to attend your special meeting, please take the
time to complete, sign and mail the enclosed proxy card to us so your shares can
be voted if you are absent.
You should consider carefully the risk factors beginning on page 10 of
this Proxy Statement /Prospectus.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this document. Any representation to the contrary is a
criminal offense.
------------------------
The shares of Community Bankshares stock are not savings accounts,
deposits or other obligations of any bank or savings association and are not
insured by the Federal Deposit Insurance Corporation or any other governmental
agency. Stock is subject to investment risks, including loss of value.
The date of this Proxy Statement/Prospectus is March 4, 2002. It is first being
mailed on or about March 8, 2002.
TABLE OF CONTENTS
SUMMARY...........................................................................................................1
The Companies............................................................................................1
The Merger...............................................................................................1
Comparative Per Share Market Price Information...........................................................1
Reasons For The Merger...................................................................................2
Ridgeway Bancshares Special Meeting......................................................................2
Community Bankshares Special Meeting.....................................................................2
Recommendations To Shareholders..........................................................................3
Voting Rights At The Special Meetings....................................................................3
Shareholder Vote Required................................................................................3
Share Ownership Of Management And Certain Shareholders...................................................3
Effective Time...........................................................................................3
Exchange Of Stock Certificates...........................................................................3
Regulatory Approvals And Other Conditions To Completion Of The Merger....................................4
Waiver, Amendment and Termination Of The Merger Agreement................................................4
Federal Income Tax Consequences..........................................................................4
Accounting Treatment.....................................................................................5
Interests Of Certain Persons In The Merger That May Be Different From Yours..............................5
Dissenting Shareholders Of Ridgeway Bancshares...........................................................5
Differences In Shareholders' Rights......................................................................5
Comparative Per Share Data...............................................................................6
Selected Financial Data..................................................................................7
RISK FACTORS.....................................................................................................10
General.................................................................................................10
Risks Relating To The Merger............................................................................10
Post Merger Risks.......................................................................................11
THE RIDGEWAY BANCSHARES SPECIAL MEETING..........................................................................12
General.................................................................................................12
Record Date; Vote Required..............................................................................13
THE COMMUNITY BANKSHARES SPECIAL MEETING.........................................................................14
General.................................................................................................14
Record Date; Vote Required..............................................................................14
THE MERGER.......................................................................................................15
General.................................................................................................15
Background Of The Merger................................................................................16
Ridgeway Bancshares' Reasons For The Merger.............................................................17
Community Bankshares' Reasons For The Merger............................................................18
Effective Time Of The Merger............................................................................19
Distribution Of Community Bankshares Stock Certificates And Cash Payments...............................19
Conditions To Completion Of The Merger..................................................................20
Regulatory Approvals....................................................................................21
Waiver, Amendment, And Termination Of The Merger Agreement..............................................21
Management Following The Merger.........................................................................23
Interests Of Some Persons In The Merger.................................................................31
Dissenting Shareholders Of Ridgeway Bancshares..........................................................31
Federal Income Tax Consequences Of The Merger...........................................................33
Accounting Treatment....................................................................................35
Expenses And Fees.......................................................................................35
Resales Of Community Bankshares Common Stock............................................................36
i
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS...................................................................36
Antitakeover Provisions Generally.......................................................................37
Authorized Capital Stock................................................................................37
Amendment Of Articles Of Incorporation And Bylaws.......................................................38
Classified Board Of Directors And Absence Of Cumulative Voting..........................................38
Removal Of Directors....................................................................................39
Indemnification.........................................................................................39
Shareholder Nominations.................................................................................40
Mergers, Consolidations, Exchanges, Sale Of Assets Or Dissolution.......................................40
Quorum..................................................................................................40
Statutory Matters.......................................................................................40
COMPARATIVE MARKET PRICES AND DIVIDENDS..........................................................................41
INFORMATION ABOUT RIDGEWAY BANCSHARES............................................................................42
Business And Properties.................................................................................43
Legal Proceedings.......................................................................................43
Management..............................................................................................44
Management Compensation.................................................................................45
Transactions With Management............................................................................46
Voting Securities And Principal Shareholders............................................................46
Management's Discussion And Analysis Of Financial Condition And Results Of Operations...................46
INFORMATION ABOUT COMMUNITY BANKSHARES...........................................................................65
General.................................................................................................65
Description of Properties...............................................................................66
Legal Proceedings.......................................................................................67
Management's Discussion and Analysis of Financial Condition and Results of Operations...................67
RECENT DEVELOPMENTS..............................................................................................95
SUPERVISION AND REGULATION.......................................................................................96
Regulation Of Bank Holding Companies....................................................................97
Capital Adequacy Guidelines For Bank Holding Companies And Banks........................................98
Payment Of Dividends....................................................................................98
Transactions By Bank Holding Companies With Their Affiliates............................................99
FDIC Insurance Assessments..............................................................................99
Regulation Of The Banks.................................................................................99
Other Safety And Soundness Regulations.................................................................100
Interstate Banking.....................................................................................100
Recent Legislation.....................................................................................101
Fiscal And Monetary Policy.............................................................................102
DESCRIPTION OF COMMUNITY BANKSHARES COMMON STOCK................................................................102
SHAREHOLDER PROPOSALS...........................................................................................103
FORWARD LOOKING STATEMENTS......................................................................................103
EXPERTS.........................................................................................................104
WHERE YOU CAN FIND MORE INFORMATION.............................................................................104
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
APPENDIX A-Agreement and Plan of Merger.........................................................................A-1
APPENDIX B-Copy of Chapter 13, South Carolina Business Corporation Act, pertaining to dissenters' rights.......B-1
ii
SUMMARY
This summary highlights selected information from this Proxy
Statement/Prospectus. It does not contain all of the information that is
important to you. You should carefully read this entire document and all other
documents to which we refer in this document in order to understand fully the
merger and to obtain a more complete description of the legal terms of the
merger. See "Where You Can Find More Information" (page 104). Each item in this
summary includes a page reference that directs you to a more complete
description in this document of the topic discussed.
The Companies (Pages 42 And 65)
RIDGEWAY BANCSHARES, INC.
100 Palmer Street
Ridgeway, South Carolina, 29130
(803) 337-2251
Ridgeway Bancshares is incorporated in South Carolina and is a bank
holding company. Ridgeway Bancshares owns Bank of Ridgeway, a commercial bank
which serves customers who are primarily located in Fairfield and northern
Richland Counties. As of September 30, 2001, Ridgeway Bancshares' total assets
were about $76.7 million, deposits were about $64.9 million, and shareholders'
equity was about $8.6 million.
COMMUNITY BANKSHARES, INC.
791 Broughton Street
Orangeburg, South Carolina 29115
(803) 535-1060
Community Bankshares is incorporated in South Carolina and is a bank
holding company. Through its subsidiaries, Community Bankshares provides banking
and other financial services. Community Bankshares has banking operations in
Orangeburg, Sumter and Florence Counties and mortgage origination offices in
Richland, Sumter and Anderson Counties. As of September 30, 2001, Community
Bankshares' total assets were about $292.0 million, deposits were about $233
million, and shareholders' equity was about $25.5 million.
The Merger (Page 15)
If we complete the merger, Community Bankshares will be the surviving
corporation. When the merger is completed, if you are a Ridgeway Bancshares
shareholder, you will receive 25 shares of Community Bankshares stock plus
$100.00 in cash for each share of Ridgeway Bancshares stock that you own.
Individual Ridgeway Bancshares shareholders will have the right until after
completion of the merger to elect to receive more or less stock or cash. If you
make this election you may not receive as much stock or cash as you elect,
depending upon the elections made by other Ridgeway Bancshares shareholders and
the total Community Bankshares stock and cash available which are fixed at
1,000,000 shares of stock and $4,000,000 in cash. In any event, you will not
receive any fraction of a share of Community Bankshares common stock. Instead,
you will receive a cash payment for any fraction of a share of Community
Bankshares common stock to which you may become entitled.
If you are a Ridgeway Bancshares shareholder and you elect to dissent
from the merger under South Carolina law and follow the required procedures, you
will receive a cash payment for your shares of Ridgeway Bancshares common stock
instead of receiving any Community Bankshares common stock in the merger. More
information about your rights to dissent from the merger, and the procedures you
must follow should you choose to do so, is included under the heading "The
Merger -- Dissenting Shareholders of Ridgeway Bancshares" on page 31. Community
Bankshares shareholders do not have the right to dissent from the merger.
1
We have attached the merger agreement to this Proxy
Statement/Prospectus as Appendix A. We encourage you to read the merger
agreement. It is the legal document that establishes the terms and conditions of
the merger.
Comparative Per Share Market Price Information (Page 41)
Shares of Community Bankshares are traded on the American Stock
Exchange under the symbol "SCB." Shares of Ridgeway Bancshares are not quoted on
any established market. The following table sets forth the last sale price of
Community Bankshares common stock, the last known sale price of Ridgeway
Bancshares common stock, and the equivalent per share price (as explained below)
of Ridgeway Bancshares common stock as of November 20, 2001, the last trading
day immediately preceding public announcement of the merger, and March __, 2002,
the latest practicable date prior to the mailing of this Proxy
Statement/Prospectus:
Equivalent Per Share Price
Community Bankshares Ridgeway Bancshares of Ridgeway Bancshares
Market Price per Share At: Common Stock Common Stock Common Stock
-------------------------- ------------ ------------ ------------
November 20, 2001 $11.95 $307.00* $398.75
March 1, 2002 $14.32 ** $458.00
----------------------
*Sale date was August 2, 2001. **No sale has been reported since August 2, 2001.
The equivalent per share price of Ridgeway Bancshares common stock is
the market value of the consideration that Ridgeway Bancshares shareholders
would have received if the merger had been consummated on the stated dates for
each share of Ridgeway Bancshares common stock based on the exchange ratio of 25
shares plus $100.00 in cash per share. Of course, even though the exchange ratio
is fixed, the market price of Community Bankshares common stock will fluctuate
prior to and after completion of the merger. Therefore, you should obtain
current stock price quotations for Community Bankshares common stock.
Reasons For The Merger (Pages 17 and 18)
Ridgeway Bancshares and Community Bankshares believe that the merger
will result in a company with expanded opportunities for profitable growth. In
addition, we anticipate that the combined resources of Ridgeway Bancshares and
Community Bankshares will improve Bank of Ridgeway's ability to compete in its
market area.
To review the background of and reasons for the merger in greater
detail, please see the discussion under the headings "The Merger - Background of
the Merger," "The Merger - Ridgeway Bancshares' Reasons for the Merger" and "The
Merger - Community Bankshares' Reasons for the Merger" on pages 16, 17 and 18.
Ridgeway Bancshares Special Meeting (Page 12)
The Ridgeway Bancshares special meeting will be held at Ridgeway
Bancshares' main office, 100 Palmer Street, Ridgeway, South Carolina, 29130, at
3:00 p.m. on Wednesday, April 10, 2002. At the special meeting, Ridgeway
Bancshares shareholders will be asked to approve the merger agreement and the
merger.
Community Bankshares Special Meeting (Page 14)
The Community Bankshares special meeting will be held in the board room
of the Orangeburg National Bank branch at 791 Broughton Street, Orangeburg,
South Carolina, 29115, at 3:00 p.m. on Monday, April 8, 2002. At the special
meeting, Community Bankshares shareholders will be asked to approve the merger
agreement and the merger.
2
Recommendations To Shareholders (Pages 18 and 19)
The Ridgeway Bancshares and Community Bankshares boards of directors
have approved the merger agreement and the merger and believe that the merger is
fair to their respective shareholders and in their best interests. The board of
directors of your company unanimously recommends that you vote "FOR" the
proposal to approve the merger agreement and the merger.
Voting Rights At The Special Meetings (Pages 13 and 14)
You can vote at the Ridgeway Bancshares special meeting if you owned
Ridgeway Bancshares common stock as of the close of business on February 28,
2002, the record date. On that date, 40,000 shares of Ridgeway Bancshares common
stock were outstanding and therefore are allowed to vote at the special meeting.
You will be able to cast one vote for each share of Ridgeway Bancshares common
stock you owned on February 28, 2002.
You can vote at the Community Bankshares special meeting if you owned
Community Bankshares common stock as of the close of business on January 31,
2002, the record date. On that date, 3,299,674 shares of Community Bankshares
common stock were outstanding and therefore are allowed to vote at the special
meeting. You will be able to cast one vote for each share of Community
Bankshares common stock you owned on January 22, 2002.
Shareholder Vote Required (Page 13 and 14)
To approve the merger, shareholders who hold on the record date a
two-thirds majority of the outstanding shares of Ridgeway Bancshares common
stock entitled to vote and shareholders who hold on the record date a two-thirds
majority of the outstanding shares of Community Bankshares common stock entitled
to vote must vote for the merger agreement and the merger. If you do not vote,
this will have the same effect as a vote against the merger.
Share Ownership Of Management And Certain Shareholders (Page 14)
All together, the directors and executive officers of Ridgeway
Bancshares, their immediate family members and entities they control can vote
13,519 shares (approximately 33.8% of the outstanding shares) of the shares
entitled to be voted at the Ridgeway Bancshares special meeting and the
directors and executive officers of Community Bankshares, their immediate family
members and entities they control can vote 888,714 shares (approximately 26.9%
of the outstanding shares) of the shares entitled to be voted at the Community
Bankshares special meeting. The directors and executive officers of Ridgeway
Bancshares and Community Bankshares have agreed to vote all of the shares over
which they have voting authority (other than as a fiduciary) in favor of the
merger.
Effective Time (Page 19)
The merger will become final at the time specified in the Articles of
Merger to be filed with the Secretary of State of the State of South Carolina.
If Ridgeway Bancshares and Community Bankshares shareholders approve the merger
at the special meetings, and all required regulatory approvals are obtained, we
currently anticipate that the merger will be completed during the second quarter
of 2002. Ridgeway Bancshares and Community Bankshares cannot assure you that we
can obtain the necessary shareholder and regulatory approvals or that the other
conditions to completion of the merger can or will be satisfied.
Exchange Of Stock Certificates (Page 19)
Promptly after the merger is completed, if you are a Ridgeway
Bancshares shareholder you will receive a letter and instructions on how to
surrender your Ridgeway Bancshares stock certificates in exchange for Community
Bankshares stock certificates and cash and how to elect to receive more or less
stock or cash and the deadline for making such election. You will need to
carefully review and complete these materials and return them as instructed
along with your stock certificates for Ridgeway Bancshares common stock. You
should not send Ridgeway Bancshares, Community Bankshares, or Community
Bankshares' transfer agent any stock certificates until you receive these
instructions.
3
Regulatory Approvals And Other Conditions To Completion Of The Merger (Pages
20 and 21)
Community Bankshares is required to notify and obtain approvals from
government regulatory agencies before the merger may be completed, including the
Federal Reserve and other federal and state banking regulators. We expect that
Community Bankshares will obtain all required regulatory approvals, but we
cannot assure you that these regulatory approvals will be obtained.
In addition to the required regulatory approvals, the merger will be
completed only if conditions, including, but not limited to the following, are
met or, if waivable, waived:
o Ridgeway Bancshares shareholders and Community Bankshares
shareholders approve the merger agreement and the merger at
the special meetings;
o Ridgeway Bancshares and Community Bankshares each receive an
opinion of counsel that the merger will qualify as a tax-free
reorganization; and
o Neither Community Bankshares nor Ridgeway Bancshares has
breached in any material respect any of its representations or
obligations under the merger agreement.
In addition to these conditions, the merger agreement, attached to this
Proxy Statement/Prospectus as Appendix A, describes other conditions that must
be met before the merger may be completed.
In cases where the law permits, either Community Bankshares or Ridgeway
Bancshares could elect to waive a condition that has not been satisfied and
complete the merger although it is entitled not to. We cannot be certain whether
or when any of the conditions we have listed will be satisfied (or waived, where
permissible), or that the merger will be completed.
Waiver, Amendment and Termination Of The Merger Agreement (Page 21)
Community Bankshares and Ridgeway Bancshares may agree to terminate the
merger agreement and elect not to complete the merger at any time before the
merger is completed.
Each of the parties also can terminate the merger agreement in other
circumstances, including if the merger is not completed by December 31, 2002.
However, a party may not terminate the merger agreement for this reason if the
merger has not been completed because of a breach of the merger agreement by the
party seeking termination.
In addition, the parties may also terminate the merger agreement if
other circumstances occur which are described in the agreement, attached to this
Proxy Statement/Prospectus as Appendix A.
The merger agreement may be amended by the written agreement of
Ridgeway Bancshares and Community Bankshares. The parties may amend the merger
agreement without shareholder approval, even if Ridgeway Bancshares shareholders
or Community Bankshares shareholders have already approved the merger. However,
Ridgeway Bancshares shareholders and Community Bankshares shareholders must
approve any amendments that would modify, in a material respect, the type or
amount of consideration to be paid and received in the merger.
Under some circumstances, if the merger is not consummated and if other
corporate transactions occur with respect to Ridgeway Bancshares before November
20, 2002, Ridgeway Bancshares may become obligated to pay a $300,000 termination
fee to Community Bankshares.
Federal Income Tax Consequences (Page 33)
We expect that Community Bankshares shareholders will not recognize any
gain or loss for U.S. federal income tax purposes and that Ridgeway Bancshares
4
shareholders will not recognize any gain or loss for U. S. federal income tax
purposes to the extent that they exchange their shares of Ridgeway Bancshares
common stock for shares of Community Bankshares common stock in the merger, but
that they will recognize gain or loss in connection with cash received. We have
conditioned the merger on our receipt of a legal opinion that this will be the
case, but this opinion will not bind the Internal Revenue Service, which could
take a different view.
The tax treatment applicable to the receipt of Community Bankshares
common stock may not apply to some Ridgeway Bancshares shareholders, including
the types of Ridgeway Bancshares shareholders discussed on page __, and will not
apply to any Ridgeway Bancshares shareholder who dissents from the merger under
South Carolina law. The extent to which cash received would result in either a
capital gain or loss or ordinary income or loss will depend on the individual
circumstances of each Ridgeway Bancshares shareholder. Determining the actual
tax consequences of the merger to you can be complicated. These consequences
will depend on your specific situation and many variables not within our
control. You should consult your own tax advisor for a full understanding of the
merger's tax consequences.
Accounting Treatment (Page 35)
Community Bankshares expects to account for the merger as a purchase
transaction for accounting and financial reporting purposes, meaning that the
assets and liabilities of Ridgeway Bancshares will be recorded at their
estimated fair values and added to those of Community Bankshares. Therefore, the
financial statements of Community Bankshares issued after the merger will
reflect these values from Ridgeway Bancshares and will not be restated
retroactively to reflect the historical financial position or results of
operations of Ridgeway Bancshares.
Interests Of Certain Persons In The Merger That May Be Different From Yours
(Page 31)
Some of the officers and directors of Ridgeway Bancshares have or will
receive employment contracts that provide them with interests in the merger that
are different from, or in addition to, their interests as shareholders of
Ridgeway Bancshares. In addition, members of Ridgeway Bancshares' board of
directors and its officers are entitled to indemnification under the merger
agreement. The Ridgeway Bancshares board of directors was aware of these
interests and considered them in approving and recommending the merger.
For more information about these matters, please refer to the
discussion under the heading "The Merger-Interests of Some Persons in the
Merger" on page 31.
Dissenting Shareholders Of Ridgeway Bancshares (Page 31)
South Carolina law permits shareholders of Ridgeway Bancshares to
dissent from the merger and to have the fair value of their stock appraised by a
court and paid in cash. To do this, you must follow required procedures,
including the filing of certain notices and refraining from voting your shares
in favor of the merger. If you dissent from the merger, your shares of Ridgeway
Bancshares common stock will not be exchanged for shares of Community Bankshares
common stock plus cash in the merger, and your only right will be to receive the
appraised value of your shares in cash.
Community Bankshares shareholders do not have the right to dissent from
the merger.
Differences In Shareholders' Rights (Page 36)
When the merger is completed, if you were a shareholder of Ridgeway
Bancshares you will automatically become a Community Bankshares shareholder,
unless you receive all cash in the merger as a result of exercising your
dissenters' rights or if you elect to and receive all cash in exchange for your
Ridgeway Bancshares shares. The rights of Community Bankshares shareholders
differ from the rights of Ridgeway Bancshares shareholders in significant ways.
Many of these differences have to do with provisions in Community Bankshares'
articles of incorporation and bylaws. Some of these provisions are intended to
make a takeover of Community Bankshares more difficult if the Community
Bankshares board of directors does not approve it.
5
Comparative Per Share Data
The following table shows information about Community Bankshares' and
Ridgeway Bancshares' income per share, dividends per share and book value per
share, and similar information reflecting the merger of Community Bankshares and
Ridgeway Bancshares (which is referred to as "pro forma" information). In
presenting the comparative pro forma information for the time periods shown, we
assumed that Community Bankshares and Ridgeway Bancshares had been merged
throughout those periods.
In presenting the comparative pro forma information, we also assumed
that Community Bankshares will record Ridgeway Bancshares assets and liabilities
at their estimated fair values and add them to the assets and liabilities of
Community Bankshares for accounting and financial reporting purposes (a method
which is referred to as the "purchase" method of accounting). No adjustment to
income was made to reflect the effect of paying $100 in cash per share of
Ridgeway Bancshares common stock at the beginning of the period.
The information listed as " pro forma equivalent " was computed by
multiplying the pro forma combined amounts by the exchange ratio of 25 shares.
It is intended to reflect the fact that Ridgeway Bancshares shareholders will be
receiving 25 shares of Community Bankshares common stock for each share of
Ridgeway Bancshares common stock exchanged in the merger, plus $100.00 in cash.
The pro forma information, while helpful in illustrating the financial
attributes of the combined company under one set of assumptions, does not
attempt to predict or suggest future results. Also, the information we have set
forth for the nine-month period ended September 30, 2001 does not indicate what
the results will be for the full 2001 fiscal year or any other time period.
The information in the following table is based on the historical
financial information of Community Bankshares and Ridgeway Bancshares. See
"Index to Financial Statements" on page F-1.
6
Nine Months Ended Year ended
September 30 December 31
------------ -----------
2001 2000
---- ----
(Unaudited) (Unaudited except
historical)
Net Income Per Common Share
Community Bankshares historical ................................................ $ 0.87 $ 0.99
Community Bankshares historical - diluted ...................................... 0.87 0.98
Ridgeway Bancshares historical ................................................. 19.81 25.72
Ridgeway Bancshares historical - diluted ....................................... 19.81 25.72
Community Bankshares and Ridgeway Bancshares
pro forma combined(1) ..................................................... 0.88 1.04
Community Bankshares and Ridgeway Bancshares
pro forma combined - diluted(1) ........................................... 0.88 1.03
Ridgeway Bancshares pro forma equivalent(2) .................................... 22.00 25.20
Ridgeway Bancshares pro forma equivalent - diluted(2) .......................... 22.00 25.15
Dividends Declared Per Common Share
Community Bankshares historical ................................................ 0.21 0.22
Ridgeway Bancshares historical ................................................. 4.00 7.00
Ridgeway Bancshares pro forma equivalent(3) .................................... 4.75 5.50
Book Value Per Common Share (Period End)
Community Bankshares historical ................................................ 7.97 7.23
Ridgeway Bancshares historical ................................................. 214.93 196.00
Community Bankshares and Ridgeway Bancshares pro forma combined(1) ............ 8.12 8.20
Ridgeway Bancshares pro forma equivalent(2) .................................... 203.00 205.00
---------------
(1) Represents the combined results of Community Bankshares and
Ridgeway Bancshares as if the merger were completed on January 1, 2000, and were
accounted for as a purchase.
(2) Represents pro forma combined information multiplied by the
exchange ratio of 25 shares of Community Bankshares common stock for each share
of Ridgeway Bancshares common stock.
(3) Represents historical dividends declared per share by Community
Bankshares multiplied by the exchange ratio of 25 shares of Community Bankshares
common stock for each share of Ridgeway Bancshares common stock.
Selected Financial Data
The following tables show summarized historical financial data for each
of Community Bankshares and Ridgeway Bancshares and proforma financial data for
both of them combined.
The information in the following tables is based on the historical
financial information of Community Bankshares and Ridgeway Bancshares. All of
the summary financial information provided in the following tables should be
read in connection with this historical financial information and with the more
detailed financial information included in this Proxy Statement/Prospectus. The
historical financial information as of or for the interim periods ended
September 30, 2001 and 2000 has not been audited and in the respective opinions
of management reflects all adjustments (consisting only of normal recurring
adjustments) necessary to a fair presentation of such data.
7
Selected Historical Financial Data of Community Bankshares
Nine Months Ended
September 30, Year ended December 31,
------------- -----------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Financial Condition (1) (Dollar amounts in thousands, except per share data)
Investment securities ................... $ 35,151 $ 47,948 $ 53,566 $ 43,935 $ 34,148 $ 32,452 $ 25,787
Net loans receivable ................... 216,364 184,137 192,653 155,153 116,336 90,811 67,953
Total assets ............................ 292,281 259,844 273,323 228,030 182,281 134,574 105,461
Total deposits .......................... 233,791 211,291 218,811 184,364 147,630 117,167 89,851
Long-term obligations ................... 20,280 19,050 20,350 19,420 9,490 1,060 1,130
Shareholders' equity .................... $ 25,546 $ 22,232 $ 23,139 $ 20,245 $ 19,659 $ 13,037 $ 12,104
Earnings Summary
Interest income ......................... $ 16,200 $ 14,744 $ 20,301 $ 15,550 $ 12,320 $ 9,820 $ 7,261
Interest expense ........................ (8,074) (7,119) (9,975) (6,958) (5,554) (4,374) (3,279)
--------- --------- --------- --------- --------- --------- ---------
Net interest income ..................... 8,126 7,625 10,326 8,592 6,766 5,446 3,982
Provision for loan losses ............... (457) (490) (688) (612) (484) (358) (227)
Other operating income .................. 1,987 1,349 1,868 1,317 1,055 768 503
Other operating expenses ................ (5,322) (4,852) (6,552) (6,066) (5,107) (4,004) (3,097)
--------- --------- --------- --------- --------- --------- ---------
Net income before taxes ................. 4,334 3,632 4,954 3,231 2,230 1,852 1,161
Income taxes ............................ (1,541) (1,290) (1,807) (1,049) (663) (636) (411)
--------- --------- --------- --------- --------- --------- ---------
Net income .............................. $ 2,793 $ 2,342 $ 3,147 $ 2,182 $ 1,567 $ 1,216 $ 750
========= ========= ========= ========= ========= ========= =========
Per share data (2)
Basic earnings per share ............... $ 0.87 $ 0.73 $ 0.99 $ 0.68 $ 0.52 $ 0.44 $ 0.29
Diluted earnings per share ............. $ 0.87 $ 0.73 $ 0.98 $ 0.68 $ 0.51 $ 0.43 $ 0.29
Dividends .............................. $ 0.21 $ 0.16 $ 0.22 $ 0.19 $ 0.15 $ 0.14 $ 0.14
(1) At period end.
(2) Per share information is adjusted for a 5% stock dividend paid on January
31, 2000 and a two-for-one stock dividend paid on July 21, 1997.
8
Selected Historical Financial Data of Ridgeway Bancshares
Nine Months Ended
September 30, Year ended December 31,
------------- -----------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Financial Condition (1) (Dollar amounts in thousands, except per share data)
Investment securities ................... $ 27,222 $ 23,663 $ 23,740 $ 25,822 $ 21,955 $ 20,739 $ 20,166
Net loans receivable ................... 40,291 37,960 39,417 33,390 30,211 29,033 25,942
Total assets ............................ 76,664 70,846 74,141 64,455 62,436 56,038 53,247
Total deposits .......................... 64,899 58,131 63,690 54,972 54,457 48,702 46,752
Long-term obligations ................... 0 0 0 0 0 0 0
Shareholders' equity .................... 8,597 7,731 7,840 7,028 6,409 5,567 4,885
Earnings Summary
Interest income ......................... 3,987 3,646 4,990 4,527 4,365 4,073 3,802
Interest expense ........................ (1,689) (1,457) (2,043) (1,744) (1,748) (1,656) (1,598)
-------- -------- -------- -------- -------- -------- --------
Net interest income ..................... 2,299 2,190 2,946 2,783 2,617 2,417 2,204
Provision for loan losses ............... (54) (45) (75) (60) (54) (42) (42)
Other operating income .................. 538 498 671 563 550 508 529
Other operating expenses ................ (1,685) (1,506) (2,138) (1,917) (1,817) 1,690 1,620
-------- -------- -------- -------- -------- -------- --------
Net income before taxes ................. 1,097 1,136 1,405 1,369 1,296 1,193 1,071
Income taxes ............................ (305) (311) (376) (359) (252) (321) (285)
-------- -------- -------- -------- -------- -------- --------
Net income .............................. 792 826 1,029 1,010 1,044 872 786
======== ======== ======== ======== ======== ======== ========
Per share data
Basic earnings per share ............... 19.81 20.64 25.72 25.24 26.10 21.81 19.66
Diluted earnings per share ............. 19.81 20.64 25.72 25.24 26.10 21.81 19.66
Dividends .............................. 4.00 3.50 7.00 6.30 5.70 - -
(1) At period end.
9
Pro Forma Combined Selected Financial Data
(Unaudited)
Nine Months Ended
September 30, Year ended December 31,
------------- -----------------------
2001 2000
---- ----
Financial Condition (1) (Dollar amounts in thousands, except per share data)
Investment securities ................... $ 62,553 $ 77,810
Net loans receivable ................... 257,615 232,870
Total assets ............................ 372,721 351,559
Total deposits .......................... 299,014 282,819
Long-term obligations ................... 20,280 20,350
Shareholders' equity .................... 37,596 34,432
Earnings Summary
Interest income ......................... 20,109 25,187
Interest expense ........................ (9,763) (12,018)
--------- ---------
Net interest income ..................... 10,346 13,169
Provision for loan losses ............... (511) (763)
Other operating income .................. 2,825 2,939
Other operating expenses ................ (7,024) (8,713)
--------- ---------
Net income before taxes ................. 5,636 6,632
Income taxes ............................ (1,920) (2,281)
--------- ---------
Net income .............................. 3,716 4,351
========= =========
Per share data(2)
Basic earnings per share ............... 0.88 1.04
Diluted earnings per share ............. 0.88 1.03
Dividends .............................. 0.20 0.22
(1) At period end. Amounts reflect the effect of adjustments to estimate the
fair market value of Ridgeway Bancshares assets and liabilities at such
date.
(2) Per share information is adjusted for a 5% stock dividend paid on January
31, 2000 to holders of Community Bankshares common stock.
RISK FACTORS
General
If the merger is completed, if you are a shareholder of Ridgeway
Bancshares you will receive shares of Community Bankshares common stock in
exchange for shares of Ridgeway Bancshares common stock unless you elect to
receive all cash and only cash is allocated to you or unless you dissent from
the merger. You should be aware of risks and uncertainties that are applicable
to an investment in Community Bankshares common stock. Specifically, there are
risks and uncertainties that bear on Community Bankshares' future financial
results and that may cause Community Bankshares' future earnings and financial
condition to be less than Community Bankshares' expectations.
Some of the risks and uncertainties involved in an investment in
Community Bankshares common stock relate to economic conditions generally and
would affect other financial institutions in similar ways. Some of these aspects
are discussed in this section and others are discussed in this Proxy
Statement/Prospectus under the heading "Forward-Looking Statements" on page 103.
10
In determining how to vote on the merger, shareholders of Ridgeway
Bancshares and Community Bankshares should give particular consideration to the
following factors:
Risks Relating To The Merger
The Exchange Ratio Is Fixed And Will Not Be Adjusted To Reflect Any Changes In
Stock Value Prior To The Effective Time Of The Merger.
The precise value of the merger consideration to be paid to Ridgeway
Bancshares shareholders will not be known at the time of the special meetings.
The agreement and plan of merger provides that 25 shares of Community Bankshares
common stock will be issued in the merger plus $100 in cash in exchange for each
share of Ridgeway Bancshares common stock, subject to the right of individual
Ridgeway Bancshares shareholders to elect to receive more or less stock or cash.
This exchange ratio is fixed and will not be adjusted to reflect any changes in
the value of either Ridgeway Bancshares or Community Bankshares common stock
between the date of the agreement and plan of merger and the effective time of
the merger. The value of Community Bankshares common stock, however, will
fluctuate prior to the effective time of the merger and may be higher or lower
than on the date of the agreement and plan of merger or the date of the special
meetings. There are no "walk away" or termination rights in the agreement and
plan of merger which would permit Ridgeway Bancshares to terminate the merger if
the market price of Community Bankshares common stock falls below a certain
level, or Community Bankshares to terminate the merger if the market price of
Community Bankshares stock rises beyond a certain amount. Similarly, there is no
"floor," "cap," or "collar" limiting the dollar value of shares of Community
Bankshares stock that can be received by Ridgeway Bancshares shareholders or
assuring that Ridgeway Bancshares shareholders will receive at least a certain
dollar value of Community Bankshares stock.
Community Bankshares Shareholders Will Be Diluted By The Merger.
The merger will dilute the ownership position of the present
shareholders of Community Bankshares. Community Bankshares will issue to
Ridgeway Bancshares shareholders one million shares of Community Bankshares
common stock in the merger. As a result, Ridgeway Bancshares shareholders will
hold approximately 23% of the Community Bankshares common stock outstanding
immediately after the completion of the merger.
Some Directors And Officers Of Ridgeway Bancshares Will Receive Benefits In The
Merger In Addition To The Merger Consideration Received By All Other Ridgeway
Bancshares Shareholders.
Some of the officers and directors of Ridgeway Bankshares have or will
receive employment contracts that provide them with interests in the merger that
are different from, or in addition to, their interests as shareholders of
Ridgeway Bancshares. In addition, three members of Ridgeway Bancshares' board of
directors will be appointed to the Community Bankshares board and, if they are
not employees of the Bank of Ridgeway, they will receive payments for their
service. See "The Merger - Interests of Some Persons in the Merger" on page 31.
Accordingly, some of Ridgeway Bancshares' directors and officers may have
interests in the merger that are different from, or in addition to, yours.
Post Merger Risks
If Community Bankshares Does Not Adjust To Rapid Changes In The Financial
Services Industry, Its Financial Performance May Suffer.
Community Bankshares' ability to maintain its history of strong
financial performance and return on investment to shareholders will depend in
part on Community Bankshares' ability to expand its scope of available financial
services as needed to meet the needs and demands of its customers. In addition
to the challenge of attracting and retaining customers for traditional banking
services, Community Bankshares' competitors now include securities dealers,
brokers, mortgage bankers, investment advisors and finance and insurance
companies who seek to offer one-stop financial services to their customers that
may include services that banks have not been able or allowed to offer to their
11
customers in the past. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and product delivery
systems and the accelerating pace of consolidation among financial service
providers.
Difficulties In Combining The Operations Of Acquired Entities With Community
Bankshares' Own Operations May Prevent Community Bankshares From Achieving The
Expected Benefits From Its Acquisitions.
Community Bankshares may not be able to achieve fully the strategic
objectives and operating efficiencies in all of its acquisitions, including the
recent acquisition of Resource Mortgage, Inc. and the merger with Ridgeway
Bancshares, which are the only acquisitions that Community Bankshares has ever
undertaken. Inherent uncertainties exist in integrating the operations of an
acquired company into Community Bankshares. In addition, the geographic and
product markets in which Community Bankshares operates are highly competitive.
Community Bankshares also may lose key personnel, either from the acquired
entities or from itself, as a result of acquisitions. These factors could
contribute to Community Bankshares not achieving the expected benefits from its
acquisitions within the desired time frames, if at all.
Future Governmental Regulation And Legislation Could Limit Community Bankshares'
Future Growth.
Community Bankshares and its subsidiaries are subject to extensive
state and federal regulation, supervision and legislation that govern almost all
aspects of the operations of Community Bankshares and its subsidiaries. These
laws may change from time to time and are primarily intended for the protection
of consumers, depositors and deposit insurance funds. The impact of any changes
to these laws may negatively impact Community Bankshares' ability to expand its
services and to increase the value of its business. While we cannot predict what
effect any presently contemplated or future changes in the laws or regulations
or their interpretations would have on Community Bankshares, these changes could
be materially adverse to Community Bankshares' shareholders.
Changes In Interest Rates Could Reduce Community Bankshares' Income And Cash
Flows.
Community Bankshares' income and cash flows depend to a great extent on
the difference between the interest rates earned on interest-earning assets such
as loans and investment securities, and the interest rates paid on
interest-bearing liabilities such as deposits and borrowings. These rates are
highly sensitive to many factors which are beyond Community Bankshares' control,
including general economic conditions and the policies of various governmental
and regulatory agencies, in particular, the Federal Reserve Board. Changes in
monetary policy, including changes in interest rates, will influence the
origination of loans, the purchase of investments, the generation of deposits
and the rates received on loans and investment securities and paid on deposits.
Fluctuations in these areas may adversely affect Community Bankshares.
THE RIDGEWAY BANCSHARES SPECIAL MEETING
General
This proxy statement of Ridgeway Bancshares and proxy
statement/prospectus of Community Bankshares is being furnished to the
shareholders of Ridgeway Bancshares in connection with the solicitation by the
Ridgeway Bancshares board of directors of proxies for use at a special meeting
of shareholders, at which Ridgeway Bancshares shareholders will be asked to vote
upon a proposal to approve the agreement and plan of merger dated as of November
20, 2001, by and between Ridgeway Bancshares and Community Bankshares, and in
connection with the proposed exchange of Ridgeway Bancshares common stock for
common stock of Community Bankshares and cash.
The special meeting will be held at 3:00 p.m., local time, on
Wednesday, April 10, 2002, at the main offices of Ridgeway Bancshares, located
at 100 Palmer Street, Ridgeway, South Carolina, 29130.
Ridgeway Bancshares shareholders are requested to sign, date, and
return promptly the accompanying proxy card to Ridgeway Bancshares in the
enclosed postage-paid, addressed envelope. A shareholder's failure to return a
12
properly executed proxy card or to vote at the special meeting will have the
same effect as a vote against the merger agreement.
Any Ridgeway Bancshares shareholder who has delivered a proxy may
revoke it at any time before it is voted by giving notice of revocation in
writing or submitting to Ridgeway Bancshares a signed proxy card bearing a later
date, provided that such notice or proxy card is actually received by Ridgeway
Bancshares before the special meeting or in open meeting prior to the taking of
the shareholder vote at the special meeting. Any notice of revocation should be
sent to Ridgeway Bancshares, Inc., 100 Palmer Street, Ridgeway, South Carolina,
29130, Attention: M. S. Brakefield, Corporate Secretary. A proxy will not be
revoked by death of the shareholder executing the proxy, or if the shareholder
becomes incompetent after submitting a signed proxy, unless, before the vote,
notice of such death or incapacity is filed with the Secretary. The shares of
Ridgeway Bancshares common stock represented by properly executed proxies
received at or prior to the special meeting and not subsequently revoked will be
voted as directed in such proxies. If instructions are not given, shares
represented by proxies received will be voted for approval of the agreement and
plan of merger and in the discretion of the proxy holder as to any other matters
that properly may come before the special meeting. If necessary, and unless
contrary instructions are given or you have voted against the merger, the proxy
holder also may vote in favor of a proposal to adjourn the special meeting to
permit further solicitation of proxies in order to obtain sufficient votes to
approve the agreement and plan of merger. As of the date of this Proxy
Statement/Prospectus, Ridgeway Bancshares is unaware of any other matter to be
presented at the special meeting.
Ridgeway Bancshares will solicit proxies by mail, and possibly by
telephone or telegram or in person by the directors, officers and employees of
Ridgeway Bancshares, who will receive no additional compensation for such
solicitation but may be reimbursed for out-of-pocket expenses. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
solicitation materials to beneficial owners and will be reimbursed for their
reasonable out-of-pocket expenses.
Ridgeway Bancshares shareholders should not forward any stock
certificates with their proxy cards.
Record Date; Vote Required
Ridgeway Bancshares' board of directors has established the close of
business on February 28, 2002, as the record date for determining the Ridgeway
Bancshares shareholders entitled to notice of and to vote at the special
meeting. Only Ridgeway Bancshares shareholders of record as of the record date
will be entitled to vote at the special meeting. As of the record date, there
were approximately 95 holders of the 40,000 shares of no par value common stock
of Ridgeway Bancshares outstanding and entitled to vote at the special meeting.
Each share is entitled to one vote. For information as to persons known by
Ridgeway Bancshares to beneficially own more than 5.0% of the outstanding shares
of Ridgeway Bancshares common stock as of the record date, see "Information
About Ridgeway Bancshares- Voting Securities and Principal Shareholders."
The presence, in person or by proxy, of a majority of the outstanding
shares of Ridgeway Bancshares common stock entitled to vote at the special
meeting is necessary to constitute a quorum of the shareholders. A quorum must
be present before a vote on the merger agreement can be taken at the special
meeting. For these purposes, shares of Ridgeway Bancshares common stock that are
present, or represented by proxy, at the special meeting will be counted for
quorum purposes regardless of whether the holder of the shares or proxy fails to
vote on the merger agreement for any reason, including broker nonvotes.
Generally, a broker who holds shares of Ridgeway Bancshares common stock in
"street" name on behalf of a beneficial owner lacks authority to vote such
shares in connection with a merger in the absence of specific voting
instructions from the beneficial owner.
Once a quorum is established, approval of the agreement and plan of
merger requires the affirmative vote of the holders of two-thirds of the
outstanding shares of Ridgeway Bancshares common stock entitled to vote at the
special meeting. A failure to vote, in person or by proxy, for any reason,
including failure to return a properly executed proxy, an abstention, or a
broker nonvote, has the same effect as a vote against the agreement and plan of
merger.
13
The directors and executive officers of Ridgeway Bancshares, their
immediate family members and entities they control can vote, as of the record
date, 13,519 shares (or approximately 33.8% of the outstanding shares) of
Ridgeway Bancshares common stock. The directors and executive officers of
Ridgeway Bancshares have agreed to vote such shares of Ridgeway Bancshares
common stock over which they have voting control (other than as a fiduciary) in
favor of the merger. The directors and executive officers of Community
Bankshares, their immediate family members and entities they control,
beneficially owned, as of the record date, no shares of Ridgeway Bancshares
common stock.
THE COMMUNITY BANKSHARES SPECIAL MEETING
General
This Proxy Statement/Prospectus is being furnished to the shareholders
of Community Bankshares, Inc. in connection with the solicitation by the
Community Bankshares board of directors of proxies for use at a special meeting
of shareholders, at which Community Bankshares shareholders will be asked to
vote upon a proposal to approve the agreement and plan of merger dated as of
November 20, 2001, by and between Ridgeway Bancshares and Community Bankshares,
Inc.
The special meeting will be held at 3:00 p.m., local time, on Monday,
April 8, 2002, in the board room of the Orangeburg National Bank branch at 791
Broughton Street, Orangeburg, South Carolina, 29115.
Community Bankshares shareholders are requested to sign, date, and
return promptly the accompanying proxy card to Community Bankshares in the
enclosed postage-paid, addressed envelope. A shareholder's failure to return a
properly executed proxy card or to vote at the special meeting will have the
same effect as a vote against the merger agreement.
Any Community Bankshares shareholder who has delivered a proxy may
revoke it at any time before it is voted by giving notice of revocation in
writing or submitting to Community Bankshares a signed proxy card bearing a
later date, provided that such notice or proxy card is actually received by
Community Bankshares before the special meeting or in open meeting prior to the
taking of the shareholder vote at the special meeting. Any notice of revocation
should be sent to Community Bankshares, Inc., 791 Broughton Street, Orangeburg,
South Carolina, 29115, Attention: William W. Traynham, President. A proxy will
not be revoked by death of the shareholder executing the proxy, or if the
shareholder becomes incompetent after submitting a signed proxy, unless, before
the vote, notice of such death or incapacity is filed with the Secretary. The
shares of Community Bankshares common stock represented by properly executed
proxies received at or prior to the special meeting and not subsequently revoked
will be voted as directed in such proxies. If instructions are not given, shares
represented by proxies received will be voted for approval of the agreement and
plan of merger and in the discretion of the proxy holder as to any other matters
that properly may come before the special meeting. If necessary, and unless
contrary instructions are given or you have voted against the merger, the proxy
holder also may vote in favor of a proposal to adjourn the special meeting to
permit further solicitation of proxies in order to obtain sufficient votes to
approve the agreement and plan of merger. As of the date of this Proxy
Statement/Prospectus, Community Bankshares is unaware of any other matter to be
presented at the special meeting.
Community Bankshares will solicit proxies by mail, and possibly by
telephone or telegram or in person by the directors, officers and employees of
Community Bankshares, who will receive no additional compensation for such
solicitation but may be reimbursed for out-of-pocket expenses. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
solicitation materials to beneficial owners and will be reimbursed for their
reasonable out-of-pocket expenses.
Record Date; Vote Required
Community Bankshares' board of directors has established the close of
business on January 31, 2002, as the record date for determining the Community
Bankshares shareholders entitled to notice of and to vote at the special
meeting. Only Community Bankshares shareholders of record as of the record date
will be entitled to vote at the special meeting. As of the record date, there
were approximately 1,963 holders of the 3,299,674 shares of no par value common
14
stock of Community Bankshares outstanding and entitled to vote at the special
meeting. Each share is entitled to one vote. For information as to persons known
by Community Bankshares to beneficially own more than 5.0% of the outstanding
shares of Community Bankshares common stock as of the record date, see
"Information About Community Bankshares- Voting Securities and Principal
Shareholders."
The presence, in person or by proxy, of one-third of the outstanding
shares of Community Bankshares common stock entitled to vote at the special
meeting is necessary to constitute a quorum of the shareholders. A quorum must
be present before a vote on the merger agreement can be taken at the special
meeting. For these purposes, shares of Community Bankshares common stock that
are present, or represented by proxy, at the special meeting will be counted for
quorum purposes regardless of whether the holder of the shares or proxy fails to
vote on the merger agreement for any reason, including broker nonvotes.
Generally, a broker who holds shares of Community Bankshares common stock in
"street" name on behalf of a beneficial owner lacks authority to vote such
shares in connection with a merger in the absence of specific voting
instructions from the beneficial owner.
Once a quorum is established, approval of the agreement and plan of
merger requires the affirmative vote of the holders of two-thirds of the
outstanding shares of Community Bankshares common stock entitled to vote at the
special meeting. A failure to vote, in person or by proxy, for any reason,
including failure to return a properly executed proxy, an abstention, or a
broker nonvote, has the same effect as a vote against the agreement and plan of
merger.
The directors and executive officers of Community Bankshares, their
immediate family members and entities they control can vote, as of the record
date, 888,714 shares (or approximately 26.9% of the outstanding shares) of
Community Bankshares common stock. The directors and executive officers of
Community Bankshares have agreed to vote such shares of Community Bankshares
common stock over which they have voting control (other than as a fiduciary) in
favor of the merger. The directors and executive officers of Ridgeway Bancshares
beneficially owned, as of the record date, no shares of Community Bankshares
common stock. As of that date, no subsidiary of either Ridgeway Bancshares or
Community Bankshares held any shares of Community Bankshares common stock as a
fiduciary for others.
THE MERGER
The following material describes certain aspects of the merger of
Ridgeway Bancshares with and into Community Bankshares. This description does
not purport to be complete and is qualified in its entirety by reference to the
Appendices hereto, including the agreement and plan of merger, which is attached
as Appendix A to this Proxy Statement/Prospectus and incorporated herein by
reference. All shareholders are urged to read the Appendices in their entirety.
General
The merger agreement provides generally for the acquisition of Ridgeway
Bancshares by Community Bankshares pursuant to the merger of Ridgeway Bancshares
with and into Community Bankshares, with Community Bankshares as the surviving
corporation resulting from the merger. Bank of Ridgeway will continue to operate
separately as a subsidiary of Community Bankshares.
On the date and at the time that the merger becomes effective, each
share of Ridgeway Bancshares common stock (excluding shares described below)
issued and outstanding at the effective time of the merger will be converted
into 25 shares of no par value common stock of Community Bankshares plus $100 in
cash, subject to the possible election by shareholders of Ridgeway Bancshares to
receive more or less stock or cash as described below. Shares held by Bank of
Ridgeway, Community Bankshares, or their respective subsidiaries, in each case
other than shares held as a fiduciary or as a result of debts previously
contracted, and all shares held by shareholders who perfect their dissenters'
rights will not be converted into Community Bankshares stock. Each share of
Community Bankshares common stock outstanding immediately prior to the effective
time of the merger will remain outstanding and unchanged as a result of the
merger.
15
If you are a Ridgeway Bancshares shareholder, you will have the right
to elect to receive more or less stock or cash in exchange for your shares of
Ridgeway Bancshares. If you exercise this election you may not receive as much
stock or cash as you request. The total amount of Community Bankshares common
stock to be issued and the total amount of cash to be paid by Community
Bankshares is fixed at 1,000,000 shares and $4,000,000 in cash. If Ridgeway
Bancshares shareholders request a total of more than 1,000,000 shares of
Community Bankshares common stock or more than $4,000,000 in cash, the amount of
Community Bankshares common stock or cash available will be allocated among the
Ridgeway Bancshares shareholders on a pro rata basis to be agreed upon by Bank
of Ridgeway and Community Bankshares. If you elect and receive more or less
stock or cash, the number of additional shares or amount of additional cash that
you receive will be based on a value of $13.825 per share, which is the average
of the daily last sales prices of Community Bankshares common stock on the
American Stock Exchange (as reported by The Wall Street Journal or, if not
reported by The Wall Street Journal, by another authoritative source agreed upon
by us) for the ten consecutive full trading days in which the shares were traded
which ended five business days before the mailing of this proxy
statement/prospectus. If you do not receive as much or as little stock or cash
as you request, the difference will be made up in stock or cash so that the
total value of the consideration that you receive will be equal to the value of
25 shares of Community Bankshares common stock (as determined using a value of
$13.825) and $100 in cash for each share of Ridgeway Bancshares common stock
that you own. If you do not make an election to receive more or less stock or
cash in exchange for your shares of Ridgeway Bancshares, then you will receive
25 shares of Community Bankshares common stock, plus $100 in cash. You will be
notified shortly after the effectiveness of the merger how to make such an
election and the deadline for making it.
No fractional shares of Community Bankshares common stock will be
issued in connection with the merger. Instead of Community Bankshares issuing
fractional shares, each Ridgeway Bancshares shareholder will receive a cash
payment equal to the fractional part of a share which the shareholder would
otherwise receive multiplied by the most recent last sale price of Community
Bankshares common stock on the American Stock Exchange (as reported by The Wall
Street Journal, or, if not reported thereby, by another authoritative source
agreed upon by Community Bankshares and Ridgeway Bancshares), as of the last
trading day prior to the completion of the merger.
The actual market value of a share of Community Bankshares common stock
at the time we complete the merger and at the time certificates for those shares
are delivered following surrender and exchange of certificates for shares of
Ridgeway Bancshares common stock may be more or less than the market value of a
share of Community Bankshares common stock on the date the merger agreement was
signed, or the date of this proxy statement/prospectus, or on the date of the
shareholders' meetings. Therefore, Ridgeway Bancshares shareholders bear the
risk of any decline in the market value of Community Bankshares common stock. We
urge you to obtain current market quotations for Community Bankshares common
stock. See "Comparative Market Prices and Dividends."
Background Of The Merger
Over the past several years and in the normal course of business,
Ridgeway Bancshares has received various inquiries as to its interest in being
acquired by, merging with, or otherwise affiliating with other financial
institutions. In that same time, major banks and other financial institutions
have established new or expanded presences in the primary market of Bank of
Ridgeway, and the use of technology to provide financial services and products
has increased dramatically. As a result, the cost for Bank of Ridgeway to remain
a leader in its markets has increased significantly.
Changes in the banking laws in recent years have resulted in
competition not only from traditional commercial banks but also from savings
banks and credit unions as well as brokerage companies and insurance companies.
All of these types of institutions are now directly competing with commercial
banks for customers of all sizes. Increasingly, the customer base of Bank of
Ridgeway is becoming more sophisticated in financial matters and requires an
even larger array of services and products.
As Bank of Ridgeway has attempted to keep pace with the technological
requirements of the financial world, this has required significant expense and
the development of additional products and services. Increasingly, the average
customer of Bank of Ridgeway is expecting services with a higher degree of
technology.
16
On June 30, 1999, the board of directors of Ridgeway Bancshares held a
strategic planning meeting, at which it concluded to pursue activities to grow
Bank of Ridgeway. At that meeting the board also agreed that the community of
Ridgeway remains a major source of strength for the business of Bank of Ridgeway
but has probably matured as a banking market. As a result, the board of
directors encouraged management to investigate the prospects and costs of
acquiring or opening one or more additional branches and of expanding Bank of
Ridgeway through greater technology and additional financial products and
services. The board also decided to consider merger and affiliation offers that
might be made by financially strong companies that share Bank of Ridgeway's
philosophies of customer service and treatment of employees and that could
provide value and liquidity for Ridgeway Bancshares shareholders.
Management determined that attractive branches of other banks were not
likely to be available for acquisition by Ridgeway Bancshares; that no new
technology, product, or service was likely to generate significant growth in
Bank of Ridgeway; and that establishing one or more new branches would likely
impair Bank of Ridgeway's earnings over the short term until the new branches
could become profitable.
Ridgeway Bancshares received various expressions of interest from other
financial institutions after that meeting. The board decided to negotiate with
RHBT Financial Corporation and received a merger proposal from RHBT Financial.
Ridgeway Bancshares and its advisors began negotiations with RHBT Financial and
on June 22, 2000, Ridgeway Bancshares signed a letter of intent to merge with
RHBT Financial in an all stock transaction valued at $15,800,000 (based on RHBT
Financial's market price). The parties then began negotiating the terms of a
definitive agreement and conducting reviews of information about the other
party. During this process RHBT Financial announced that it had been named a
defendant in a law suit that could have materially adversely affected it. The
parties suspended their negotiations by mutual consent. The letter of intent
expired August 31, 2000 with no definitive agreement having been reached on a
merger between Ridgeway Bancshares and RHBT Financial.
Ridgeway Bancshares received inquiries and expressions of interest from
other financial institutions, including Community Bankshares, after the public
announcement that the RHBT Financial transaction would not be consummated. After
discussions with representatives of Community Bankshares and other prospective
merger partners, the board of directors concluded that the transaction with
Community Bankshares was in the best interests of Ridgeway Bancshares, its
shareholders, customers, and employees. Ridgeway Bancshares and Community
Bankshares negotiated a definitive merger agreement which was reviewed and
approved by both boards and was executed as of November 20, 2001. Based on the
last reported sale price of Community Bankshares stock prior to announcement of
the merger, the merger would have a value of $15,950,000. The actual value of
the merger may be more or less than that amount, if the market price of
Community Bankshares stock is more or less than $11.95 as of the effective date
of the merger.
Ridgeway Bancshares' Reasons For The Merger
In approving the merger, the directors of Ridgeway Bancshares
considered a number of factors. Without assigning any relative or specific
weights to the factors, the Ridgeway Bancshares board of directors considered
the following material factors:
o the information presented to the directors by the management
of Ridgeway Bancshares concerning the business, operations,
management, earnings, asset quality, financial condition and
future prospects of Ridgeway Bancshares and Community
Bankshares;
o the financial terms of the merger, including the relationship
of the merger price to the prices received by other comparable
banking organizations in other financial institution mergers;
o the nonfinancial terms of the merger, including the treatment
of a portion of the consideration received in the merger as a
tax-free exchange of Ridgeway Bancshares common stock for
Community Bankshares common stock for federal and state income
tax purposes;
o the receipt by Ridgeway shareholders of cash as part of the
consideration;
17
o the possibility that Ridgeway shareholders may, at their
option, be able to adjust the ratio of cash and Community
Bankshares common stock they receive;
o the exchange ratio will enable Ridgeway shareholders to own a
substantial portion of Community Bankshares;
o the continuation of a separate board of directors to supervise
Bank of Ridgeway; and
o the inclusion of three Bank of Ridgeway directors on the board
of directors of Community Bankshares.
The board of directors of Ridgeway Bancshares also considered the
requirement that Ridgeway Bancshares pay a termination fee of $300,000 under
certain circumstances if the proposed merger with Community Bankshares is not
completed. This factor was considered negatively as a drawback but the Ridgeway
Bancshares board of directors felt it was outweighed by the other benefits of
the transaction.
The foregoing discussion of the information and factors considered by
the Ridgeway Bancshares board of directors is not intended to be exhaustive but
includes all material factors considered by the board of directors. In reaching
its determination to approve the merger and the merger agreement, the Ridgeway
Bancshares board of directors did not assign any relative or specific weights to
the foregoing factors, and individual directors may have given differing weights
to different factors.
The terms of the merger were the result of arms-length negotiations
between representatives of Ridgeway Bancshares and representatives of Community
Bankshares. Based upon the consideration of the foregoing and other factors, the
board of directors of Ridgeway Bancshares unanimously approved the merger as
being in the best interests of Ridgeway Bancshares and its shareholders. Each
member of the board of directors of Ridgeway Bancshares has agreed to vote those
shares of Ridgeway Bancshares common stock over which such member has voting
authority (other than as a fiduciary) in favor of the merger and the merger
agreement.
Ridgeway Bancshares' board of directors unanimously recommends that
Ridgeway Bancshares shareholders vote "FOR" approval of the merger and the
merger agreement.
Community Bankshares' Reasons For The Merger
In approving the merger agreement and the merger, the Community
Bankshares board of directors considered a number of factors concerning the
benefits of the merger, including the following:
o Information Concerning Ridgeway Bancshares: The Community
Bankshares board of directors considered information
concerning the business, operations, earnings, asset quality,
and financial condition of Ridgeway Bancshares, and aspects of
the Ridgeway Bancshares franchise, including the market
position of Ridgeway Bancshares in the markets in which it
operates and the compatibility of the community bank
orientation of the operations of Ridgeway Bancshares to that
of Community Bankshares. The Community Bankshares board of
directors concluded that Ridgeway Bancshares is a sound, well
managed financial institution which is well positioned in its
market areas and which presents an attractive opportunity for
Community Bankshares to add to its franchise in the South
Carolina market.
o Financial Terms of the Merger: The Community Bankshares board
of directors considered various financial aspects of the
merger as reported by Community Bankshares' management
including (1) the anticipated effect of the merger on
Community Bankshares' per share earnings (with the merger
anticipated to have no significant effect on Community
Bankshares' earnings per share), (2) the anticipated effect of
the merger on Community Bankshares' book value per share (with
the merger anticipated not to dilute significantly Community
Bankshares' book value per share), (3) a comparison of
18
Ridgeway Bancshares to selected peer banks and a comparison of
pricing aspects of the merger to pricing characteristics of
other merger transactions involving financial institutions,
and (4) the accounting treatment of the merger as a purchase.
o Nonfinancial Terms of the Merger: The Community Bankshares
board of directors considered various nonfinancial aspects of
the merger, including the treatment of a portion of the
consideration paid in the merger as a tax-free exchange of
Ridgeway Bancshares common stock for Community Bankshares
common stock for federal income tax purposes and the
likelihood of the merger being approved by applicable
regulatory authorities without undue conditions or delay.
The foregoing discussion of the information and factors considered by
the Community Bankshares board of directors is not intended to be exhaustive but
includes all material factors considered by the Community Bankshares board of
directors. In reaching its determination to approve the merger and the merger
agreement, the Community Bankshares board of directors did not assign any
relative or specific weights to the foregoing factors, and individual directors
may have given differing weights to different factors.
The terms of the merger were the result of arms-length negotiations
between representatives of Ridgeway Bancshares and representatives of Community
Bankshares. Based upon the consideration of the foregoing and other factors, the
board of directors of Community Bankshares unanimously approved the merger as
being in the best interests of Community Bankshares and its shareholders. Each
member of the board of directors of Community Bankshares has agreed to vote
those shares of Community Bankshares common stock over which such member has
voting authority (other than as a fiduciary) in favor of the merger and the
merger agreement.
Community Bankshares' board of directors unanimously recommends that
Community Bankshares shareholders vote "FOR" approval of the merger and the
merger agreement.
Effective Time Of The Merger
After all conditions to the merger are satisfied or waived, Community
Bankshares will file articles of merger with the Secretary of State of South
Carolina. The merger will become effective on the date and at the time specified
in such filing, or, if later or if no date and time is specified, the date and
time when the articles of merger have been filed with the South Carolina
Secretary of State. Unless otherwise agreed upon by Community Bankshares and
Ridgeway Bancshares, and subject to the satisfaction or waiver of the conditions
to the obligations of the parties to complete the merger, the parties will use
their reasonable efforts to complete the merger not later than the last business
day of the month during which the last of the following events occurs: (1) the
effective date (including the expiration of any applicable waiting period) of
the last federal or state regulatory approval required for the merger, and (2)
the date on which the merger and the merger agreement are approved by the
requisite vote of Ridgeway Bancshares shareholders and Community Bankshares
shareholders.
No assurance can be provided that the necessary shareholder and
regulatory approvals can be obtained or that other conditions precedent to the
merger can or will be satisfied. Community Bankshares and Ridgeway Bancshares
anticipate that all conditions to completion of the merger will be satisfied so
that the merger can be completed during the second quarter of 2002. However,
delays in the completion of the merger could occur.
The board of directors of either Community Bankshares or Ridgeway
Bancshares generally may terminate the merger agreement if the merger is not
completed by December 31, 2002, unless the failure to complete by that date is
the result of a breach of the merger agreement by the party seeking termination.
See "-Conditions to Completion of the Merger" and "-Waiver, Amendment and
Termination of the Agreement."
Distribution Of Community Bankshares Stock Certificates And Cash Payments
If you are a shareholder of Ridgeway Bancshares, promptly after the
effective time of the merger, Community Bankshares will cause an exchange agent
selected by Community Bankshares to mail to you an election form for you to
request more or less stock or cash and a form letter of transmittal, together
with instructions for the completion of the election form and exchange of
certificates representing shares of Ridgeway Bancshares common stock for
19
certificates representing shares of Community Bankshares common stock and cash.
If you are a Ridgeway Bancshares shareholder, you should not send in
your certificates until you receive the form letter of transmittal and
instructions. Upon your surrender to the exchange agent of certificates for
Ridgeway Bancshares common stock, together with a properly completed letter of
transmittal, there will be issued and mailed to you a certificate or
certificates representing the number of shares of Community Bankshares common
stock to which you are entitled, if any, and a check for the amount to be paid
to you in cash, if any, without interest. After the effective time of the
merger, to the extent permitted by law, Ridgeway Bancshares shareholders of
record as of the effective time will be entitled to vote at any meeting of
holders of Community Bankshares common stock the number of whole shares of
Community Bankshares common stock into which their Ridgeway Bancshares common
stock has been converted, regardless of whether you have surrendered your
Ridgeway Bancshares common stock certificates. No cash dividend or other
distribution payable after the effective time of the merger with respect to
Community Bankshares common stock, however, will be paid to the holder of any
unsurrendered Ridgeway Bancshares certificate until the shareholder duly
surrenders the certificate or complies with the requirements for replacement of
a lost certificate. Upon such surrender, all undelivered dividends and other
distributions and, if applicable, a check for the amount to be paid in cash will
be delivered to the former Ridgeway Bancshares shareholder, in each case without
interest.
After the effective time of the merger, a Ridgeway Bancshares
shareholder will be unable to transfer shares of Ridgeway Bancshares common
stock. If a certificate representing shares of Ridgeway Bancshares common stock
is presented for transfer after the completion of the merger, it will be
canceled and exchanged for shares of Community Bankshares common stock and a
check for the amount due in cash, if any.
Conditions To Completion Of The Merger
Completion of the merger is subject to a number of conditions,
including, but not limited to:
o the approval of the merger by the Board of Governors of the
Federal Reserve System and the South Carolina State Board of
Financial Institutions and the expiration of all applicable
waiting periods associated with such approvals, without any
conditions or restrictions (excluding requirements relating to
the raising of additional capital or the disposition of assets
or deposits) that would, in the reasonable good faith judgment
of Community Bankshares' board of directors, so materially
adversely impact the economic or business benefits of the
transactions contemplated by the merger agreement as to render
inadvisable the completion of the merger;
o the approval of the merger agreement by the holders of the
requisite number of shares of Ridgeway Bancshares common stock
and Community Bankshares common stock;
o the absence of any action by any court, or governmental
authority, or regulatory authority with appropriate
jurisdiction prohibiting, restraining, or making illegal the
completion of the merger and the other transactions
contemplated by the merger agreement; and
o the receipt of a satisfactory opinion of counsel that the
merger qualifies for federal income tax treatment as a
reorganization under Section 368(a) of the Code, with the
effects described under "-- Federal Income Tax Consequences of
the Merger," including, among others, that the exchange of
Ridgeway Bancshares common stock for Community Bankshares
common stock will not give rise to recognition of gain or loss
to Ridgeway Bancshares shareholders, except to the extent of
any cash received.
Completion of the merger also is subject to the satisfaction or waiver
of various other conditions specified in the merger agreement which are
customary in transactions of this nature, including, among others: (1) the
delivery by Community Bankshares and Ridgeway Bancshares of certificates
executed by their respective duly authorized officers as to the satisfaction of
certain conditions and obligations set forth in the merger agreement, and (2) as
20
of the effective time of the merger, the accuracy under the standard set forth
in the merger agreement of certain representations and warranties and the
compliance in all material respects with the agreements and covenants of each
party.
Regulatory Approvals
The merger may not proceed in the absence of receipt of the requisite
regulatory approvals. There can be no assurance that such regulatory approvals
will be obtained or as to the timing of such approvals. It is also possible that
any such approval may be accompanied by a conditional requirement which causes
such approvals to fail to satisfy the conditions set forth in the merger
agreement. Applications for the approvals described below have been submitted to
the appropriate regulatory agencies.
Community Bankshares and Ridgeway Bancshares are not aware of any
material governmental approvals or actions that are required for completion of
the merger, except as described below. Should any other approval or action be
required, it presently is contemplated that such approval or action would be
sought.
The merger requires the prior approval of the Federal Reserve Board,
pursuant to Section 3 of the Bank Holding Company Act of 1956. In granting its
approval under Section 3 of the Bank Holding Company Act, the Federal Reserve
Board must take into consideration, among other factors, the financial and
managerial resources and future prospects of the institutions and the
convenience and needs of the communities to be served. The relevant statutes
prohibit the Federal Reserve Board from approving the merger (1) if it would
result in a monopoly or be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking in any part of the
United States or (2) if its effect in any section of the country may be to
substantially lessen competition or to tend to create a monopoly, or if it would
be a restraint of trade in any other manner, unless the Federal Reserve Board
finds that any anticompetitive effects are outweighed clearly by the public
interest and the probable effect of the transaction in meeting the convenience
and needs of the communities to be served. Under the Bank Holding Company Act,
the merger may not be completed until the 30th day following the date of Federal
Reserve Board approval, which may be shortened by the Federal Reserve Board to
the 15th day, during which time the United States Department of Justice may
challenge the transaction on antitrust grounds. The commencement of any
antitrust action would stay the effectiveness of the Federal Reserve Board's
approval, unless a court specifically orders otherwise.
The merger also requires the prior approval of the South Carolina State
Board of Financial Institutions, pursuant to Section 34-25-30 of the South
Carolina Code of Laws, as amended. The State Board of Financial Institutions is
required not to approve the merger if it would result in any depository
institution affiliated with Community Bankshares controlling 30% or more of the
total deposits held by depository institutions in South Carolina or if the Bank
of Ridgeway has not been in existence and in continuous operation for more than
five years as of the proposed date of the merger. Neither of these conditions
that would require the State Board of Financial Institutions not to approve the
merger is expected to exist. However, there can be no assurance that the
approval of the State Board of Financial Institutions will be obtained or as to
the timing of such approval.
Waiver, Amendment, And Termination Of The Merger Agreement
Prior to the effective time of the merger, and to the extent permitted
by law, any provision of the merger agreement generally may be (1) waived by the
party benefited by the provision or (2) amended by a written agreement between
Community Bankshares and Ridgeway Bancshares approved by their respective boards
of directors; provided, however, that after approval by the Ridgeway Bancshares
shareholders or Community Bankshares shareholders, no amendment that pursuant to
the South Carolina Business Corporation Act requires further approval of the
Ridgeway Bancshares shareholders or the Community Bankshares shareholders,
including changing the consideration for the merger, may be made without the
further approval of such shareholders.
The merger agreement may be terminated, and the merger abandoned, at
any time prior to the effective time of the merger, either before or after
approval by Ridgeway Bancshares shareholders or Community Bankshares
shareholders, under certain circumstances, including:
o by mutual consent of the boards of directors of Community
Bankshares and Ridgeway Bancshares;
21
o by the board of directors of either party upon final denial of
any required consent of any regulatory authority, if such
denial is nonappealable or was not appealed within the time
limit for appeal;
o by the board of directors of either party, if the holders of
the requisite number of shares of Ridgeway Bancshares or
Community Bankshares common stock shall not have approved the
merger agreement;
o by the board of directors of either party (provided the
terminating party is not in material breach of any
representation, warranty, covenant or agreement included in
the merger agreement), in the event of any inaccuracy in any
representation or warranty by the other party which meets
standards specified in the merger agreement and cannot be or
has not been cured within 30 days after the giving of written
notice to the breaching party;
o by the board of directors of either party (provided the
terminating party is not in material breach of any
representation or warranty included in the merger agreement),
in the event of a breach by the other party of any covenant or
agreement included in the merger agreement that cannot be
cured within 30 days after giving notice to the breaching
party; and
o by the board of directors of either party if the merger shall
not have been completed by December 31, 2002, but only if the
failure to complete the merger by such date has not been
caused by the terminating party's breach of the merger
agreement.
If the merger agreement is terminated, the parties will have no further
obligations, except with respect to a few provisions, including those providing
for payment of expenses and a possible termination fee and restricting
disclosure of confidential information. Further, termination generally will not
relieve the parties from the consequences of any uncured willful breach of the
merger agreement giving rise to such termination.
Under some circumstances, if the merger is not consummated and if,
before November 20, 2002, Ridgeway Bancshares participates in a transaction with
a party other than Community Bankshares or if a transaction occurs with respect
to the assets or stock of Ridgeway Bancshares, Ridgeway Bancshares may be
obligated to pay a $300,000 termination fee to Community Bankshares. In general,
those types of transactions are Ridgeway Bancshares' being acquired by or
merging into another party; or another party's acquisition of more than 25% in
value of Ridgeway Bancshares' consolidated total assets, whether by purchase,
liquidating or restructuring distribution, or special dividend or distribution;
a repurchase or transfer of more than 25% of Ridgeway Bancshares's outstanding
common stock; or Ridgeway Bancshares' entry into an agreement to do any of the
foregoing. The details of this termination fee are in section 10.3 of the merger
agreement which is attached as Appendix A to this Proxy Statement/Prospectus,
and all shareholders are urged to read that Appendix in its entirety.
Conduct Of Business Pending The Merger
Each of Ridgeway Bancshares and Community Bankshares generally has
agreed to operate its business only in the usual, regular, and ordinary course
of business, and to use its reasonable best efforts to preserve intact its
business organizations and assets and maintain its rights and franchises. Each
has also agreed to take no action which would materially adversely affect the
ability of either party to obtain any consents required for the merger or to
perform its covenants and agreements under the merger agreement and to complete
the merger. However, Community Bankshares and its subsidiaries are not prevented
from discontinuing or disposing of any of their assets or businesses. Nor is
Community Bankshares prevented from acquiring or agreeing to acquire any other
entity or any assets thereof, if such action is, in the judgment of Community
Bankshares, desirable in the conduct of the business of Community Bankshares and
its subsidiaries. In addition, the merger agreement includes other restrictions
applicable to the conduct of the business of Ridgeway Bancshares prior to
completion of the merger, as described below.
Ridgeway Bancshares has agreed not to take actions relating to the
operation of its business pending completion of the merger without the prior
written consent of Community Bankshares, which Community Bankshares has agreed
it will not unreasonably withhold. The actions Ridgeway Bancshares has agreed
22
not to take are subject in some cases to exceptions for actions in the ordinary
course of business consistent with Ridgeway Bancshares' past practice or subject
to exceptions expressly recognized in the merger agreement. The specific
agreements not to take certain actions, including the exceptions and
contractually permitted actions, are set forth in the merger agreement, which is
attached as Appendix A. See Article 7 of the merger agreement. The actions
Ridgeway Bancshares has agreed not to take are in the general categories of:
o amending its articles of incorporation, bylaws or other
governing instruments;
o incurring indebtedness in excess of $50,000 or incurring
material liens;
o acquiring any of its outstanding shares of stock or the shares
of stock of its subsidiaries or making distributions in
respect to its outstanding shares, except for the payment of
regular dividends consistent with past practice;
o issuing additional securities;
o reclassifying capital stock or selling or encumbering assets;
o increasing employees' salaries and benefits or accelerating
the vesting of any stock-based compensation or employee
benefits;
o entering into or amending employment contracts;
o adopting employee benefit plans or amending existing plans;
o changing accounting methods or practices;
o commencing or settling litigation; or
o entering into or terminating material contracts.
In addition, Ridgeway Bancshares has agreed not to solicit, directly or
indirectly, encourage, or facilitate any acquisition proposal from any other
person or entity. Ridgeway Bancshares also has agreed not to negotiate with
respect to any such proposal, provide nonpublic information to any party making
such a proposal, or enter into any agreement with respect to any such proposal,
except in compliance with the fiduciary obligations of its board of directors.
In addition, Ridgeway Bancshares has agreed to use reasonable efforts to cause
its officers, directors, affiliates, advisors, and other representatives not to
engage in any of the foregoing activities.
Management Following The Merger
Upon completion of the merger, the present officers and directors of
Community Bankshares will retain their respective positions with Community
Bankshares.
Directors
The table below sets forth the age, business experience for the past five
years, and term in office for each of the directors of Community Bankshares.
Each of the directors of Community Bankshares except Mr. Douroux is also a
director of one or more of the subsidiary banks. There are no family
relationships among any of the directors or executive officers of Community
Bankshares.
23
Name, Address (and age) Director Since Business Experience During the Past 5 Years
----------------------- --------------- -------------------------------------------
Directors Whose Terms Expire in 2002
Martha Rose C. Carson (66) 1987* President, Marty Rae, Inc., apparel and furniture
Orangeburg, S.C. retailers
J. M. Guthrie (74) 1987* President, Superior Motors, Inc., car dealership; Chairman
Orangeburg, S.C. of the Board of Directors of Orangeburg National Bank
since March 1998
Phil P. Leventis (55) 1996 President and Chief Executive Officer, Dixie Central
Sumter, S.C. Distributing Co., Inc., wholesale beverage distributor;
member of the South Carolina State Senate; Chairman of
the Board of Directors of Sumter National Bank since June
1996
Wm. Reynolds Williams (55) 1998 Attorney, Managing Partner, Willcox, Buyck & Williams,
Florence, S.C. P.A.; Chairman of the Board of Directors of Florence
National Bank since July 1998
Michael A. Wolfe (44) 1992* President and Chief Executive Officer of Orangeburg
Orangeburg, S.C. National Bank
A. Wade Douroux (30) 2001 President and Chief Executive Officer of Community
Columbia, S. C. Resource Mortgage, Inc. since 1995
Directors whose Terms Expire in 2003
E. J. Ayers, Jr. (69) 1987* Chairman of the Board of Directors and Chief Executive
Orangeburg, S.C. Officer of Community Bankshares since January, 1999;
retired President, C.M. Dukes Oil Co., oil distributor
and auto parts supplier
Alvis J. Bynum (64) 1996 Retired President, Cities Supply Co., waterwork supplies
Sumter, S.C. distributor
J. Otto Warren, Jr. (74) 1987* President, Warren and Griffin Lumber Co., Inc. and Home
Orangeburg, S.C. Builder's Supply Co., Inc., builders' supply and lumber
manufacturer
Jesse A. Nance (48) 1998 President and Chief Executive Officer of Florence National
Florence S.C. Bank since July 1998; Vice President of Community
Bankshares from June 1997 to July 1998; Vice President of
First Union National Bank of South Carolina from November
1989 to June 1997
24
Directors whose Terms Expire in 2004
Anna O. Dantzler (62) 1994 Retired; former customer service representative
Orangeburg, S.C. for Orangeburg National Bank
Richard L. Havekost (61) 1998 Licensed professional engineer; Principal in Raldex, Inc.
Florence S.C. (investor in motel properties); Principal and Secretary
of RDBP, Inc. (retail beverage store); 1967-1993,
employed by Nucor Corp. in various capacities, including
Vice President of Nucor Corp. and General Manager of the
Florence Division
William H. Nock (56) 1996 President and Chief Executive Officer, Sumter National
Sumter, S.C. Bank
Samuel F. Reid, Jr. (53) 1994 Attorney, Horger, Barnwell & Reid
Orangeburg, S.C.
William W. Traynham (46) 1992* President and Chief Financial Officer of Community
Orangeburg, S.C. Bankshares
--------------------
* Includes service as Director of Orangeburg National Bank prior to formation of
Community Bankshares in 1992.
Under the terms of the merger agreement, upon consummation of the
merger, the board of directors of Community Bankshares will elect three new
directors of Community Bankshares from among the then current directors of
Ridgeway Bancshares. These new directors of Community Bankshares will include
the Chairman of the Board of the Bank of Ridgeway, now J. V. Nicholson, Jr.,
and the President of the Bank of Ridgeway, now William A. Harwell.
Executive Officers
Information about Mr. Ayers, the Chief Executive Officer of Community
Bankshares, and Mr. Traynham, the President and Chief Financial Officer of
Community Bankshares, is set forth above under "Directors." Donald Newnham, age
64, is Senior Vice President, Operations, of Community Bankshares. Mr. Newnham
has been employed by Community Bankshares since March 1998. Prior to that time,
from 1981 to 1998, Mr. Newnham was Senior Vice President and Operations
Administrator of First National Bank, Orangeburg, South Carolina.
Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth, as of December 31, 2001, the number and
percentage of outstanding shares of Community Bankshares common stock
beneficially owned by (i) each person known by Community Bankshares to own more
than 5% of the outstanding common stock of Community Bankshares, (ii) each
director of Community Bankshares, (iii) each person named in the Summary
Compensation Table, and (iv) all executive officers and directors of Community
Bankshares as a group.
25
Number of % of
Shares Common
Name (and Address Beneficially Stock
of 5% Shareholders) Position in Community Bankshares Owned Ownership**
------------------- -------------------------------- ----- -----------
E. J. Ayers, Jr. ............. Director, Chairman and 92,980 (1) 2.81%
Chief Executive Officer
Alvis J. Bynum ............... Director 32,685 (2) **
Martha Rose C. Carson ........ Director 70,940 (3) 2.15%
Anna O. Dantzler ............. Director 99,500 (4) 3.01%
A. Wade Douroux .............. Director 66,818 (5) 2.02%
J. M. Guthrie ................ Director and Chairman of Executive 167,750 (6) 5.08%
Post Office Box 649 Committee
Orangeburg, SC 29116
Richard L. Havekost .......... Director 12,450 (7) **
Phil P. Leventis ............. Director 43,550 (8) 1.32%
Jesse A. Nance ............... Director 16,668 (9) **
William H. Nock .............. Director 64,317 (10) 1.94%
Samuel F. Reid, Jr. .......... Director 53,702 (11) 1.62%
William W. Traynham .......... Director, President and Chief Financial 61,341 (12) 1.85%
Officer
J. Otto Warren, Jr. .......... Director and Vice Chairman 176,519 (13) 5.34%
Post Office Box 666
Orangeburg, SC 29116
Wm. Reynolds Williams ........ Director 17,118 (14) **
Michael A. Wolfe ............. Director 60,651 (15) 1.83%
All executive officers and
directors as a group (16 persons) 1,053,226 (16) 31.08%
----------------------
**Less than 1%.
(1) Includes 1,680 shares owned by Nancy R. Ayers, Mr. Ayers' wife; 2,730
shares owned by an IRA for the benefit of Nancy R. Ayers; 1,680 shares held
by an IRA for the benefit of Mr. Ayers; and 11,250 shares subject to stock
options which are currently exercisable or which will become exercisable
within 60 days after December 31, 2001.
(2) Includes 5,874 shares owned by Marjorie F. Bynum, Mr. Bynum's wife; and
8,150 shares subject to stock options which are currently exercisable or
which will become exercisable within 60 days after December 31, 2001.
(3) Includes 10,250 shares subject to stock options which are currently
exercisable or which will become exercisable within 60 days after December
31, 2001.
(4) Includes 10,250 shares subject to stock options which are currently
exercisable or which will become exercisable within 60 days after December
31, 2001.
(5) Includes 44,548 shares held in escrow pending the satisfaction of certain
financial performance results by Community Resource Mortgage, Inc.
26
(6) Includes 157,500 shares owned jointly with Lou D. Guthrie, Mr. Guthrie's
wife; and 10,250 shares subject to stock options which are currently
exercisable or which will become exercisable within 60 days after December
31, 2001.
(7) Includes 4,050 shares subject to stock options which are currently
exercisable or which will become exercisable within 60 days after December
31, 2001.
(8) Includes 10,891 shares owned by LPT Enterprises, a limited partnership;
2,422 shares owned by an IRA for the benefit of Mr. Leventis; and 8,150
shares subject to stock options which are currently exercisable or which
will become exercisable within 60 days after December 31, 2001.
(9) Includes 4,771 shares owned by an IRA for the benefit of Mr. Nance, 541
shares owned by Martha F. Nance, Mr. Nance's wife; and 11,250 shares
subject to stock options which are currently exercisable or which will
become exercisable within 60 days after December 31, 2001.
(10) Includes 1,359 shares owned by the Nock Family Trust; 468 shares owned by
an IRA for the benefit of Linda H. Nock, Mr. Nock's wife; 39,697 shares
held by Paine Webber for benefit of Mr. Nock; 2,760 shares held by Scott &
Stringfellow for the benefit of Linda Nock; and 19,650 shares subject to
stock options which are currently exercisable or which will become
exercisable within 60 days after December 31, 2001.
(11) Includes 14,052 shares held by Mr. Reid as trustee for his minor children;
16,800 shares owned by Rosa G. Reid, Mr. Reid's wife; and 10,250 shares
subject to stock options which are currently exercisable or which will
become exercisable within 60 days after December 31, 2001.
(12) Includes 18,436 shares owned jointly with Margaret S. Traynham, Mr.
Traynham's wife; 2,038 shares owned jointly with minor children; and 19,650
shares subject to stock options which are currently exercisable or which
will become exercisable within 60 days after December 31, 2001.
(13) Includes 53,000 shares owned by Mildred J. Warren, Mr. Warren's wife; and
10,250 shares subject to stock options which are currently exercisable or
which will become exercisable within 60 days after December 31, 2001.
(14) Includes 4,738 shares owned jointly with Mary T. Williams, Mr. Williams'
wife; and 4,050 shares subject to stock options which are currently
exercisable or which will become exercisable within 60 days after December
31, 2001.
(15) Includes 2,151 shares owned by Joye McGrady Wolfe as custodian for minor
children; and 19,650 shares subject to stock options which are currently
exercisable or which will become exercisable within 60 days after December
31, 2001.
(16) Includes 164,512 shares subject to stock options which are currently
exercisable or which will become exercisable within 60 days after December
31, 2001.
Executive Officer Compensation
The following table summarizes for the years ended December 31, 2001,
2000, and 1999 the compensation paid to the Chairman and Chief Executive Officer
of Community Bankshares and to executive officers of Community Bankshares or its
subsidiaries who received compensation greater than $100,000 in 2001.
27
Summary Compensation Table
Long-Term
---------
Compensation
------------
Awards
------
Annual Securities
Compensation
------------ Underlying All Other
Year Salary Bonus Options(1) Compensation(2)
---- ------ ----- ---------- ---------------
E. J. Ayers, Jr ........................................ 2001 $ 82,000 6,000 $ 2,460
Chairman and Chief Executive Officer of ................ 2000 82,000 - - 12,163
Community Bankshares ................................... 1999 82,000 - 5,250 8,200
William W. Traynham .................................... 2001 $135,000 $ 9,450 6,000 $ 4,333
President of Community Bankshares ...................... 2000 135,000 9,450 - 23,562
1999 130,000 9,100 5,250 21,250
Michael A. Wolfe ....................................... 2001 $135,000 $ 9,450 6,000 $ 5,869
President and Chief Executive Officer .................. 2000 135,000 9,450 - 26,268
of Orangeburg National Bank ............................ 1999 130,000 9,100 5,250 21,250
William H. Nock ........................................ 2001 $135,000 $ 4,050 6,000 $ 4,185
President and Chief Executive Officer .................. 2000 135,000 4,050 - 4,050
of Sumter National Bank ................................ 1999 130,000 13,000 5,250 3,900
Jesse A. Nance(4) ...................................... 2001 $117,874 $ 5,337 6,000 $ 3,248
President and Chief Executive Officer .................. 2000 109,847 5,737 - 3,220
of Florence National Bank .............................. 1999 101,840 - 5,250 3,055
-----------------------------------------
(1) Adjusted to reflect the 5% stock dividend issued January 31, 2000.
(2) The column sets forth Company contributions to the 401(k) plan on behalf of
the executive officers. For Mr. Wolfe in 2001 it also includes loan
incentive payments of $1,819. For Messrs. Wolfe and Traynham, it also
includes unused sick and vacation leave payments. Such payments totaled
$7,780 and $7,500 in 2000 and 1999, respectively, to each of Mr. Wolfe and
Mr. Traynham.
Aggregated Option Exercises in 2001 and 2001 Year End Option Values
The following table sets forth information about stock options held at
December 31, 2001 by the executive officers listed in the Summary Compensation
Table. No options were exercised in 2001.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options 12/31/01 Options 12/31/01
---------------- ----------------
Name Exercisable Unexercisable Exercisable(1) Unexercisable
---- ----------- ------------- -------------- -------------
E. J. Ayers .................................... 5,250 6,000 $ 893 $12,000
Jesse A. Nance ................................. 5,250 6,000 893 12,000
William H. Nock ................................ 13,650 6,000 58,085 12,000
William W. Traynham ............................ 13,650 6,000 58,085 12,000
Michael A. Wolfe ............................... 13,650 6,000 58,085 12,000
(1) Based on a fair value of $13.00 per share, the closing price of a share
of Community Bankshares common stock on December 31, 2001. Each of the
28
above persons holds options for 5,250 shares at an exercise price per
share of $12.83. Messrs. Nock, Traynham and Wolfe also each have
options for 8,400 shares at an exercise price per share of $7.62. Each
of the above persons also holds options for 6,000 shares at an exercise
price of $11.00, which are not currently exercisable.
Option Grants in Last Fiscal Year
The following table sets forth information about options granted to the
executive officers listed in the Summary Compensation Table in 2001.
Individual Grants
-----------------
Number of % of Total
Securities Options Potential Realizable Value at
Underlying Granted to Exercise Assumed Annual Rates of Stock
Options Employees Price Expiration Price Appreciation for 10-Year
Name Granted(1) in 2001 (per share) Date Option Term(2)
---- ---------- ------- ----------- ---- --------------
5% 10%
-- ---
E. J. Ayers ......................... 6,000 6.4% $ 11.00 2/26/11 $ 41,507 $105,187
Jesse A. Nance ...................... 6,000 6.4% $ 11.00 2/26/11 $ 41,507 $105,187
William H. Nock ..................... 6,000 6.4% $ 11.00 2/26/11 $ 41,507 $105,187
William W. Traynham ................. 6,000 6.4% $ 11.00 2/26/11 $ 41,507 $105,187
Michael A. Wolfe .................... 6,000 6.4% $ 11.00 2/26/11 $ 41,507 $105,187
-----------------
(1) These options were granted on February 26, 2001 and become exercisable on
February 26, 2002.
(2) The amounts in these columns are the result of calculations based on the
assumption that the market price of Community Bankshares common stock will
appreciate in value from the date of grant to the end of the ten-year
option term at rates of 5% and 10% per year. The 5% and 10% annual
appreciation assumptions are required by the Securities and Exchange
Commission; they are not intended to forecast possible future appreciation,
if any, of Community Bankshares' stock price.
Compensation Committee Interlocks And Insider Participation
The members of the Compensation Committee for the year ended December
31, 2001 were Richard L. Havekost, Chair, Alvis J. Bynum, J. M. Guthrie, Phil P.
Leventis, Samuel F. Reid and Wm. Reynolds Williams.
The law firm of Horger, Barnwell and Reid, in which Samuel F. Reid, a
director of Community Bankshares, is a partner, provided legal services to
Community Bankshares in 2001, and is continuing to provide legal services to
Community Bankshares in 2002. The law firm of Willcox, Buyck and Williams, P.A.
in which Wm. Reynolds Williams, a director of Community Bankshares, is a member
provided legal services to Community Bankshares in 2001, and is continuing to
provide legal services to Community Bankshares in 2002.
Change of Control and Employment Agreements
In 1999, Community Bankshares entered into Change of Control Agreements
with Messrs. Ayers, Traynham, Wolfe, Nock and Nance. The principal purpose of
the agreements is to protect these executives against a change in control of
Community Bankshares. The agreements provide that, if within five years after
the date of the agreements, any change of control of Community Bankshares is
effected, then the executive will be entitled to certain benefits. A change of
control of Community Bankshares will be deemed to have been effected for
purposes of the Agreement if: (i) voting control of Community Bankshares is
acquired, directly or indirectly, by any person or group acting in concert, (ii)
Community Bankshares is merged with or into any other entity and Community
Bankshares is not the surviving entity of the merger, (iii) voting control of
any subsidiary of Community Bankshares by which the executive is principally
employed is acquired, directly or indirectly, by any person or group acting in
concert, or (iv) any subsidiary of Community Bankshares by which the executive
is principally employed is merged with or into another entity that is not also a
subsidiary of Community Bankshares and such subsidiary is not the surviving
29
entity of the merger. If the executive terminates his employment with Community
Bankshares or his employment is terminated by Community Bankshares at any time
within six months following the effective date of a change in control, the
executive will be entitled to a lump sum payment equal to twice his annual
salary in effect at the date of termination. The Agreement requires downward
adjustments in the event that the lump sum payment exceeds the amount prescribed
by Section 280G of the Internal Revenue Code. The term of the Agreement extends
automatically for an additional year on each annual anniversary thereof, unless
Community Bankshares gives 30 days prior notice to the executive that the term
will not be extended.
In 2001, Community Bankshares acquired Community Resource Mortgage,
Inc. A. Wade Douroux, President and Chief Executive Officer of this new
subsidiary and a new director of Community Bankshares, entered into an
Employment Agreement with Community Resource Mortgage. Pursuant to the
Employment Agreement, Mr. Douroux will serve as President of Community Resource
Mortgage for a period of three years until October 31, 2004. During this three
year period, Mr. Douroux will be paid a base annual salary of $96,000 and he
will be subject to covenants not to compete with Community Bankshares or
Community Resource Mortgage. Mr. Douroux's Employment Agreement also contains
provisions regarding a change of control that are substantially the same as the
provisions of the Change of Control Agreements with certain other officers of
Community Bankshares or its subsidiaries that are described in the previous
paragraph.
Director Compensation
Community Bankshares pays directors who are not employees of Community
Bankshares or its subsidiaries $200 per month for service as directors. In
addition, Orangeburg National Bank pays monthly fees of $600 to its non-employee
directors. Sumter National Bank and Florence National Bank pay monthly fees of
$300 to their non-employee directors. Community Resource Mortgage does not pay
director fees. Each of the non-employee directors of Community Bankshares serves
as a director of one of Community Bankshares' subsidiary banks. Director fees
paid by Community Bankshares in 2001 totaled $161,550. Director fees paid by
Orangeburg National Bank in 2001 totaled $72,000. Director fees paid by Sumter
National Bank in 2001 totaled $39,150. Director fees paid by Florence National
Bank in 2001 totaled $21,600.
Some Relationships And Related Transactions
The subsidiary banks have loan and deposit relationships with some of
the directors of Community Bankshares and some of the directors of the
subsidiaries of Community Bankshares and with companies with which the directors
are associated as well as with members of the immediate families of the
directors. The term members of the immediate families for purposes of this
paragraph includes each person's spouse, parents, children, siblings, mothers
and fathers-in-law, sons and daughters-in-law, and brothers and sisters-in-law.
The total loans outstanding to these parties at September 30, 2001, were
$9,102,000. All of these loans were made in the ordinary course of business,
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and did not, at the time they were made involve more than the
normal risk of collectibility or present other unfavorable features.
The law firm of Horger, Barnwell and Reid, in which Samuel F. Reid, a
director of Community Bankshares, is a partner, provided legal services to
Community Bankshares in 2001, and is continuing to provide legal services to
Community Bankshares in 2002. The law firm of Willcox, Buyck and Williams, P.A.
in which Wm. Reynolds Williams, a director of Community Bankshares, is a member
also provided legal services to Community Bankshares in 2001, and is continuing
to provide legal services to Community Bankshares in 2002.
30
Interests Of Some Persons In The Merger
It is a condition to consummation of the merger that William A.
Harwell, the president of Bank of Ridgeway, enter into an employment agreement
with Bank of Ridgeway and Community Bankshares. Pursuant to the employment
agreement, Mr. Harwell will serve as President of Bank of Ridgeway for a period
of five years after the effectiveness of the merger. During this five year
period, Mr. Harwell will be paid a base annual salary of $135,000, and he will
be subject to covenants not to compete with Bank of Ridgeway. Mr. Harwell may
terminate the employment agreement at any time. Mr. Harwell will also enter into
a Change of Control Agreement with Bank of Ridgeway that includes substantially
the same provisions as the Change of Control Agreements with certain officers of
Community Bankshares or its subsidiaries that are described above.
The merger agreement generally provides that Community Bankshares will
indemnify and hold harmless each person entitled to indemnification from
Ridgeway Bancshares or any of its subsidiaries to the full extent permitted by
law, and that such rights will continue in full force and effect for six years
from the effective time of the merger with respect to matters occurring at or
prior to the effective time.
The merger agreement also requires Community Bankshares to use
commercially reasonable efforts to maintain in effect for a period of three
years after the effective time of the merger Ridgeway Bancshares' existing
directors' and officers' liability insurance policy with respect to claims
arising from acts or events which occurred prior to the effective time of the
merger. Community Bankshares may substitute policies of at least the same
coverage and amounts containing terms and conditions which are not less
advantageous.
The merger agreement also provides that, after the effective time of
the merger, Community Bankshares will provide generally to officers and
employees of Ridgeway Bancshares and its subsidiaries who, at or after the
effective time, become officers or employees of Community Bankshares or its
subsidiaries, employee benefits under employee benefit plans (other than stock
option or other plans involving the potential issuance of Community Bankshares
common stock) on terms and conditions that, taken as a whole, are substantially
similar to those currently provided by Community Bankshares and its subsidiaries
to their similarly situated officers and employees. For purposes of
participation and vesting (but not benefit accrual) under such employee benefit
plans, service with Ridgeway Bancshares or its subsidiaries prior to the
effective time of the merger will be treated as service with Community
Bankshares or its subsidiaries. The merger agreement further provides that
Community Bankshares will cause Ridgeway Bancshares to honor all employment,
severance, consulting, and other compensation contracts previously disclosed to
Community Bankshares between Ridgeway Bancshares or its subsidiaries and any
current or former director, officer, or employee, and all provisions for vested
amounts earned or accrued through the effective time of the merger under
Ridgeway Bancshares' benefit plans.
Under the terms of the merger agreement, directors of the Bank of
Ridgeway, who are not employees of the bank, will each receive a director's fee
from the bank of $300 per month.
As of the record date, directors and executive officers of Ridgeway
Bancshares owned no shares of Community Bankshares common stock.
Dissenting Shareholders Of Ridgeway Bancshares
Any shareholder of Ridgeway Bancshares entitled to vote on the Merger
has the right to dissent from the merger and receive payment of the fair value
of his shares of Ridgeway Bancshares common stock upon compliance with Sections
33-13-210 and 33-13-230 of the South Carolina Business Corporation Act. A
shareholder may not dissent as to less than all of the shares that he
beneficially owns or over which he has power to direct the vote. A nominee or
fiduciary may not dissent on behalf of any beneficial owner as to less than all
of the shares of such beneficial owner held of record by such nominee or
fiduciary. A beneficial owner asserting dissenters' rights to shares held on his
behalf must notify Ridgeway Bancshares in writing of the names and addresses of
the record holders of the shares, if known to him. Any Ridgeway Bancshares
shareholder intending to enforce this right may not vote in favor of the Merger
and must file a written notice of intent to demand payment for his shares (the
31
"Objection Notice") with the Corporate Secretary of Ridgeway Bancshares either
before Ridgeway Bancshares' Special Meeting or before the vote is taken at the
meeting. The Objection Notice must state that the shareholder intends to demand
payment for his shares of Ridgeway Bancshares' common stock if the Merger is
effected. Although any Ridgeway Bancshares shareholder who has filed an
Objection Notice must not vote in favor of the Merger, a vote in favor of the
Merger cast by the holder of a proxy appointment solicited by Ridgeway
Bancshares (whether pursuant to the instruction of the shareholder or otherwise)
will not disqualify the shareholder from demanding payment for his shares under
the South Carolina Business Corporation Act. A vote against approval of the
Merger will not, in and of itself, constitute an Objection Notice satisfying the
requirements of Section 33-13-210 of the South Carolina Business Corporation
Act. If the Merger is approved by Ridgeway Bancshares' shareholders at Ridgeway
Bancshares' Special Meeting, each shareholder who has filed an Objection Notice
will be notified by Ridgeway Bancshares of such approval within 10 days after
Ridgeway Bancshares' Special Meeting (the "Dissenters' Notice"). The Dissenters'
Notice will (i) state where dissenting shareholders must (a) send the Payment
Demand (as defined below) and (b) deposit their common stock certificates (the
"Certificates"), (ii) inform holders of uncertificated shares of Ridgeway
Bancshares' common stock of the extent of any restrictions on the
transferability of such shares; (iii) be accompanied by a form for demanding
payment that includes the date of the first announcement to the news media or to
shareholders of the terms of the proposed Merger, (iv) set a date by which (x)
Ridgeway Bancshares must receive the Payment Demand, which may not be fewer than
30 or more than 60 days after the date the Dissenters' Notice is delivered and
(y) the Certificates must be deposited as instructed in the Dissenters' Notice,
which may not be earlier than 20 days after the date the Payment Demand is
received by Ridgeway Bancshares and (v) be accompanied by a copy of Sections
33-13-101 through 33-13-310 of the South Carolina Business Corporation Act.
Within the time prescribed in the Dissenters' Notice, a shareholder electing to
dissent must make a demand for payment (the "Payment Demand"), certify whether
he (or the beneficial shareholder on whose behalf he is asserting dissenters'
rights) acquired beneficial ownership of the shares of Ridgeway Bancshares'
common stock before November 21, 2001 (the date of the first public announcement
of the terms of the Merger) and deposit his Certificates in accordance with the
terms of the Dissenters' Notice. Upon filing the Payment Demand and depositing
the Certificates, the shareholder will retain all other rights of a shareholder
until these rights are cancelled or modified by consummation of the Merger.
Failure to comply substantially with these procedures will cause the shareholder
to lose his dissenters' rights to payment for the shares. Consequently, any
Ridgeway Bancshares shareholder who desires to exercise his rights to receive
payment for his shares is urged to consult his legal advisor before attempting
to exercise such rights.
As soon as the Merger is consummated, or upon receipt of a Payment
Demand, Ridgeway Bancshares shall, pursuant to Section 33-13-250 of the South
Carolina Business Corporation Act, pay to each dissenting shareholder who has
substantially complied with the requirements of Section 33-13-230 of the South
Carolina Business Corporation Act, the amount that Ridgeway Bancshares estimates
to be the fair value of the shares of Ridgeway Bancshares' common stock plus
accrued interest. Section 33-13-250 of the South Carolina Business Corporation
Act requires that payment to be accompanied by (i) certain of Ridgeway
Bancshares' financial statements, (ii) a statement of Ridgeway Bancshares'
estimate of fair value of the shares and explanation of how Ridgeway Bancshares'
estimate of fair value and the interest were calculated, (iii) notification of
rights to demand additional payment, and (iv) a copy of Sections 33-13-101
through 33-13-310 of the South Carolina Business Corporation Act. As authorized
by Section 33-13-270, Ridgeway Bancshares intends to delay any payments with
respect to any shares (the "After-acquired shares") held by a dissenting
shareholder which were not held by such shareholder on the date of the first
public announcement of the terms of the Merger, unless the beneficial ownership
devolved upon him by operation of law from a person who was the beneficial owner
on such date. Where payments are so withheld, Sections 33-13-270(b) and
33-13-280(a) of the South Carolina Business Corporation Act will require
Ridgeway Bancshares, after the Merger, to send to the holder of the
after-acquired shares an offer to pay the holder an amount equal to Ridgeway
Bancshares' estimate of their fair value plus accrued interest, together with an
explanation of the calculation of fair value and interest and a statement of the
holder's right to demand additional payment under Section 33-13-280 of the South
Carolina Business Corporation Act.
If the Merger is not consummated within 60 days after the date set for
demanding payment and depositing Certificates, Ridgeway Bancshares, within the
60 day period, shall return the deposited Certificates and release the transfer
restrictions imposed on uncertificated shares. If, after returning deposited
Certificates and releasing transfer restrictions, the Merger is consummated,
Ridgeway Bancshares must send a new Dissenters' Notice and repeat the payment
demand procedure.
32
If the dissenting shareholder believes that the amount paid by Ridgeway
Bancshares pursuant to Section 33-13-250 of the South Carolina Business
Corporation Act or offered under Section 33-13-270 of the South Carolina
Business Corporation Act is less than the fair value of his shares or that the
interest due is calculated incorrectly, or if Ridgeway Bancshares fails to make
payment or offer payment (or, if the Merger has not been consummated, Ridgeway
Bancshares does not return the deposited Certificates or release the transfer
restrictions imposed on uncertificated shares), within 60 days after the date
set in the Dissenters' Notice, then the dissenting shareholder may within 30
days after Ridgeway Bancshares made or offered payment for the shares or failed
to pay for the shares, notify Ridgeway Bancshares in writing of his own estimate
of the fair value of such shares (including interest due) and demand payment of
such estimate (less any payment previously received). Failure to notify Ridgeway
Bancshares in writing of any demand for additional payment within 30 days after
Ridgeway Bancshares has made payment for such shares will constitute a waiver of
the right to demand additional payment.
If Ridgeway Bancshares and the dissenting shareholder cannot agree on a
fair price within 60 days after Ridgeway Bancshares receives such a demand for
additional payment, the statute provides that Ridgeway Bancshares will institute
judicial proceedings in the South Carolina Court of Common Pleas in Fairfield
County (the "Court") to fix (i) the fair value of the shares immediately before
consummation of the Merger, excluding any appreciation or depreciation in
anticipation of the Merger, unless such exclusion would be inequitable and (ii)
the accrued interest. The "fair value" of Ridgeway Bancshares' common stock
could be more than, the same as, or less than that produced by the exchange
ratio set by the Merger. Ridgeway Bancshares must make all dissenters whose
demands for additional payment remain unsettled parties to the proceeding and
all such parties must be served with a copy of the petition. The Court may, in
its discretion, appoint an appraiser to receive evidence and recommend a
decision on the question of fair value. The Court is required to issue a
judgment for the amount, if any, by which the fair value of the shares, as
determined by the Court, plus interest, exceeds the amount paid by Ridgeway
Bancshares. If Ridgeway Bancshares does not institute such proceeding within
such 60 day period, Ridgeway Bancshares shall pay each dissenting shareholder
whose demand remains unsettled the respective amount demanded by each
shareholder.
The Court will assess the costs and expenses of such proceeding
(including reasonable compensation for and the expenses of the appraiser but
excluding fees and expenses of counsel and experts) against Ridgeway Bancshares,
except that the Court may assess such costs and expenses as it deems appropriate
against any or all of the dissenting shareholders if it finds that their demand
for additional payment was arbitrary, vexatious or otherwise not in good faith.
The Court may award fees and expenses of counsel and experts in amounts the
Court finds equitable: (i) against Ridgeway Bancshares if the Court finds that
Ridgeway Bancshares did not comply substantially with the relevant requirements
of the South Carolina Business Corporation Act or (ii) against either Ridgeway
Bancshares or any dissenting shareholder, if the Court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously
or not in good faith.
Community Bankshares shareholders are not entitled to dissenter's
rights.
The foregoing is a summary of the applicable provisions of Sections
33-13-101 through 33-13-310 of the South Carolina Business Corporation Act. It
is not intended to be a complete statement of such provisions, and is qualified
in its entirety by reference to such sections, which are included as Appendix B
hereof. It is not intended to give any right of dissent or payment to any
shareholder and should not be so read. Shareholders' rights of dissent and
payment are limited to those provided by law.
Federal Income Tax Consequences Of The Merger
The following is a discussion of the material federal income tax
consequences of the merger to holders of Ridgeway Bancshares common stock. This
discussion may not apply to special situations, such as Ridgeway Bancshares
shareholders, if any, who hold Ridgeway Bancshares common stock other than as a
capital asset, who received Ridgeway Bancshares common stock upon the exercise
of employee stock options or otherwise as compensation, who hold Ridgeway
Bancshares common stock as part of a "straddle" or "conversion transaction," or
who are insurance companies, securities dealers, financial institutions or
foreign persons, and does not discuss any aspects of state, local, or foreign
taxation. This discussion is based upon laws, regulations, rulings and decisions
now in effect and on proposed regulations, all of which are subject to change
(possibly with retroactive effect) by legislation, administrative action, or
33
judicial decision. No ruling has been or will be requested from the internal
revenue service on any matter relating to the tax consequences of the merger.
Completion of the merger is conditioned upon receipt by Community
Bankshares and Ridgeway Bancshares of an opinion from Haynsworth Sinkler Boyd,
P.A., counsel to Community Bankshares, concerning the material federal income
tax consequences of the merger. Based upon the assumption that the merger is
completed in accordance with the merger agreement and upon factual statements
and factual representations made by Community Bankshares and Ridgeway
Bancshares, it is such firm's opinion that the merger will be a reorganization
for federal income tax purposes within the meaning of Internal Revenue Code ss.
368(a)(1)(A), and Ridgeway Bancshares and Community Bankshares will each be "a
party to a reorganization" within the meaning of Internal Revenue Code ss.
368(b) and that:
If you are a holder of Ridgeway Bancshares common stock and you
exchange all of your Ridgeway Bancshares common stock solely for Community
Bankshares common stock (and a cash payment in lieu of any fractional share) in
the merger:
o You will not recognize any gain or loss (except for any cash
you receive in lieu of a fractional share interest in
Community Bankshares common stock);
o The tax basis of the Community Bankshares common stock you
receive (including any fractional share deemed received and
redeemed) will be the same as the tax basis of the Ridgeway
Bancshares common stock you surrender in exchange for
Community Bankshares common stock; and
o The holding period of the Community Bankshares common stock
you receive (including any fractional share deemed received
and redeemed) will be the same as the holding period of the
Ridgeway Bancshares common stock you surrender in exchange for
Community Bankshares common stock, provided that your Ridgeway
Bancshares common stock is held as a capital asset at the
effective time of the merger.
If you are a holder of Ridgeway Bancshares common stock and you
exchange all of your Ridgeway Bancshares common stock for a combination of
Community Bankshares common stock and cash in the merger:
o You will recognize gain (but not loss) to the extent of the
lesser of (i) your realized gain for all Ridgeway Bancshares
common stock you surrender in the merger or (ii) the amount of
cash you receive;
o If the exchange with you does not have the effect of the
distribution of a dividend within the meaning of Internal
Revenue Code ss. 356(a)(2) (which must be determined on a
shareholder-by-shareholder basis), the gain will be treated as
gain from the sale or exchange of an asset, and any such gain
will be treated as capital gain if you hold the Ridgeway
Bancshares common stock you surrender as a capital asset at
the effective time of the merger;
o If the exchange with you does have the effect of the
distribution of a dividend, then the gain will be treated as
ordinary income (not capital gain) to the extent of your
ratable share of Ridgeway Bancshares' accumulated earnings and
profits, and the balance of any such gain will be treated as
gain from the sale or exchange of an asset;
o The aggregate tax basis of the Community Bankshares common
stock you receive will equal (i) the aggregate tax basis of
the Ridgeway Bancshares common stock you surrender in the
merger, reduced by (ii) the amount of cash you receive, and
increased by (iii) the amount of any gain you recognize;
o The holding period of the Community Bankshares common stock
you receive will be the same as the holding period of Ridgeway
Bancshares common stock you surrender in the merger if you
hold your Ridgeway Bancshares common stock as a capital asset
at the effective time of the merger.
34
If you are a holder of Ridgeway Bancshares common stock and you
exchange all of your Ridgeway Bancshares common stock for cash pursuant to the
merger or by exercise of dissenters' rights, then more likely than not,
o You will be treated as if (i) you sold all of your Ridgeway
Bancshares common stock to Community Bankshares for cash or
(ii) Community Bankshares issued to you the number of shares
of Community Bankshares common stock that you could have
received instead of cash and then redeemed those shares for
the amount of cash distributed to you and unless the exchange
with you is essentially equivalent to a dividend within the
meaning of Internal Revenue Code ss. 302(b)(1) (which must be
determined on a shareholder-by-shareholder basis) and:
o You will recognize gain (to the extent that the amount of cash
you receive exceeds your basis in the Ridgeway Bancshares
common stock you exchange) or loss (to the extent that your
basis in the Ridgeway Bancshares common stock you exchange
exceeds the amount of cash you receive);
o Your gain or loss will be treated as gain or loss from the
sale or exchange of an asset; and
o Your gain or loss will be treated as capital gain if you hold
the Ridgeway Bancshares common stock you surrender as a
capital asset at the effective time of the merger;
o If the exchange with you is treated as if Community Bankshares
issued to you the number of shares of Community Bankshares
common stock that you could have received instead of cash and
then redeemed those shares for the amount of cash distributed
to you, and if the exchange with you is essentially equivalent
to a dividend within the meaning of Code ss. 302(b)(1), then
the payment to you will be treated as a dividend distribution
and taxed as ordinary income to you to the extent of the
accumulated and current earnings and profits of Community
Bankshares.
The tax opinion does not address any state, local, foreign, or other
tax consequences of the merger. If you are a Ridgeway Bancshares shareholder,
you should consult your own tax advisors with respect to the tax consequences of
the proposed transaction to you individually, including the tax treatment of
cash payments, tax reporting requirements, and tax consequences under state,
local, and foreign law.
Accounting Treatment
It is anticipated that the merger will be accounted for as a
"purchase," as that term is used pursuant to accounting principles generally
accepted in the United States, for accounting and financial reporting purposes.
Under the purchase method of accounting, the assets and liabilities of Ridgeway
Bancshares as of the effective time of the merger will be recorded at their
estimated respective fair values and added to those of Community Bankshares.
Financial statements of Community Bankshares issued after the effective time
will reflect such values and will not be restated retroactively to reflect the
historical financial position or results of operations of Ridgeway Bancshares.
Expenses And Fees
The merger agreement provides, in general, that each of the parties
will bear and pay its own expenses in connection with the transactions
contemplated by the merger agreement, including fees and expenses of its own
financial or other consultants, investment bankers, accountants, and counsel,
except that Community Bankshares will bear and pay all of the filing fees and
one-half of the printing costs in connection with this Proxy
Statement/Prospectus.
35
Resales Of Community Bankshares Common Stock
The Community Bankshares common stock to be issued to Ridgeway
Bancshares shareholders in the merger has been registered under the Securities
Act of 1933, but that registration does not cover resales of those shares by
persons who control, are controlled by, or are under common control with,
Ridgeway Bancshares (such persons are referred to hereinafter as "affiliates"
and generally include executive officers, directors, and 10% shareholders) at
the time of the special meeting. Affiliates may not sell shares of Community
Bankshares common stock acquired in connection with the merger, except pursuant
to an effective registration statement under the Securities Act or in compliance
with Rule 145 promulgated under the Securities Act or in accordance with a legal
opinion satisfactory to Community Bankshares that such sale or transfer is
otherwise exempt from the Securities Act registration requirements.
Rule 145 promulgated under the Securities Act restricts the sale of
Community Bankshares common stock received in the merger by affiliates and
certain of their family members and related interests. Under the rule, during
the one-year period following the effective time of the merger, affiliates of
Ridgeway Bancshares may resell publicly the Community Bankshares common stock
received by them in the merger subject to certain limitations as to the amount
of Community Bankshares common stock sold in any three-month period and as to
the manner of sale, and subject to the timeliness of Community Bankshares'
periodic reporting obligations with the Securities and Exchange Commission.
After the one-year period and within two years following the effective time of
the merger, affiliates of Ridgeway Bancshares who are not affiliates of
Community Bankshares may effect such resales subject only to the timeliness of
Community Bankshares' periodic reporting requirements. After two years, such
affiliates of Ridgeway Bancshares who are not affiliates of Community Bankshares
may resell their shares without restriction. Persons who are affiliates of
Community Bankshares after the effective time of the merger may publicly resell
the Community Bankshares common stock received by them in the merger subject to
similar limitations and subject to certain filing requirements specified in SEC
Rule 144. Affiliates will receive additional information regarding the effect of
Rule 145 on their ability to resell Community Bankshares common stock received
in the merger. Affiliates also would be permitted to resell Community Bankshares
common stock received in the merger pursuant to an effective registration
statement under the Securities Act or an available exemption from the Securities
Act registration requirements. This Proxy Statement/Prospectus does not cover
any resales of Community Bankshares common stock received by persons who may be
deemed to be affiliates of Ridgeway Bancshares or Community Bankshares.
Each person who Ridgeway Bancshares reasonably believes is an affiliate
of Ridgeway Bancshares has delivered to Community Bankshares a written agreement
providing that such person generally will not sell, pledge, transfer, or
otherwise dispose of any Community Bankshares common stock to be received by
such person upon completion of the merger, except in compliance with the
Securities Act and the rules and regulations promulgated thereunder.
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS
As a result of the merger, holders of Ridgeway Bancshares common stock
will be exchanging their shares of a South Carolina corporation governed by the
South Carolina Business Corporation Act and Ridgeway Bancshares' articles of
incorporation and bylaws, for shares of Community Bankshares, a South Carolina
corporation governed by the South Carolina Business Corporation Act and
Community Bankshares' articles of incorporation and bylaws. Significant
differences exist between the rights of Ridgeway Bancshares shareholders and
those of Community Bankshares shareholders. The material differences are
summarized below. In particular, Community Bankshares' articles of incorporation
and bylaws contain several provisions that may have an antitakeover effect in
that they could impede or prevent an acquisition of Community Bankshares unless
the potential acquirer has obtained the approval of Community Bankshares' board
of directors. The following discussion is necessarily general; it is not
intended to be a complete statement of all differences affecting the rights of
shareholders and their respective entities, and it is qualified in its entirety
by reference to the South Carolina Business Corporation Act as well as to
Community Bankshares' articles of incorporation and bylaws and Ridgeway
Bancshares' articles of incorporation and bylaws.
36
Antitakeover Provisions Generally
The term "protective provisions" herein refers to the provisions of
Community Bankshares' articles of incorporation and bylaws described below under
the headings, "-Authorized Capital Stock," "-Amendment of Articles of
Incorporation and Bylaws," "-Classified Board of Directors and Absence of
Cumulative Voting," "-Removal of Directors," "-Limitations on Director
Liability," "-Special Meetings of Shareholders," "-Actions by Shareholders
Without a Meeting," "-Shareholder Nominations," and "-Mergers, Consolidations,
and Sales of Assets Generally," and the provisions of the South Carolina General
Corporation Law described under the heading "-Business Combinations With Certain
Persons." In general, one purpose of the protective provisions is to assist
Community Bankshares' board of directors in playing a role in connection with
attempts to acquire control of Community Bankshares, so that the board of
directors can further and protect the interests of Community Bankshares and its
shareholders as appropriate under the circumstances, including, if the board of
directors determines that a sale of control is in their best interests, by
enhancing the board of directors' ability to maximize the value to be received
by the shareholders upon such a sale.
Although Community Bankshares' management believes the protective
provisions are, therefore, beneficial to Community Bankshares' shareholders, the
protective provisions also may tend to discourage some takeover bids. As a
result, Community Bankshares' shareholders may be deprived of opportunities to
sell some or all of their shares at prices that represent a premium over
prevailing market prices. On the other hand, defeating undesirable acquisition
offers can be a very expensive and time-consuming process. To the extent that
the protective provisions discourage undesirable proposals, Community Bankshares
may be able to avoid those expenditures of time and money.
The protective provisions also may discourage open market purchases by
a potential acquirer. Such purchases may increase the market price of Community
Bankshares common stock temporarily, enabling shareholders to sell their shares
at a price higher than that which otherwise would prevail. In addition, the
protective provisions may decrease the market price of Community Bankshares
common stock by making the stock less attractive to persons who invest in
securities in anticipation of price increases from potential acquisition
attempts. The protective provisions also may make it more difficult and time
consuming for a potential acquirer to obtain control of Community Bankshares
through replacing the board of directors and management. Furthermore, the
protective provisions may make it more difficult for Community Bankshares'
shareholders to replace the board of directors or management, even if a majority
of the shareholders believes such replacement is in the best interests of
Community Bankshares. As a result, the protective provisions may tend to
perpetuate the incumbent board of directors and management.
Authorized Capital Stock
Community Bankshares. The articles of incorporation authorize the
issuance of up to 12,000,000 shares of Community Bankshares common stock. At
September 30, 2001, there were 3,204,220 shares of Community Bankshares common
stock issued and outstanding. Community Bankshares' board of directors may
authorize the issuance of additional shares of Community Bankshares common stock
without further action by Community Bankshares' shareholders, unless such action
is required in a particular case by applicable laws or regulations or by any
stock exchange upon which Community Bankshares' capital stock may be listed. The
articles of incorporation provide that Community Bankshares shareholders do not
have preemptive rights.
The authority to issue additional shares of Community Bankshares
capital stock provides Community Bankshares with the flexibility necessary to
meet its future needs without the delay resulting from seeking shareholder
approval. The authorized but unissued shares of Community Bankshares common
stock will be issuable from time to time for any corporate purpose, including,
without limitation, stock splits, stock dividends, employee benefit and
compensation plans, acquisitions, and public or private sales for cash as a
means of raising capital. Such shares could be used to dilute the stock
ownership of persons seeking to obtain control of Community Bankshares. In
addition, the sale of a substantial number of shares of Community Bankshares
common stock to persons who have an understanding with Community Bankshares
concerning the voting of such shares, or the distribution or declaration of a
dividend of shares of Community Bankshares common stock (or the right to receive
Community Bankshares common stock) to Community Bankshares shareholders, may
have the effect of discouraging or increasing the cost of unsolicited attempts
to acquire control of Community Bankshares.
37
Ridgeway Bancshares. Ridgeway Bancshares' authorized capital stock
consists of 100,000 shares of Ridgeway Bancshares common stock. As of September
30, 2001, there were 40,000 shares of Ridgeway Bancshares common stock issued
and outstanding.
Pursuant to the South Carolina Business Corporation Act, Ridgeway
Bancshares' board of directors may authorize the issuance of additional shares
of Ridgeway Bancshares common stock without further action by Ridgeway
Bancshares' shareholders. Ridgeway Bancshares' articles of incorporation provide
that shareholders of Ridgeway Bancshares do not have preemptive rights.
Amendment Of Articles Of Incorporation And Bylaws
Community Bankshares. The South Carolina Business Corporation Act
generally provides that a South Carolina corporation's articles of incorporation
may be amended by the affirmative vote of at least two-thirds of the shares
entitled to vote thereon, unless the articles of incorporation provide for a
higher or lower requirement. The Community Bankshares articles provide that,
unless an amendment has been approved by the affirmative vote of at least
two-thirds of the full board of directors, no amendment that amends, alters,
repeals or is inconsistent with the provisions of the articles regarding
mergers, consolidations, exchanges, sales of assets or dissolution, classified
board of directors, nomination of directors, removal of directors, duty of
directors, preemptive rights or cumulative voting, shall be effective unless it
is approved by the affirmative vote of 80% of the outstanding shares of
Community Bankshares.
Ridgeway Bancshares. Ridgeway Bancshares' articles of incorporation do
not include special provisions relating to amendment of the articles of
incorporation.
The boards of directors of Community Bankshares and Ridgeway Bancshares
each have the power to adopt, amend, or repeal the bylaws of their respective
companies by a majority vote, subject to the right of the shareholders by
majority vote to adopt, amend or repeal the bylaws by majority vote.
Classified Board Of Directors And Absence Of Cumulative Voting
Community Bankshares. The articles of incorporation provides that
Community Bankshares' board of directors is divided into three classes, with
each class to be as nearly equal in number as possible. The directors in each
class serve three-year terms of office.
The effect of Community Bankshares' having a classified board of
directors is that only approximately one-third of the members of the board of
directors are elected each year; consequently, two annual meetings are
effectively required for Community Bankshares' shareholders to change a majority
of the members of the board of directors.
Pursuant to the articles of incorporation, each shareholder generally
is entitled to one vote for each share of Community Bankshares stock held and is
not entitled to cumulative voting rights in the election of directors. With
cumulative voting, a shareholder has the right to cast a number of votes equal
to the total number of such holder's shares multiplied by the number of
directors to be elected, and may cast all of such holder's votes in favor of one
candidate or may distribute such holder's votes in any manner among any number
of candidates. Directors are elected by a plurality of the total votes cast by
all shareholders. With cumulative voting, it may be possible for minority
shareholders to obtain representation on the board of directors. Without
cumulative voting, the holders of more than 50% of the shares of Community
Bankshares common stock generally have the ability to elect 100% of the
directors. As a result, the holders of the remaining Community Bankshares common
stock effectively may not be able to elect any person to the board of directors.
The absence of cumulative voting, therefore, could make it more difficult for a
shareholder who acquires less than a majority of the shares of Community
Bankshares common stock to obtain representation on Community Bankshares' board
of directors.
Ridgeway Bancshares. Ridgeway Bancshares' articles of incorporation do
not provide for a classified board of directors. Holders of Ridgeway Bancshares
common stock are not afforded cumulative voting rights.
38
Removal Of Directors
Community Bankshares. Under the articles of incorporation, any director
or the entire board of directors may be removed without cause only by the
affirmative vote of the holders of at least 80% of Community Bankshares' voting
stock.
Ridgeway Bancshares. Pursuant to Ridgeway Bancshares' bylaws, any
director or the entire board of directors may be removed, with or without cause,
by a vote of the holders of a majority of the shares entitled to vote on the
election of directors.
Duty Of Directors
Community Bankshares. The articles of incorporation provide that when
evaluating any proposed plan of merger, consolidation, share exchange or sale of
all, or substantially all, of the assets of company, the board of directors
shall consider the interests of the employees of the company and the community
or communities in which it and its subsidiaries, if any, do business in addition
to the interests of the company's shareholders. Absent this provision, under
existing common law, directors would be required to give paramount consideration
with respect to such matters to the best interests of shareholders.
Ridgeway Bancshares. The articles and bylaws of Ridgeway Bancshares do
not include any comparable provision.
Indemnification
Community Bankshares. Under the South Carolina Business Corporation
Act, a corporation has the power to indemnify directors and officers who meet
the standards of good faith and reasonable belief that their conduct was lawful
and in the corporate interest (or not opposed thereto) set forth by statute. A
corporation may also provide insurance for directors and officers against
liability arising out of their positions even though the insurance coverage is
broader than the power of the corporation to indemnify. Unless limited by its
articles of incorporation, a corporation must indemnify a director or officer
who is wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he was a party because he is or was a director against
reasonable expenses incurred by him in connection with the proceeding. Community
Bankshares' articles of incorporation do not limit such indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of Community Bankshares pursuant to the foregoing provisions, or
otherwise, Community Bankshares has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
Ridgeway Bancshares. The bylaws provide that Ridgeway Bancshares will
indemnify all persons whom it may indemnify to the full extent permitted by the
South Carolina Business Corporation Act so long as such persons have conducted
themselves in good faith and reasonably believed their conduct not to be opposed
to the corporation's best interests. Under Section 33-8-510 of the South
Carolina Business Corporation Act as currently in effect, other than in actions
brought by or in the right of Ridgeway Bancshares, such indemnification would
apply if it were determined in the specific case that the proposed indemnitee
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of Ridgeway Bancshares and, with respect to
any criminal proceeding, if such person had no reasonable cause to believe that
the conduct was unlawful. In actions brought by or in the right of Ridgeway
Bancshares, such indemnification would be limited to reasonable expenses and
would apply if it were determined in the specific case that the proposed
indemnitee acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of Ridgeway Bancshares, except
that no indemnification may be made with respect to any proceeding by or in the
right of the corporation as to which such person is adjudged liable to Ridgeway
Bancshares or in connection with any other proceeding charging improper personal
benefit to him, whether or not involving action in his official capacity, in
which he was adjudged liable on the basis that personal benefit was improperly
received by him. Ridgeway Bancshares also provides insurance for its directors
and officers against liability arising out of their service in such positions.
39
The scope of the acts and omissions covered by such insurance policy may be
broader than the power of the corporation to indemnify.
Shareholder Nominations
Community Bankshares. Community Bankshares' articles of incorporation
provide that any nomination by shareholders of individuals for election to the
board of directors must be made by delivering written notice of such nomination
to the Secretary of Community Bankshares not less than 30 days before any
meeting of the shareholders called for the election of directors.
Ridgeway Bancshares. Ridgeway Bancshares' bylaws contain substantially
the same shareholder nominating procedures for election of directors.
Mergers, Consolidations, Exchanges, Sale Of Assets Or Dissolution
Community Bankshares. The articles of incorporation provide that with
respect to any plan of merger, consolidation or exchange or any plan for the
sale of all, or substantially all, the property and assets, with or without the
good will, of Community Bankshares or any resolution to dissolve Community
Bankshares, which plan or resolution shall not have been adopted by the
affirmative vote of at least two-thirds of the full board of directors, such
plan or resolution must be approved by the affirmative vote of holders of 80% of
the outstanding shares of Community Bankshares. If at least two-thirds of the
full board of directors approve any such plan or resolution, the plan or
resolution need only be approved by the affirmative vote of holders of
two-thirds of the outstanding shares of Community Bankshares. Consequently,
unless two-thirds of the directors favor such a plan or resolution, it may be
very difficult to effect any such transaction.
Ridgeway Bancshares. The articles and bylaws of Ridgeway Bancshares do
not provide for special requirements for approval of mergers, consolidations,
exchanges, sales of assets or dissolution. The South Carolina Business
Corporation Act generally requires approval of at least two-thirds of the
outstanding shares of a corporation's voting stock to approve a merger,
consolidation, share exchange, sale of all or substantially all of the
corporation's assets or similar corporate transaction. The corporation's board
of directors by resolution may require a different percentage of votes necessary
for approval.
Quorum
Community Bankshares. Under its articles of incorporation, one-third of
the shares entitled to vote constitutes a quorum at any meeting of shareholders
of Community Bankshares.
Ridgeway Bancshares. Under its bylaws, a majority of the shares
entitled to vote constitutes a quorum at any meeting of shareholders of Ridgeway
Bancshares.
Statutory Matters
Business Combinations Statute. The South Carolina business combinations
statute provides that a 10% or greater shareholder of a resident domestic
corporation cannot engage in a "business combination" (as defined in the
statute) with such corporation for a period of two years following the date on
which the 10% shareholder became such, unless the business combination or the
acquisition of shares is approved by a majority of the disinterested members of
such corporation's board of directors before the 10% shareholder's share
acquisition date. This statute further provides that at no time (even after the
two-year period subsequent to such share acquisition date) may the 10%
shareholder engage in a business combination with the relevant corporation
unless certain approvals of the board of directors or disinterested shareholders
are obtained or unless the consideration given in the combination meets certain
minimum standards set forth in the statute. The law is very broad in its scope
and is designed to inhibit unfriendly acquisitions but it does not apply to
corporations whose articles of incorporation contain a provision electing not to
be covered by the law. Neither Community Bankshares nor Ridgeway Bancshares'
articles of incorporation contain such a provision. An amendment of the articles
40
of incorporation to that effect will, however, permit a business combination
with an interested shareholder even though that status was obtained prior to the
amendment.
Control Share Acquisitions. The South Carolina corporations law also
contains provisions that, under certain circumstances, would preclude an
acquiror of the shares of a South Carolina corporation who crosses one of three
voting thresholds (20%, 33 1/3%, or 50%) from obtaining voting rights with
respect to such shares unless a majority in interest of the disinterested
shareholders of the corporation votes to accord voting power to such shares.
The legislation provides that, if authorized by the articles of
incorporation or bylaws prior to the occurrence of a control share acquisition,
the corporation may redeem the control shares for their fair value if the
acquiring person has not complied with certain procedural requirements
(including the filing of an "acquiring person statement" with the corporation
within 60 days after the control share acquisition) or if the control shares are
not accorded full voting rights by the shareholders. Neither Community
Bankshares nor Ridgeway Bancshares is authorized by its articles or bylaws to
redeem control shares pursuant to such legislation.
COMPARATIVE MARKET PRICES AND DIVIDENDS
Community Bankshares common stock is traded on the American Stock
Exchange under the symbol "SCB." Ridgeway Bancshares common stock is not traded
in any established market. The following table sets forth, for the indicated
periods, the high and low closing sale prices for Community Bankshares common
stock as reported on the American Stock Exchange and the cash dividends declared
per share of Community Bankshares and Ridgeway Bancshares common stock. For the
indicated period there has been only a very limited number of transactions in
Ridgeway Bancshares common stock and all such transactions have involved limited
numbers of shares.
Community Bankshares Ridgeway Bancshares
-------------------- -------------------
Cash Cash
Price Range Dividends Dividends
----------- Declared Declared
per Share per Share
--------- ---------
High Low
---- ---
1999
First Quarter ............................. $ 13.78 $ 12.29 $ 0.045 $ 0
Second Quarter ............................ 13.48 11.51 0.045 3.15
Third Quarter ............................. 14.01 11.29 0.050 0
Fourth Quarter ............................ 13.78 11.16 0.050 3.15
2000
First Quarter ............................. $ 12.88 $ 10.88 $ 0.05 $ 0
Second Quarter ............................ 12.50 10.75 0.05 3.50
Third Quarter ............................. 12.56 11.13 0.06 0
Fourth Quarter ............................ 11.87 10.56 0.06 3.50
2001
First Quarter ............................. $ 11.25 $ 10.20 $ 0.07 $ 0
Second Quarter ............................ 11.49 10.65 0.07 4.00
Third Quarter ............................. 12.60 10.30 0.07 0
Fourth Quarter ............................ 13.20 11.00 0.07 4.00
Although the common stock of Ridgeway Bancshares is traded from time to
time on an individual basis, no established trading market has developed and
none is expected to develop in the foreseeable future. The common stock is not
traded on the NASDAQ National Market System, nor are there any market makers
known to management. Management of Ridgeway Bancshares is aware of a few
transactions in which the common stock has been traded in the period from
January 1, 2000 through August 2, 2001. Prices in such transactions ranged from
41
$300 to $350. However, management has not ascertained that these transactions
are the result of arm's length negotiations between the parties, and because of
the limited number of shares involved, such prices, if any, may not be
indicative of the market value of Ridgeway Bancshares common stock.
On March 1, 2002, the last reported sale price of Community Bankshares
common stock as reported on the American Stock Exchange, was $14.32, and the
reported price of Ridgeway Bancshares common stock in the last known transaction
was $307, on August 2, 2001. On November 20, 2001, the last business day prior
to public announcement of the proposed merger, the last reported sale price of
Community Bankshares common stock as reported on the American Stock Exchange was
$11.95, and the reported sale price of Ridgeway Bancshares common stock in the
last known transaction was $307, on August 2, 2001.
The holders of Community Bankshares common stock are entitled to
receive dividends when and if declared by the board of directors out of funds
legally available therefor. Community Bankshares has paid regular cash dividends
since 1991. Although Community Bankshares currently intends to continue to pay
quarterly cash dividends on the Community Bankshares common stock, there can be
no assurance that Community Bankshares' dividend policy will remain unchanged
after completion of the merger. The declaration and payment of dividends
thereafter will depend upon business conditions, operating results, capital and
reserve requirements, and the board of directors' consideration of other
relevant factors.
Community Bankshares is a legal entity separate and distinct from its
subsidiaries and its revenues depend in significant part on the payment of
dividends from its subsidiary financial institutions. Community Bankshares'
subsidiary depository institutions are subject to legal restrictions on the
amount of dividends they are permitted to pay. See "Supervision and
Regulation-Payment of Dividends."
The holders of Ridgeway Bancshares' common stock are entitled to
receive dividends when and if declared by the board of directors out of funds
legally available therefor. Ridgeway Bancshares has paid regular semi-annual
cash dividends since June 2000, and Bank of Ridgeway paid regular semi-annual
cash dividends for more than 20 years prior to that date. Pursuant to the merger
agreement, Ridgeway Bancshares may only declare and pay dividends consistent
with past practices. There can be no assurance that Ridgeway Bancshares will
continue to pay dividends. The declaration and payment of dividends depends upon
business conditions, operating results, capital and reserve requirements, and
the board of directors' consideration of other relevant factors. See
"Supervision and Regulation - Payment of Dividends."
Ridgeway Bancshares is a legal entity separate and distinct from its
subsidiaries and its revenues depend in significant part on the payment of
dividends from Bank of Ridgeway. Bank of Ridgeway is subject to certain legal
restrictions on the amount of dividends it is permitted to pay. See "Supervision
and Regulation - Payment of Dividends."
Under the terms of the merger agreement, Community Bankshares and
Ridgeway Bancshares have agreed to cooperate in selecting the date on which the
merger becomes effective, or in permitting Ridgeway Bancshares to pay a special
dividend so that, for the semi-annual period in which the merger occurs, holders
of Ridgeway Bancshares common stock do not become entitled to dividends from
both Ridgeway Bancshares and Community Bankshares, and do not fail to receive a
dividend of less than a pro-rata portion of the regular semi-annual dividend
amount of $4.00 per share that was paid during 2001 to holders of Ridgeway
Bancshares common stock.
INFORMATION ABOUT RIDGEWAY BANCSHARES
Ridgeway Bancshares is a bank holding company organized under the laws
of the state of South Carolina with its principal executive office located in
Ridgeway, South Carolina. Ridgeway Bancshares operates principally through Bank
of Ridgeway, which is a state-chartered commercial bank and which provides a
range of consumer and commercial banking services through three offices in
Fairfield and Richland Counties. At September 30, 2001, Ridgeway Bancshares had
total consolidated assets of approximately $76.6 million, total consolidated
deposits of approximately $64.9 million, and total consolidated shareholders'
equity of approximately $8.6 million. Ridgeway Bancshares' principal executive
42
office is located at 100 Palmer Street, Ridgeway, South Carolina, 29130 and its
telephone number at such address is (803) 337-2251.
Business And Properties
Ridgeway Bancshares was organized as a bank holding company for the
Bank of Ridgeway in 1999. Ridgeway Bancshares offers a diversified range of
commercial and retail banking services for customers located principally in
Fairfield and northern Richland Counties. Ridgeway Bancshares' customer base is
composed primarily of individuals who either work or reside in Ridgeway
Bancshares' market areas and commercial enterprises engaged in a wide range of
businesses throughout Ridgeway Bancshares' market areas.
Through its banking subsidiary, Ridgeway Bancshares provides its
customers with a variety of banking services, including checking accounts,
savings accounts, certificates of deposit, bank-by-mail and 24-hour depository
facilities, cashier's checks, travelers checks, savings bonds, consumer loans,
automobile loans, commercial loans, real estate loans, home improvement loans
and safe deposit boxes.
At December 31, 2001, Ridgeway Bankshares had 29 full-time employees
and four part-time employees through its banking subsidiary.
Ridgeway Bancshares conducts business at three banking locations.
Ridgeway Bancshares owns all of the buildings in which its banking offices are
located.
The following table sets forth specific information on Ridgeway
Bancshares' headquarters location and each of its three full-service banking
offices:
Deposits at
Location Address September 30, 2001
-------- ------- ------------------
Ridgeway 100 Palmer Street, Ridgeway, South Carolina $26,816,381
Winnsboro 610 West Moultrie Street, Winnsboro South Carolina $21,530,260
Blythewood 115 McNulty Street, Blythewood, South Carolina $16,558,992
Competition
Ridgeway Bancshares encounters vigorous competition in its market areas
for the provision of depository institution financial services from a number of
sources, including bank holding companies and commercial banks, savings and loan
associations and other thrift institutions, credit unions, other financial
institutions and financial intermediaries that operate in Ridgeway Bancshares'
market area. Regional interstate banking laws and other recent federal and state
laws have resulted in increased competition from both conventional banking
institutions and other businesses offering financial services and products. Bank
of Ridgeway also competes for interest bearing funds with a number of other
financial intermediaries and nontraditional consumer investment alternatives,
including brokerage firms, consumer finance companies, commercial finance
companies, credit unions, money market funds and federal, state and municipal
issuers of short term obligations. Many of these competitors have greater
financial resources than Bank of Ridgeway. At June 30, 2001, there were three
commercial banks or thrift institutions competing with Bank of Ridgeway in
Fairfield and northern Richland Counties.
Legal Proceedings
Ridgeway Bancshares and Bank of Ridgeway are not parties to any
material legal proceedings other than ordinary routine litigation incidental to
their business.
43
Management
The following table presents information about the directors and
executive officers of Ridgeway Bancshares. Unless otherwise indicated, each
person has sole voting and investment powers over the indicated shares.
Information relating to beneficial ownership of Ridgeway Bancshares common stock
is based upon "beneficial ownership" concepts set forth in rules promulgated
under the Securities Exchange Act of 1934. Under such rules a person is deemed
to be a "beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under the rules, more than one person
may be deemed to be a beneficial owner of the same securities. A person is also
deemed to be a beneficial owner of any security of which that person has the
right to acquire beneficial ownership within 60 days from the record date.
Present Occupation And Number Of Shares
Principal Occupation For Beneficially Owned At
Name Last Five Years The Record Date Percent of Class
---- --------------- --------------- ----------------
William A. Harwell Director; President and Chief Executive 4,824(1) 12.06
Officer Bank of Ridgeway since 1982 and
Ridgeway Bancshares, Inc. since 1999
M. S. Brakefield Senior Vice President and Secretary Bank 300(2) *
of Ridgeway since 1988; Secretary
Ridgeway Bancshares, Inc. since 1999
T. Heyward Mattox Director; Vice President and Cashier Bank 200 *
of Ridgeway since 1964; Treasurer
Ridgeway Bancshares, Inc. since 1999
Thomas W. Copeland Vice President Bank of Ridgeway, 0 *
Blythewood, SC since 1994
Robert D. Drake Vice President Bank of Ridgeway, 20 *
Winnsboro, SC since 1996
Herbert C. Humphries Vice President Bank of Ridgeway, 70 *
Ridgeway, SC since 1992
Thomas B. Edmunds Director; Retired financial consultant 800(3) 2.00
Merrill Lynch
Roger A. Gaddy Director; Family practitioner Fairfield 240(4) *
Medical Associates, P.A., Winnsboro, SC
J. V. Nicholson, Jr. Director; Retired dentist; Chairman Bank 5,400(5) 13.50
of Ridgeway and Ridgeway Bancshares, Inc.
since 2001
Eleanor T. Parrish Director; Retired teacher Kershaw County 690(6) 1.98
School District
Daniel W. Ruff, III Director; Co-owner Ruff & Co., Inc. 605(7) 1.51
hardware and furniture retailer
44
Present Occupation And Number Of Shares
Principal Occupation For Beneficially Owned At
Name Last Five Years The Record Date Percent of Class
---- --------------- --------------- ----------------
Joseph E. Sharpe Director; Owner Joe Sharpe's Service 150 *
Station, Blythewood, SC; Chairman
Fairfield Electric Cooperative
David G. Traylor, Jr. Director; Attorney Nelson, Mullins, Riley 120 *
& Scarborough
All executive officers and 13,519 33.8%
directors as a group (13
persons)
------------------------
*less than 1%
(1) Shares shown as beneficially owned by William A. Harwell consist of 564
shares belonging jointly to William A. Harwell and his spouse, Kathryne B.
Harwell; 360 shares held by Smith Barney, Inc. as custodian for the William
A. Harwell IRA; 200 shares held by Smith Barney, Inc. as custodian for the
Kathryne B. Harwell IRA; and 3,700 shares held in an estate for which Mr.
Harwell shares voting power.
(2) Shares shown as beneficially owned by M. S. Brakefield consist of 50 shares
owned individually by M. S. Brakefield and 250 shares held by A. G. Edwards
& Sons as custodian for the M. S. Brakefield IRA.
(3) Shares shown as beneficially owned by Thomas B. Edmunds consist of 400
shares in the name of Thomas B. Edmunds and 400 shares in the name of Lucy
S. Edmunds, Mr. Edmunds' spouse.
(4) Shares shown as beneficially owned by Roger A. Gaddy consist of 50 shares
belonging jointly to Roger A. Gaddy and Beth M. Gaddy; 165 shares held by
Scott & Stringfellow as custodian for the Roger A. Gaddy IRA; and 25 shares
held by Scott & Stringfellow as custodian for the Beth M. Gaddy IRA
(5) Shares shown as beneficially owned by J. V. Nicholson, Jr. consist of 2,700
shares in the name of John V. Nicholson, Jr. and 2,700 shares in the name
of Ellen M. Nicholson, Dr. Nicholson's spouse.
(6) Shares shown as beneficially owned by Eleanor T. Parrish consist of 420
shares in the name of Eleanor Thomas Parrish and 270 shares owned jointly
by Eleanor T. Parrish and James E. Parrish.
(7) Shares shown as beneficially owned by Daniel W. Ruff, III consist of 580
shares owned individually by Daniel W. Ruff, III and 25 shares owned by
Daniel W. Ruff, IV, Mr. Ruff's son.
Management Compensation
The following table summarizes for the years ended December 31, 2001,
2000 and 1999 the compensation paid to the President and Chief Executive officer
of Ridgeway Bancshares. There were no other executive officers of Ridgeway
Bancshares or its subsidiaries who received compensation greater than $100,000
in 2001.
Summary Compensation Table
Annual
Compensation
------------ All Other
Year Salary(1) Compensation (2)
---- --------- ----------------
Bonus
William A. Harwell ................................ 2001 $101,520 $9,762 $4,808(3)
President and Chief Executive Officer of Ridgeway 2000 99,000 9,360 4,697
Bankshares 1999 93,900 8,100 4,315
-------------------
(1) This column includes salary and director's fees
(2) This column includes Ridgeway Bancshares' contribution to the 401(K) plan
on behalf of Mr. Harwell totaling $2,929, $2,808 and $2,700 in each of
2001, 2000 and 1999, respectively.
45
(3) This number includes a contribution to the 401(k) plan on behalf of Mr.
Harwell of $2,929, a contribution to Mr. Harwell's PS58 savings plan of
$263 and life insurance premiums of $1,616.
Transactions With Management
In the ordinary course of business, Bank of Ridgeway has loans,
deposits and other transactions with its executive officers and directors and
organizations with which such persons are associated. Such transactions are on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others. The aggregate
amount of loans to such persons and any company in which they have a 10% or more
ownership interest as of September 30, 2001, were approximately $920,000.
Voting Securities And Principal Shareholders
The following table sets forth certain information concerning the
beneficial owners of more than five percent of Ridgeway Bancshares common stock,
as of the record date.
Name and Address Amount and Nature Percent of
Of Beneficial Owner Beneficial Ownership Class (1)
------------------- -------------------- ---------
J. V. Nicholson, Jr. 5,400 (2) 13.50%
219 Tuckahoe Road
Ridgeway, South Carolina 29130
Estate of Joseph N. Crumpton 3,700 (3) 9.25%
c/o W. A. Harwell, Personal Representative
P. O. Box 434
Ridgeway, South Carolina 29130
Sara Beth Salley 2,800 7.00%
258 Voyager Road
Salley, South Carolina 29137
Jo-Anne K. Urwick 2,080 5.20%
1211 Overland Drive
High Point, North Carolina 27262
(1) The information shown above is based upon information furnished by the
named persons. Information relating to beneficial ownership is based upon
"beneficial ownership" concepts set forth in rules promulgated under the
Securities Exchange Act of 1934. Under such rules a person is deemed to be
a "beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under the rules, more than one
person may be deemed to be a beneficial owner of the same securities. A
person is also deemed to be a beneficial owner of any security of which
that person has the right to acquire beneficial ownership within 60 days
from the record date.
(2) Shares shown as beneficially owned by J. V. Nicholson, Jr. consist of 2,700
shares in the name of John V. Nicholson, Jr. and 2,700 shares in the name
of Ellen M. Nicholson, Dr. Nicholson's spouse.
(3) Voting power is shared by the personal representatives, Zack Thompson
Crumpton and William A. Harwell.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Basis of Presentation
The following discussion should be read in conjunction with the
"Selected Financial Data" in the "Summary" and Ridgeway Bancshares' Financial
Statements and the Notes thereto and the other financial data included elsewhere
46
in this Proxy Statement/Prospectus. The financial information provided below has
been rounded in order to simplify its presentation. However, the ratios and
percentages provided below are calculated using the detailed financial
information contained in the Financial Statements, the Notes thereto and the
other financial data included elsewhere in this Proxy Statement/Prospectus.
General
Ridgeway Bancshares, Inc. was organized in 1999 to serve as a bank
holding company for Bank of Ridgeway. Bank of Ridgeway is the oldest
state-chartered bank headquartered in South Carolina. The corporate headquarters
are located in Ridgeway, South Carolina. The principal business activity of
Ridgeway Bancshares is to provide banking services to domestic markets,
principally in Fairfield and northern Richland counties in South Carolina. Bank
of Ridgeway also has a wholly-owned subsidiary, Ridgeway Insurance Agency. This
agency has been inactive for the last few years. The bank also has two
additional offices in Winnsboro and Blythewood, South Carolina.
On December 1, 1999, the stockholders of Bank of Ridgeway approved a
plan of corporate reorganization under which the bank became a wholly-owned
subsidiary of Ridgeway Bancshares, Inc. The original authorized common stock of
Ridgeway Bancshares, Inc. is 100,000 shares with no par value. Pursuant to the
reorganization, Ridgeway Bancshares issued 40,000 shares of its common stock in
exchange for all of the 40,000 outstanding common shares of the bank. The
effective date of the reorganization was December 31, 1999 and it was accounted
for as if it were a pooling of interests.
FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999:
Results of Operations
Year ended December 31, 2000, compared with year ended December 31, 1999
Net interest income increased $163,305, or 5.87%, to $2,946,415 in 2000
from $2,783,110 in 1999. The increase in net interest income was due primarily
to an increase in average earning assets. Average earning assets increased
approximately $3,730,000, or 6.14%, due to continued growth by Ridgeway
Bancshares.
Ridgeway Bancshares' net interest spread and net interest margin were
3.71% and 4.57%, respectively, in 2000 compared to 3.87% and 4.58% in 1999. The
decreases in net interest spread and net interest margin were primarily the
result of an increase in the yields on interest bearing liabilities. Yields on
interest bearing liabilities increased from 3.59% in 1999 to 4.03% in 2000.
The provision for loan losses was $75,000 in 2000 compared to $60,000
in 1999. Ridgeway Bancshares continues to maintain the allowance for loan losses
at a level sufficient to cover known and inherent losses in the loan portfolio.
Noninterest income increased $108,370, or 19.25%, to $671,374 in 2000
from $563,004 in 1999, primarily as a result of an increase in service charges
on deposit accounts. Service charges on deposit accounts increased $74,466, or
18.32%, to $480,961 for the year ended December 31, 2000. The increase in
service charges on deposit accounts was attributable to an increase of $47,430
in NSF charges. Other charges, commissions, and fees increased $36,128, or
28.80%, to $161,589 for the year ended December 31, 2000.
Noninterest expense increased $221,626, or 11.56%, to $2,138,246 in
2000 from $1,916,620 in 1999. The largest increase in noninterest expense was
attributable to an increase in other operating expense. Other operating expense
increased $107,970, or 16.94%, to $745,510 in 2000 from $637,540 in 1999. The
increase was partially attributable to expenses of $74,600 associated with the
proposed merger with RHBT Financial Corporation that did not occur. Additional
data processing charges of $45,447 in 2000 also contributed to the increase.
Salaries and employee benefits increased $89,743, or 8.29%, to $1,172,132 in
2000 from $1,082,389 in 1999.
47
Net income was $1,028,718 in 2000 compared to net income of $1,009,694
in 1999. The increase in net income was comprised of a $163,305 increase in net
interest income and $108,370 increase in noninterest income, which were
partially offset by the increases of $221,626 and $16,025 in noninterest
expenses and the income tax provision, respectively. The increase in income
taxes was the result of increased income before taxes. Return on average assets
during 2000 was 1.50% compared to 1.55% during 1999, and return on average
equity was 13.62% during 2000 compared to 15.01% during 1999.
Year ended December 31, 1999, compared with year ended December 31, 1998
Net interest income increased $166,039, or 6.34%, to $2,783,110 in 1999
from $2,617,071 in 1998. The increase in net interest income was due primarily
to an increase in average earning assets. Average earning assets increased
$4,966,600, or 8.91%, due to continued growth by Ridgeway Bancshares.
Ridgeway Bancshares' net interest spread and net interest margin were
3.87% and 4.58%, respectively, in 1999 compared to 3.91% and 4.69% in 1998. The
decreases in net interest spread and net interest margin were primarily the
result of a decrease in the yields on earning assets. Yields on earning assets
decreased from 7.83% in 1998 to 7.46% in 1999.
The provision for loan losses was $60,000 in 1999 compared to $54,000
in 1998. Ridgeway Bancshares continues to maintain the allowance for loan losses
at a level sufficient to cover known and inherent losses in the loan portfolio.
Noninterest income increased $12,943, or 2.35%, to $563,004 in 1999
from $550,061 in 1998, primarily as a result of an increase in other service
charges and fees. Other service charges and fees increased $33,846, or 36.94%,
to $125,461 for the year ended December 31, 1999. The increase in other service
charges and fees was partially attributable to the increase in fees charged to
noncustomers for the use of the bank's ATMs. Other income, which consists
primarily of credit life insurance commissions, decreased $19,260, or 38.28%, to
$31,048 for the year ended December 31, 1999.
Noninterest expense increased $99,482, or 5.47%, to $1,916,620 in 1999
from $1,817,138 in 1998. The largest increase in noninterest expense was
attributable to an increase in other operating expense. Other operating expense
increased $66,490, or 11.64%, to $637,540 in 1999 from $571,050 in 1998. The
increase was partially attributable to additional data processing charges of
$39,867 in 1999. In addition, expenses totaling approximately $25,000 were
incurred to form the holding company. Net occupancy and equipment expense
increased $34,863, or 21.54%, to $196,691 in 1999 from $161,828 in 1998. This
increase was primarily attributable to the land leases acquired for the two
additional ATMs and increased depreciation expense.
Net income was $1,009,694 in 1999 compared to net income of $1,044,296
in 1998. The decrease in net income was due primarily to increases in
noninterest expense. The increase in income taxes was the result of increased
income before taxes. Return on average assets during 1999 was 1.55% compared to
1.75% during 1998, and return on average equity was 15.01% during 1999 compared
to 15.05% during 1998.
Net Interest Income
General. The largest component of Ridgeway Bancshares' net income is its net
interest income, which is the difference between the income earned on assets and
interest paid on deposits and borrowings used to support such assets. Net
interest income is determined by the yields earned on Ridgeway Bancshares'
interest-earning assets and the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the degree of mismatch and the maturity and repricing
characteristics of its interest-earning assets and interest-bearing liabilities.
Net interest income divided by average interest-earning assets represents
Ridgeway Bancshares' net interest margin.
Average Balances, Income and Expenses and Rates. The following table sets forth,
for the periods indicated, certain information related to Ridgeway Bancshares'
average balance sheet and its average yields on assets and average costs of
48
liabilities. Such yields are derived by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been derived from the daily balances throughout the periods indicated.
Average Balances, Income and Expenses and Rates
Year Ended December 31,
-----------------------
2000 1999
---- ----
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Assets:
Earning Assets
Loans (1) ........................................... $ 36,223 $3,410 9.41% $ 31,713 $2,941 9.27%
Securities, taxable (2) ............................. 15,631 912 5.83% 15,459 919 5.94%
Securities, non-taxable ............................. 8,962 438 4.89% 9,016 445 4.94%
Nonmarketable equity securities ..................... 64 226 6.35% 64 5 7.81%
Federal funds sold and other ........................ 3,561 4 6.25% 4,459 217 4.87%
-------- ------ -------- ------
Total earning assets ............................ 64,441 4,990 7.74% 60,711 4,527 7.46%
-------- ------ -------- ------
Cash and due from banks ............................... 2,691 2,685
Premises and equipment ................................ 801 738
Other assets .......................................... 1,192 1,129
Allowance for loan losses ............................. (361) (321)
-------- --------
Total assets .................................... $ 68,764 $ 64,942
======== ========
Liabilities:
Interest-Bearing Liabilities
Interest-bearing transaction accounts .............. $ 16,145 383 2.37% $ 16,393 384 2.34%
Savings deposits .................................... 7,305 170 2.33% 7,048 166 2.36%
Time deposits ....................................... 24,319 1,329 5.46% 23,182 1,109 4.78%
Federal funds purchased and securities .............. 2,939 161 5.48% 1,950 85 4.36%
-------- ------ -------- ------
sold under agreements to repurchase
Total interest-bearing liabilities .............. 50,708 2,043 4.03% 48,573 1,744 3.59%
-------- ------ -------- ------
Demand deposits ....................................... 10,193 9,298
Accrued interest and other liabilities ................ 313 343
Shareholders' equity .................................. 7,550 6,728
-------- --------
Total liabilities and shareholders' equity ...... $ 68,764 $ 64,942
======== ========
Net interest spread .................................... 3.71% 3.87%
Net interest income .................................... $2,947 $2,783
====== ======
Net interest margin .................................... 4.57% 4.58%
(1) Excludes nonaccrual loans. The effect of fees collected on loans is not
significant to the computations. All loans and deposits are domestic.
(2) Average investment securities exclude the valuation allowance on securities
available-for-sale.
Analysis of Changes in Net Interest Income. The following tables set forth the
effect which the varying levels of earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
from 1999 to 2000 and 1998 to 1999.
49
Average Balances, Income and Expenses and Rates
2000 Compared with 1999
Variance Due to
(Dollars in thousands) Volume (1) Rate (1) Total
---------- -------- -----
Earning Assets
Loans ............................................................................ $ 424 $ 45 $ 469
Securities, taxable .............................................................. 10 (17) (7)
Securities, nontaxable ........................................................... (3) (4) (7)
Nonmarketable equity securities .................................................. (49) 58 9
Federal funds sold and other ..................................................... - (1) (1)
----- ----- -----
Total interest income ........................................................ 382 81 463
----- ----- -----
Interest-Bearing Liabilities Interest-bearing deposits:
Interest-bearing transaction accounts .......................................... (6) 5 (1)
Savings deposits ............................................................... 6 (2) 4
Time deposits .................................................................. 56 164 220
----- ----- -----
Total interest-bearing deposits .............................................. 56 167 223
Federal funds purchased and securities sold under agreements ..................... 50 26 76
----- ----- -----
to repurchase
Total interest expense ....................................................... 106 193 299
----- ----- -----
Net interest income .......................................................... $ 276 $(112) $ 164
===== ===== =====
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
50
Average Balances, Income and Expenses and Rates -- continued
1999 Compared with 1998
Variance Due to
(Dollars in thousands) Volume (1) Rate (1) Total
---------- -------- -----
Earning Assets
Loans ............................................................................ $ 151 $(105) $ 46
Securities, taxable .............................................................. 192 (50) 142
Securities, nontaxable ........................................................... 44 (11) 33
Nonmarketable equity securities .................................................. - 2 2
Federal funds sold and other ..................................................... (41) (20) (61)
----- ----- -----
Total interest income ........................................................ 346 (184) 162
----- ----- -----
Interest-Bearing Liabilities Interest-bearing deposits:
Interest-bearing transaction accounts .......................................... 44 (32) 12
Savings deposits ............................................................... 6 (12) (6)
Time deposits .................................................................. 66 (97) (31)
----- ----- -----
Total interest-bearing deposits .............................................. 116 (141) (25)
Federal funds purchased and securities sold under agreements ..................... 26 (5) 21
----- ----- -----
to repurchase
Total interest expense ....................................................... 142 (146) (4)
----- ----- -----
Net interest income .......................................................... $ 204 $ (38) $ 166
===== ===== =====
(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.
Interest Sensitivity. Ridgeway Bancshares monitors and manages the pricing and
maturity of its assets and liabilities in order to diminish the potential
adverse impact that changes in interest rates could have on its net interest
income. The principal monitoring technique employed by Ridgeway Bancshares is
the measurement of Ridgeway Bancshares' interest sensitivity "gap," which is the
positive or negative dollar difference between assets and liabilities that are
subject to interest rate repricing within a given period of time. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity, or
adjusting the interest rate during the life of an asset or liability. Managing
the amount of assets and liabilities repricing in this same time interval helps
to hedge the risk and minimize the impact on net interest income of rising or
falling interest rates.
51
The following table sets forth Ridgeway Bancshares' interest rate
sensitivity at December 31, 2000.
Interest Sensitivity Analysis
After One After Three Greater
Through Through Than One
Within One Three Twelve Within One Year or Non-
(Dollars in thousands) Month Months Months Year Sensitive Total
----- ------ ------ ---- --------- -----
Assets
Earning Assets:
Loans (1) ........................................... $ 3,341 $ 6,680 $ 2,402 $ 12,423 $ 27,157 $ 39,580
Securities .......................................... 2,800 4,484 7,284 16,456 23,740
Federal funds sold and securities
purchased under agreements to resell ............... 5,960 5,960 5,960
Time deposits with other banks ...................... 37 37 100 137
-------- -------- -------- -------- -------- --------
Total earning assets ............................ 9,301 9,480 6,923 25,704 43,713 69,417
-------- -------- -------- -------- -------- --------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits ................................... 19,373 19,373 19,373
Savings deposits .................................. 7,622 7,622 7,622
Time deposits ..................................... 3,958 4,930 15,556 24,444 2,412 26,856
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits ................. 30,953 4,930 15,556 51,439 2,412 53,851
Securities sold under agreements to repurchase ....... 2,419 2,419 2,419
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities .............. 33,372 4,930 15,556 53,858 2,412 56,270
-------- -------- -------- -------- -------- --------
Period gap .............................................. $(24,071) $ 4,550 $ (8,633) $(28,154) $ 41,301
======== ======== ======== ======== ========
Cumulative gap .......................................... $(24,071) $(19,521) $(28,154) $(28,154) $ 13,147
======== ======== ======== ======== ========
Ratio of cumulative gap to total earning assets ......... (34.68)% (28.12)% (40.56)% (40.56)% 18.94%
(1) Excludes nonaccrual loans. The effect of fees collected on loans is not
significant to the computations.
The above table reflects the balances of interest-earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Overnight federal funds are reflected at the earliest pricing interval
due to the immediately available nature of the instruments. Securities purchased
under agreements to resell are reflected at the maturity date of each agreement,
which ranges from one to 30 days. Debt securities are reflected at each
instrument's ultimate maturity date. Time deposits with other banks are
reflected at their scheduled maturity date. Scheduled payment amounts of fixed
rate amortizing loans are reflected at each scheduled payment date. Scheduled
payment amounts of variable rate amortizing loans are reflected at each
scheduled payment date until the loan may be repriced contractually; the
unamortized balance is reflected at that point. 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 Ridgeway Bancshares 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. Securities sold under agreements to repurchase are
reflected at the maturity date of each repurchase agreement, which ranges from
one to 30 days.
52
Ridgeway Bancshares generally would benefit from increasing market
rates of interest when it has an asset-sensitive gap position and generally
would benefit from decreasing market rates of interest when it is
liability-sensitive. Ridgeway Bancshares is cumulative liability-sensitive over
the one month to 12 month time frame. However, Ridgeway Bancshares' gap analysis
is not a precise indicator of its interest-sensitivity position. The analysis
presents only a static view of the timing of maturities and repricing
opportunities, without taking into consideration that changes in interest rates
do not affect all assets and liabilities equally. For example, rates paid on a
substantial portion of core deposits may change contractually within a
relatively short time frame, but those rates are viewed by management as
significantly less interest-sensitive than market-based rates such as those paid
on noncore deposits. Accordingly, management believes a liability-sensitive gap
position is not as indicative of Ridgeway Bancshares' true interest-sensitivity
as it would be for an organization which depends to a greater extent on
purchased funds to support earning assets. Net interest income may be impacted
by other significant factors in a given interest rate environment, including
changes in the volume and mix of earning assets and interest-bearing
liabilities.
Provision and Allowance for Loan Losses
General. Ridgeway Bancshares has developed policies and procedures for
evaluating the overall quality of its credit portfolio and the timely
identification of potential problem credits. On a quarterly basis, Ridgeway
Bancshares' Board of Directors reviews and approves the appropriate level for
Ridgeway Bancshares' allowance for loan losses based upon management's
recommendations, the results of the internal monitoring and reporting system,
and an analysis of economic conditions in its market. The objective of
management has been to fund the allowance for loan losses at approximately 1% of
total loans outstanding.
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on Ridgeway Bancshares' income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio. Loan losses
and recoveries are charged or credited directly to the allowance. The amount of
the provision is a function of the level of loans outstanding, the level of
nonperforming loans, historical loan loss experience, the amount of loan losses
actually charged against the reserve during a given period, and current and
anticipated economic conditions.
Ridgeway Bancshares' allowance for loan losses is based upon judgments
and assumptions of risk elements in the portfolio, future economic conditions,
and other factors affecting borrowers. The process of determining the amount of
the allowance 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,
charge-offs, and general and economic conditions in the service area. The
adequacy of the allowance for loan losses and the effectiveness of Ridgeway
Bancshares' monitoring and analysis system are also reviewed periodically by the
banking regulators and Ridgeway Bancshares' independent auditors.
Based on present information and an ongoing evaluation, management
considers the allowance for loan losses to be adequate to meet presently known
and inherent risks in the loan portfolio. Management's judgment about the
adequacy of the allowance is based upon a number of assumptions about future
events, which it believes to be reasonable but which may or may not be accurate.
Thus, there can be no assurance that charge-offs in future periods will not
exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required. Ridgeway Bancshares does not
allocate the allowance for loan losses to specific categories of loans but
evaluates the adequacy on an overall portfolio basis utilizing a risk grading
system.
The following table sets forth certain information with respect to
Ridgeway Bancshares' allowance for loan losses and the composition of
charge-offs and recoveries for the years ended December 31, 2000, 1999 and 1998.
53
Allowance for Loan Losses
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Total loans outstanding at end of period ..................................... $39,805 $33,724 $30,516
======= ======= =======
Average loans outstanding .................................................... $36,311 $31,713 $30,112
======= ======= =======
Balance of allowance for loan losses at beginning of period .................. $ 335 $ 305 $ 287
Loan losses:
Real estate - construction ................................................. - - -
Real estate - mortgage ..................................................... - 1 -
Commercial and industrial .................................................. 1 14 25
Consumer ................................................................... 43 32 21
------- ------- -------
Total loan losses ........................................................ 44 47 46
------- ------- -------
Recoveries of previous loan losses:
Real estate - construction ................................................. - - -
Real estate - mortgage ..................................................... - - -
Commercial and industrial .................................................. 16 8 5
Consumer ................................................................... 6 9 5
------- ------- -------
Total recoveries ......................................................... 22 17 10
------- ------- -------
Net loan losses .............................................................. 22 30 36
Provision for loan losses .................................................... 75 60 54
------- ------- -------
Balance of allowance for loan losses at end of period ........................ $ 388 $ 335 $ 305
======= ======= =======
Allowance for loan losses to period end loans ................................ 0.97% 0.99% 1.00%
Net charge-offs to average loans ............................................. 0.06% 0.09% 0.12%
Nonperforming Assets
Nonperforming Assets. The following table sets forth Ridgeway Bancshares'
nonperforming assets for the dates indicated.
December 31,
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Nonaccrual loans ................................................................... $225 $ 19 $ 10
Restructured or impaired loans ..................................................... - - -
----
Total nonperforming loans ...................................................... $225 $ 19 $ 10
Other real estate owned ............................................................ - - -
----
Total nonperforming assets ..................................................... $225 $ 19 $ 10
==== ==== ====
Loans 90 days or more past due and still accruing interest ......................... $355 $103 $ 52
Nonperforming assets to period end loans and foreclosed property ................... 0.57% 0.06% 0.03%
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions, and collection efforts, that
the borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed in nonaccrual status when it
becomes 90 days or more past due. When a loan is placed in nonaccrual status,
all interest, which has been accrued on the loan but remains unpaid, is reversed
and deducted from current earnings as a reduction of reported interest income.
No additional interest is accrued on the loan balance until the collection of
both principal and interest becomes reasonably certain. When a problem loan is
54
finally resolved, there may ultimately be an actual write down or charge-off of
the principal balance of the loan which would necessitate additional charges to
earnings. For all periods presented, the additional interest income, which would
have been recognized into earnings if Ridgeway Bancshares' nonaccrual loans had
been current in accordance with their original terms, is immaterial.
Potential Problem Loans. At December 31, 2000, Ridgeway Bancshares reviewed its
loan portfolio to identify any criticized or classified loans through its
internal review mechanisms. The results of this internal review process are
considered in determining management's assessment of the adequacy of the
allowance for loan losses. The overall objective of Ridgeway Bancshares has been
to maintain the allowance for loan losses at approximately 1% of total loans to
provide for potential problem loans.
Noninterest Income and Expense
Noninterest Income. The largest component of noninterest income is service
charges on deposit accounts, which totaled $480,961 in 2000, an 18.32% increase
over the 1999 amount of $406,495. The $74,466 increase in service charges on
deposit accounts is primarily attributable to the $47,430 increase in NSF
charges. Other service charges and fees increased to $161,589 in 2000 from
$125,461 in 1999. The primary cause for this increase was attributable to fees
generated from ATMs used by noncustomers.
Other service charges and fees increased to $125,461 in 1999 from
$91,615 in 1998. This increase was primarily attributable to fees generated from
ATMs used by noncustomers. In 1999, service charges on deposit accounts totaled
$406,495, a .40% decrease from the 1998 amount of $408,138.
The following table sets forth the principal components of noninterest
income for the years ended December 31, 2000, 1999 and 1998.
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Service charges on deposit accounts ........... $481 $407 $408
Other service charges and fees ................ 161 125 92
Other income .................................. 29 31 50
---- ---- ----
Total noninterest income ...................... $671 $563 $550
==== ==== ====
Noninterest Expense. Other operating expense increased $107,970, or 16.94%, to
$745,510 in 2000 from $637,540 in 1999. The increase was primarily a result of
additional expenses of $74,600 associated with the proposed merger with RHBT
Financial Corporation that did not occur. Additional data processing charges
were approximately $43,000 in 2000. Net occupancy and equipment expense
increased $23,913 from $196,691 in 1999 to $220,604 in 2000. Salaries and
benefits are the largest component of noninterest expense totaling $1,172,132 in
2000, an increase of $89,743, or 8.29%. Ridgeway Bancshares' efficiency ratio,
which is noninterest expense as a percentage of the total of net interest income
plus noninterest income, net of gains and losses on the sale of assets, was
59.10% in 2000 compared to 57.28% in 1999.
Other operating expense increased $66,490, or 11.64%, to $637,540 in
1999 from $571,050 in 1998. The increase was primarily a result of additional
data processing charges and expenses associated with the formation of the
holding company. Additional data processing charges were approximately $40,000
in 1999. Net occupancy and equipment expense increased from $161,828 in 1998 to
$196,691 in 1999. The increase was primarily attributable to the expense
associated with land leases obtained for two additional ATM machines and to an
increase in depreciation expense. While salaries and benefits comprise the
largest component of noninterest expense at $1,082,389 in 1999, these expenses
were virtually unchanged from 1998. Ridgeway Bancshares' efficiency ratio was
57.28% in 1999 compared to 57.37% in 1998.
The following table sets forth the primary components of noninterest
expense for the years ended December 31, 2000, 1999 and 1998.
55
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Salaries and employee benefits ............. $1,172 $1,082 $1,084
Net occupancy and equipment expense ........ 221 197 162
Stationery and printing expense ............ 59 58 65
Postage and freight ........................ 56 59 54
Data processing services ................... 194 149 109
Merger expenses ............................ 75 - -
Intangible costs ........................... 42 51 62
Other ...................................... 319 321 281
------ ------ ------
Total noninterest expense .............. $2,138 $1,917 $1,817
====== ====== ======
Efficiency ratio ........................... 59.10% 57.28% 57.37%
Earning Assets
Loans. Loans are the largest category of earning assets and typically provide
higher yields than the other types of earning assets. Associated with the higher
loan yields are the inherent credit and liquidity risks which management
attempts to control and counterbalance. Loans averaged $36,223,378 in 2000
compared to $31,713,429 in 1999, an increase of $4,509,949, or 14.22%. At
December 31, 2000, total loans were $39,804,725 compared to $33,723,521 at
December 31, 1999.
The increase in loans during 2000 was primarily due to the steady
growth of Ridgeway Bancshares. The following table sets forth the composition of
the loan portfolio by category at the dates indicated and highlights Ridgeway
Bancshares' general emphasis on consumer and mortgage lending.
Composition of Loan Portfolio
December 31,
2000 1999
---- ----
(Dollars in thousands) Amount Percent of Total Amount Percent of
------ ---------------- ------ ----------
Commercial and industrial .......................... $ 5,045 12.67% $ 4,716 13.98%
Real estate
Construction ..................................... 290 0.73 154 0.46
Mortgage-residential ............................. 16,784 42.17 16,464 48.82
Mortgage-nonresidential .......................... 8,949 22.48 3,925 11.64
Consumer ........................................... 8,020 20.15 7,914 23.47
Other .............................................. 717 1.80 550 1.63
------- ------ ------- ------
Total loans .................................... 39,805 100.00% 33,723 100.00%
====== ======= ======
Allowance for loan losses .......................... 388 334
------- -------
Net loans ........................................ $39,417 $33,389
======= =======
Ridgeway Bancshares' loan portfolio is largely comprised of real estate
mortgage loans. At December 31, 2000, real estate mortgage loans totaled
$25,733,008 and represented 64.65% of the total loan portfolio, compared to
$20,389,286, or 60.46%, at December 31, 1999.
In the context of this discussion, a "real estate mortgage loan" is
defined as any loan, other than loans for construction purposes, secured by real
estate, regardless of the purpose of the loan. It is common practice for
financial institutions in Ridgeway Bancshares' market area to obtain a security
interest in real estate whenever possible, in addition to any other available
collateral. This collateral is taken to reinforce the likelihood of the ultimate
repayment of the loan and tends to increase the magnitude of the real estate
loan portfolio component.
56
Residential mortgage loans increased $320,247, or 1.95%, to $16,784,482
at December 31, 2000, from $16,464,235 at December 31, 1999. Residential real
estate loans consist of first and second mortgages on single or multi-family
residential dwellings. Nonresidential mortgage loans, which include commercial
loans and other loans secured by multi-family properties and farmland, increased
$5,023,159, or 127.97%, to $8,948,526 at December 31, 2000, from $3,925,367 at
December 31, 1999. This increase in real estate lending was primarily
attributable to the purchase of residential and commercial real estate loans
from other institutions.
Commercial and industrial loans increased $329,406, or 6.99%, to
$5,045,202 at December 31, 2000, from $4,715,796 at December 31, 1999. Ridgeway
Bancshares continues to focus on real estate and consumer lending rather than
commercial and industrial lending.
Consumer loans increased $105,294, or 1.33%, to $8,019,601 at December
31, 2000, from $7,914,307 at December 31, 1999. Consumer lending continues to be
an important focus of the bank's loan portfolio.
Ridgeway Bancshares' loan portfolio reflects the diversity of its
market. Ridgeway Bancshares' three office locations are in Fairfield County and
northern Richland County, South Carolina. The economy of Fairfield and northern
Richland counties contains elements of medium and light manufacturing, local
health care, and distribution facilities. Due to its proximity to a major
interstate highway, management expects the area to remain stable with continued
growth. The diversity of the economy creates opportunities for all types of
lending. Ridgeway Bancshares does not engage in foreign lending.
The repayment of loans in the loan portfolio as they mature is also a
source of liquidity for Ridgeway Bancshares. The following table sets forth
Ridgeway Bancshares' loans maturing within specified intervals at December 31,
2000.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
Over One
Year
One Year Through Over Five
(Dollars in thousands) or Less Five Years Years Total
------- ---------- ----- -----
Commercial and industrial .................................. $ 3,236 $ 1,551 $ 258 $ 5,045
Real estate ................................................ 7,014 9,563 9,446 26,023
Consumer and other ......................................... 2,173 6,452 112 8,737
------- ------- ------- -------
12,423 17,566 9,816 39,805
------- ------- ------- -------
Loans maturing after one year with:
Fixed interest rates .................................... $ 27,382
Floating interest rates ................................. -
-
--------
$ 27,382
========
The information presented in the above table is based on the
contractual maturities of the individual loans, including loans which may be
subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval as well as modification of terms upon
their maturity. Consequently, management believes this treatment presents fairly
the maturity and repricing structure of the loan portfolio shown in the above
table.
Investment Securities. The investment securities portfolio is a significant
component of Ridgeway Bancshares' total earning assets. Total securities
averaged $24,656,924 in 2000, compared to $24,539,334 in 1999. At December 31,
2000, the total securities portfolio was $23,740,091. All securities designated
as available-for-sale were recorded at their estimated fair market value.
Securities designated as held-to-maturity were recorded at their amortized cost
and totaled $16,116,759 at December 31, 2000.
57
The following table sets forth the book value of the securities held by
Ridgeway Bancshares at the dates indicated.
Book Value of Securities
December 31,
2000 1999
---- ----
(Dollars in thousands)
U.S. Treasury .......................................... $ 1,497 $ 2,689
U.S. Government agencies ............................... 12,956 13,574
Obligations of state and political subdivisions ........ 9,223 9,495
------- -------
Total securities ................................... $23,676 $25,758
======= =======
The following table sets forth the scheduled maturities and average
yields of securities held at December 31, 2000.
Investment Securities Maturity Distribution and Yields
After One But After Five But
Within One Year Within Five Years Within Ten Years Over Ten Years Total
--------------- ----------------- ---------------- -------------- -----
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
U.S. Treasury .................... $ 1,497 5.59% $ - -% $ - -% $ - -% $ 1,497 5.59%
U.S. Government agencies ......... 4,992 5.42 7,964 6.12 - - - - 12,956 5.85
Obligations of state
and political subdivisions...... 786 8.11 4,006 7.13 4,344 6.57 87 8.25 9,223 6.96
------- ---- ------- ---- ------- ---- ----- ---- ------- ----
Total securities ............ $ 7,275 5.75 $11,970 6.46 $ 4,344 6.57 $ 87 8.25 $23,676 6.27
======= ==== ======= ==== ======= ==== ===== ==== ======= ====
Other attributes of the securities portfolio, including yields and
maturities, are discussed above in "---Net Interest Income--- Interest
Sensitivity."
Short-Term Investments. Short-term investments, which consist primarily of
federal funds sold and securities purchased under agreements to resell, averaged
$3,425,246 in 2000, compared to $4,329,466 in 1999. At December 31, 2000,
short-term investments totaled $5,960,000. These funds are an important source
of Ridgeway Bancshares' liquidity. Federal funds are generally invested in an
earning capacity on an overnight basis. Securities purchased under agreements to
resell are invested on a seven to thirty-one day period, depending on the terms
of each agreement.
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities increased $2,135,032, or 4.40%, to
$50,707,663 in 2000, from $48,572,631 in 1999. Average interest-bearing deposits
increased $1,146,830, or 2.46%, to $47,769,131 in 2000, from $46,622,301 in
1999. These increases resulted from increases in most categories of
interest-bearing liabilities, primarily as a result of the continued growth of
Ridgeway Bancshares.
Deposits. Average total deposits increased $2,047,347, or 3.65%, to $57,963,646
during 2000, from $55,920,299 during 1999. At December 31, 2000, total deposits
were $63,690,415 compared to $54,971,646 a year earlier, an increase of 15.86%.
58
The following table sets forth the deposits of Ridgeway Bancshares by
category at the dates indicated.
Deposits
December 31,
2000 1999
---- ----
Percent of Percent of
(Dollars in thousands) Amount Deposits Amount Deposits
------ -------- ------ --------
Demand deposit accounts .................................... $ 9,839 15.45% $ 9,552 17.38%
NOW accounts ............................................... 9,211 14.46 8,414 15.31
Money market accounts ...................................... 10,161 15.95 7,172 13.05
Savings accounts ........................................... 7,622 11.97 6,773 12.32
Time deposits less than $100,000 ........................... 19,993 31.39 18,866 34.32
Time deposits of $100,000 or over .......................... 6,864 10.78 4,195 7.62
------- ------ ------- ------
Total deposits ................................... $63,690 100.00% $54,972 100.00%
======= ====== ======= ======
Core deposits, which exclude certificates of deposit of $100,000 or
more, provide a relatively stable funding source for Ridgeway Bancshares' loan
portfolio and other earning assets. Ridgeway Bancshares' core deposits increased
$6,049,228 in 2000 due to the continued growth of Ridgeway Bancshares.
Deposits, and particularly core deposits, have been Ridgeway
Bancshares' primary source of funding and have enabled Ridgeway Bancshares to
meet successfully both its short-term and long-term liquidity needs. Management
anticipates that such deposits will continue to be Ridgeway Bancshares' primary
source of funding in the future. Ridgeway Bancshares' loan-to-deposit ratio was
62.50% at December 31, 2000, and 61.35% at the end of 1999; and the ratio
averaged 62.49% during 2000. The maturity distribution of Ridgeway Bancshares'
time deposits over $100,000 at December 31, 2000, is set forth in the following
table:
Maturities of Certificates of Deposit of $100,000 or More
After Six
Wintin After Three Through After
Three Through Six Twelve Twelve
(Dollars in thousands) Months Months Months Months Total
------ ------ ------ ------ -----
Certificates of deposit of $100,000 or more .................. $1,968 $2,061 $2,071 $ 764 $6,864
Approximately 28.67% of Ridgeway Bancshares' time deposits over
$100,000 had scheduled maturities within three months, and 58.70% had maturities
within six months. Large certificate of deposit customers tend to be extremely
sensitive to interest rate levels, making these deposits less reliable sources
of funding for liquidity planning purposes than core deposits.
Borrowed Funds. Borrowed funds consist of short-term borrowings in the form of
federal funds purchased and securities sold under agreements to repurchase.
Average short-term borrowings were $2,938,538 in 2000, compared to
$1,950,330 in 1999. At December 31, 2000, Ridgeway Bancshares had no federal
funds purchased and securities sold under agreements to repurchase totaled
$2,418,501. The average balance in 2000 related mostly to securities sold under
agreements to repurchase with several customers. These agreements typically
range from one to 30 days. Although management may from time to time use
59
short-term borrowings as a secondary funding source, core deposits will continue
to be Ridgeway Bancshares' primary funding source.
Capital
Ridgeway Bancshares and its subsidiary bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a material effect on Ridgeway Bancshares' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Ridgeway Bancshares' subsidiary bank must meet specific capital
guidelines that involve quantitative measures of the bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. Ridgeway Bancshares' and its subsidiary bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Ridgeway Bancshares' subsidiary bank to maintain minimum ratios
of Tier 1 and total capital as a percentage of assets and off-balance-sheet
exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital
consists of common shareholders' equity, excluding the unrealized gain or loss
on securities available-for-sale, minus certain intangible assets. Tier 2
capital consists of the allowance for loan losses subject to certain
limitations. Total capital for purposes of computing the capital ratios consists
of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are
4% for Tier 1 and 8% for total risk-based capital.
Ridgeway Bancshares' subsidiary bank is also required to maintain
capital at a minimum level based on quarterly average assets, which is known as
the leverage ratio. Only the strongest banks are allowed to maintain capital at
the minimum requirement of 3%. All others are subject to maintaining ratios 1%
to 2% above the minimum.
Ridgeway Bancshares is currently not subject to direct regulatory
capital requirements. Under Federal Reserve Board guidelines, bank holding
companies such as Ridgeway Bancshares with less than $150,000,000 in
consolidated assets are exempt from these requirements.
Ridgeway Bancshares and its subsidiary bank exceeded the regulatory
capital ratios at December 31, 2000 and 1999 as set forth in the following
table.
Analysis of Capital and Capital Ratios
Ridgeway Bancshares Bank of Ridgeway
(Dollars in thousands) 2000 1999 2000 1999
---- ---- ---- ----
Tier 1 capital ............................................. $ 7,505 $ 6,715 $ 7,492 $ 6,731
Tier 2 capital ............................................. 388 334 388 334
------- ------- ------- -------
Total qualifying capital ............................... $ 7,893 $ 7,049 $ 7,880 $ 7,065
======= ======= ======= =======
Risk-adjusted total assets ................................. $37,214 $35,692 $37,204 $35,690
======= ======= ======= =======
(including off-balance sheet exposures)
Tier 1 risk-based capital ratio ............................ 20.17% 18.81% 20.14% 18.86%
Total risk-based capital ratio ............................. 21.21 19.75 21.18 19.80
Tier 1 leverage ratio ...................................... 10.41 10.35 10.40 10.31
60
Liquidity Management and Capital Resources
Liquidity management involves monitoring Ridgeway Bancshares' sources
and uses of funds in order to meet its day-to-day cash flow requirements while
maximizing profits. Liquidity represents the ability of Ridgeway Bancshares to
convert assets into cash or cash equivalents without significant loss and to
raise additional funds by increasing liabilities. Without proper liquidity
management, Ridgeway Bancshares would not be able to perform the primary
function of a financial intermediary and, therefore, would be unable to meet the
needs of the communities it serves.
Liquidity management is made more complex because different balance
sheet components are subject to varying degrees of management control. For
example, the timing of maturities of the investment portfolio is very
predictable and subject to a high degree of control at the time investment
decisions are made. However, net deposit inflows and outflows are far less
predictable and are not subject to nearly the same degree of control.
Accounting and Financial Reporting Issues
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, effective for fiscal years beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
embedded in other contracts, and requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet and measure them at
fair value. The accounting for changes in the fair value of a derivative depends
on how the derivative is used and how the derivative is designated. Ridgeway
Bancshares adopted SFAS No. 133 on July 1, 2000. The adoption of SFAS No. 133
did not have a material impact on the consolidated financial statements.
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of
financial institutions such as Ridgeway Bancshares are primarily monetary in
nature. Therefore, interest rates have a more significant effect on Ridgeway
Bancshares' performance than do the effects of changes in the general rate of
inflation and change in prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. As discussed previously, management seeks to manage the relationships
between interest sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from inflation.
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000:
Results of Operations
Net Interest Income
For the nine months ended September 30, 2001, net interest income
increased $109,075, or 4.98%, to $2,298,599 as compared to $2,189,524 for the
same period in 2000. The net interest margin realized on earning assets
decreased from 3.77% for the nine months ended September 30, 2000 to 3.55% for
the same period in 2001. The interest rate spread also decreased by 28 basis
points from 4.61% at September 30, 2000 to 4.33% at September 30, 2001.
Net interest income increased from $730,543 for the quarter ending
September 30, 2000 to $784,285 for the quarter ending September 30, 2001. This
represents an increase of $53,742, or 7.36%. The net interest margin realized on
earning assets increased from 4.49% for the quarter ended September 30, 2000 to
4.32% for the quarter ended September 30, 2001. The interest rate spread was
3.58% at September 30, 2000 and 3.59% at September 30, 2001.
61
Provision and Allowance for Loan Losses
The provision for loan losses is the charge to operating earnings that
management believes is necessary to maintain the allowance for possible loan
losses at an adequate level. For the nine months ended September 30, 2001 and
2000, the provisions charged to expense were $54,000 and $45,000, respectively.
For the quarters ended September 30, 2001 and 2000, the provisions charged to
expense were $18,000 and $15,000, respectively. There are risks inherent in
making all loans, including risks with respect to the period of time over which
loans may be repaid, risks resulting from changes in economic and industry
conditions, risks inherent in dealing with individual borrowers, and, in the
case of a collateralized loan, risks resulting from uncertainties about the
future value of the collateral. Ridgeway Bancshares maintains an allowance for
loan losses based on, among other things, historical experience, an evaluation
of economic conditions, and regular reviews of delinquencies and loan portfolio
quality. Management's judgment about the adequacy of the allowance is based upon
a number of assumptions about future events, which it believes to be reasonable,
but which may not prove to be accurate. Thus, there is a risk that chargeoffs in
future periods could exceed the allowance for loan losses or that substantial
additional increases in the allowance for loan losses could be required.
Additions to the allowance for loan losses would result in a decrease of
Ridgeway Bancshares' net income and, possibly, its capital.
Noninterest Income
Noninterest income during the nine months ended September 30, 2001 was
$538,119, an increase of $39,797 from $498,322 during the comparable period in
2000. The increase is primarily a result of an increase in service charges on
deposit accounts from $377,537 at September 30, 2000 to $435,984 at September
30, 2001. However, other service charges and fees resulted in income of $85,199
during the nine months ended September 30, 2001, compared to $107,008 during the
comparable period in 2000. This decrease was primarily because of decreases in
non-customer ATM fees, credit insurance commissions, and mortgage loan
origination fees.
For the quarter ended September 30, 2001, noninterest income increased
$86, or 0.05%, from $172,085 for the same period in 2000. Service charges on
deposit accounts increased $8,601, or 6.47%, from the quarter ended September
30, 2000. Other service charges and fees decreased from $35,053 for the quarter
ended September 30, 2000 to $25,142 for the quarter ended September 30, 2001.
Noninterest Expense
Total noninterest expense for the nine months ended September 30, 2001
was $1,685,475, or 11.89%, higher than the $1,506,405 amount for the nine months
ended September 30, 2000. The largest increase was in other operating expenses,
which increased from $470,128 at September 30, 2000 to $626,743 for the nine
months ended September 30, 2001. Of this $156,615 increase, $108,628 is for the
increase in data processing services created by the outsourcing of proof work to
an independent contractor. Salaries and employee benefits also increased
$30,454, or 3.52%, to $896,781 at September 30, 2001.
For the quarter ended September 30, 2001, noninterest expense increased
$52,289, or 10.14%, over the same period in 2000. The largest increase between
the quarters ended September 30, 2001 and September 30, 2000 was in other
operating expense, which increased $46,397, or 27.31%. Salaries and employee
benefits also increased from $289,638 for the quarter ended September 30, 2000
to $297,400 at September 30, 2001.
Income Taxes
The income tax provision for the nine months ended September 30, 2001
was $305,000 as compared to $310,700 for the same period in 2000. The effective
tax rates were 27.80% and 27.34% at September 30, 2001 and September 30, 2000,
respectively. The effective tax rates were 27.53% and 26.85% for the quarter
ended September 30, 2001 and September 30, 2000, respectively.
62
Net Income
The combination of the above factors resulted in net income for the
nine months ended September 30, 2001 of $792,243 as compared to $825,741 for the
same period in 2000. This represents a decrease of $33,498. For the quarter
ended September 30, 2001, net income was $268,544, or $3,561 lower than $272,105
for the quarter ended September 30, 2000. This decrease is primarily a result of
the decline in interest rates and an increase in other operating expenses.
Assets and Liabilities
During the first nine months of 2001, total assets increased
$2,522,329, or 3.40%, when compared to December 31, 2000. The primary source of
growth in assets was investment securities, which increased $3,482,367 during
the first nine months of 2001. Federal funds sold and repurchase agreements
decreased $1,356,000 from December 31, 2000 to $4,604,000 at September 30, 2001.
Total deposits also increased $1,208,486, or 1.90%, from the December 31, 2000
amount of $63,690,415. Within the deposit area, certificates of deposit
increased $3,318,778, or 12.36%, during the first nine months of 2001.
Investment Securities
Investment securities increased from $23,740,091 at December 31, 2000
to $27,222,458 at September 30, 2001. The increase can be attributed to the
purchase of several available-for-sale securities during the first nine months
of the year. The funds to purchase these securities were provided from lower
yielding federal funds sold and the increase in deposits. Ridgeway Bancshares'
investment securities designated as available-for-sale at September 30, 2001
totaled $9,260,563. Held-to-maturity securities totaled $17,961,895 at September
30, 2001.
Loans
Ridgeway Bancshares continued its trend of loan growth during the first
nine months of 2001. Net loans increased $874,049, or 2.22%, during the period.
As shown below, the main component of growth in the loan portfolio was real
estate loans, which increased 5.08%, or $1,198,236, from December 31, 2000.
Also, consumer and other loans increased $89,909, or 1.03%. Balances within the
major loans receivable categories as of September 30, 2001 and December 31, 2000
are as follows:
September 30, December 31,
------------- ------------
2001 2000
---- ----
Real estate ............................ $24,800,728 $23,602,492
Home equity ............................ 2,272,717 2,420,481
Commercial and industrial .............. 4,810,403 5,045,202
Consumer and other ..................... 8,826,459 8,736,550
$40,710,307 $39,804,725
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
September 30,
2001 2000
---- ----
Loans:
Nonaccrual loans ................................... $360,744 $185,762
Accruing loans more than 90 days past due ......... $105,980 $ 33,017
63
Activity in the Allowance for Loan Losses is as follows:
September 30,
-------------
2001 2000
---- ----
Balance, January 1, .......................... $ 387,529 $ 334,209
Provision for loan losses for the period ..... 54,000 45,000
Net loans (charged-off) for the period ....... (22,467) (2,512)
------------
Balance, end of period ....................... $ 419,062 $ 376,697
============ ============
Gross loans outstanding, end of period ....... $ 40,710,307 $ 38,337,145
Allowance for loan losses to loans outstanding 1.03% 0.98%
Deposits
At September 30, 2001, total deposits had increased by $1,208,486, or
1.90%, from December 31, 2000. The largest increase was in certificates of
deposit, which increased $3,318,778, or 12.36%, from December 31, 2000 to
September 30, 2001. Expressed in percentages, noninterest-bearing deposits
decreased 1.27% and interest-bearing deposits increased 2.48%.
Balances within the major deposit categories as of September 30, 2001
and December 31, 2000 are as follows:
September 30, December 31,
------------- ------------
2001 2000
---- ----
oninterest-bearing demand deposits .......... $ 9,714,465 $ 9,839,029
Interest-bearing demand deposits ............. 9,016,304 9,211,538
Money-market accounts ........................ 8,457,583 10,161,177
Savings deposits ............................. 7,534,858 7,621,758
Time deposits $100,000 and over .............. 8,095,969 6,864,350
Other time deposits .......................... 22,079,722 19,992,563
----------- -----------
$64,898,901 $63,690,415
=========== ===========
Liquidity
Liquidity needs are met by Ridgeway Bancshares through scheduled
maturities of loans and investments on the asset side and through pricing
policies on the liability side for interest-bearing deposit accounts. The level
of liquidity is measured by the loan-to-total borrowed funds ratio, which was at
60.11% at September 30, 2001 and 60.21% at December 31, 2000.
Securities available-for-sale, which totaled $9,260,563 at September
30, 2001, serves as a ready source of liquidity. Ridgeway Bancshares also has
lines of credit available with correspondent banks to purchase federal funds for
periods from one to seven days. At September 30, 2001, unused lines of credit
totaled $5,000,000.
Capital Resources
Total shareholders' equity increased from $7,840,482 at December 31,
2000 to $8,597,286 at September 30, 2001. The increase is due to net income for
the period of $792,243, partially offset by dividends of $160,000. Shareholder's
equity was also increased by the $124,561 increase in the fair value of
securities available-for-sale.
64
The following table summarizes Ridgeway Bancshares' risk-based capital
at September 30, 2001:
Shareholders' equity .......................................... $ 8,597,286
Less: unrealized gains on available-for-sale securities ....... 106,148
Less: disallowed intangible assets ............................ 322,000
-----------
Tier 1 capital ................................................ 8,169,138
Plus: allowance for loan losses (1) ........................... 418,533
-----------
Total capital ................................................. $ 8,587,671
===========
Risk-weighted assets .......................................... $42,321,000
===========
Risk-based capital ratios
Total capital (to risk-weighted assets) ....................... 20.29%
Tier 1 capital (to risk-weighted assets) ...................... 19.30%
Tier 1 capital (to average assets) ............................ 10.66%
INFORMATION ABOUT COMMUNITY BANKSHARES
General
Community Bankshares is a South Carolina corporation and a bank holding
company. Community Bankshares commenced operations on July 1, 1993, upon
effectiveness of the acquisition of the Orangeburg National Bank as a wholly
owned subsidiary. In June 1996 Community Bankshares acquired all the stock of
Sumter National Bank, which is also a wholly owned subsidiary. In July 1998
Community Bankshares acquired all the stock of Florence National Bank, which is
also a wholly owned subsidiary.
Orangeburg National Bank is a national bank, chartered in 1987,
operating from two offices located in Orangeburg, South Carolina.
Sumter National Bank is a national bank, chartered in 1996, operating
from one office located in Sumter, South Carolina. The Sumter bank plans to open
its second office in February 2002.
Florence National Bank is a national bank, chartered in 1998, operating
from one office located in Florence, South Carolina.
Business of Banking
The Orangeburg, Sumter and Florence banks offer a full array of
commercial bank services. Deposit services include business and personal
checking accounts, NOW accounts, savings accounts, money market accounts,
various term certificates of deposit, IRA accounts, and other deposit services.
The Federal Deposit Insurance Corporation insures deposits up to applicable
limits. Most of the subsidiary banks' deposits are attracted from individuals
and small businesses.
The subsidiary banks offer secured and unsecured, short-to-intermediate
term loans, with floating and fixed interest rates for commercial and consumer
purposes. Consumer loans include: car loans, home equity improvement loans
secured by first and second mortgages, personal expenditure loans, education
loans, and the like. Commercial loans include short-term unsecured loans, short
and intermediate term real estate mortgage loans, loans secured by listed
stocks, loans secured by equipment, inventory, accounts receivable, and the
like. The subsidiary banks do not and will not discriminate against any
applicant for credit on the basis of race, color, creed, sex, age, marital
status, familial status, handicap, or derivation of income from public
assistance programs.
65
Other services offered by the subsidiary banks include safe deposit
boxes, night depository service, VISA and Master Card charge cards (through a
correspondent), tax deposits, sale of U.S. Treasury bonds, notes and bills and
other U. S. government securities (through a correspondent), and twenty-four
hour automated teller service. Each of the subsidiary banks has ATMs and they
are all part of the Star and Cirrus networks.
Competition
The market for financial institutions in Orangeburg, Sumter, and
Florence is highly competitive. Banks generally compete with other financial
institutions through the banking services and products offered, the pricing of
services, the level of service provided, the convenience and availability of
services, and the degree of expertise and personal concern with which services
are offered. The subsidiary banks encounter strong competition from most of the
financial institutions in their market areas.
The market area for the Orangeburg bank generally encompasses an area
extending nine miles around the city of Orangeburg. The market area for the
Sumter bank generally encompasses the county of Sumter. The market area for the
Florence bank generally encompasses the city of Florence. In the conduct of
certain banking business, the subsidiary banks also compete with credit unions,
consumer finance companies, insurance companies, money market mutual funds, and
other financial institutions, some of which are not subject to the same degree
of regulation and restrictions imposed upon banks. Many of these competitors
have substantially greater resources and lending limits than the subsidiary
banks and offer certain services, such as international banking and trust
services, that the subsidiary banks do not provide. The subsidiary banks
believe, however, that their relatively small size permits them to offer more
personalized services than many of their competitors. The subsidiary banks
attempt to compensate for their lower lending limits by participating larger
loans with other institutions, often with each other.
Most of the other financial institutions in the Orangeburg, Sumter, and
Florence areas are branch offices of large, regional banks. At June 30, 2001,
there were eight commercial banks or thrift institutions competing with
Community Bankshares in Orangeburg County, seven commercial banks or thrift
institutions competing with Community Bankshares in Sumter County and 18
commercial banks or thrift institutions competing with Community Bankshares in
Florence County. In Sumter County, the SAFE Federal Credit Union is also a major
competitor.
Dependence on Major Customers
The subsidiary banks do not consider themselves dependent on any single
customer or small group of customers, either in the deposit or lending areas.
Employees
At December 31, 2000 Community Bankshares employed 84 full time
equivalent employees. Of these, the Orangeburg bank employed 38, the Sumter bank
employed 19, the Florence bank employed 11 and 16 were employed by the holding
company. Management believes that its employee relations are excellent.
Description of Properties
Community Bankshares' Orangeburg bank owns land located at 1820
Columbia Road NE, in Orangeburg, South Carolina. The Orangeburg bank maintains
its main office at this address. The total investment in this real estate was
$245,000. The bank operates from a one-story building of approximately 7,000
square feet. The bank's investment in the building is $536,000.
The Orangeburg bank also owns a building, which was previously a branch
of the bank, at the corner of Broughton and Glover Streets in Orangeburg. The
bank's investment in the land is $120,000. The bank's investment in the building
plus its improvements and renovations is $83,000. The Orangeburg bank currently
rents this facility to Community Bankshares for office space. In June 1999 the
bank moved into a new branch facility located adjacent to the old building. This
new branch office is approximately 6,500 square feet and the total investment in
66
it was approximately $790,000, with an additional investment of $78,000 in land
improvements.
The foregoing properties are owned in fee simple by the Orangeburg
bank. Management believes that insurance coverage on the foregoing properties is
adequate.
Community Bankshares' Sumter bank owns land located at 683 Bultman
Drive, in Sumter, South Carolina. The Sumter bank maintains its main office at
this address. The total investment in this real estate was $317,000. The bank
operates from a one-story building of approximately 6,500 square feet. The
bank's investment in the building is $606,000.
The foregoing property is owned in fee simple by the Sumter bank.
Management believes that insurance coverage on the foregoing properties is
adequate.
The Florence bank is leasing approximately 1.7 acres of land located at
2009 Hoffmeyer Road in Florence, South Carolina. This land is the site of the
main office for Florence National Bank. The details of the lease are discussed
in Note 6 to the financial statements contained elsewhere in this Proxy
Statement/Prospectus. Community Bankshares has constructed a one-story building
for the Florence bank of approximately 7,500 square feet on the leased site. The
building cost approximately $724,000. Management believes that insurance
coverage on the foregoing properties is adequate.
Legal Proceedings
Community Bankshares and its subsidiaries are not parties to any
material legal proceedings other than ordinary routine litigation incidental to
their business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999:
General
The discussion and data presented below analyze major factors and
trends regarding the financial position and results of operations of Community
Bankshares and its subsidiary banks for the three year period ended December 31,
2000.
Business of Community Bankshares and its Subsidiaries
Community Bankshares Inc. is a bank holding company. It was
incorporated on November 30, 1992, and commenced operations July 1, 1993, by
acquiring Orangeburg National Bank. Community Bankshares now owns three banking
subsidiaries: Orangeburg National Bank, Sumter National Bank, and Florence
National Bank. Community Bankshares provides item and data processing and other
technical services for its banking subsidiaries. The consolidated financial
report for 2000 represents the operations of the holding company and its three
banks. (Parent-only financial statements are presented in the footnotes to the
consolidated financial statements.)
Orangeburg National Bank is a national banking association and
commenced operations in November 1987. It operates two offices in Orangeburg,
South Carolina. Sumter National Bank is a national banking association and
commenced operations in June 1996. It operates one office in Sumter, South
Carolina. Florence National Bank is a national banking association and commenced
operations in July 1998. It operates one office in Florence, South Carolina. The
banks provide commercial banking services in their respective communities. Their
primary customer markets are consumers and small businesses.
67
Stock Split and Stock Dividend
On January 31, 2000 Community Bankshares effected a five-percent stock
dividend. All references to per share information contained in this discussion
have been adjusted accordingly.
Distribution of Assets and Liabilities
The following table presents the average balance sheets, the average
yield and the interest earned on earning assets, and the average rate and the
interest paid on interest bearing liabilities for the years ended December 31,
2000, 1999 and 1998.
Years ended December 31, 2000 1999 1998
Interest Interest Interest
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense(1) Rates(1) Balance Expense(1) Rates(1) Balance Expense(1) Rates(1)
------- ---------- -------- ------- ---------- -------- ------- ---------- --------
(Dollar amounts in thousands)
Interest bearing deposits $ 1,024 $ 64 6.25% $ 1,937 $ 101 5.21% $ 2,385 $ 126 5.28%
Investment securities taxable 47,377 3,025 6.38% 39,856 2,458 6.17% 30,096 1,915 6.36%
Investment securities--tax 807 32 6.01% 783 30 5.81% 341 14 6.22%
exempt
Federal funds sold 6,670 430 6.45% 10,967 555 5.06% 10,626 568 5.35%
Loans receivable (2) 179,654 16,750 9.32% 139,215 12,406 8.91% 103,500 9,697 9.37%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest earning assets 235,532 20,301 8.62% 192,758 15,550 8.07% 146,948 12,320 8.38%
Cash and due from banks 8,582 8,896 6,499
Allowance for loan losses (2,186) (1,692) (1,281)
Premises and equipment 4,564 4,549 3,622
Other assets 3,232 2,251 1,718
-------- -------- --------
Total assets $249,724 $206,762 $157,506
======== ======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits
Savings $ 33,445 $ 1,358 4.06% $ 28,321 $ 943 3.33% $ 22,235 $ 774 3.48%
Interest bearing transaction 21,039 329 1.56% 17,417 269 1.54% 14,028 253 1.80%
accounts
Time deposits 119,949 6,905 5.76% 96,761 4,901 5.07% 73,045 4,018 5.50%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest bearing 174,433 8,592 4.93% 142,499 6,113 4.29% 109,308 5,045 4.62%
deposits
Short term borrowing 4,501 218 4.84% 5,210 170 3.26% 3,225 119 3.69%
FHLB advances 19,385 1,165 6.01% 12,335 675 5.47% 6,905 390 5.65%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest bearing 198,319 9,975 5.03% 160,044 6,958 4.35% 119,438 5,554 4.65%
liabilities
Noninterest bearing demand 28,531 26,124 19,536
deposits
Other liabilities 1,421 978 942
Shareholders' equity 21,453 19,616 17,590
-------- -------- --------
Total liabilities and $249,724 $206,762 $157,506
======== ======== ========
shareholders' equity
Interest rate spread (3) 3.59% 3.72% 3.73%
Net int. income and net yield on earning
assets (4) $10,326 4.38% $ 8,592 4.46% $6,766 4.60%
(1) Computed on a fully taxable equivalent basis using a federal tax rate of
34%.
(2) Nonaccruing loans are included in the average loan balances and income from
such loans is recognized on a cash basis.
(3) Total interest earning assets yield less total interest bearing liabilities
rate.
(4) Net yield equals net interest income divided by total interest earning
assets.
68
Earnings Performance, 2000 compared to 1999
Community Bankshares' net income was $3,147,000 or $.99 per share in
2000. This compares to $2,182,000 or $.68 per share in 1999, an increase of
$965,000, or 44.2%.
This increase in earnings resulted from improved profit at all three
banks. Earnings at the Sumter bank increased to $908,000 in 2000 from $559,000
in 1999, an increase of 62.4% or $349,000. Earnings at the Orangeburg bank
increased to $2,243,000 in 2000 from $2,054,000 in 1999, an increase of 9.2% or
$189,000. Earnings at the Florence bank increased to $78,000 in 2000 from a loss
of $314,000 for 1999, an improvement of $392,000.
Interest Income and Interest Expense, 2000 compared to 1999
Community Bankshares' interest income increased substantially in 2000
from 1999. In 2000 Community Bankshares earned $20,301,000 in total interest
income, up from the prior year's $15,550,000. This represented a $4,751,000 or a
30.6% increase. This growth was mostly the result of increased volume in the
loan and investment portfolios at the three banks.
Interest bearing deposits in other banks contributed $64,000 to
interest income in 2000, down from $101,000 the prior year, a decrease of
$37,000 or 36.6%. In 2000 Community Bankshares had an average of $1,024,000 in
interest bearing deposits, down from the prior year's $1,937,000, a decrease of
$913,000 or 47.1%. The average yield on these deposits during 2000 was 6.25%, up
from the prior year's 5.21%.
Investments contributed $3,025,000 to interest income in 2000, up from
$2,458,000 the prior year, an increase of $567,000 or 23.1%. The investment
portfolio averaged $47,377,000 in 2000, up from the prior year's $39,856,000, an
increase of $7,521,000 or 18.9%. Community Bankshares' investment portfolio
consists primarily of short-term U. S. government and agency debt issues. The
average yield on investments during 2000 was 6.38%, up from 6.17% in 1999.
Community Bankshares' tax-exempt securities portfolio earned $32,000
during 2000, up from $30,000 the prior year, an increase of $2,000 or 6.7%. The
portfolio averaged $807,000 in 2000, up from $783,000 in 1999, an increase of
$24,000 or 3.1%. The average yield was 6.01%, compared to 5.81% the prior year,
on a fully taxable equivalent basis.
Federal funds sold represent temporary surplus funds that one bank
lends to another. These funds are a source of day to day operating liquidity.
Federal funds sold contributed $430,000 to interest income in 2000, down from
$555,000 in the prior year, a decrease of $125,000 or 22.5%. Community
Bankshares had an average of $6,670,000 in federal funds during 2000, down from
the prior year's $10,967,000, a decrease of $4,297,000 or 39.2%. The average
yield on federal funds during 2000 was 6.45%, up from 5.06% in 1999. The decline
in federal funds sold was directly related to continued strong loan demand.
Community Bankshares' major source of interest income is the loan
portfolio, which contributed $16,750,000 to interest income in 2000, up from
$12,406,000 in the prior year, an increase of $4,344,000 or 35%. The average
loan portfolio for 2000 was $179,654,000 compared to the prior year's
$139,215,000, an increase of $40,439,000 or 29%. The average yield on loans
during 2000 was 9.32%, up from 8.91% in 1999.
Community Bankshares had average earning assets in 2000 of
$235,532,000, which earned a yield of 8.62%. Community Bankshares had average
earning assets in 1999 of $192,758,000, which earned a yield of 8.07%. Average
earning assets increased $42,774,000 or 22.2%.
The category savings accounts consists of savings and money market
accounts. Total savings accounts averaged $33,445,000 in 2000, up from
$28,321,000 in the prior year, an increase of $5,124,000 or 18.1%. The cost of
these funds increased to 4.06% in 2000 from 3.33% in the prior year.
69
Interest bearing transaction accounts are the primary checking accounts
that the banks offer customers. This overall category was $21,039,000 in 2000,
up from $17,417,000 in 1999, an increase of $3,622,000 or 20.8%. The average
cost of these funds was 1.56% in 2000 compared to 1.54% in the prior year.
Time deposits are the largest category of deposits, averaging
$119,949,000 in 2000, up from $96,761,000 in the prior year, an increase of
$23,188,000 or 24%. The cost of time deposits increased to 5.76% from 5.07%.
Short-term borrowing includes federal funds purchased and securities
sold under agreements to repurchase. The repurchase agreements are entered into
with a number of larger commercial customers. These accounts are not deposits;
they are considered other obligations of the subsidiary banks. Balances in these
accounts are subject to wide fluctuation, but they constitute a relatively small
portion of the balance sheet. The average balance for 2000 was $4,501,000, down
from $5,210,000 in the prior year, a decrease of $709,000 or 13.6%. The cost of
these funds increased to 4.84% from 3.26%.
The subsidiary banks are members of and have the ability to borrow from
the Federal Home Loan Bank (FHLB). The banks had an average $19,385,000
outstanding borrowing balance during 2000 at an average cost of 6.01%. The banks
had an average $12,335,000 outstanding during 1999 at an average cost of 5.47%.
Borrowings increased by $7,050,000 or 57.2%. These borrowings are mostly for
longer terms than other interest bearing liabilities and are part of the banks'
on-going asset/liability management strategy. These loans are secured by a
blanket lien on the subsidiary banks' one-to-four family residential mortgage
loan portfolios or portions of their investment portfolios or the subsidiary
banks' FHLB stock.
Community Bankshares had total interest bearing liabilities in 2000 of
$198,319,000 costing an average of 5.03% compared with interest bearing
liabilities in 1999 of $160,044,000 costing an average of 4.35%. Average
interest bearing liabilities increased $38,275,000 or 23.9%.
Earnings Performance, 1999 compared to 1998
Community Bankshares' net income was $2,182,000, or $.68 per share, in
1999. This compares to $1,567,000, or $.52 per share, in 1998, an increase of
$615,000, or 39%.
Management views this increase in earnings as primarily the result of a
212% increase in earnings at the Sumter bank to $559,000 in 1999 from $179,000
in 1998 and a $317,000 increase in earnings at the Orangeburg bank to $2,054,000
in 1999 from $1,737,000 in 1998. The Florence bank showed a net loss of $314,000
for the twelve-month period in 1999 compared to a net loss of $331,000 for six
months of operation in 1998.
Interest Income and Interest Expense, 1999 compared to 1998
Community Bankshares' interest income increased substantially in 1999
from 1998. In 1999 Community Bankshares earned $15,550,000 in total interest
income, up from the prior year's $12,320,000. This represented a $3,230,000 or a
26.2% increase. This growth was mostly the result of increased volume in the
loan and investment portfolios at each of the three subsidiary banks.
Interest bearing deposits in other banks contributed $101,000 to
interest income in 1999, down from $126,000 the prior year, a decrease of
$25,000 or 19.8%. In 1999 Community Bankshares had an average of $1,937,000 in
interest bearing deposits, down from the prior year's $2,385,000, a decrease of
$448,000 or 18.8%. The average yield on these deposits during 1999 was 5.21%,
down from the prior year's 5.28%.
Investments contributed $2,458,000 to interest income in 1999, up from
$1,915,000 the prior year, an increase of $543,000 or 28.4%. The investment
portfolio averaged $39,856,000 in 1999, up from the prior year's $30,096,000, an
increase of $9,760,000 or 32.4%. Community Bankshares' investment portfolio
consists primarily of short-term U. S. government and agency debt issues. The
average yield on investments during 1999 was 6.17%, down from 6.36% in 1998.
Community Bankshares' tax-exempt securities portfolio earned $30,000
during 1999, up from $14,000 the prior year. The portfolio averaged $783,000 in
1999, up from $341,000 in 1998, an increase of $442,000 or 130%. The average
yield was 5.81%, compared to 6.22% the prior year, on a fully taxable equivalent
basis.
70
Federal funds sold contributed $555,000 to interest income in 1999,
down slightly from $568,000 in the prior year, a decrease of $13,000 or 2.3%.
Community Bankshares had an average of $10,967,000 in federal funds during 1999,
up from the prior year's $10,626,000, an increase of $341,000 or 3.2%. The
average yield on federal funds during 1999 was 5.06%, down from 5.35% in 1998.
Community Bankshares' loan portfolio contributed $12,406,000 to
interest income in 1999, up from $9,697,000 in the prior year, an increase of
$2,709,000 or 28%. The average loan portfolio for 1999 was $139,215,000,
compared to the prior year's $103,500,000, an increase of $35,715,000 or 34.5%.
The average yield on loans during 1999 was 8.91%, down from 9.37% in 1998.
Community Bankshares had average earning assets in 1999 of
$192,758,000, which earned a yield of 8.07%. Community Bankshares had average
earning assets in 1998 of $146,948,000, which earned a yield of 8.38%. Average
earning assets increased $45,810,000 or 31.2%.
Community Bankshares' savings accounts averaged $28,321,000 in 1999, up
from $22,235,000 in the prior year, an increase of $6,086,000 or 27.4%. The cost
of these funds decreased to 3.33% in 1999 from 3.48% in the prior year.
Interest bearing transaction accounts averaged $17,417,000 in 1999, up
from $14,028,000 in 1998, an increase of $3,389,000 or 24.2%. The average cost
of these funds was 1.54% in 1999, compared to 1.80% in the prior year.
Time deposits averaged $96,761,000 in 1999, up from $73,045,000 in the
prior year, an increase of $23,716,000 or 32.5%. The cost of time deposits
decreased to 5.07% from 5.50%.
Short-term borrowing averaged $5,210,000 in 1999, up from $3,225,000 in
the prior year, an increase of $1,985,000 or 61.5%. The cost of these funds
decreased to 3.26% from 3.69%.
The subsidiary banks had an average $12,335,000 outstanding in FHLB
borrowings during 1999 at an average cost of 5.47%. The subsidiary banks had an
average $6,905,000 outstanding during 1998 at an average cost of 5.65%.
Borrowings increased by $5,430,000 or 78.6%.
Community Bankshares had average interest bearing liabilities in 1999
of $160,044,000 costing an average of 4.35%, compared with interest bearing
liabilities in 1998 of $119,438,000 that cost an average of 4.65%. Average
interest bearing liabilities increased $40,606,000 or 34%.
Volume and Rate Variance Analysis
The table "Volume and Rate Variance Analysis" provides a summary of
changes in net interest income resulting from changes in volume and changes in
rate (The changes in volume are the difference between the current and prior
year's balances times the prior year's rate. The changes in rate are the
difference between the current and prior year's rate times the prior year's
balance.)
As reflected in the table, the increase in 2000 net interest income of
$1,734,000 is primarily due to changes in volume. Of the $4,751,000 increase in
interest income $3,748,000 or 79% was from volume growth in the loan portfolio.
Of the $3,017,000 increase in interest expense $1,276,000 or 42% was due to
volume increases for time deposits. Also, $728,000 or 24% of the increase was
due to rate changes in time deposits. During 1999 there was a similar pattern,
only more of the increase in net interest income came from changes in volume.
71
Volume and Rate Variance Analysis
2000 compared to 1999 1999 compared to 1998
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest earning assets (Dollar amounts in thousands)
Interest bearing deposits ................... $ (54) $ 17 $ (37) $ (24) $ (1) $ (25)
Investment securities taxable ............... 480 87 567 602 (59) 543
Investment securities--tax exempt ........... 1 1 2 17 (1) 16
Federal funds sold .......................... (252) 127 (125) 18 (31) (13)
Loans receivable ............................ 3,748 596 4,344 3,203 (494) 2,709
------- ------- ------- ------- ------- -------
Total interest income ....................... 3,923 828 4,751 3,816 (586) 3,230
------- ------- ------- ------- ------- -------
Interest bearing liabilities
Savings ..................................... 188 227 415 204 (35) 169
Interest bearing transaction ................ 57 3 60 55 (39) 16
accounts
Time deposits ............................... 1,276 728 2,004 1,221 (338) 883
------- ------- ------- ------- ------- -------
Total interest bearing deposits ............. 1,521 958 2,479 1,480 (412) 1,068
Short term borrowing ........................ (25) 73 48 66 (15) 51
FHLB advances ............................... 416 74 490 297 (12) 285
------- ------- ------- ------- ------- -------
Total interest expense ...................... 1,912 1,105 3,017 1,843 (439) 1,404
------- ------- ------- ------- ------- -------
Net interest income ............................ $ 2,013 $ (277) $ 1,734 $ 1,973 $ (147) $ 1,826
======= ======= ======= ======= ======= =======
Premises And Equipment
Premises and equipment were $4,411,000 at December 31, 2000 compared to
$4,619,000 the prior year, a decrease of $208,000 or 4.5%. There were no
significant changes in Community Bankshares' fixed asset accounts. Premises and
equipment are discussed further in Note 6 to the attached consolidated financial
statements of Community Bankshares.
Investment Portfolio
Community Bankshares' investment portfolio consists primarily of
short-term U. S. government and agency debt issues. Investment securities
averaged $48.2 million in 2000, $40.6 million in 1999 and $30.4 million in 1998.
Note 4 to the consolidated financial statements provides further information on
the investment portfolio.
The table below gives the amortized cost and fair value of Community
Bankshares' investment portfolio for the past three years.
72
2000 1999 1998
Amortized Fair value Amortized Fair value Amortized Fair value
cost ---------- cost ---------- cost ----------
---- ---- ----
Securities held-to-maturity (Dollar amounts in thousands)
U.S. government and agencies ............. $12,371 $12,217 $13,369 $12,919 $15,035 $15,076
State and local government ............... - - - - 251 253
------- ------- ------- ------- ------- -------
Total held-to-maturity .................. $12,371 $12,217 $13,369 $12,919 $15,286 $15,329
======= ======= ======= ======= ======= =======
Securities available-for sale
U.S. government and agencies ............. $38,599 $38,403 $28,931 $28,151 $16,921 $16,975
State and local government ............... 814 810 825 814 225 227
Other securities ......................... 1,982 1,982 1,601 1,601 1,660 1,660
------- ------- ------- ------- ------- -------
Total available for sale ................ $41,395 $41,195 $31,357 $30,566 $18,806 $18,862
======= ======= ======= ======= ======= =======
Information on the maturity distribution of the investment portfolio is
presented in Note 4 to the financial statements.
At December 31, 2000 Community Bankshares' available for sale portfolio
showed a net of tax other comprehensive loss in the equity section of the
balance sheet of $131,000 compared to $511,000 the prior year. The change in the
valuation of the investment portfolio was directly related to the changes in
market interest rates during the year. Management considers it unlikely that a
significant amount of investments will be sold prior to maturity and does not
regard the valuation as anything other than a temporary fluctuation in market
value.
Loan Portfolio
The average size of the loan portfolio in 2000 was $179.7 million,
compared to $139.2 million in 1999 and $103.5 million in 1998.
At December 31, 2000 the net loan portfolio was $192.7 million,
compared to $155.2 million the prior year, an increase of $37.5 million or
24.2%.
Management believes the loan portfolio is adequately diversified. There
are no foreign loans and few agricultural loans.
The table, "Loan Portfolio Composition," in the following section,
indicates the amounts of loans outstanding according to the type of loan at the
dates indicated.
Loan Portfolio Composition
The following table shows the composition of the loan portfolio for the
years ended December 31, 1996 through 2000.
Loan category 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Commercial, financial and agricultural $51,966 $39,752 $29,403 $21,690 $16,520
Real estate - construction 15,389 9,156 5,738 6,563 5,611
Real estate - mortgage 98,154 84,680 62,789 46,734 35,553
Installment loans to individuals 29,270 23,033 19,325 16,348 11,021
Obligations of political subdivisions 298 468 540 616 124
-------- -------- -------- ------- -------
Total loans - gross $195,077 $157,089 $117,795 $91,951 $68,829
======== ======== ======== ======= =======
73
Commercial, financial, and agricultural loans, primarily representing
loans made to small businesses, increased by $12.2 million or 30.7% during 2000.
These loans may be made on either a secured or an unsecured basis. When taken,
security usually consists of liens on inventories, receivables, equipment, and
furniture and fixtures. Unsecured business loans are generally short-term with
emphasis on repayment strengths and low debt to worth ratios.
Real estate loans consist of construction loans and loans secured by
mortgages. Construction loans are also generally secured with mortgages. Because
Community Bankshares' subsidiaries are community banks, real estate loans
comprise the bulk of the loan portfolio. Construction loans increased $6.2
million or 68.1% in 2000. Mortgage loans increased $13.5 million or 15.9% in
2000.
During 1998 through 2000 Community Bankshares generally did not compete
with 15 and 30 year fixed secondary market mortgage interest rates, so it
elected to pursue the origination of mortgage loans that could be easily sold
into the secondary mortgage market. These loans were generally pre-qualified
with the underwriters to avoid problems in the sale of the loans. In 2000, 1999
and 1998 Community Bankshares sold $5.9 million, $9.9 million and $12.1 million,
respectively, in such loans. These loans were sold at par so no gain or loss
would be recognized at the time of sale. However, the origination and sale of
these loans generates fee income. Community Bankshares also makes mortgage loans
for its own account. Such loans are usually for a shorter term than loans
originated to sell and usually have a variable rather than a fixed interest
rate.
Installment loans to individuals increased $6.2 million or 27.1% in
2000.
Interest income from the loan portfolio was $16.7 million in 2000
compared to $12.4 million in 1998, an increase of $4.3 million or 35%. The
average yield on the portfolio was 9.32% in 2000, compared to 8.91% in 1999.
Maturity Distribution of Loans
The following table sets forth the maturity distribution of Community
Bankshares' loans, by type, as of December 31, 2000 as well as the type of
interest on loans due after one year.
After one Over
Within one year but five
Category year within five years years Total
-------- ---- ----------------- ----- -----
(Dollar amounts in thousands)
Commercial $24,903 $23,269 $ 4,092 $ 52,264
Real estate 33,724 52,277 27,542 113,543
Installment 10,113 18,175 982 29,270
------- ------- ------- --------
Total $68,740 $93,721 $32,616 $195,077
======= ======= ======= ========
Loans due after one year
Predetermined interest rate $122,810
Floating interest rate 3,527
--------
Total $126,337
========
Lending Risks
Because extending credit involves a certain degree of risk, management
has established loan and credit policies designed to control both the types and
amounts of risks assumed and to minimize losses. Such policies include
limitations on loan-to-collateral values for various types of collateral,
requirements for appraisals of real estate collateral, problem loan management
practices and collection procedures, and nonaccrual and charge-off guidelines.
74
Community Bankshares also conducts internal loan reviews to monitor on an
ongoing basis the quality of its portfolio.
Community Bankshares has a geographic concentration of loans within its
home communities of Orangeburg, Sumter, and Florence, South Carolina, because
its primary business is community banking.
Concentrations of credit also occur where a number of customers are
engaged in similar business activities. A concentration is defined as a
concentration of loans exceeding 10% of total loans. The subsidiary banks
regularly review their business lending in an effort to detect, monitor and
control such loan concentrations. At December 31, 2000, Community Bankshares had
no such loan concentrations.
Nonaccrual and Past Due Loans
The nonaccrual, past due, and impaired loans and other real estate
owned are summarized in Note 5 to the consolidated financial statements.
Community Bankshares had no restructured loans in 2000 or 1999.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Nonaccrual loans ............................................. $ 238 $ 90 $ 31 $ 81 $431
Accruing loans 90 days or more past due ...................... 93 6 187 - 93
------ ---- ---- ---- ----
Total ................................................... $ 331 $ 96 $218 $ 81 $524
====== ==== ==== ==== ====
Total as a % of outstanding loans ....................... 0.17% 0.06% 0.19% 0.09% 0.76%
====== ==== ==== ==== ====
Other Real Estate Owned ...................................... $ - $ - $266 $132 $ -
====== ==== ==== ==== ====
Impaired Loans (included in non accrual) ..................... $ 238 $ 90 $ 31 $ 81 $120
====== ==== ==== ==== ====
Gross income that would have been recorded for the year ended December
31, 2000 and 1999, if nonaccrual loans had been performing in accordance with
their original terms was approximately $32,641 and $2,100 respectively. No
interest income was recognized in the 2000 period for the non-accrual loans.
Community Bankshares' nonaccrual loan policy is discussed in Note 2 to
the consolidated financial statements in the section labeled Loans Receivable.
Community Bankshares' policy on impaired loans is discussed in Note 2 to the
consolidated financial statements in the section labeled Allowance for Loan
Losses.
Nonaccrual loans and impaired loans were not material in relation to
the portfolio as a whole in 2000. Management is aware of no trends, events or
uncertainties that would cause nonaccrual loans to change materially in 2001.
Potential Problem Loans
At December 31, 2000, Community Bankshares' internal loan review
program had identified $992,000 (0.51% of the portfolio) in various loans where
information about credit problems of borrowers had caused management to have
concerns about the ability of the borrowers to comply with original repayment
terms.
The amounts reflected above do not represent management's estimate of
the potential losses since a large proportion of these loans are secured by real
estate and other marketable collateral.
Secured versus Unsecured Loans
Community Bankshares does not aggressively seek to make unsecured
loans, since these loans may be somewhat more risky than collateralized loans.
There are, however, occasions when it is in the business interests of Community
Bankshares to provide short-term, unsecured loans to selected customers. In
75
2000, Community Bankshares had $12.4 million in unsecured loans or 6.4% of its
loan portfolio. In 1999, Community Bankshares had $9.6 million in unsecured
loans or 6.1% of its loan portfolio.
Loan Participations
Periodically, Community Bankshares' banking subsidiaries enter into
sales or purchases of loan participations with one another and other financial
institutions. The subsidiary banks generally only sell participations in loans
that would cause the bank to exceed its lending limitation to a single customer.
As the subsidiary banks' lending limits increase they may buy back such loan
participations. Such loans are usually commercial in nature, subject to the
purchasing bank's standard underwriting requirements, and all risks associated
with the portion of the loan sold flow to the purchaser.
At the end of 2000 the three subsidiary banks had $14,748,000 in loan
participations purchased. Of these loans $6,017,000 was with nonaffiliated
banks.
At the end of 2000 the three subsidiary banks had $10,895,000 in loan
participations sold. Of these loans $2,164,000 was with nonaffiliated banks.
At the end of 1999 the three subsidiary banks had $7,292,000 in loan
participations purchased. Of these loans, all but $564,000 were among the three
banks.
At the end of 1999 the three subsidiary banks had $6,701,000 in loan
participations sold. Of these loans, all were sold among the three banks.
Other Real Estate
Other real estate, consisting of foreclosed properties, was $0 in 2000
and 1999 and $266,000 in 1998. Other real estate is initially recorded at the
lower of net loan balance or its estimated fair value, net of estimated disposal
costs. The estimate of fair value for foreclosed properties is determined by
appraisal at the time of acquisition.
Summary Of Loan Loss Experience
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan
losses, which is a direct charge to expense. Losses on specific loans are
charged against the allowance in the period in which management determines that
such loans become uncollectible. Recoveries of previously charged-off loans are
credited to the allowance. At December 31, 2000 and 1999 the allowance for loan
losses was 1.24% and 1.23%, respectively, of total loans. The following table
provides details on the changes in the allowance for loan losses during the past
five fiscal years.
76
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Average amount of loans outstanding ............................... $179,654 $139,215 $103,500 $ 81,167 $ 57,806
======== ======== ======== ======== ========
Allowance for loan losses - January 1 ............................. $ 1,936 $ 1,459 $ 1,140 $ 876 $ 707
-------- -------- -------- -------- --------
Loan charge-offs:
Real estate ....................................................... 78 0 7 0 0
Installment ....................................................... 116 95 111 121 70
Credit cards and related plans .................................... 9 5 6 9 5
Commercial and other .............................................. 33 80 56 2 11
-------- -------- -------- -------- --------
Total charge-offs ................................................. 236 180 180 132 86
-------- -------- -------- -------- --------
Recoveries:
Real Estate ....................................................... 3 0 0 0 4
Installment ....................................................... 25 17 12 34 23
Credit cards and related plans .................................... 2 3 3 4 1
Commercial ........................................................ 6 25 0 0 0
-------- -------- -------- -------- --------
Total recoveries .................................................. 36 45 15 38 28
-------- -------- -------- -------- --------
Net charge-offs ................................................... 200 135 165 94 58
Provision for loan losses ......................................... 688 612 484 358 227
-------- -------- -------- -------- --------
Allowance for loan losses - Dec. 31 ............................... $ 2,424 $ 1,936 $ 1,459 $ 1,140 $ 876
======== ======== ======== ======== ========
Ratios
Net charge-offs to average loans outstanding ...................... 0.11% 0.10% 0.16% 0.12% 0.10%
Net charge-offs to loans outstanding at end of year ............... 0.10% 0.09% 0.14% 0.10% 0.08%
llowance for loan losses to average loans ........................ 1.35% 1.39% 1.41% 1.40% 1.52%
Allowance for loan losses to total loans at end of year ........... 1.24% 1.23% 1.24% 1.24% 1.27%
Net charge-offs to allowance for losses ........................... 8.25% 6.97% 11.31% 8.25% 6.62%
Net charge-offs to provision for loans losses ..................... 29.07% 22.06% 34.09% 26.25% 25.55%
Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and installment loans. The combination of a
relatively short operating history and relatively high asset quality precludes
management from establishing a specific loan loss percentage for the computation
of the allowance for each category. Instead management assigns an estimated
percentage factor to each in the computation of the overall allowance. In
general terms, the real estate portfolio is subject to the least risk, followed
by the commercial loan portfolio, followed by the installment loan portfolio.
The subsidiary banks' internal and external loan review programs will from time
to time identify loans that are subject to specific weaknesses and such loans
will be reviewed for a specific loan loss allowance.
Community Bankshares operates three independent community banks in
central South Carolina. Under the provisions of the National Bank Act each board
of directors is responsible for determining the adequacy of its bank's loan loss
allowance. In addition, each bank is supervised and regularly examined by the
77
Office of the Comptroller of the Currency of the U. S. Treasury Department. As a
normal part of a safety and soundness examination, the OCC examiners will assess
and comment on the adequacy of a national bank's allowance for loan losses. The
allowance presented in this discussion is on an aggregated basis and as such
will generally show a substantial unallocated reserve that might not be present
if the Corporation were comprised of one operating bank subsidiary.
The nature of community banking is such that the loan portfolios will
be predominantly comprised of small and medium size business and consumer loans.
With community banks there is by definition a geographic concentration of loans
within the banks' respective city or county. Management at each subsidiary bank
monitors the loan concentrations and loan portfolio quality on an ongoing basis
including, but not limited to: quarterly analysis of loan concentrations,
monthly reporting of past dues, non-accruals, and watch loans, and quarterly
reporting of loan charge-offs and recoveries. These efforts focus on historical
experience and are bolstered by quarterly analysis of local and state economic
conditions, which is part of the subsidiary banks' assessment of the adequacy of
their allowances for loan losses.
Management believes that the allowance for loan losses, as of December
31, 2000 is sufficient to absorb the expected charge-offs and provide adequately
for the inherent losses that remain in the loan portfolio. Management will
continue to closely monitor the levels of non-performing and potential problem
loans and address the weaknesses in these credits to enhance the amount of
ultimate collection or recovery of these assets. Management considers the levels
and trends in non-performing and past due loans in determining how historical
loan loss rates are adjusted.
The following table presents the allocation of the allowance for loan
losses, as of December 31, 1996 through 2000, compared with the percent of loans
in the applicable categories to total loans.
% of % of % of % of % of
loans in loans in loans in loans in loans in
each each each each each
2000 category 1999 category 1998 category 1997 category 1996 category
---- -------- ---- -------- ---- -------- ---- -------- ---- --------
(Dollar amounts in thousands)
Commercial ................ $ 801 27% $ 660 28% $ 364 25% $ 336 24% $ 314 24%
Real estate ............... 752 58% 565 58% 385 58% 301 58% 313 60%
Installment ............... 487 15% 360 15% 388 16% 288 18% 188 16%
Unallocated ............... 384 0% 351 0% 322 0% 215 0% 61 0%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ................ $2,424 100% $1,936 100% $1,459 100% $1,140 100% $ 876 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Community Bankshares maintains an allowance for loan losses it believes
sufficient to cover estimated losses. The allowance is allocated to different
segments of the portfolio, based on management's expectations of risk in that
segment of the portfolio. This allocation is an estimate only and is not
intended to restrict Community Bankshares' ability to respond to losses.
Community Bankshares charges losses from any segment of the portfolio to the
allowance, regardless of the allocation.
In reviewing the adequacy of the allowance for loan losses at the end
of each period, Community Bankshares considers historical loan loss experience,
current economic conditions, loans outstanding, trends in non-performing and
delinquent loans, and the quality of collateral securing problem loans. The
allowance for loan losses is management's best estimate of probable loan losses
that have been incurred as of December 31, 2000.
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and general
economic conditions. In reviewing the adequacy of the provision for loan losses
during each period, Community Bankshares considers historical loan loss
experience, current economic conditions, loans outstanding, trends in
non-performing and delinquent loans, the quality of collateral securing problem
78
loans, and the results of its ongoing internal and external loan review process.
Provisions for loan losses totaled $688,000 and $612,000 in 2000 and 1999,
respectively. Based on the available information, Community Bankshares considers
its 2000 provision for loan losses adequate.
Net charge-offs in 2000 were $200,000 or 29.1% of the provision for
loan losses compared to $135,000 or 22.1% of the provision for loan losses in
the prior year. See "Allowance for Loan Losses" for a discussion of the factors
management considers in its review of the adequacy of the allowance and
provision for loan losses.
Average Deposits
Community Bankshares' average deposits in 2000 were $203 million,
compared to $168.6 million in 1999, an increase of $34.3 million or 20.4%.
The total average deposits for Community Bankshares for the years ended
December 31, 2000, 1999 and 1998 are summarized below:
2000 1999 1998
Average Average Average Average Average Average
balance cost balance cost balance cost
------- ---- ------- ---- ------- ----
(Dollar amounts in thousands)
Noninterest bearing demand $ 28,531 $ 26,124 $ 19,536
Interest bearing transaction accounts 21,039 1.56% 17,417 1.54% 14,028 1.80%
Savings-regular 8,414 2.12% 8,595 2.08% 10,774 2.38%
Savings- money market 25,031 4.73% 19,726 3.97% 11,461 4.96%
Time deposits less than $100,000 81,797 5.66% 39,406 5.09% 52,314 5.39%
Time deposits greater than $100,000 38,152 6.10% 57,355 5.14% 20,731 5.92%
-------- -------- --------
Total average deposits $202,964 $168,623 $128,844
======== ======== ========
At December 31, 2000 Community Bankshares had $38,702,000 in
certificates of deposit of $100,000 or more. The maturities of these
certificates are disclosed are as follows:
Maturity
(dollar amounts in
thousands)
Of 3 months or less 12,721
From 3 to 6 months 9,050
From 6 to 12 months 13,575
Over 12 months 3,356
-------
$38,702
=======
Return On Equity And Assets
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2000, 1999 and 1998.
79
2000 1999 1998
---- ---- ----
Return on assets (ROA) ........................... 1.26% 1.06% 0.99%
Return on equity (ROE) ........................... 14.67% 11.12% 8.91%
Dividend payout ratio (dividends/net income) ..... 20.50% 27.82% 28.91%
Equity as a percent of assets .................... 8.59% 9.49% 11.17%
Short-Term Borrowings
Community Bankshares' short-term borrowings consist of federal funds
purchased and securities sold under agreements to repurchase, which generally
mature each business day. There was $9,352,000, $2,782,000, and $4,464,000
outstanding at year-end 2000, 1999 and 1998, respectively. Further information
is provided in the following table.
2000 1999 1998
---- ---- ----
(Dollar amounts in thousands)
Outstanding at year-end .......................... $9,352 $2,782 $4,464
Interest rate at year-end ........................ 5.01% 3.50% 3.00%
Maximum month-end balance during the year ........ $9,532 $6,473 $7,315
Average amount outstanding during the year ....... $4,501 $5,210 $3,225
Weighted average interest rate during the year ... 4.84% 3.26% 3.69%
Federal Home Loan Bank Advances
Community Bankshares' banking subsidiaries are members of the Federal
Home Loan Bank of Atlanta. As such they have access to long-term borrowing from
the FHLB. There were $20,350,000, $19,420,000 and $9,490,000 outstanding in such
advances at year-end 2000, 1999 and 1998, respectively. Further information on
these borrowings from the FHLB is provided in the following table.
2000 1999 1998
---- ---- ----
(Dollar amounts in thousands)
Outstanding at year-end ....................... $20,350 $19,420 $ 9,490
Interest rate at year-end ..................... 6.04% 5.55% 5.41%
Maximum month-end balance during the year ..... $20,350 $19,420 $ 9,560
Average amount outstanding during the year .... $19,385 $12,335 $ 6,905
Weighted average interest rate during the year 6.01% 5.47% 5.65%
Capital
Dividends
During 2000 Community Bankshares paid cash dividends to shareholders of
22 cents per share, which totaled $645,000. This represented a dividend payout
ratio (dividends divided by net income) of 20.5%. In 1999 Community Bankshares
paid cash dividends to shareholders of 19 cents per share, which totaled
$608,000. This represented a dividend payout ratio of 27.8%.
Common Stock
Common stock at December 31, 2000 totaled $15,928,000 compared to
$14,207,000 the prior year, an increase of $1,721,000. This increase was
80
comprised of a transfer from retained earnings of $1,709,000, the market value
of a five-percent stock dividend on January 31, 2000, as well as smaller changes
associated with the exercise of stock options and shares issued by the dividend
reinvestment program.
Capital Adequacy
The Federal Reserve and federal bank regulatory agencies have adopted a
risk-based capital standard for assessing the capital adequacy of a bank holding
company or financial institution. The minimum required ratio is 8%. Orangeburg
National Bank, Sumter National Bank, and Florence National Bank are each
considered `well capitalized' for regulatory purposes. This category requires a
minimum risk based capital ratio of 10%. Detailed information on Community
Bankshares' capital position, as well as that of its subsidiary banks, is
provided in Note 20 to the consolidated financial statements. Community
Bankshares considers its current and projected capital position to be adequate.
Noninterest Income And Expense
Noninterest income, 2000 compared to 1999
Noninterest income increased to $1,868,000 in 2000 from $1,317,000 in
1999, a $551,000 or 41.8% increase. The major component of this change was in
service charge income, which in 2000 was $1,475,000 compared to $1,031,000 in
the prior year, a $444,000 or 43.1% increase. Most of this increase was related
to growth in the Florence and Sumter banks' returned check fees and deposit
account service charge income.
Noninterest expense, 2000 compared to 1999
Overall, non-interest expenses increased to $6,552,000 in 2000 from
$6,066,000 in 1999, an increase of $486,000 or 8%.
Personnel costs in 2000 were $3,779,000 compared to $3,493,000 the
prior year, an increase of $286,000 or 8.2%.
Premises and equipment expenses in 2000 were $942,000 compared to
$886,000 the prior year, a $56,000 or 6.3% increase.
Marketing expenses in 2000 were $207,000 compared to $180,000 the prior
year, a $27,000 or 15% increase.
Regulatory fees in 2000 were $140,000 compared to $155,000 the prior
year, a $15,000 or 9.7% decrease.
Supplies expense was $160,000 in 2000 compared to $155,000 in the prior
year, an increase of $5,000 or 3.1%.
Director fees were $137,000 in 2000 compared to $121,000 in the prior
year, an increase of $16,000 or 13.2%. Orangeburg National Bank pays outside
directors $600 per month. Sumter National Bank and Florence National Banks pays
outside directors $300 per month. The Florence bank began paying director fees
during 2000. Community Bankshares pays outside directors $200 per month.
FDIC insurance costs were $33,000 in 2000 compared to $23,000 in the
prior year, an increase of $10,000 or 43.4%.
All other expenses were $1,154,000 in 2000 compared to $1,053,000 in the prior
year, an increase of $101,000 or 9.6%.
81
Income Taxes, 2000 compared to 1999
Community Bankshares pays U. S. corporate income taxes and South
Carolina bank income taxes. The 2000 provision for income taxes was $1,807,000
compared to $1,049,000 the prior year, an increase of $758,000 or 72.3%.
Community Bankshares' effective average tax rate is 36.5% in 2000 compared to
32.4% the prior year. Community Bankshares was the beneficiary of the exercise
of non-qualified stock options on 27,500 shares during 1999. The tax benefit to
Community Bankshares approximated $89,000 and accounts for the temporary
reduction in the effective tax rate during 1999.
Noninterest income, 1999 compared to 1998
Noninterest income increased to $1,317,000 in 1999 from $1,055,000 in
1998, a $262,000 or 24.8% increase. The major component of this change was in
service charge income, which in 1999 was $1,031,000 compared to $798,000 in the
prior year, a $233,000 or 29.2% increase.
Noninterest expense, 1999 compared to 1998
Overall, non-interest expenses increased to $6,066,000 in 1999 from
$5,074,000 in 1998, an increase of $992,000 or 19.6%. The first full year of
operation of the new subsidiary bank in Florence accounted for much of this
increase. Accordingly, many of the dollar and percentage changes discussed
herein will be larger than normal.
Personnel costs in 1999 were $3,493,000 compared to $2,911,000 the
prior year, an increase of $582,000 or 20%.
Premises and equipment expenses in 1999 were $886,000 compared to
$701,000 the prior year, a $185,000 or 26.4% increase.
Marketing expenses in 1999 were $180,000 compared to $166,000 the prior
year, a $14,000 or 8.4% decrease.
Regulatory expenses in 1999 were $155,000 compared to $92,000 the prior
year, a $63,000 or 68.5% increase.
Supplies expense was $155,000 in 1999 compared to $174,000 in the prior
year, a decrease of $19,000 or 10.9%.
Director fees were $121,000 in 1999 compared to $125,000 in the prior
year, a decrease of $4,000 or 3%. Orangeburg National Bank paid its outside
directors $600 per month. Sumter National Bank paid its directors $300 per
month. Community Bankshares paid its outside directors $200 per month. Florence
National Bank did not pay outside director fees in 1999.
FDIC insurance costs were $23,000 in 1999 compared to $16,000 in the
prior year, an increase of $7,000 or 44%.
All other expenses were $1,053,000 in 1999 compared to $889,000 in the
prior year, an increase of $164,000 or 18.5%.
Income Taxes, 1999 compared to 1998
The 1999 provision for income taxes was $1,049,000 compared to $663,000
the prior year, an increase of $386,000 or 58.2%. Community Bankshares'
effective average tax rate was 32.4%. Community Bankshares was the beneficiary
of the exercise of non-qualified stock options on 27,500 shares during 1999. The
tax benefit to Community Bankshares approximated $89,000 and accounts for the
temporary reduction in the effective tax rate.
82
Inflation
The assets and liabilities of Community Bankshares are mostly monetary
in nature. Accordingly, the financial results and operations of Community
Bankshares are much more affected by changes in interest rates than changes in
inflation. There is, however, a strong correlation between increasing inflation
and increasing interest rates. The impact of inflation has been very moderate,
less than 3%, during 2000. Prospects appear good for continued low inflation,
despite some increases in energy costs. Although inflation does not normally
affect a financial institution as dramatically as it affects businesses with
large investments in plants and inventories, it does have an effect. During
periods of high inflation there are usually corresponding increases in the money
supply, and banks experience above average growth in assets, loans, and
deposits. General increases in the prices of goods and services also result in
increased operating expenses.
Liquidity
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in a timely and economical manner.
The most manageable sources of liquidity are composed of liabilities, with the
primary focus of liquidity management being the ability to attract deposits
within the subsidiary banks' service areas. Core deposits (total deposits less
certificates of deposit of $100,000 or more) provide a relatively stable funding
base. Certificates of deposit of $100,000 or more are generally more sensitive
to changes in rates, so they must be monitored carefully. Asset liquidity is
provided by several sources, including amounts due from banks, federal funds
sold, and investments available-for-sale.
Community Bankshares maintains an available-for-sale investment
portfolio. While investment securities purchased for this portfolio are
generally purchased with the intent to be held to maturity, such securities are
marketable and occasional sales may occur prior to maturity as part of the
process of asset/liability and liquidity management. Community Bankshares also
maintains a held-to-maturity investment portfolio. Securities in this portfolio
are generally not considered a primary source of liquidity. Management
deliberately maintains a short-term maturity schedule for its investments so
that there is a continuing stream of maturing investments. Community Bankshares
intends to maintain a short-term investment portfolio in order to continue to be
able to supply liquidity to its loan portfolio and for customer withdrawals.
Community Bankshares has substantially more liabilities that mature in
the next 12 months than it has assets maturing in the same period. However,
based on its historical experience, and that of similar financial institutions,
Community Bankshares believes that it is unlikely that so many deposits would be
withdrawn, without being replaced by other deposits, that Community Bankshares
would be unable to meet its liquidity needs with the proceeds of maturing
assets.
Community Bankshares also maintains various federal funds lines of
credit with correspondent banks and is able to borrow from the Federal Home Loan
Bank and the Federal Reserve's discount window.
Community Bankshares, through its subsidiary banks, has a demonstrated
ability to attract deposits from its market area. Deposits have grown from $72
million in 1995 to over $218 million in 2000. This stable growing base of
deposits is the major source of operating liquidity.
Community Bankshares' long-term liquidity needs are expected to be
primarily affected by the maturing of long-term certificates of deposit. At
December 31, 2000 Community Bankshares had approximately $15.3 million in
certificates of deposit and other obligations maturing in one to five years.
Community Bankshares had $17.9 million in obligations maturing after five years.
Community Bankshares' assets maturing in the same periods were $119.4 million
and $35.5 million, respectively. Even with a substantially larger dollar amount
of assets maturing in both periods than liabilities, Community Bankshares
believes that it will not have any significant long-term liquidity problems.
In the opinion of management, the current and projected liquidity
position is adequate.
83
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000:
Results Of Operations
Net Income
For the nine months ended September 30, 2001 Community Bankshares
earned a consolidated profit of $2,793,000 compared to $2,342,000 for the
comparable period in 2000, an increase of 19.3% or $451,000. Basic and diluted
earnings per share were $.87 in the 2001 period compared to $.73 for the 2000
period.
For the 2001 period Orangeburg National Bank reported a profit of
$1,869,000 compared to $1,687,000 for the 2000 period, an increase of 10.8% or
$182,000.
For the 2001 period Sumter National Bank reported a profit of $849,000
compared to $634,000 for the 2000 period, an increase of 33.9% or $215,000. The
Sumter bank began operation in September 1996.
For the 2001 period Florence National Bank reported a profit of
$125,000 compared to $39,000 for the 2000 period, an increase of 220% or
$86,000. The Florence bank began operation in July 1998.
As noted above, consolidated net income for the nine months ended
September 30, 2001, increased from the prior year by 19.3% or $451,000. The
major components of this increase are discussed below. Net interest income
before provision for loan losses for the nine months ended September 30, 2001
increased to $8,126,000 compared to $7,625,000 for the same period in 2000, an
increase of 6.6% or $501,000. For the 2001 period the provision for loan losses
was $457,000 compared to $490,000 for the 2000 period, a decrease of 6.7% or
$33,000. Non-interest income for the 2001 period was $1,987,000 compared to
$1,349,000 for the 2000 period, a 47.3% or $638,000 increase. For the same
periods, non-interest expense was $5,322,000 compared to $4,852,000, a 9.7% or
$470,000 increase.
Profitability
Profitability may be measured through the ROA (return on average
assets) and the ROE (return on average equity). Return on assets is the income
for the period divided by the average assets for the period, annualized. Return
on equity is the income for the period divided by the average equity for the
period, annualized. Operating results for the nine months ended September 30,
2001 and 2000 yield the results in the table shown below.
Nine months ended Sept. 30,
2001 2000
---- ----
(dollars in thousands)
Average assets $281,704 $243,697
ROA 1.32% 1.28%
Average equity $24,488 $21,047
ROE 15.21% 14.84%
Net income $2,793 $2,342
Net interest income
Net interest income, the major component of Community Bankshares'
income, is the amount by which interest and fees on interest earning assets
exceeds the interest paid on interest bearing deposits and other interest
bearing funds. During the first nine months of 2001 net interest income after
provision for loan losses increased to $7,669,000 from $7,135,000, a 7.5% or
$534,000 increase over the first nine months of 2000. This improvement was the
result of a $38 million increase in the average volume of earning assets. The
average yield on earning assets decreased to 8.07% for the 2001 period from
8.56% for the 2000 period. This decline was the result of market interest rate
84
declines. During the first nine months of 2001 the prime lending rate declined
from 9.0% to 5.50%. During the first nine months of 2000 the prime lending rate
increased from 8.75% to 9.50%.
For the first nine months of 2001 the cost of funds averaged 4.79%,
decreased from 4.90% for the first nine months of 2000. The effect of these
changes was a net interest spread (yield on earning assets less cost of interest
bearing liabilities) of 3.28% for the 2001 period, decreased from 3.66% for the
2000 period. Community Bankshares' net interest margin (net interest income
divided by total earning assets) was 4.05% for the 2001 period compared to 4.43%
for the 2000 period.
Interest Income
Elsewhere in this report is a table comparing the average balances,
yields, and rates for the interest rate sensitive segments of Community
Bankshares' balance sheets for the nine months ended September 30, 2001 and
2000. A discussion of that table follows.
Total interest income for the first nine months of 2001 was $16,200,000
compared with $14,744,000 for the same period in 2000, a 9.9% or $1,456,000
increase. The yield on average earning assets for the 2001 period was 8.07%,
decreased from 8.56% for the 2000 period. The decline in yields was directly
related to the overall decline in market interest rates. Total average interest
earning assets for the 2001 period were $267,610,000 compared to $229,709,000
for the 2000 period, an increase of 16.5% or $37,901,000.
The loan portfolio earned $13,694,000 for the first nine months of 2001
compared to $12,184,000 for the same period of 2000, a 12.4% or $1,510,000
increase. The yield decreased to 8.85% for the 2001 period from 9.24% for the
2000 period. The average size of the loan portfolio was $206,419,000 for the
2001 period compared to $175,774,000 for the 2000 period, an increase of 17.4%
or $30,645,000.
The taxable investment portfolio earned $1,699,000 for the first nine
months in 2001 compared to $2,230,000 for the same period in 2000, a 23.8% or
$531,000 decrease. The yield decreased to 6.21% in the 2001 period from 6.37% in
the 2000 period. The average size of the portfolio was $36,490,000 in the 2001
period compared to $46,646,000 in the 2000 period, a decrease of 21.8% or
$10,156,000. As bond market interest rates declined during 2001, Community
Bankshares had numerous securities called prior to maturity.
The tax-exempt investment portfolio earned $21,000 for the first nine
months in 2001 compared to $25,000 for the same period in 2000, a 16% or $4,000
decrease. The yield (on a taxable equivalent basis) on the portfolio was 5.69%
for the 2001 period, decreased from 6.27% for the 2000 period. The average size
of the portfolio was $746,000 for the 2001 period compared to $806,000 in the
2000 period, a decrease of 7.4% or $60,000.
Interest bearing deposits in other banks contributed $144,000 for the
first nine months of 2001 compared to $53,000 for the same period in 2000, an
increase of 172% or $91,000. The yield on these deposits decreased to 4.32% for
the 2001 period from 6.10% in the 2000 period. Community Bankshares averaged
$4,441,000 in the 2001 period compared to $1,159,000 in the 2000 period, an
increase of 283% or $3,282,000. The increase in these deposits was the result of
declining market interest rates, which caused numerous calls of investment
securities prior to maturity. The funds resulting from these calls were
temporarily invested in interest bearing deposits and federal funds.
Federal funds sold earned $642,000 the first nine months of 2001
compared to $252,000 for the same period in 2000, an increase of 155% or
$390,000. Yields decreased to 4.39% for the 2001 period from 6.31% for the 2000
period. For the 2001 period Community Bankshares increased its average volume in
federal funds sold to $19,514,000 compared to $5,324,000 for the 2000 period, a
267% or $14,190,000 increase.
Interest Expense
Interest expense for the first nine months of 2001 was $8,074,000
compared to the prior year's $7,119,000, a 13.4% or $955,000 increase. The
85
average volume of interest bearing liabilities was $224,702,000 for the 2001
period compared to $193,799,000 for the 2000 period, a 15.9% or $30,903,000
increase. The average rate paid for interest-bearing liabilities during the 2001
period was 4.79%, decreased from 4.90% for the 2000 period.
The cost of savings accounts was $927,000 in the first nine months in
2001 compared to $955,000 in the first nine months of 2000, a 2.9% or $28,000
decrease. Average savings deposit balances were $37,290,000 for the 2001 period
compared to $32,650,000 for the 2000 period, an increase of 14.2% or $4,640,000.
The average rate paid on these funds decreased to 3.31% from 3.90%.
Interest bearing transaction accounts cost $165,000 for the first nine
months in 2001 compared to the prior year's $241,000, a decrease of 31.5% or
$76,000. The volume of these deposits was $23,389,000 for the 2001 period
compared to $20,519,000 for the 2000 period, a 14% or $2,870,000 increase. The
average rate paid on these funds in the 2001 period decreased to .94% from 1.57%
in the 2000 period.
Time deposits cost $5,909,000 for the first nine months of 2001
compared to $4,943,000 for the first nine months of the prior year, an increase
of 19.5% or $966,000. The volume was $136,836,000 for the 2001 period compared
to $117,735,000 for the 2000 period, a 16.2% or $19,101,000 increase. The
average rate paid on these funds increased to 5.76% for the 2001 period from
5.60% for the 2000 period. This increase runs contrary to market interest rates
but reflects increased competition for time deposits in Community Bankshares'
markets.
Short-term borrowings consist of federal funds purchased and securities
sold under agreements to repurchase. This is a relatively small and volatile
part of the balance sheet. It cost $212,000 for the first nine months in 2001
compared to $117,000 for the first nine months of 2000, an increase of 81.2% or
$95,000. The volume of these funds was $7,414,000 in the 2001 period compared to
$3,553,000 in the 2000 period, an increase of 109% or $3,861,000. The average
rate paid on these funds decreased to 3.81% from 4.39%.
Borrowings from the Federal Home Loan Bank cost $861,000 for the first
nine months in 2001 compared to $863,000 for the first nine months in 2000,
virtually unchanged. The advances averaged $19,773,000 during the 2001 period
compared to $19,342,000 for the 2000 period, a 2.2% or $431,000 increase. The
average rate paid on these funds decreased to 5.81% from 5.95%.
Non-Interest Income
Non-interest income for the first nine months of 2001 grew to
$1,987,000 compared to $1,349,000 in the first nine months of 2000, a 47.3% or
$638,000 increase. Much of this increase resulted from the introduction of a new
service, an automated overdraft courtesy line for customers. This service
provides for a flat fee for paying customer checks in overdraft that is
equivalent to the fee charged for returned checks. Customers who use this
service are subject to other terms and conditions.
Non-Interest Expense
For the first nine months of 2001 non-interest expenses were $5,322,000
compared to $4,852,000 for the first nine months of 2000, a 9.7% or $470,000
increase. This increase is related to higher levels of business activity and
included the following components:
For the 2001 period personnel costs were $3,172,000 compared to
$2,831,000 for the 2000 period, an increase of 12% or $341,000;
For the 2001 period premises and equipment expenses were $703,000
compared to $690,000 for the 2000 period, an increase of 1.9% or $13,000; and
For the 2001 period other costs were $1,447,000 compared to $1,331,000
for the 2000 period, an increase of 8.7% or $116,000.
86
Income Taxes
Community Bankshares provided $1,541,000 for federal and state income
taxes during the first nine months of 2001 compared to $1,290,000 for the same
period in 2000, a 19.5% or $251,000 increase. The average tax rate for the 2001
period was 35.6% and for the 2000 period it was 35.5%.
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000:
Results of Operations
Net Income
For the quarter ended September 30, 2001, Community Bankshares earned a
consolidated profit of $962,000, compared to $865,000 for the comparable period
of 2000, an increase of 11.2% or $97,000. Basic or diluted earnings per share
were $.30 in the 2001 period, compared to $.27 for the 2000 period. The changes
in the items comprising net interest income, which are discussed below, resulted
from essentially the same factors discussed above regarding the results of
operation for the nine months ended September 30, 2001.
Net interest income
Net interest income before provision for loan losses for the quarter
ended September 30, 2001 increased to $2,770,000 compared to $2,648,000 for the
same period in 2000, an increase of 4.6% or $122,000. For the same period the
provision for loan losses was $180,000 compared to $152,000 for the 2000 period,
an increase of 18.4% or $28,000.
Interest Income
Total interest income for the third quarter 2001 was $5,261,000
compared to $5,273,000 for the same period in 2000, virtually unchanged.
The loan portfolio earned $4,578,000 for the third quarter 2001
compared to $4,421,000 for the same period of 2000, a 3.6% or $157,000 increase.
The investment portfolio earned $457,000 for the third quarter 2001
compared to $763,000 for the same period of 2000 period, a 40.1% or $306,000
decrease.
Interest bearing deposits in other banks contributed $38,000 for the
third quarter 2001 compared to $25,000 for the same period of 2000, an increase
of 52% or $13,000.
Federal funds sold earned $188,000 for the third quarter of 2001
compared to $64,000 for the same period of 2002, an increase of 194% or
$124,000.
Interest expense
Interest expense for the third quarter of 2001 was $2,491,000 compared
to $2,625,000 for the same period of 2000, a 5.1% or $134,000 decrease.
Non-interest income and expense
Non-interest income for the 2001 period was $744,000 compared to
$464,000 for the 2000 period, a 60.3% or $280,000 increase. This increase was
mostly the result of the introduction of the new automated overdraft service.
Non-interest expense was $1,833,000 compared to $1,625,000, a 12.8% or $208,000
increase.
87
Changes In Financial Position
Investment portfolio
The investment portfolio is comprised of held to maturity securities
and available for sale securities. Community Bankshares and its three subsidiary
banks usually purchase short-term issues (ten years or less) of U. S Treasury
and U. S. Government agency securities for investment purposes. At September 30,
2001 the held to maturity portfolio totaled $2,149,000 compared to $12,371,000
at December 31, 2000, a decrease of 82.6% or $10,222,000. At September 30, 2001,
the available for sale portfolio totaled $33,002,000 compared to $41,195,000 at
December 31, 2000, a decrease of 19.9% or $8,193,000. Most of the decline in the
subsidiary banks' investment portfolios was due to the call of many securities
during 2001, which resulted from the decline in bond market interest rates. The
following chart summarizes the investment portfolios at September 30, 2001, and
December 31, 2000.
September 30, 2001
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and federal agencies $2,149 $2,157 $30,036 $30,201
Tax exempt securities - - 803 820
Other equity securities - - 1,981 1,981
- - ------- -------
Total $2,149 $2,157 $32,820 $33,002
====== ====== ======= =======
Unrealized gain $ 8 $ 182
====== =======
December 31, 2000
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and federal agencies $12,371 $12,217 $38,599 $38,404
Tax exempt securities - - 814 810
Other equity securities - - 1,981 1,981
- - ------- -------
Total $12,371 $12,217 $41,394 $41,195
======= ======= ======= =======
Unrealized (loss) $ (154) $ (199)
======= =======
Loan portfolio
The loan portfolio is primarily consumer and small business oriented.
At September 30, 2001 the loan portfolio was $219,125,000 compared to
$195,077,000 at December 31, 2000, a 12.3% or $24,048,000 increase. The
following chart summarizes the loan portfolio at September 30, 2001 and December
31, 2000.
Sept. 30, 2001 Dec. 31, 2000
-------------- -------------
(dollars in thousands)
Real estate $138,258 $113,543
Commercial 55,260 52,264
Loans to individuals 25,607 29,270
-------- --------
Total $219,125 $195,077
======== ========
88
Past Due and Non-Performing Assets and the Allowance for Loan Losses
Community Bankshares closely monitors past due loans and loans that are
in non-accrual status and other real estate owned. Below is a summary of past
due and non-performing assets at September 30, 2001 and December 31, 2000.
Sept. 30, 2001 Dec. 31, 2000
-------------- -------------
(dollars in thousands)
Past due 90 days + accruing loans $101 $ 93
Non-accrual loans $413 $238
Impaired loans (included in nonaccrual) $413 $238
Other real estate owned $267 $ -
Management considers the past due and non-accrual amounts at September
30, 2001 to be reasonable in relation to the size of the portfolio and
manageable in the normal course of business. The increase in non-accrual assets
is associated with a small number of loans and is not indicative, in the opinion
of management, of any trend.
Community Bankshares had no restructured loans during any of the above
listed periods.
Allowance for Loan Losses
Management believes that the allowance for loan losses, as of September
30, 2001, is sufficient to absorb the expected charge-offs and provide
adequately for the inherent losses that remain in the loan portfolio. Management
will continue to closely monitor the levels of non-performing and potential
problem loans and address the weaknesses in these credits to enhance the amount
of ultimate collection or recovery of these assets. Management considers the
levels and trends in non-performing and past due loans in determining how
historical loan loss rates are adjusted.
The aggregate allowance for loan losses of the subsidiary banks and the
aggregate activity with respect to those allowances are summarized in the
following table.
Nine months ended Year ended Nine months ended
Sept. 30, 2001 Dec. 31, 2000 Sept. 30, 2000
-------------- ------------- --------------
Allowance at beginning of period $2,424 $1,936 $1,936
Provision expense 457 688 490
Net charge offs (120) (200) (156)
------ ------ ------
Allowance at end of period $2,761 $2,424 $2,270
====== ====== ======
Allowance / outstanding loans 1.26% 1.24% 1.22%
In reviewing the adequacy of the allowance for loan losses at the end
of each period, management of each bank considers historical loan loss
experience, current economic conditions, loans outstanding, trends in
non-performing and delinquent loans, and the quality of collateral securing
problem loans. After charging off all known losses, management of each
subsidiary bank considers the allowance adequate to provide for estimated losses
inherent in the loan portfolio at September 30, 2001.
Deposits
Deposits were $233,791,000 at September 30, 2001 compared to
$218,811,000 at December 31, 2000, an increase of 6.8% or $14,980,000.
Time deposits greater than $100,000 were $48,708,000 at September 30,
2001 compared to $38,702,000 at December 31, 2000, an increase of 25.9% or
$10,006,000.
89
Liquidity
Community Bankshares has substantially more liabilities (mostly
deposits, which may be withdrawn) which mature in the next 12 months than it has
assets maturing in the same period. However, based on its historical experience,
and that of similar financial institutions, Community Bankshares believes that
it is unlikely that so many deposits would be withdrawn, without being replaced
by other deposits, that Community Bankshares would be unable to meet its
liquidity needs with the proceeds of maturing assets.
Community Bankshares through its banking subsidiaries also maintains
federal funds lines of credit with correspondent banks, and is able to borrow
from the Federal Home Loan Bank and from the Federal Reserve's discount window.
Community Bankshares through its banking subsidiaries has a
demonstrated ability to attract deposits from its markets. Deposits have grown
from $30 million in 1989 to over $233 million in 2001. This base of deposits is
the major source of operating liquidity.
Community Bankshares' long term liquidity needs are expected to be
primarily affected by the maturing of long-term certificates of deposit. At
September 30, 2001 Community Bankshares had approximately $24.7 million and
$11.5 million in certificates of deposit and other interest bearing liabilities
maturing in one to five years and over five years, respectively. Community
Bankshares' assets maturing or repricing in the same periods were $124.8 million
and $26.1 million, respectively. Community Bankshares expects to be able to
manage its current balance sheet structure without experiencing any material
liquidity problems.
In the opinion of management, Community Bankshares' current and
projected liquidity position is adequate.
Capital resources
As summarized in the table below, Community Bankshares maintains a
strong capital position.
Minimum required
for
Sept. 30, 2001 Dec. 31, 2000 capital adequacy
-------------- ------------- ----------------
Tier 1 capital to average total assets 8.89% 8.20% 4.00%
Tier 1 capital to risk weighted assets 11.77% 11.10% 4.00%
Total capital to risk weighted assets 12.95% 12.30% 6.00%
In the opinion of management, Community Bankshares' current and
projected capital positions are adequate.
Dividends
Community Bankshares declared and paid a quarterly cash dividend of
seven cents per share during the first three quarters of 2001, for a total of 21
cents per share. The total cost of these dividends was $672,000.
Commitments
Sumter National Bank has entered into a contract to construct a new
branch bank. This building is currently under construction near the corner of
Liberty Street and Wedgefield Highway in Sumter. The contracted cost of the
building is $567,681.
90
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. Community Bankshares' market risk arises principally from interest
rate risk inherent in its lending, deposit and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although
Community Bankshares manages other risks, such as credit quality and liquidity
risk in the normal course of business, management considers interest rate risk
to be its most significant market risk and this risk could potentially have the
largest material effect on Community Bankshares' financial condition and results
of operations. Other types of market risks such as foreign currency exchange
risk and commodity price risk, do not arise in the normal course of community
banking activities.
Achieving consistent growth in net interest income is the primary goal
of Community Bankshares' asset/liability function. Community Bankshares attempts
to control the mix and maturities of assets and liabilities to achieve
consistent growth in net interest income despite changes in market interest
rates. Community Bankshares seeks to accomplish this goal while maintaining
adequate liquidity and capital. Community Bankshares' asset/liability mix is
sufficiently balanced so that the effect of interest rates moving in either
direction is not expected to be significant over time.
Community Bankshares' Asset/Liability Committee uses a simulation model
to assist in achieving consistent growth in net interest income while managing
interest rate risk. The model takes into account interest rate changes as well
as changes in the mix and volume of assets and liabilities. The model simulates
Community Bankshares' balance sheet and income statement under several different
rate scenarios. The model's inputs (such as interest rates and levels of loans
and deposits) are updated on a quarterly basis in order to obtain the most
accurate forecast possible. The forecast presents information over a
twelve-month period. It reports a base case in which interest rates remain flat
and reports variations that occur when rates increase and decrease 100 and 200
basis points. According to the model as of December 31, 2000 Community
Bankshares is positioned so that net interest income will increase $240,000 and
net income will increase $147,000 if interest rates rise 300 basis points in the
next twelve months. Conversely, net interest income will decline $251,000 and
net income will decline $154,000 if interest rates decline 200 basis points.
According to the model as of September 30, 2001 Community Bankshares was
positioned so that net interest income would be expected to increase $242,000
and net income would be expected to increase $149,000 in the next twelve months
if interest rates rise 100 basis points. Conversely, net interest income would
be expected to decline $242,000 and net income would be expected to decline
$149,000 in the next twelve months if interest rates decline 100 basis points.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates and loan prepayment, and should not be relied upon as indicative of actual
results. Further, the computations do not contemplate any actions Community
Bankshares could undertake in response to changes in interest rates.
The Market Risk table, which follows this discussion, shows Community
Bankshares' financial instruments that are sensitive to changes in interest
rates. Community Bankshares uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments, and prepayment of principal and potential calls.
For core deposits without contractual maturity (i.e., interest checking, savings
and money market accounts), the table presents principal cash flows based on
management's judgment concerning their most likely runoff. The actual maturities
and runoff could vary substantially if future prepayments, runoff and calls
differ from Community Bankshares' historical experience.
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Average 2001 2002 2003 2004 2005 After 2006 Balance Fair value
------- ---- ---- ---- ---- ---- ---------- ------- ----------
rate
(Dollar amounts in thousands)
Earning assets
Interest bearing deposits .... 6.25% $ 594 $ $- $ - $ - $ - $ - $ 594 $ 594
Investment securities ........ 6.38% 1,740 7,487 8,300 9,028 13,217 12,984 52,756
Investment securities - tax .. 6.01% 201 412 197 810
--------
exempt
Total securities investments . 53,566 53,412
-------- --------
Federal funds sold ........... 6.45% 8,130 - - - - - 8,130 8,130
Loans ........................ 9.32% 92,325 12,904 22,864 25,499 $19,176 22,309 195,077 197,811
Interest bearing liabilities
Savings ...................... 4.06% 1,919 1,823 1,732 1,646 1,563 29,702 38,385
Interest bearing transaction . 1.56% 1,135 1,079 1,025 973 925 17,571 22,708
accounts
Time deposits < $100,000 ..... 5.66% 75,329 9,815 1,166 456 936 95 87,797
Time deposits > $100,000 ..... 6.10% 35,719 2,637 144 100 102 - 38,702
------- --------
Total deposits ............... 187,592 187,365
------- -------- --------
Short term borrowing ......... 4.84% 9,352 - - - - - 9,352 9,352
FHLB advances ................ 6.01% $ 2,500 $ - $ - $ - $ 1,650 $16,200 $ 20,350 $ 20,209
The static interest rate sensitivity gap position, while not a complete
measure of interest sensitivity, is also reviewed periodically to provide
insights related to the static repricing structure of the subsidiary banks'
assets and liabilities. At December 31, 2000 on a cumulative basis through
twelve months, rate sensitive liabilities exceeded rate sensitive assets, by
$81.5 million. The liability sensitive position is largely due to the assumption
that the banks' $61 million in interest bearing transaction accounts, savings
accounts and money market accounts will reprice within a year. This assumption
may or may not be valid, since these accounts vary greatly in their sensitivity
to interest rate changes in the market.
92
The following table summarizes Community Bankshares' interest
sensitivity position as of December 31, 2000.
Interest Sensitivity Analysis
Within 3 4-12 months 1-5 years Over 5 Total
months ----------- --------- years -----
------ -----
(Dollar amounts in thousands)
Interest earning assets
Interest bearing deposits ...................... $ 594 $ - $ - $ - $ 594
Taxable investment securities .................. 700 1,241 37,835 12,980 52,756
Tax exempt investment securities ............... - - 810 - 810
Federal funds sold ............................. 8,130 - - - 8,130
Loans, net of unearned income .................. 78,229 13,577 80,716 22,555 195,077
--------- --------- --------- --------- ---------
Total interest earning assets .................. 87,653 14,818 119,361 35,535 257,367
--------- --------- --------- --------- ---------
Interest bearing liabilities
Savings ........................................ 38,385 - - - 38,385
Interest bearing transaction accounts .......... 22,708 - - - 22,708
Time deposits < $100M .......................... 23,728 51,970 12,004 95 87,797
Time deposits > $100M .......................... 12,721 22,625 3,356 - 38,702
Short term borrowing ........................... 9,352 - - - 9,352
FHLB advances .................................. - 2,570 140 17,640 20,350
--------- --------- --------- --------- ---------
Total interest bearing liabilities ............. $ 106,894 $ 77,165 $ 15,500 $ 17,735 $ 217,294
--------- --------- --------- --------- ---------
Interest sensitivity gap ....................... $ (19,241) $ (62,347) $ 103,861 $ 17,800 $ 40,073
Cumulative gap ................................. (19,241) (81,588) 22,273 40,073
RSA/RSL ........................................ 82% 19%
Cumulative RSA/RSL ............................. 82% 56%
RSA- rate sensitive assets; RSL- rate sensitive liabilities
The above table reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amortizing fixed rate loans are reflected at the scheduled maturity date.
Variable rate amortizing loans are reflected at the earliest date at which they
may be repriced contractually. Deposits in other banks and debt securities are
reflected at each instrument's ultimate maturity date. Overnight federal funds
sold are reflected as instantly repriceable. Interest bearing liabilities with
no contractual maturity, such as savings deposits and interest bearing
transaction accounts, are reflected in the earliest repricing period possible.
Fixed rate time deposits are reflected at the earlier of their next repricing or
maturity dates.
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Selected Quareterly Financial Data
The following table contains selected financial data of Community
Bankshares on a quarterly basis from the first quarter of 1999 through the third
quarter of 2001.
Selected Quarterly Financial Data
(Dollars in thousands, except per share data)
Quarters of 2001 Quarters of 2000 Quarters of 1999
----------------------- ----------------------------------- ------------------------------------
Third Second First Fourth Third Second First Fourth Third Second First
----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Interest and dividend income $ 5,550 $ 5,389 $ 5,261 $ 5,557 $ 5,273 $ 4,888 $ 4,583 $ 4,313 $ 4,092 $ 3,730 $ 3,415
Interest expense ............ (2,846) (2,737) (2,491) (2,856) (2,625) (2,329) (2,165) (1,942) (1,827) (1,670) (1,519)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income ......... 2,704 2,652 2,770 2,701 2,648 2,559 2,418 2,371 2,265 2,060 1,896
Provision for loan losses ... (142) (135) (180) (198) (152) (158) (180) (173) (166) (139) (134)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 2,562 2,517 2,590 2,503 2,496 2,401 2,238 2,198 2,099 1,921 1,762
Noninterest income .......... 551 692 744 519 464 448 437 323 344 345 305
Noninterest expenses ........ (1,712) (1,777) (1,833) (1,700) (1,625) (1,627) (1,600) (1,639) (1,530) (1,460) (1,437)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes .. 1,401 1,432 1,501 1,322 1,335 1,222 1,075 882 913 806 630
Provision for income taxes .. (500) (502) (539) (517) (470) (439) (381) (286) (299) (263) (201)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income .................. 901 930 962 805 865 783 694 596 614 543 429
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
Basic ................... $ 0.28 $ 0.29 $ 0.30 $ 0.25 $ 0.27 $ 0.25 $ 0.22 $ 0.19 $ 0.19 $ 0.17 $ 0.13
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted ................. $ 0.28 $ 0.29 $ 0.30 $ 0.24 $ 0.27 $ 0.25 $ 0.22 $ 0.19 $ 0.19 $ 0.17 $ 0.13
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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RECENT DEVELOPMENTS
On October 31, 2001, Community Bankshares completed its previously
announced acquisition of Resource Mortgage, Inc., a mortgage company
headquartered in Columbia, South Carolina. Consideration for the acquisition was
95,454 shares of Community Bankshares common stock, of which 63,636 are being
held in escrow pending the attainment of certain earnings goals by the
subsidiary. The subsidiary, which was renamed Community Resource Mortgage, Inc.,
has 29 employees and has offices in Columbia, Sumter and Anderson, South
Carolina. The subsidiary originates and sells residential mortgage loans.
In connection with the acquisition, Community Bankshares has guaranteed
a $9 million line of credit with an unaffiliated lender for the subsidiary's
general working capital purposes.
Condensed Financial Information
The following tables set forth condensed balance sheets at December 31,
2001 and statements of income for the year ended December 31, 2001, for each of
Community Bankshares and Ridgeway Bancshares. This information is not audited
and does not contain the detail and notes which would accompany full financial
statements prepared in accordance with generally accepted accounting principles.
Community Bankshares, Inc.
Unaudited Condensed Balance Sheet
December 31, 2001
(Dollars in Thousands)
ASSETS
Cash and Federal funds ..................................... $ 28,025
Investments ................................................ 43,707
Loans, net of allowance .................................... 237,340
Premises and equipment ..................................... 5,202
Other assets ............................................... 4,343
--------
Total Assets ........................................... $318,617
========
LIABILITIES AND EQUITY
Deposits ................................................... $255,433
Borrowings ................................................. 33,479
Other liabilities .......................................... 2,158
Shareholders' equity ....................................... 27,547
--------
Total liabilities and shareholders' equity ............. $318,617
========
Community Bankshares, Inc.
Unaudited Condensed Statement of Income
December 31, 2001
(Dollars in Thousands)
Interest income .......................................... $ 21,234
Interest expense ......................................... (10,294)
--------
Net interest income ................................. 10,940
Provision for loan losses ................................ (650)
Other Income ............................................. 3,584
Other expense ............................................ (7,810)
--------
Income before taxes ................................. 6,064
--------
Income taxes ............................................. (2,135)
--------
Net income .......................................... $ 3,929
========
95
Ridgeway Bancshares, Inc.
Unaudited Condensed Balance Sheet
December 31, 2001
(Dollars in Thousands)
ASSETS
Cash and Federal funds ...................................... $ 8,962
Investments ................................................. 28,124
Loans, net of allowance ..................................... 40,401
Premises and equipment ...................................... 737
Other assets ................................................ 1,096
-------
Total Assets ............................................ $79,320
=======
LIABILITIES AND EQUITY
Deposits .................................................... $67,353
Borrowings .................................................. 3,134
Other liabilities ........................................... 138
Shareholders' equity ........................................ 8,695
-------
Total liabilities and shareholders' equity .............. $79,320
=======
Ridgeway Bancshares, Inc.
Unaudited Condensed Statement of Income
December 31, 2001
(Dollars in Thousands)
Interest income .......................................... $ 5,236
Interest expense ......................................... (2,113)
-------
Net interest income ................................. 3,123
Provision for loan losses ................................ (80)
Other Income ............................................. 738
Other expense ............................................ (2,280)
-------
Income before taxes ................................. 1,501
Income taxes ............................................. (413)
-------
Net income .......................................... $ 1,088
=======
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of Community Bankshares,
Ridgeway Bancshares and their respective banking subsidiaries.
As discussed below under the caption "Recent Legislation", Congress has
recently adopted extensive changes in the laws governing the financial services
industry. Among the changes adopted are creation of the financial holding
company, a new type of bank holding company with powers that greatly exceed
those of standard holding companies, and creation of the financial subsidiary, a
subsidiary that can be used by national banks to engage in many, though not all,
of the same activities in which a financial holding company may engage. The
legislation also establishes the concept of functional regulation whereby the
various financial activities in which financial institutions engage are overseen
by the regulator with the relevant regulatory experience. Neither Community
Bankshares, Ridgeway Bancshares, nor their respective banking subsidiaries has
yet made a decision as to how to adapt the new legislation to its use.
96
Accordingly, the following discussion relates to the supervisory and regulatory
provisions that apply to Community Bankshares and Ridgeway Bancshares as they
currently operate.
Regulation Of Bank Holding Companies
General
As bank holding companies registered under the federal Bank Holding
Company Act, Community Bankshares and Ridgeway Bancshares are subject to the
regulations of the Federal Reserve. Under the Bank Holding Company Act,
Community Bankshares' and Ridgeway Bancshares' activities and those of their
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
Bank Holding Company Act prohibits Community Bankshares or Ridgeway Bancshares
from acquiring direct or indirect control of more than 5% of the outstanding
voting stock or substantially all of the assets of any bank or from merging or
consolidating with another bank holding company without prior approval of the
Federal Reserve. The BHCA also prohibits Community Bankshares or Ridgeway
Bancshares from acquiring control of any bank operating outside the State of
South Carolina unless such action is specifically authorized by the statutes of
the state where the bank to be acquired is located.
Additionally, the Bank Holding Company Act prohibits Community
Bankshares or Ridgeway Bancshares from engaging in or from acquiring ownership
or control of more than 5% of the outstanding voting stock of any company
engaged in a non-banking business unless such business is determined by the
Federal Reserve to be so closely related to banking as to be properly incident
thereto. The Bank Holding Company Act generally does not place territorial
restrictions on the activities of such non-banking-related activities.
As discussed below under "Recent Legislation", a bank holding company
that meets certain requirements may now qualify as a financial holding company
and thereby significantly increase the variety of services it may provide and
the investments it may make.
Community Bankshares and Ridgeway Bancshares are also subject to
limited regulation and supervision by the South Carolina State Board of
Financial Institutions. A South Carolina bank holding company may be required to
provide the State Board with information with respect to the financial
condition, operations, management and inter-company relationships of the holding
company and its subsidiaries. The State Board also may require such other
information as is necessary to keep itself informed about whether the provisions
of South Carolina law and the regulations and orders issued thereunder by the
State Board have been complied with, and the State Board may examine any bank
holding company and its subsidiaries. Furthermore, pursuant to applicable law
and regulations, Community Bankshares and Ridgeway Bancshares must receive
approval of, or give notice to (as applicable) the State Board prior to engaging
in the acquisition of banking or non-banking institutions or assets.
Obligations of Holding Companies to their Subsidiary Banks
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policies that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended,
require insured depository institutions under common control to reimburse the
FDIC for any loss suffered or reasonably anticipated by either the Savings
Association Insurance Fund or the Bank Insurance Fund of the FDIC as a result of
the default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the Savings Association Insurance fund or the Bank Insurance fund or
both. The FDIC's claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is subordinate to
97
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
The Federal Deposit Insurance Act also provides that amounts received
from the liquidation or other resolution of any insured depository institution
by any receiver must be distributed (after payment of secured claims) to pay the
deposit liabilities of the institution prior to payment of any other general or
unsecured senior liability, subordinated liability, general creditor or
stockholder. This provision would give depositors a preference over general and
subordinated creditors and stockholders in the event a receiver is appointed to
distribute the assets of any banking subsidiary of Community Bankshares or
Ridgeway Bancshares.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
The banking subsidiaries of Community Bankshares are all national
banking associations subject to the provisions of the National Bank Act. Under
the National Bank Act, if the capital stock of a national bank is impaired by
losses or otherwise, the Office of the Comptroller of the Currency is authorized
to require payment of the deficiency by assessment upon the bank's
shareholders', pro rata, and to the extent necessary, if any such assessment is
not paid by any shareholder after three months notice, to sell the stock of such
shareholder to make good the deficiency.
Capital Adequacy Guidelines For Bank Holding Companies And Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC, have adopted risk-based and leverage capital adequacy guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks.
Failure to meet capital guidelines could subject the banking
subsidiaries of Community Bankshares and Ridgeway Bancshares to a variety of
enforcement remedies, including the termination of deposit insurance by the FDIC
and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.
The applicable capital adequacy guidelines and the capital position of
Community Bankshares and its subsidiary banks are summarized in Note 20 to the
financial statements of Community Bankshares contained elsewhere in this Proxy
Statement/Prospectus and the applicable capital adequacy guidelines and the
capital position of Ridgeway Bankshares and its subsidiary banks are summarized
in Note 16 to the financial statements of Ridgeway Bancshares contained
elsewhere in this Proxy Statement/Prospectus. Each of Community Bankshares,
Ridgeway Bancshares and their respective banking subsidiaries exceeded all
applicable capital adequacy guidelines at September 30, 2001.
Payment Of Dividends
Community Bankshares and Ridgeway Bancshares are legal entities
separate and distinct from their banking subsidiaries. Most of the revenues of
Community Bankshares and Ridgeway Bancshares result from dividends paid to them
by their respective banking subsidiaries. There are statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by bank holding companies.
98
Each national banking association is required by federal law to obtain
the prior approval of the Office of the Comptroller of the Currency for the
payment of dividends if the total of all dividends declared by the board of
directors of such bank in any year will exceed the total of (i) such bank's net
profits (as defined and interpreted by regulation) for that year plus (ii) the
retained net profits (as defined and interpreted by regulation) for the
preceding two years, less any required transfers to surplus. In addition,
national banks can only pay dividends to the extent that retained net profits
(including the portion transferred to surplus) exceed bad debts (as defined by
regulation).
All shares of Ridgeway Bancshares common stock are entitled to share
equally in such dividends as Ridgeway Bancshares may pay on its common stock.
The payment by Ridgeway Bancshares of dividends, if any, rests within the
discretion of its board of directors and depends upon its earnings, its
compliance with capital requirements, its financial condition and other relevant
factors. Bank of Ridgeway is authorized to pay cash dividends up to 100% of net
income in any calendar year without obtaining the prior approval of the State
Board of Financial Institutions provided that Bank of Ridgeway received a
composite rating of one or two at the last examination conducted by the State
Board. South Carolina law requires each state nonmember bank to maintain the
same reserves against deposits as are required for state member banks under the
Federal Reserve Act. This requirement is not expected to limit the ability of
Bank of Ridgeway to pay dividends on its common stock.
The payment of dividends by Community Bankshares, Ridgeway Bancshares
or their respective banking subsidiaries may also be affected or limited by
other factors, such as the requirements to maintain adequate capital above
regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the banks, could include the payment of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. The Office of the Comptroller of the Currency has indicated that
paying dividends that deplete a national bank's capital base to an inadequate
level would be an unsafe and unsound banking practice. The Federal Reserve, the
Office of the Comptroller of the Currency and the FDIC have issued policy
statements, which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
Transactions By Bank Holding Companies With Their Affiliates
Federal law regulates transactions among Community Bankshares and
Ridgeway Bancshares and their affiliates, including the amount of the banks'
loans to or investments in nonbank affiliates and the amount of advances to
third parties collateralized by securities of an affiliate. Further, a bank
holding company and its affiliates are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
FDIC Insurance Assessments
Because the deposits of all of the banking subsidiaries of Community
Bankshares and Ridgeway Bancshares are insured by the Bank Insurance Fund, the
banks are subject to semiannual insurance assessments imposed by the FDIC. Since
January 1, 1997, the assessments imposed on all FDIC deposits for deposit
insurance have an effective rate ranging from 0 to 27 basis points per $100 of
insured deposits, depending on the institution's capital position and other
supervisory factors. However, because legislation enacted in 1996 requires that
both Savings Association Insurance Fund-insured and Bank Insurance Fund-insured
deposits pay a pro rata portion of the interest due on the obligations issued by
the Financing Corporation, the FDIC is currently assessing Bank Insurance
Fund-insured deposits an additional 1.26 basis points per $100 of deposits, and
Savings Association Insurance Fund-insured deposits an additional 6.30 basis
points per $100 of deposits, to cover those obligations. The Financing
Corporation assessment will continue to be adjusted quarterly to reflect changes
in the assessment bases of the respective funds based on quarterly Call Report
and Thrift Financial Report submissions.
Regulation Of The Banks
Orangeburg National Bank, Sumter National Bank, and Florence National
Bank are also subject to examination by the Office of the Comptroller of the
99
Currency bank examiners and the Bank of Ridgeway is also subject to examination
by the South Carolina State Board of Financial Institutions. In addition, the
banks are subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer credit and
branch banking. The banks' loan operations are subject to certain federal
consumer credit laws and regulations promulgated thereunder, including, but not
limited to: the federal Truth-In-Lending Act, governing disclosures of credit
terms to consumer borrowers; the Home Mortgage Disclosure Act, requiring
financial institutions to provide certain information concerning their mortgage
lending; the Equal Credit Opportunity Act and the Fair Housing Act, prohibiting
discrimination on the basis of certain prohibited factors in extending credit;
the Fair Credit Reporting Act, governing the use and provision of information to
credit reporting agencies; the Bank Secrecy Act, dealing with, among other
things, the reporting of certain currency transactions; and the Fair Debt
Collection Act, governing the manner in which consumer debts may be collected by
collection agencies. The deposit operations of the banks are subject to the
Truth in Savings Act, requiring certain disclosures about rates paid on savings
accounts; the Expedited Funds Availability Act, which deals with disclosure of
the availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The banks are subject to the requirements of the Community Reinvestment
Act. The Community Reinvestment Act imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also are considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety And Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
Federal Deposit Insurance Act restricting payment of capital distributions and
management fees; requiring the Office of the Comptroller of the Currency to
monitor the condition of the bank; requiring submission by the bank of a capital
restoration plan; restricting the growth of the bank's assets and requiring
prior approval of certain expansion proposals. A bank that is "significantly
undercapitalized" is also subject to restrictions on compensation paid to senior
management of the bank, and a bank that is "critically undercapitalized" is
further subject to restrictions on the activities of the bank and restrictions
on payments of subordinated debt of the bank. The purpose of these provisions is
to require banks with less than adequate capital to act quickly to restore their
capital and to have the Office of the Comptroller of the Currency move promptly
to take over banks that are unwilling or unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 ("Riegel-Neal"), Community Bankshares, Ridgeway Bancshares and any other
adequately capitalized bank holding company located in South Carolina can
acquire a bank located in any other state, and a bank holding company located
outside South Carolina can acquire any South Carolina-based bank, in either case
100
subject to certain deposit percentage and other restrictions. Riegle-Neal also
provides that, in any state that has not previously elected to prohibit
out-of-state banks from operating interstate branches within its territory,
adequately capitalized and managed bank holding companies can consolidate their
multistate bank operations into a single bank subsidiary and branch interstate
through acquisitions. De novo branching by an out-of-state bank is permitted
only if it is expressly permitted by the laws of the host state. The authority
of a bank to establish and operate branches within a state will continue to be
subject to applicable state branching laws. South Carolina law was amended,
effective July 1, 1996, to permit such interstate branching but not de novo
branching by an out-of-state bank.
The Riegel-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger customers. These advantages
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region.
Legislative Proposals
Other proposed legislation which could significantly affect the
business of banking has been introduced or may be introduced in Congress from
time to time. Neither Community Bankshares nor Ridgeway Bancshares can predict
the future course of such legislative proposals or their impact on Community
Bankshares or Ridgeway Bancshares should they be adopted.
Recent Legislation
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act,
which makes it easier for affiliations between banks, securities firms and
insurance companies to take place. The Act removes Depression-era barriers that
had separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information. Most of the provisions of the Act require the
applicable regulators to adopt regulations in order to implement these
provisions, and a significant number of regulations have already been adopted.
Under provisions of the new legislation, which were effective March 11,
2000, banks, securities firms and insurance companies are able to structure new
affiliations through a holding company structure or through a financial
subsidiary. The legislation creates a new type of bank holding company called a
"financial holding company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial activities," which are activities that are (1) financial in nature;
(2) incidental to activities that are financial in nature; or (3) complimentary
to a financial activity and that do not impose a safety and soundness risk.
Significantly, the permitted financial activities for financial holding
companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
101
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.
Community Bankshares anticipates that the Act and the regulations
adopted pursuant to the Act will be likely to create new opportunities for it to
offer expanded services to customers in the future, though Community Bankshares
has not yet determined what the nature of the expanded services might be or when
Community Bankshares might find it feasible to offer them. Community Bankshares
further expects that the Act will increase competition from larger financial
institutions that are currently more capable than Community Bankshares of taking
advantage of the opportunity to provide a broader range of services. However,
Community Bankshares continues to believe that its commitment to providing high
quality, personalized service to customers will permit it to remain competitive
in its market area.
Fiscal And Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of Community Bankshares are subject to
the influence of economic conditions generally, both domestic and foreign, and
also to the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve. The Federal Reserve regulates the supply of
money through various means, including open-market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve, and the reserve requirements on deposits. The nature and timing
of any changes in such policies and their impact on Community Bankshares cannot
be predicted.
DESCRIPTION OF COMMUNITY BANKSHARES COMMON STOCK
Community Bankshares is authorized to issue 12,000,000 shares of
Community Bankshares common stock. At September 30, 2001, there were 3,204,220
shares of Community Bankshares common stock issued and outstanding. No other
class of stock is authorized.
Community Bankshares' common stock has unlimited voting rights and is
entitled to receive the net assets of Community Bankshares upon dissolution. All
shares of common stock, upon issuance and receipt of the consideration for their
issuance, will be fully paid and nonassessable. None of the shares issued or
proposed to be issued pursuant to this offering is convertible, has any
redemption rights or is entitled to any sinking fund.
Holders of Community Bankshares common stock are entitled to receive
such dividends as may be declared by the board of directors out of funds legally
available therefor. The ability of Community Bankshares to pay dividends is
affected by the ability of its subsidiary institutions to pay dividends, which
is limited by applicable regulatory requirements and capital guidelines. At
September 30, 2001, under such requirements and guidelines, Community
Bankshares' subsidiary institutions had $4.8 million of undivided profits
legally available for the payment of dividends. See "Supervision and
Regulation-Payment of Dividends."
For a further description of Community Bankshares common stock, see
"EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS."
102
SHAREHOLDER PROPOSALS
Community Bankshares expects to hold its next annual meeting of
shareholders after the merger during May 2002. Under SEC rules, proposals of
Community Bankshares shareholders intended to be presented at that meeting must
have been received by Community Bankshares at its principal executive offices,
791 Broughton Street, Orangeburg, South Carolina 29115, Attention: William W.
Traynham, President, by December 3, 2001, for consideration by Community
Bankshares for possible inclusion in such proxy statement. If any shareholder
proposal is not received by Community Bankshares by February 16, 2002, proxies
solicited by management of Community Bankshares will be voted on the proposal in
the discretion of the designated proxy agents.
FORWARD LOOKING STATEMENTS
This Proxy Statement/Prospectus and documents incorporated in it may
include forward looking statements which reflect Community Bankshares' or
Ridgeway Bancshares' current views with respect to future events and financial
performance. Such forward looking statements are based on general assumptions
and are subject to various risks, uncertainties and other factors that may cause
actual results to differ materially from the views, beliefs and projections
expressed in such statements. Some factors are specific to Community Bankshares
and Ridgeway Bancshares, including:
o The cost and other effects of material contingencies, including
litigation contingencies and other contingencies related to acquired
operations.
o Community Bankshares' ability to expand into new markets and to
maintain profit margins in the face of pricing pressures.
o The ability of Community Bankshares to achieve the earnings
expectations related to the acquired operations of recently-completed
and pending acquisitions, which in turn depends on a variety of
factors, including
o The ability of Community Bankshares to achieve the anticipated cost
savings and revenue enhancements with respect to the acquired
operations.
o The assimilation of the acquired operations with Community Bankshares'
corporate culture, including the ability to instill Community
Bankshares' credit practices and efficient approach to the acquired
operations.
o The continued growth of the acquired entities' markets consistent with
recent historical experience.
Other factors which may affect Community Bankshares or Ridgeway Bancshares apply
to the financial services industry more generally, including:
o Possible changes in economic and business conditions that may affect
the prevailing interest rates, the prevailing rates of inflation, or
the amount of growth, stagnation, or recession in the global, U.S.,
and southeastern U.S. economies, the value of investments,
collectibility of loans, and the profitability of business entities.
o Possible changes in monetary and fiscal policies, laws, and
regulations, and other activities of governments, agencies, and
similar organizations.
o The effects of easing of restrictions on participants in the financial
services industry, such as banks, securities brokers and dealers,
investment companies, and finance companies, and attendant changes in
patterns and effects of competition in the financial services
industry.
103
The words "believe", "expect", "anticipate", "project", and similar
expressions signify forward looking statements. Readers are cautioned not to
place undue reliance on any forward looking statements made by or on behalf of
Community Bankshares. Any such statement speaks only as of the date the
statement was made. Community Bankshares undertakes no obligation to update or
revise any forward looking statements.
EXPERTS
The consolidated financial statements of Community Bankshares December
31, 2000 and 1999, and for each of the three years in the period ended December
31, 2000, included in this Proxy Statement/Prospectus, have been audited by J.
W. Hunt & Company, L.L.P., independent auditors, as set forth in their report
thereon which is included herein. The financial statements audited by J. W. Hunt
& Company, L.L.P., have been included in reliance on their report given on their
authority as experts in accounting and auditing.
The consolidated financial statements of Ridgeway Bancshares, included
with this Proxy Statement/Prospectus, have been audited by Tourville, Simpson &
Caskey, LLP., independent auditors, for the periods indicated in their report
thereon which is included herein. The financial statements audited by Tourville,
Simpson & Caskey, LLP have been included in reliance on their report given on
their authority as experts in accounting and auditing.
OPINIONS
The legality of the shares of Community Bankshares common stock to be
issued in the merger will be passed upon by Haynsworth Sinkler Boyd, P.A.,
Columbia South Carolina. Certain tax consequences of the transaction have also
been passed upon by Haynsworth Sinkler Boyd, P.A.
WHERE YOU CAN FIND MORE INFORMATION
Community Bankshares files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that Community Bankshares files with
the SEC at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C., 20549. Please call the SEC at 1-800-SEC-0330 for further
information on operation of the public reference rooms. These filings are also
available at the Internet world wide web site maintained by the SEC at
"http://www.sec.gov."
Community Bankshares filed a Registration Statement on Form S-4 (the
"Registration Statement") to register with the SEC the Community Bankshares
common stock to be issued to Ridgeway Bancshares shareholders in the merger.
This Proxy Statement/Prospectus is a part of that Registration Statement and
constitutes a prospectus of Community Bankshares. As allowed by SEC rules, this
Proxy Statement/Prospectus does not contain all the information you can find in
Community Bankshares' registration statement or the exhibits to that
registration statement.
Community Bankshares has supplied all information contained or
incorporated by reference in this Proxy Statement/Prospectus relating to
Community Bankshares, and Ridgeway Bancshares has supplied all such information
relating to Ridgeway Bancshares.
You should rely only on the information contained in this Proxy
Statement/Prospectus. We have not authorized anyone to provide you with
information that is different from what is contained in this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus is dated March 4, 2002.
You should not assume that the information contained in this Proxy
Statement/Prospectus is accurate as of any date other than that date. Neither
the mailing of this Proxy Statement/Prospectus to shareholders nor the issuance
of Community Bankshares common stock in the merger creates any implication to
the contrary. There may be changes in the affairs of Community Bankshares or
Ridgeway Bancshares since the date of this Proxy Statement/Prospectus which are
not reflected in this document.
We have not authorized anyone to give any information or make any
representation about the merger or Community Bankshares or Ridgeway Bancshares
that differs from, or adds to, the information in this Proxy
Statement/Prospectus or in Community Bankshares' documents that are publicly
filed with the Securities and Exchange Commission. Therefore, if anyone does
give you different or additional information, you should not rely on it.
104
If you are in a jurisdiction where it is unlawful to offer to exchange
or sell, or to ask for offers to exchange or buy, the securities offered by this
Proxy Statement/Prospectus or to ask for proxies, or if you are a person to whom
it is unlawful to direct such activities, then the offer presented by this Proxy
Statement/Prospectus does not extend to you.
105
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND PRO FORMA FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS Page
----
Ridgeway Bancshares, Inc.:
Report of Independent Accountants.........................................................................................F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 (audited)....................................................F-3
Consolidated Statements of Operations for the Years ended December 31, 2000, 1999 and 1998 (audited)......................F-4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the Years
ended December 31, 2000, 1999 and 1998 (audited)........................................................................F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 2000, 1999 and 1998 (audited)......................F-6
Notes to Consolidated Financial Statements..............................................................................F-7-21
Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 (unaudited)..........................F-22
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
ended September 30, 2001 and 2000 (unaudited) ..........................................................................F-23
Condensed Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
for the Nine Months ended September 30, 2001 and 2000 (unaudited) ......................................................F-24
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2001 and 2000 (unaudited).........F-25
Notes to Condensed Consolidated Financial Statements (unaudited).......................................................F-26-27
Community Bankshares, Inc.:
Independent Auditors' Report..............................................................................................F-28
Consolidated Balance Sheets as of December 31, 2000 and 1999 (audited)....................................................F-29
Consolidated Statements of Income for the Years ended December 31, 2000, 1999 and 1998 (audited)......................F-30-31
Consolidated Statements of Changes in Shareholders' Equity for the Years
ended December 31, 2000, 1999 and 1998 (audited) ....................................................................F-32-33
Consolidated Statements of Cash Flows for the Years ended December 31, 2000, 1999 and 1998 (audited)...................F-34-35
Notes to Consolidated Financial Statements.............................................................................F-36-65
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 (unaudited)....................................F-66
Consolidated Statements of Income for the Three Months and Nine Months
ended September 30, 2001 and 2000 (unaudited) ..........................................................................F-67
Consolidated Statements of Changes in Shareholders' Equity for the Nine Months
ended September 30, 2001 and 2000 (unaudited) ..........................................................................F-68
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2001 and 2000 (unaudited)...................F-69
Notes to Unaudited Consolidated Financial Statements......................................................................F-70
PRO FORMA FINANCIAL INFORMATION
Community Bankshares, Inc:
Pro Forma Combined Condensed Financial Statements.........................................................................F-71
Pro Forma Combined Condensed Balance Sheet as of September 30, 2001.......................................................F-72
Pro Forma Combined Condensed Statement of Income for the Nine Months ended September 30, 2001.............................F-73
Pro Forma Combined Condensed Statement of Income for the Year ended December 31, 2000.....................................F-73
F-1
TOURVILLE, SIMPSON & CASKEY, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
POST OFFICE BOX 1769
COLUMBIA, SOUTH CAROLINA 29202
TELEPHONE (803) 252-3000
FAX (803) 252-2226
WILLIAM E. TOURVILLE, CPA MEMBER AICPA SEC AND
HARRIET S. SIMPSON, CPA, CISA, CDP PRIVATE COMPANIES
R. JASON CASKEY, CPA PRACTICE SECTIONS
JOHN T. DRAWDY, JR., CPA
TIMOTHY R. ALFORD, CPA
DAVID J. WATKINS II, CPA
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Ridgeway Bancshares, Inc.
Ridgeway, South Carolina
We have audited the accompanying consolidated balance sheets of Ridgeway
Bancshares, Inc. and its subsidiary as of December 31, 2000 and 1999 and the
related statements of operations, changes in shareholders' equity and
comprehensive income, and cash flows for the years ended December 31, 2000,
1999, and 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ridgeway Bancshares, Inc. and
its subsidiary as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years ended December 31, 2000, 1999, and
1998 in conformity with generally accepted accounting principles.
Tourville, Simpson & Caskey, L.L.P.
Columbia, South Carolina
January 11, 2001
Tourville, Simpson & Caskey, L.L.P.
F-2
RIDGEWAY BANCSHARES, INC.
Consolidated Balance Sheets
December 31, 2000 and 1999
2000 1999
---- ----
Assets
Cash and cash equivalents:
Cash and due from banks ............................................................ $ 2,938,982 $ 2,786,891
Federal funds sold and securities purchased under agreements
to resell ......................................................................... 5,960,000 300,000
------------ ------------
Total cash and cash equivalents .................................................... 8,898,982 3,086,891
Time deposits with other banks ..................................................... 137,000 130,000
Investment securities:
Securities available-for-sale ...................................................... 7,559,684 9,663,001
Securities held-to-maturity (market value of $16,220,805 in 2000 ................... 16,116,759 16,095,443
and $15,976,538 in 1999)
Nonmarketable equity securities .................................................... 63,648 63,648
------------ ------------
Total investment securities ........................................................ 23,740,091 25,822,092
Loans receivable: .................................................................. 39,804,725 33,723,521
Less allowance for loan losses ..................................................... 387,529 334,209
------------ ------------
Loans, net ......................................................................... 39,417,196 33,389,312
Premises and equipment, net ........................................................ 773,165 834,424
Accrued interest receivable ........................................................ 601,553 571,218
Other assets ....................................................................... 573,394 621,067
------------ ------------
Total assets ....................................................................... $ 74,141,381 $ 64,455,004
============ ============
Liabilities
Deposits:
Non-interest bearing demand deposits ............................................... $ 9,839,029 $ 9,552,518
Interest bearing demand deposits ................................................... 9,211,538 8,414,369
Money market accounts .............................................................. 10,161,177 7,171,753
Savings ............................................................................ 7,621,758 6,772,620
Certificates of deposit of $100,000 and over ....................................... 6,864,350 4,194,809
Certificates of deposit of under $100,000 .......................................... 19,992,563 18,865,577
------------ ------------
Total deposits ..................................................................... 63,690,415 54,971,646
Accrued interest payable ........................................................... 171,663 163,368
Federal funds purchased ............................................................ - 390,000
Securities sold under agreements to repurchase ..................................... 2,418,501 1,812,270
Other liabilities .................................................................. 20,320 90,183
------------ ------------
Total liabilities .................................................................. 66,300,899 57,427,467
------------ ------------
Shareholders' Equity
Common stock, no par value; 100,000 shares authorized; ............................. 2,200,000 2,200,000
40,000 shares issued and outstanding
Accumulated other comprehensive income (loss) ...................................... (18,413) (82,640)
Retained earnings .................................................................. 5,658,895 4,910,177
------------ ------------
Total shareholders' equity ......................................................... 7,840,482 7,027,537
------------ ------------
Total liabilities and shareholders' equity ......................................... $ 74,141,381 $ 64,455,004
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
Tourville, Simpson & Caskey, L.L.P.
F-3
RIDGEWAY BANCSHARES, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Interest income:
Loans, including fees .................................................. $3,410,292 $2,941,423 $2,895,415
Investment securities:
Taxable ................................................................ 912,003 919,085 776,608
Tax-exempt ............................................................. 437,632 444,786 411,670
Nonmarketable equity securities ........................................ 3,609 4,631 2,800
Federal funds sold and securities purchased ............................ 218,083 210,617 270,948
under agreements to resell
Time deposits with other banks ......................................... 8,241 6,713 7,562
---------- ---------- ----------
Total ................................................................. 4,989,860 4,527,255 4,365,003
---------- ---------- ----------
Interest expense:
Deposits ............................................................... 1,882,089 1,658,883 1,683,687
Federal funds purchased and securities sold
under agreement to repurchase ............ ............................ 161,356 85,262 64,245
---------- ---------- ----------
Total ................................................................. 2,043,445 1,744,145 1,747,932
---------- ---------- ----------
Net interest income .................................................... 2,946,415 2,783,110 2,617,071
Provision for loan losses .............................................. 75,000 60,000 54,000
---------- ---------- ----------
Net interest income after provision for loan losses .................... 2,871,415 2,723,110 2,563,071
---------- ---------- ----------
Other operating income
Service charges on deposit accounts .................................... 480,961 406,495 408,138
Other service charges and fees ......................................... 161,589 125,461 91,615
Other income ........................................................... 28,824 31,048 50,308
---------- ---------- ----------
Total ................................................................. 671,374 563,004 550,061
---------- ---------- ----------
Other operating expenses
Salaries and benefits .................................................. 1,172,132 1,082,389 1,084,260
Net occupancy and equipment expense .................................... 220,604 196,691 161,828
Other operating expense ................................................ 745,510 637,540 571,050
---------- ---------- ----------
Total ................................................................. 2,138,246 1,916,620 1,817,138
---------- ---------- ----------
Income before income taxes ............................................. 1,404,543 1,369,494 1,295,994
Income tax expense ..................................................... 375,825 359,800 251,698
---------- ---------- ----------
Net income ............................................................. $1,028,718 $1,009,694 $1,044,296
========== ========== ==========
Earnings per share
Weighted average common shares outstanding ............................ 40,000 40,000 40,000
Net income ............................................................ $ 25.72 $ 25.24 $ 26.10
The accompanying notes are an integral part of the consolidated financial
statements.
Tourville, Simpson & Caskey, L.L.P.
F-4
RIDGEWAY BANCSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income For the Years Ended December 31, 2000, 1999, and 1998
Accumulated
Common Stock Other
------------ Comprehensive Retained
Shares Amount Income(Loss) Earnings Total
------ ------ ------------ -------- -----
Balance, December 31, 1997 ............ 40,000 2,200,000 31,126 3,336,187 5,567,313
Net income ............................ 1,044,296 1,044,296
Other comprehensive income ............ 25,748 25,748
-----------
Comprehensive income ................ 1,070,044
-----------
Cash dividends declared
-$5.70 per share ..................... (228,000) (228,000)
------ ----------- ----------- --------- -----------
Balance, December 31, 1998 ............ 40,000 2,200,000 56,874 4,152,483 6,409,357
Net income ............................ 1,009,694 1,009,694
Other comprehensive income ............ (139,514) (139,514)
-----------
Comprehensive income ................ 870,180
-----------
Cash dividends declared ............... (252,000) (252,000)
-$6.30 per share
------ ----------- ----------- --------- -----------
Balance, December 31, 1999 ............ 40,000 2,200,000 (82,640) 4,910,177 7,027,537
Net income ............................ 1,028,718 1,028,718
Other comprehensive income ............ 64,227 64,227
-----------
Comprehensive income ................ 1,092,945
-----------
Cash dividends declared
-$7.00 per share ..................... (280,000) (280,000)
------ ----------- ----------- --------- -----------
Balance, December 31, 2000 ............ 40,000 $ 2,200,000 $ (18,413) $ 5,658,8 $ 7,840,482
====== =========== =========== ========= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
Tourville, Simpson & Caskey, L.L.P.
F-5
RIDGEWAY BANCSHARES, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income ........................................................... $ 1,028,718 $ 1,009,694 $ 1,044,296
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ....................................................... 87,785 73,366 64,078
Provision for possible loan losses ................................. 75,000 60,000 54,000
Premium amortization less accretion ................................ 1,135 (512) (23,867)
Deferred income tax provision (benefit) ............................ (25,969) (36,680) (92,501)
Amortization of intangible assets .................................. 42,000 50,524 62,457
(Increase) decrease in accrued interest receivable ................. (30,335) (115,688) 6,188
(Increase) decrease in other assets ................................ (6,079) 33,154 42,558
Increase (decrease) in accrued interest payable .................... 8,295 1,800 (17,195)
Increase (decrease) in other liabilities ........................... (69,863) 46,695 (51,606)
----------- ----------- -----------
Net cash provided by operating activities ........................ 1,110,687 1,122,353 1,088,408
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available-for-sale ............ 2,700,000 3,100,000 4,300,000
Purchases of securities available-for-sale ........................... (490,313) (2,999,817) (7,499,688)
Proceeds from maturities of securities held-to-maturity .............. 2,195,137 2,083,015 3,553,998
Purchases of securities held-to-maturity ............................. (2,222,010) (6,207,114) (1,508,741)
Net increase in loans to customers ................................... (6,102,884) (3,237,668) (1,232,643)
Purchase of premises and equipment ................................... (26,526) (229,777) (61,771)
Net increase in time deposits with other banks ....................... (7,000) - (10,000)
----------- ----------- -----------
Net cash used by investing activities ............................ (3,953,596) (7,491,361) (2,458,845)
----------- ----------- -----------
Cash flows from financing activities:
Net increase in demand and savings deposits .......................... 4,922,242 711,851 3,179,417
Net increase (decrease) in certificates of deposit ................... 3,796,527 (196,707) 2,574,712
Net increase (decrease) in federal funds purchased and ............... 216,231 837,669 (129,800)
securities sold under repurchase agreements
Cash dividends paid .................................................. (280,000) (252,000) (228,000)
----------- ----------- -----------
Net cash provided by financing activities ........................ 8,655,000 1,100,813 5,396,329
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ................... 5,812,091 (5,268,195) 4,025,892
Cash and cash equivalents, beginning of period ......................... 3,086,891 8,355,086 4,329,194
----------- ----------- -----------
Cash and cash equivalents, end of period ............................... $ 8,898,982 $ 3,086,891 $ 8,355,086
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
Tourville, Simpson & Caskey, L.L.P.
F-6
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation - The accompanying consolidated
financial statements include the accounts of Ridgeway Bancshares, Inc. (the
Company), its wholly-owned subsidiary, Bank of Ridgeway (the Bank), and the
Bank's wholly-owned subsidiary, Ridgeway Insurance Agency (the Agency). The Bank
provides commercial banking services to domestic markets principally in northern
Richland County and in Fairfield County, South Carolina. The Agency has been in
a dormant status for the past several years. The consolidated financial
statements include the accounts of the parent company and its wholly-owned
subsidiary after elimination of all significant intercompany balances and
transactions.
The accounting and reporting policies of the Bank reflect industry practices and
conform to generally accepted accounting principles in all material respects.
All significant intercompany accounts and transactions have been eliminated.
Management's Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans, including
valuation allowances for impaired loans and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for
significant properties. Management must also make estimates in determining the
estimated useful lives and methods for depreciating premises and equipment.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is possible that the allowances for losses on loans
and foreclosed real estate may change in the near term.
Significant Group Concentrations of Credit Risk - Most of the Company's
activities are with customers located within Fairfield and Richland Counties in
South Carolina. Note 4 discusses the types of securities that the Company
invests in. Note 5 discusses the types of lending that the Company engages in.
The Company does not have any significant concentrations to any one industry or
customer.
Investment Securities Held to Maturity - Investment securities held to maturity
are stated at cost, adjusted for amortization of premium and accretion of
discount computed by the straight-line method. The Bank has the ability and
management has the intent to hold designated investment securities to maturity.
Reductions in market value considered by management to be other than temporary
are reported as a realized loss and a reduction in the cost basis of the
security.
Investment Securities Available-for-Sale - Investment securities
available-for-sale are carried at amortized cost and adjusted to estimated
market value by recognizing the aggregate unrealized gains or losses in a
valuation account. Aggregate market valuation adjustments are recorded in
shareholders' equity net of deferred income taxes. Reductions in market value
considered by management to be other than temporary are reported as a realized
loss and a reduction in the cost basis of the security. The adjusted cost basis
of securities available-for-sale is determined by specific identification and is
used in computing the gain or loss upon sale.
Nonmarketable Equity Securities - Nonmarketable equity securities include the
Bank's investments in the stock of Community Financial Services. The stock is
carried at cost because it has no quoted market value and no ready market
exists. Dividends received from the investment is included as a separate
component in interest income.
Tourville, Simpson & Caskey, L.L.P.
F-7
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Loans - Interest income on loans is computed based upon the unpaid principal
balance. Interest income is recorded in the period earned.
The accrual of interest income is discontinued when a loan becomes 90 days past
due as to principal or interest. Management may elect to continue the accrual of
interest when the estimated net realizable value of collateral exceeds the
principal balance and accrued interest. Impaired loans are measured based on the
present value of discounted expected cash flows. When it is determined that a
loan is impaired, a direct charge to bad debt expense is made for the difference
between the net present value of expected future cash flows based on the
contractual rate and the Bank's recorded investment in the related loan. The
corresponding entry is to a related valuation account. Interest is discontinued
on impaired loans when management determines that a borrower may be unable to
meet payments as they become due.
The Company identifies impaired loans through its normal internal loan review
process. Loans on the Company's problem 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. At December 31, 2000, management has determined that
no impairment of loans existed that would have a material effect on the
Company's financial statements.
Allowance for Loan Losses - An allowance for possible loan losses is maintained
at a level deemed appropriate by management to provide adequately for known and
inherent risks in the loan portfolio. The allowance is based upon a continuing
review of past loan loss experience, current economic conditions which may
affect the borrowers' ability to pay and the underlying collateral value of the
loans. Loans, which are deemed to be uncollectible, are charged off and deducted
from the allowance. The provision for possible loan losses and recoveries on
loans previously charged off are added to the allowance.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed primarily
by the declining-balance method. Rates of depreciation are generally based on
the following estimated useful lives: buildings - 30 years; furniture and
equipment - 5 to 15 years. The cost of assets sold or otherwise disposed of, and
the related accumulated depreciation are eliminated from the accounts and the
resulting gains or losses are reflected in the income statement. Maintenance and
repairs are charged to current expense as incurred, and the costs of major
renewals and improvements are capitalized.
Other Real Estate Owned - Other real estate owned includes real estate acquired
through foreclosure and loans accounted for as in substance foreclosures.
Collateral is considered foreclosed in substance when the borrower has little or
no equity in the fair value of the collateral, proceeds for repayment of the
debt can be expected to come only from the sale of the collateral and it is
doubtful that the borrower can rebuild equity or otherwise repay the loan in the
foreseeable future. Other real estate owned is initially recorded at the lower
of cost (principal balance of the former loan plus costs of improvements) or
estimated fair value.
Any write-downs at the dates of acquisition are charged to the allowance for
possible loan losses. Expenses to maintain such assets, subsequent write-downs
and gains and losses on disposal are included in other expenses.
Intangible Assets - Intangible assets consist of core deposit premiums resulting
from the acquisition of the Blythewood branch. The core deposit premiums are
being amortized over fifteen years using the straight-line method.
Income and Expense Recognition - The accrual method of accounting is used for
all significant categories of income and expense. Immaterial amounts of
insurance commissions and other miscellaneous fees are reported when received.
Tourville, Simpson & Caskey, L.L.P.
F-8
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Retirement Benefits - The Bank sponsors a trusteed non-contributory defined
benefit pension plan covering employees who have completed at least 1,000 hours
of service within one year and have attained age twenty-one. The funding policy
for this plan is to contribute annually an amount between the minimum funding
amount required by ERISA and the maximum tax-deductible contribution.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. See Note
13.
A trusteed retirement savings plan is sponsored by the Bank, which provides
retirement benefits to substantially all officers and employees who meet certain
age and service requirements. The plan includes a "salary reduction" feature
pursuant to Section 401(k) of the Internal Revenue Code. Under the plan and
present policies, participants are permitted to make contributions up to 15% of
their annual compensation. At its discretion, the Bank can make matching
contributions up to 100% of the participants' contributions. Expenses charged to
earnings for the retirement savings plan were approximately $18,536, $16,853,
and $15,967 in 2000, 1999, and 1998, respectively.
Income taxes - Income taxes are the sum of amounts currently payable to taxing
authorities and the net changes in income taxes payable or refundable in future
years. Income taxes deferred to future years are determined utilizing a
liability approach. This method gives consideration to the future tax
consequences associated with differences between the financial accounting and
tax bases of certain assets and liabilities, principally the allowance for loan
losses.
Earnings Per Share - Earnings per share is calculated by dividing earnings by
the weighted average number of common shares outstanding during the year.
Comprehensive Income - Accounting principles generally require that recognized
revenue, expenses, gains, and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
The components of other comprehensive income and related tax effects are as
follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Unrealized holding gains (losses) on available-for-sale
securities ............................................................... $ 101,948 $(221,451) $ 38,399
Reclassification adjustment for (gains) losses realized
in net income ............................................................ - - -
--------- --------- ---------
Net unrealized gains (losses) on securities ............................... 101,948 (221,451) 38,399
Tax effect ................................................................ (37,721) 81,937 (12,651)
--------- --------- ---------
Net-of-tax amount ......................................................... $ 64,227 $(139,514) $ 25,748
========= ========= =========
Tourville, Simpson & Caskey, L.L.P.
F-9
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Statement of Cash Flows - For purposes of reporting cash flows, the Company
considers certain highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents include amounts
due from banks, federal funds sold, and securities purchased under agreements to
resell.
During 2000, 1999, and 1998, the Company paid $2,035,150, $1,742,345, and
$1,765,127 respectively, for interest. Cash paid for income taxes was $442,944,
$371,310, and $352,079 in 2000, 1999, and 1998, respectively.
Changes in the valuation account of securities available-for-sale, including the
deferred tax effects, are considered non-cash transactions for purposes of the
statement of cash flows and are presented in detail in the notes to the
financial statements.
Off-Balance-Sheet Financial Instruments - In the ordinary course of business,
the Company enters into off-balance-sheet financial instruments consisting of
commitments to extend credit and letters of credit. These financial instruments
are recorded in the financial statements when they become payable by the
customer.
Recent Accounting Pronouncements - In June 1998, the FASB issued Statement
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,
effective for fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. The accounting
for changes in the fair value of a derivative depends on how the derivative is
used and how the derivative is designated. The Company adopted SFAS on July 1,
2000. The adoption of SFAS No. 133 did not have a material impact on the
consolidated financial statements.
Reclassifications - Certain captions and amounts in the consolidated financial
statements of 1999 and 1998 were reclassified to conform with the 2000
presentation.
NOTE 2 - MERGER WITH RHBT FINANCIAL CORPORATION
On June 28, 2000, the Company announced that it signed a letter of intent to
merge with RHBT Financial Corporation, a bank holding company headquartered in
Rock Hill, South Carolina. As of the date of this report no definitive agreement
has been reached.
NOTE 3 - CASH AND DUE FROM BANKS
The Bank is required by regulation to maintain an average cash reserve balance
based on a percentage of deposits. The average amount of the cash reserve
balances at December 31, 2000 were approximately $546,000.
Tourville, Simpson & Caskey, L.L.P.
F-10
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and estimated market values of securities available-for sale
at December 31, 2000 and 1999 were:
Gross Unrealized Estimated
Amortized ---------------- Market
Cost Gains Losses Value
---- ----- ------ -----
December 31, 2000:
U.S. Treasuries ............................................... $1,498,005 $ 1,483 $ 2,613 $1,496,875
U.S. Government agencies and corporations ..................... 5,990,905 5,256 36,048 5,960,113
Obligations of state and political subdivisions ............... 100,000 2,696 - 102,696
---------- ---------- ---------- ----------
Total securities .......................................... $7,588,910 $ 9,435 $ 38,661 $7,559,684
========== ========== ========== ==========
December 31, 1999:
U.S. Treasuries ............................................... $2,695,467 $ 2,790 $ 9,288 $2,688,969
U.S. Government agencies and corporations ..................... 6,998,708 1,084 127,079 6,872,713
Obligations of state and political subdivisions ............... 100,000 1,319 - 101,319
---------- ---------- ---------- ----------
Total securities .......................................... $9,794,175 $ 5,193 $ 136,367 $9,663,001
========== ========== ========== ==========
The amortized cost and estimated market value of securities held to maturity at
December 31, 2000 and 1999 were:
Gross Unrealized Estimated
Amortized ---------------- Market
Cost Gains Losses Value
---- ----- ------ -----
December 31, 2000
U.S. Government agencies & corporations ................... $ 7,098,958 $ 7,573 $ 26,734 $ 7,079,797
Obligations of state and political subdivisions ........... 9,017,801 140,116 16,909 9,141,008
----------- ----------- ----------- -----------
Total securities ...................................... $16,116,759 $ 147,689 $ 43,643 $16,220,805
=========== =========== =========== ===========
December 31, 1999:
U.S. Government agencies & corporations ................... $ 6,701,888 $ 21,198 $ 99,537 $ 6,623,549
Obligations of state and political subdivisions ........... 9,393,555 71,067 111,633 9,352,989
----------- ----------- ----------- -----------
Total securities ...................................... $16,095,443 $ 92,265 $ 211,170 $15,976,538
=========== =========== =========== ===========
There were no sales of investment securities during 2000 or 1999.
Tourville, Simpson & Caskey, L.L.P.
F-11
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 4 - INVESTMENT SECURITIES - continued
The amortized cost and estimated market value of investment securities at
December 31, 2000 based on their contractual maturities are summarized below.
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations without penalty.
2000
----
Estimated
Amortized Market
Cost Value
---- -----
Due within one year ............................ $ 7,283,481 $ 7,268,757
Due after one year but within five years ....... 11,990,945 12,021,818
Due after five years but within ten years ...... 4,344,567 4,400,111
Due after ten years ............................ 86,676 89,803
----------- -----------
Total .......................................... $23,705,669 $23,780,489
=========== ===========
At December 31, 2000 and 1999 investment securities with a book value of
$8,543,148 and $6,398,452 and a market value of $8,523,642 and $6,349,184,
respectively, were pledged as collateral to secure public deposits and for other
purposes.
NOTE 5 - LOANS
Loans consisted of the following:
December 31,
------------
2000 1999
---- ----
Real estate ................................ $23,602,492 $18,237,180
Home equity ................................ 2,420,481 2,305,281
Commercial and industrial loans ............ 5,045,202 4,715,796
Consumer ................................... 8,019,601 7,914,307
All other loans ............................ 716,949 550,957
----------- -----------
$39,804,725 $33,723,521
As of December 31, 2000 and 1999, management had placed loans totaling $225,340
and $18,586 in nonaccrual status because the loans were not performing as
originally contracted. Loans ninety days or more past due and still accruing
interest were $355,233 and $102,886 at December 31, 2000 and 1999 respectively.
No impairment has been recognized because management has determined that the
discounted value of expected proceeds from the sale of collateral, typically
real estate, exceeds the carrying amount of these loans.
Tourville, Simpson & Caskey, L.L.P.
F-12
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 5 - LOANS - continued
Transactions in the allowance for loan losses are summarized below:
2000 1999 1998
---- ---- ----
Balance, January 1 ................ $ 334,209 $ 304,837 $ 286,689
Provision charged to expense ...... 75,000 60,000 54,000
Charge-offs ....................... (44,871) (47,445) (45,882)
Recoveries ........................ 23,191 16,817 10,030
--------- --------- ---------
Balance, December 31 .............. $ 387,529 $ 334,209 $ 304,837
========= ========= =========
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statements of
financial position. The contractual or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual or notional amount
of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counter-party.
Collateral held for commitments to extend credit and standby letters of credit
varies but may include accounts receivable, inventory, property, plant,
equipment, and income-producing commercial properties.
The following table summarizes the Company's off-balance-sheet financial
instruments whose contractual amounts represent credit risk at December 31, 2000
and 1999:
2000 1999
---- ----
Commitments to extend credit ............... $5,417,598 $3,992,000
Standby letters of credit .................. 273,000 358,000
Management is not aware of any significant concentrations of loans to classes of
borrowers or industries that would be affected similarly by economic conditions.
At December 31, 2000, the Bank was not committed to lend additional funds to
borrowers having loans in nonaccrual status.
Tourville, Simpson & Caskey, L.L.P.
F-13
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
------------
2000 1999
---- ----
Land ....................................... $ 145,185 $ 145,185
Buildings and improvements ................. 943,823 943,823
Furniture and equipment .................... 632,497 605,971
---------- ----------
1,721,505 1,694,979
Less, accumulated depreciation ............. 948,340 860,555
---------- ----------
$ 773,165 $ 834,424
========== ==========
NOTE 7 - DEPOSITS
At December 31, 2000, the scheduled maturities of time deposits are as follows:
2001 $24,444,493
2002 2,040,614
2003 114,857
2004 240,112
2005 and thereafter 16,837
-----------
$26,856,913
===========
Overdrawn deposit accounts in the amount of $35,638 are classified as loans as
of December 31, 2000.
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings payable at December 31, 2000 and 1999 consist of federal
funds purchased and securities sold under agreements to repurchase which
generally mature on a one to thirty day basis. Information concerning securities
sold under agreements to repurchase is summarized as follows:
2000 1999
---- ----
Average balance during the year ................ $2,894,137 $1,943,398
Average interest rate during the year .......... 5.48% 4.38%
Maximum month-end balance during the year ...... $4,663,044 $2,373,711
Under the terms of the repurchase agreement, the Bank sells an interest in
securities issued by United States Government Agencies, and the Bank agrees to
repurchase the same securities the following business day. The securities sold
under these agreements are the identical securities on the Bank's balance sheet
captioned as securities purchased under agreements to resell. As of December 31,
2000, the par value and market value of the securities held by the third-party
for the underlying agreements were $2,435,000 and $2,435,688, respectively.
Tourville, Simpson & Caskey, L.L.P.
F-14
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 9 - RELATED PARTY TRANSACTIONS
Certain parties (principally certain directors and stockholders of the Bank,
their immediate families and business interests) were loan customers of, and had
other transactions in the normal course of business with the Bank. Related party
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate dollar amount of loans to related parties was $844,208 and
$500,413 at December 31, 2000 and 1999, respectively.
NOTE 10 - UNUSED LINES OF CREDIT
As of December 31, 2000, the Company had unused lines of credit to purchase
federal funds from other financial institutions totaling $5,000,000. These lines
of credit are available on a one to seven day basis for general corporate
purposes. The lenders have reserved the right not to renew their respective
lines.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company was not involved as defendant in any litigation at December 31,
2000. Management and legal counsel are not aware of any pending or threatened
litigation, or unasserted claims or assessments that could result in losses, if
any, that would be material to the financial statements.
NOTE 12 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES
South Carolina banking regulations restrict the amount of dividends that can be
paid to shareholders. All of the Bank's dividends to Ridgeway Bancshares, Inc.
are payable only from the undivided profits of the Bank. At December 31, 2000,
the Bank's undivided profits were $5,645,441. The Bank is authorized to pay cash
dividends up to 100% of net income in any calendar year without obtaining the
prior approval of the Commissioner of Banking provided that the Bank received a
composite rating of one or two at the last Federal or State regulatory
examination. Under Federal Reserve Board regulations, the amounts of loans or
advances from the Bank to the parent company are also restricted.
NOTE 13 - EMPLOYEE BENEFITS
The Bank has a contributory defined benefit pension plan, which covers
substantially all employees. Employees covered under the plan are eligible to
participate after attainment of age 21 and completion of at least 1,000 hours of
service, and pension benefits are based on salary and years of service. All
employees are fully vested in the plan after 7 years of service. The actuarially
determined pension benefits are based on the aggregate method. The Bank's
funding policy provides that payments to the plan shall be consistent with
minimum government funding regulations plus additional amounts, which may be
approved by the Bank from time to time.
Tourville, Simpson & Caskey, L.L.P.
F-15
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 13 - EMPLOYEE BENEFITS - continued
Plan assets are stated at fair value and consist primarily of interest-bearing
certificates of deposit and U.S. Governments bonds. The table of actuarially
computed benefit obligations and net assets of the plan at December 31, 2000 and
1999 is presented below:
2000 1999
---- ----
Benefit obligation ................................... $ 687,651 $ 659,915
Fair Value of plan assets ............................ 641,693 646,383
--------- ---------
Funded status ........................................ $ (45,958) $ (13,532)
========= =========
Prepaid (unfunded) benefit cost recognized in the
statement of financial position ..................... $ (486) $ 537
========= =========
The weighted-average assumptions for 2000 and 1999 are as follows:
2000 1999
---- ----
Discount rate ................................. 7.25% 6.75%
Expected return on plan assets ................ 7.25% 6.75%
Rate of compensation increase ................. 5.00% 5.00%
Benefit cost .................................. $ 59,023 $64,121
Employer contribution ......................... 58,000 63,982
Plan participants' contributions .............. - 2,368
Benefits paid ................................. 476 5,484
NOTE 14 - OTHER EXPENSES
Other expenses for the years ended December 31, 2000, 1999, and 1998 are
summarized as follows:
2000 1999 1998
---- ---- ----
Stationery and printing .............. $ 59,406 $ 58,258 $ 64,740
Postage and freight .................. 55,881 58,638 54,103
Data processing services ............. 194,377 148,930 109,062
Intangible costs ..................... 42,000 50,524 62,457
Merger expenses ...................... 74,600 - -
Other ................................ 319,246 321,190 280,688
-------- -------- --------
Total ............................ $745,510 $637,540 $571,050
======== ======== ========
Tourville, Simpson & Caskey, L.L.P.
F-16
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 15 - INCOME TAXES
Income tax expense included in the statement of operations for the years ended
December 31, 2000, 1999, and 1998 are summarized as follows:
2000 1999 1998
---- ---- ----
Currently payable:
Federal ........................................................ $ 353,346 $ 348,060 $ 300,958
State .......................................................... 48,448 48,420 43,241
--------- --------- ---------
401,794 396,480 344,199
--------- --------- ---------
Deferred:
Federal ........................................................ 10,804 (107,687) (69,091)
State .......................................................... 948 (10,930) (10,759)
--------- --------- ---------
11,752 (118,617) (79,850)
--------- --------- ---------
$ 413,546 $ 277,863 $ 264,349
========= ========= =========
Income tax expense is allocated as follows:
To continuing operations ....................................... $ 375,825 $ 359,800 $ 251,698
To shareholders' equity ........................................ 37,721 (81,937) 12,651
--------- --------- ---------
$ 413,546 $ 277,863 $ 264,349
========= ========= =========
Net deferred income taxes of $164,863 and $176,615 were included in other assets
at December 31, 2000 and 1999, respectively. Deferred income taxes result from
temporary differences in the recognition of certain items of income and expense
for tax and financial reporting purposes.
The gross amounts of deferred tax assets and deferred tax liabilities as of
December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
---- ---- ----
Deferred tax assets:
Allowance for loan losses ......................................... $149,199 $128,670 $117,362
Available-for-sale securities ..................................... 10,814 48,535 -
Organizational expense ............................................ 8,281 10,219 -
Other ............................................................. 187 - -
-------- -------- --------
Total deferred tax assets ....................................... 168,481 187,424 117,362
-------- -------- --------
Deferred tax liabilities:
Accumulated accretion and amortization ............................ 3,618 10,603 25,701
on investment securities
Available-for-sale securities ..................................... - - 33,402
Other ............................................................. - 206 261
-------- -------- --------
Total deferred tax liabilities .................................. 3,618 10,809 59,364
-------- -------- --------
Net deferred tax asset .......................................... $164,863 $176,615 $ 57,998
======== ======== ========
Tourville, Simpson & Caskey, L.L.P.
F-17
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 15 - INCOME TAXES - continued
Deferred tax assets represent the future tax benefit of deductible differences
and, if it is more likely than not that a tax asset will not be realized, a
valuation allowance is required to reduce the recorded deferred tax assets to
net realizable value. Management has determined that it is more likely than not
that the entire deferred tax asset at December 31, 2000 will be realized, and
accordingly, has not established a valuation allowance.
A reconciliation between the income tax expense for the years ended December 31,
2000, 1999, and 1998 and the amount computed by applying the Federal statutory
rate of 34% to income before income taxes follows:
2000 1999 1998
---- ---- ----
Tax expense at statutory rate .......................................... $ 477,545 $ 465,628 $ 440,638
State income tax, net of Federal income tax effect ..................... 32,601 27,671 14,270
Tax exempt interest income ............................................. (155,113) (154,188) (139,968)
Disallowed interest expense ............................................ 21,659 18,075 17,195
Other, net ............................................................. (867) 2,614 (80,437)
--------- --------- ---------
Total ............................................................. $ 375,825 $ 359,800 $ 251,698
========= ========= =========
NOTE 16 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material
effect on the Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum ratios (set forth in the
table below) of Tier 1 and total capital as a percentage of assets and
off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%.
Tier 1 capital of the Company and the Bank consists of common shareholders'
equity, excluding the unrealized gain or loss on securities available-for-sale,
minus certain intangible assets. Tier 2 capital consists of the allowance for
loan losses subject to certain limitations. Total capital for purposes of
computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.
The Company and the Bank are also required to maintain capital at a minimum
level based on average assets (as defined), which is known as the leverage
ratio. Only the strongest institutions are allowed to maintain capital at the
minimum requirement. All others are subject to maintaining ratios 1% to 2% above
the minimum.
As of the most recent regulatory examination, the Bank was deemed
well-capitalized under the regulatory framework for prompt corrective action. To
be categorized well capitalized, the Bank must maintain total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table below. There
are no conditions or events that management believes have changed the Bank's
categories.
Tourville, Simpson & Caskey, L.L.P.
F-18
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 16 - REGULATORY MATTERS - continued
The following table summarizes the capital amounts and ratios of the Bank and
the regulatory minimum requirements at December 31, 2000 and 1999.
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2000
Total capital (to risk-weighted assets) ............... $7,879 21.18% $2,976 8.00% $3,720 10.00%
Tier 1 capital (to risk-weighted assets) .............. 7,492 20.14% 1,488 4.00% 2,232 6.00%
Tier 1 capital (to average assets) .................... 7,492 10.40% 2,881 4.00% 3,602 5.00%
December 31, 1999
Total capital (to risk-weighted assets) ............... $7,065 19.80% $2,855 8.00% $3,569 10.00%
Tier 1 capital (to risk-weighted assets) .............. 6,731 18.86% 1,428 4.00% 2,141 6.00%
Tier 1 capital (to average assets) .................... 6,731 10.31% 2,612 4.00% 3,265 5.00%
The Federal Reserve Board has similar requirements for bank holding companies.
The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies with less
than $150,000,000 in consolidated assets.
Tourville, Simpson & Caskey, L.L.P.
F-19
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 17 - RIDGEWAY BANCSHARES, INC. (PARENT COMPANY ONLY)
Presented below are the condensed financial statements for Ridgeway Bancshares,
Inc. (Parent Company Only).
Balance Sheets
December 31, 2000 and 1999
2000 1999
---- ----
Assets
Cash ........................................................................... $ 3,458 $ -
Investment in banking subsidiary ............................................... 7,827,028 7,044,258
Other assets ................................................................... 9,996 9,821
---------- ----------
Total assets ............................................................. $7,840,482 $7,054,079
========== ==========
Liabilities and Shareholders' equity
Due to banking subsidiary ...................................................... $ - $ 26,542
---------- ----------
Shareholders' equity ........................................................... 7,840,482 7,027,537
---------- ----------
Total liabilities and shareholders' equity ............................... $7,840,482 $7,027,537
========== ==========
Statements of Operations
For the years ended December 31, 2000 and 1999
2000 1999
---- ----
Income
Dividends from banking subsidiary ................................................. $ 310,000 $ -
Expenses
Other expenses .................................................................... - 26,542
----------- -----------
Income (loss) before income taxes and equity in undistributed ....................... 310,000 (26,542)
earnings of banking subsidiary
Income tax benefit ................................................................ 175 9,821
Equity in undistributed earnings of banking subsidiary ............................ 718,543 1,026,415
----------- -----------
Net income .......................................................................... $ 1,028,718 $ 1,009,694
=========== ===========
Tourville, Simpson & Caskey, L.L.P.
F-20
RIDGEWAY BANCSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 17 - RIDGEWAY BANCSHARES, INC. (PARENT COMPANY ONLY) - continued
2000 1999
---- ----
Cash flows from operating activities:
Net income ......................................................................... $ 1,028,718 $ 1,009,694
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of banking subsidiary ............................. (718,543) (1,026,415)
Decrease (increase) in other assets ................................................ 1,804 (9,821)
(Decrease) increase in other liabilities ........................................... (26,542) 26,542
----------- -----------
Net cash provided by operating activities .......................................... 285,437 -
----------- -----------
Cash flows from financing activities:
Cash dividends paid ................................................................ (280,000) -
----------- -----------
Net cash used by financing activities .............................................. (280,000) -
----------- -----------
Increase in cash ................................................................... 5,437 -
Cash, beginning .................................................................... - -
----------- -----------
Cash, ending ....................................................................... $ 5,437 $ -
=========== ===========
Tourville, Simpson & Caskey, L.L.P.
F-21
RIDGEWAY BANCSHARES, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2001 2000
----- ----
Assets Cash and cash equivalents:
Cash and due from banks ............................................................... $ 2,475,152 $ 2,938,982
Federal funds sold and securites purchased under agreements to resell ................. 4,604,000 5,960,000
------------ ------------
Total ............................................................................... 7,079,152 8,898,982
Time deposits with other banks ........................................................ 148,000 137,000
Investment securities:
Securities available-for-sale ......................................................... 9,260,563 7,559,684
Securities held-to-maturity ........................................................... 17,898,247 16,116,759
Nonmarketable equity securities ....................................................... 63,648 63,648
------------ ------------
Total ............................................................................... 27,222,458 23,740,091
Loans receivable: ....................................................................... 40,710,307 39,804,725
Less allowance for loan losses ........................................................ 419,062 387,529
------------ ------------
Loans, net .......................................................................... 40,291,245 39,417,196
Premises and equipment, net ............................................................. 755,583 773,165
Accrued interest receivable ............................................................. 609,894 601,553
Other assets ............................................................................ 557,378 573,394
------------ ------------
Total assets ........................................................................ $ 76,663,710 $ 74,141,381
============ ============
Liabilities
Deposits:
Noninterest-bearing demand deposits ................................................. $ 9,714,465 $ 9,839,029
Interest-bearing demand deposits .................................................... 9,016,304 9,211,538
Money market accounts ............................................................... 8,457,583 10,161,177
Savings ............................................................................. 7,534,858 7,621,758
Certificates of deposit of $100,000 and over ........................................ 8,095,969 6,864,350
Certificates of deposit of under $100,000 ........................................... 22,079,722 19,992,563
------------ ------------
Total deposits .................................................................... 64,898,901 63,690,415
Accrued interest payable ................................................................ 148,438 171,663
Securities sold under agreement to repurchase ........................................... 2,832,974 2,418,501
Other liabilities ....................................................................... 186,111 20,320
------------ ------------
Total liabilities ................................................................... 68,066,424 66,300,899
Shareholders' Equity
Common stock, no par value in 2001 and 2000; 100,000 shares ............................. 2,200,000 2,200,000
authorized in 2001 and 2000; 40,000 shares issued and outstanding
Accumulated other comprehensive income (loss) ........................................... 106,148 (18,413)
Retained earnings ....................................................................... 6,291,138 5,658,895
------------ ------------
Total shareholders' equity .......................................................... 8,597,286 7,840,482
------------ ------------
Total liabilities and shareholders' equity .......................................... $ 76,663,710 $ 74,141,381
============ ============
See notes to condensed consolidated financial statements.
F-22
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Loans, including fees .................................... $2,783,847 $2,482,337 $ 911,447 $ 862,731
Investment securities:
Taxable ................................................ 669,524 700,992 225,885 225,674
Tax-exempt ............................................. 325,996 326,942 111,688 110,255
Federal funds sold and securites ......................... 201,696 130,016 53,486 58,155
purchased under agreements to resell
Time deposits with other banks ........................... 6,296 5,775 2,002 2,083
---------- ---------- ---------- ----------
Total ............................................... 3,987,359 3,646,062 1,304,508 1,258,898
---------- ---------- ---------- ----------
Interest expense:
Deposit accounts ......................................... 1,611,382 1,354,375 498,145 484,835
Federal funds purchased and securities sold .............. 77,378 102,163 22,078 43,520
---------- ---------- ---------- ----------
under agreement to repurchase
Total ............................................... 1,688,760 1,456,538 520,223 528,355
---------- ---------- ---------- ----------
Net interest income ........................................ 2,298,599 2,189,524 784,285 730,543
Provision for loan losses .................................. 54,000 45,000 18,000 15,000
---------- ---------- ---------- ----------
Net interest income after provision for loan ............... 2,244,599 2,144,524 766,285 715,543
---------- ---------- ---------- ----------
losses
Other operating income:
Service charges on deposit accounts ...................... 435,984 377,537 141,598 132,997
Other service charges and fees ........................... 85,199 107,008 25,142 35,053
Other income ............................................ 16,936 13,777 5,431 4,035
---------- ---------- ---------- ----------
Total ............................................... 538,119 498,322 172,171 172,085
---------- ---------- ---------- ----------
Other operating expenses:
Salaries and wages ....................................... 665,568 646,841 223,911 217,124
Employee benefits ........................................ 231,213 219,486 73,489 72,514
Net occupancy and equipment expense ...................... 161,951 169,950 54,252 56,122
Other operating expenses ................................. 626,743 470,128 216,260 169,863
---------- ---------- ---------- ----------
Total ............................................... 1,685,475 1,506,405 567,912 515,623
---------- ---------- ---------- ----------
Income before income taxes ................................. 1,097,243 1,136,441 370,544 372,005
Income tax expense ......................................... 305,000 310,700 102,000 99,900
---------- ---------- ---------- ----------
Net income ................................................. $ 792,243 $ 825,741 $ 268,544 $ 272,105
========== ========== ========== ==========
Earnings per share
Weighted average common shares outstanding .............. 40,000 40,000 40,000 40,000
Net income .............................................. $ 19.81 $ 20.64 $ 6.71 $ 6.80
See notes to condensed consolidated financial statements.
F-23
Condensed Consolidated Statements of Changes
in Shareholders' Equity and Comprehensive Income
For the Nine Months Ended September 30, 2001
Accumulated
Common Stock Other
------------- Retained Comprehensive
Shares Amount Earnings Income Total
Balance, December 31, 199 ................. 40,000 $2,200,000 $ 4,910,177 $ (82,640) $ 7,027,537
Net income for the period ................. 1,028,718 1,028,718
Other comprehensive income ................ 64,227 64,227
-----------
Comprehensive income ...................... 1,092,945
-----------
Cash dividends declared
$7.00 per share .......................... (280,000) (280,000)
------ ---------- ----------- --------- -----------
Balance, December 31, 2000 ................ 40,000 $2,200,000 $ 5,658,895 $ (18,413) $ 7,840,482
Net income for the period ................. 792,243 792,243
Other comprehensive income ................ 124,561 124,561
-----------
Comprehensive income ...................... 916,804
-----------
Cash dividends declared
$4.00 per share ......................... (160,000) (160,000)
------ ---------- ----------- --------- -----------
Balance, September 30, 2001 ............... 40,000 $2,200,000 $ 6,291,138 $ 106,148 $ 8,597,286
====== ========== =========== ========= ===========
F-24
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income ............................................................................. $ 792,243 $ 825,741
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Depreciation .......................................................................... 65,475 67,185
Provision for possible loan losses .................................................... 54,000 45,000
Premium amortization less accretion ................................................... (6,728) 1,725
Amortization of intangible assets ..................................................... 31,500 31,500
(Increase) in accrued interest receivable ............................................. (8,341) (952)
(Increase) in other assets ............................................................ (17,332) (25,159)
(Decrease) in accrued interest payable ................................................ (23,225) (12,841)
Increase in other liabilities ......................................................... 165,791 80,790
----------- -----------
Net cash provided by operating activities .......................................... 1,053,383 1,012,989
----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available-for-sale .............................. 6,000,000 1,200,000
Purchases of securities available-for-sale ............................................. (7,500,000) -
Proceeds from sales of securities held-to-maturity ..................................... 350,000 -
Proceeds from maturities of securities held-to-maturity ................................ 6,815,416 2,146,759
Purchases of securities held-to-maturity ............................................... (9,014,646) (1,220,447)
Net increase in loans to customers ..................................................... (928,049) (4,616,136)
Net increase in time deposits with other banks ......................................... (11,000) (7,000)
Purchases of premises and equipment .................................................... (47,893) (16,337)
----------- -----------
Net cash used by investing activities ................................................ (4,336,172) (2,513,161)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits ................................. (2,110,292) 1,314,631
Net increase in certificates of deposit ................................................ 3,318,778 1,844,589
Net increase in federal funds purchased and securities sold ............................ 414,473 2,460,774
under repurchase agreements
Cash dividends paid .................................................................... (160,000) (140,000)
----------- -----------
Net cash provided by financing activities ............................................. 1,462,959 5,479,994
----------- -----------
Net increase (decrease) in cash and cash equivalents ..................................... (1,819,830) 3,979,822
Cash and cash equivalents, beginning of period ........................................... 8,898,982 3,086,891
----------- -----------
Cash and cash equivalents, end of period ................................................. $ 7,079,152 $ 7,066,713
=========== ===========
Cash paid during the period for:
Income taxes ........................................................................... $ 343,987 $ 360,994
Interest ............................................................................... $ 1,711,985 $ 1,469,379
F-25
RIDGEWAY BANCSHARES, INC.
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the requirements for interim financial statements and,
accordingly, they are condensed and omit disclosures, which would substantially
duplicate those contained in the most recent annual report to shareholders. The
financial statements as of September 30, 2001 and for the interim periods ended
September 30, 2001 and 2000 are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation. The financial information as of December 31,
2000 has been derived from the audited financial statements as of that date. For
further information, refer to the financial statements and the notes included in
Ridgeway Bancshares, Inc.'s 2000 Annual Report.
NOTE 2 - MERGER WITH COMMUNITY BANKSHARES, INC.
On November 22, 2001, the Company announced that it had signed a letter
of intent to merge with Community Bankshares, Inc., a bank holding company
headquartered in Orangeburg, South Carolina. Under the agreement, the Company's
shareholders will receive 25 shares of Community Bankshares common stock for
each share of the Company's common stock and $100 in cash. Following the merger,
the Bank of Ridgeway will continue to operate as a wholly-owned subsidiary of
Community Bankshares, Inc. The merger is expected to be completed by July 1,
2002.
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive income, which
is defined as nonowner related transactions in equity. The following table sets
forth the amounts of other comprehensive income included in equity along with
the related tax effect for the three and nine month periods ended September 30,
2001 and 2000.
Pre-tax Net-of-tax
Amount (Expense) Amount
------ ------- ------
For the Nine Months Ended September 30, 2001:
Unrealized gains on securities:
Unrealized holding gains arising during the period ............................. $190,057 ($ 65,496) $124,561
Plus: reclassification adjustment for gains realized in net income.............. - - -
-------- -------- --------
Net unrealized gains on securities ............................................. 190,057 ( 65,496) 124,561
-------- -------- --------
Other comprehensive income ...................................................... $190,057 ($ 65,496) $124,561
======== ======== ========
F-26
Pre-tax Net-of-tax
Amount (Expense) Amount
------ ------- ------
For the Nine Months Ended September 30, 2000:
Unrealized gains on securities:
Unrealized holding gains arising during the period ................................ $32,867 ($15,110) $17,757
Plus: reclassification adjustment for gains realized in net income................. - - -
------- ------- -------
Net unrealized gains on securities ................................................ 32,867 ( 15,110) 17,757
------- ------- -------
Other comprehensive income ......................................................... $32,867 ($15,110) $17,757
======= ======= =======
Pre-tax Net-of-tax
Amount (Expense) Amount
------ ------- ------
For the Three Months Ended September 30, 2001:
Unrealized gains on securities:
Unrealized holding gains arising during the period ................................ $62,520 ($21,257) $41,263
Plus: reclassification adjustment for gains realized in net income................. - - -
------- ------- -------
Net unrealized gains on securities ................................................ 62,520 ( 21,257) 41,263
------- ------- -------
Other comprehensive income ......................................................... $62,520 ($21,257) $41,263
======= ======= =======
Pre-tax Net-of-tax
Amount (Expense) Amount
------ ------- ------
For the Three Months Ended September 30, 2000:
Unrealized gains on securities:
Unrealized holding gains arising during the period .............................. $52,056 ($19,202) $32,854
Plus: reclassification adjustment for gains realized in net income............... - - -
------- ------- -------
Net unrealized gains on securities .............................................. 52,056 ( 19,202) 32,854
------- ------- -------
Other comprehensive income ...................................................... $52,056 ($19,202) $32,854
======= ======= =======
Accumulated other comprehensive income consists solely of the unrealized gain on
securities available for sale, net of the deferred tax effects.
F-27
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
Community Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Community
Bankshares, Inc., and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community
Bankshares, Inc., and subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with generally accepted
accounting principles.
s/J. W. Hunt & Company, L.L.P.
Columbia, South Carolina
February 2, 2001
F-28
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2000 AND 1999
ASSETS
($ in thousands) 2000 1999
---- ----
Cash and due from banks ................................................................ $ 10,209 $ 12,275
Federal funds sold ..................................................................... 8,130 8,040
--------- ---------
Total cash and cash equivalents ....................................... 18,339 20,315
Interest-bearing deposits with banks ................................................... 594 788
Securities available for sale, at fair value ........................................... 41,195 30,566
Securities held to maturity (fair value approximates $12,217
and $12,919 as of December 31, 2000 and 1999, respectively) ......................... 12,371 13,369
Loans held for sale .................................................................... 343 269
Loans receivable, net of allowance for loan
losses of $2,424 in 2000 and $1,936 in 1999 ......................................... 192,653 155,153
Accrued interest receivable ............................................................ 2,330 1,700
Premises and equipment - net ........................................................... 4,411 4,619
Net deferred tax asset ................................................................. 795 858
Other assets ........................................................................... 292 393
--------- ---------
Total assets ......................................................... 273,323 228,030
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non interest-bearing ..................................................... $ 31,219 $ 26,878
Interest-bearing transaction accounts ............................................ 22,708 18,372
Savings .......................................................................... 38,385 30,506
Certificates of deposit of $100 and over ......................................... 38,702 36,163
Other time deposits .............................................................. 87,797 72,445
--------- ---------
Total deposits ....................................................... 218,811 184,364
Federal funds purchased and securities sold under
agreements to repurchase ...................................................... 9,352 2,782
Federal Home Loan Bank advances .................................................. 20,350 19,420
Accrued interest payable ......................................................... 1,224 770
Accrued expenses and other liabilities ........................................... 447 449
--------- ---------
Total liabilities .................................................... 250,184 207,785
--------- ---------
Shareholders' equity:
Common stock - no par value, authorized shares
- 12,000,000; issued and outstanding - 3,199,180 shares
in 2000 and 3,191,462 shares in 1999 ............................................. 15,928 14,207
Retained earnings ................................................................... 7,342 6,549
Accumulated other comprehensive loss ................................................ (131) (511)
--------- ---------
Total shareholders' equity ........................................... 23,139 20,245
--------- ---------
Total liabilities and shareholders' equity ........................... 273,323 228,030
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
F-29
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
($ in thousands, except per share data) 2000 1999 1998
---- ---- ----
Interest and dividend income:
Loans, including fees .................................................. $16,750 $12,406 $ 9,697
Deposits with other financial institutions ............................. 64 101 126
Investment securities interest and dividends:
Interest - U. S. Treasury and
U.S. Government Agencies ......................................... 2,891 2,352 1,831
Interest - tax-exempt securities .................................... 32 30 14
Dividends ........................................................... 134 106 84
Federal funds sold and securities
purchased under agreements to resell ................................ 430 555 568
------- ------- -------
Total interest and dividend income ...................... 20,301 15,550 12,320
------- ------- -------
Interest expense:
Deposits:
Interest-bearing transaction accounts ............................... 329 269 253
Savings ............................................................. 1,358 942 774
Certificates of deposit of $100 and over ............................ 2,279 1,523 1,174
Certificates of deposit of less than $100 ........................... 4,626 3,379 2,844
------- ------- -------
Total interest on deposits .............................. 8,592 6,113 5,045
Federal funds purchased and securities sold
under agreements to repurchase ...................................... 218 170 119
Federal Home Loan Bank advances ........................................ 1,165 675 390
------- ------- -------
Total interest expense .................................. 9,975 6,958 5,554
------- ------- -------
Net interest income ....................................................... 10,326 8,592 6,766
Provision for loan losses ................................................. 688 612 484
------- ------- -------
Net interest income after provision
for loan losses ...................................... 9,638 7,980 6,282
------- ------- -------
Noninterest income:
Service charges on deposit accounts .................................... 1,475 1,031 798
Deposit box rent ....................................................... 25 24 19
Bank card fees ......................................................... 29 14 12
Credit life insurance commissions ...................................... 77 48 74
Other .................................................................. 262 200 152
------- ------- -------
Total noninterest income ................................ 1,868 1,317 1,055
------- ------- -------
Noninterest expenses:
Salaries and employee benefits ......................................... 3,779 3,493 2,911
Premises and equipment ................................................. 942 886 701
Marketing .............................................................. 207 180 166
Regulatory fees ........................................................ 140 155 92
Supplies ............................................................... 160 155 174
Director fees .......................................................... 137 121 125
FDIC insurance ......................................................... 33 23 16
Other .................................................................. 1,154 1,053 889
------- ------- -------
Total noninterest expenses .............................. 6,552 6,066 5,074
------- ------- -------
(Continued) - 1.
F-30
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
Income before provision for income taxes and
cumulative effect of a change in accounting principle .................... $ 4,954 $ 3,231 $ 2,263
Provision for income taxes .................................................. 1,807 1,049 663
------- ------- -------
Income before cumulative effect of a change in
accounting principle ..................................................... 3,147 2,182 1,600
Cumulative effect of a change in accounting principle,
net of tax ............................................................... - - 33
------- ------- -------
Net income ...................................................... 3,147 2,182 1,567
======= ======= =======
Average number of common shares outstanding ................................. 3,194 3,189 3,041
======= ======= =======
Average number of common shares outstanding,
assuming dilution ........................................................ 3,215 3,215 3,097
======= ======= =======
Basic earnings per common share:
Income before cumulative effect of a change in
accounting principle .................................................. $ 0.99 $ 0.68 $ 0.53
Cumulative effect of a change in accounting principle,
net of tax ............................................................ - - (0.01)
------- ------- -------
Net income ............................................................... 0.99 0.68 0.52
======= ======= =======
Diluted earnings per common share:
Income before cumulative effect of a change in
accounting principle .................................................. $ 0.98 $ 0.68 $ 0.52
Cumulative effect of a change in accounting principle,
net of tax ............................................................ - - (0.01)
------- ------- -------
Net income ............................................................... 0.98 0.68 0.51
======= ======= =======
(Concluded) -2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
F-31
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
($ in thousands, except per share data)
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
------ ------ -------- ------------- -----
Balance,
January 1, 1998 ............................ 2,766,410 $ 9,156 $ 3,861 $ 20 $ 13,037
Common stock issued ........................ 433,660 5,579 - - 5,579
Stock issuance cost ........................ - (87) - - (87)
----------
Comprehensive income:
Net income ............................... - - 1,567 - 1,567
Change in unrealized gains
(losses), net of applicable
deferred income taxes
on securities
available for sale .................... - - - 16 16
----------
Total comprehensive income ........ 1,583
----------
Dividends paid at $.15
per share ............................... - - (453) - (453)
---------- ---------- ---------- ---------- ----------
Balance,
December 31, 1998 .......................... 3,200,070 14,648 4,975 36 19,659
Repurchase of common stock ................. (49,455) (630) - - (630)
Common stock issued ........................ 40,847 189 - - 189
----------
Comprehensive income:
Net income ............................... - - 2,182 - 2,182
Change in unrealized gains
(losses), net of applicable
deferred income taxes
on securities
available for sale .................... - - - (547) (547)
----------
Total comprehensive income ........ - - - - 1,635
----------
Dividends paid at $.19
per share ............................... - - (608) - (608)
---------- ---------- ---------- ---------- ----------
(Continued) - 1.
F-32
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
($ in thousands, except per share data)
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
------ ------ -------- ------------- -----
Balance,
December 31, 1999 .......................... 3,191,462 $ 14,207 $ 6,549 $ (511) $ 20,245
Shares issued by DRIP ...................... 5,335 3 - - 3
Common stock issued ........................ 2,520 19 - - 19
Costs of stock dividend .................... - (10) - - (10)
Cash-in-lieu of 5% stock dividend .......... (137) - - - -
Market value of 5% stock dividend .......... - 1,709 (1,709) - -
----------
Comprehensive income:
Net income ............................... - - 3,147 - 3,147
Change in unrealized gains
(losses), net of applicable
deferred income taxes
on securities
available for sale .................... - - - 380 380
----------
Total comprehensive income ........ 3,527
----------
Dividends paid at $.22
per share ............................... - - (645) - (645)
---------- ---------- ---------- ---------- ----------
Balance,
December 31, 2000 .......................... 3,199,180 15,928 7,342 (131) 23,139
========== ========== ========== ========== ==========
(Concluded) - 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
F-33
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
($ in thousands)
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income ................................................................ $ 3,147 $ 2,182 $ 1,567
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................................... 478 462 437
Accretion of discounts and amortization of premiums -
securities - net .................................................... 15 (14) (8)
Provision for loan losses .............................................. 688 612 484
Deferred income taxes .................................................. (148) (405) (102)
Proceeds from sales of real estate loans held for sale ................. 5,868 9,963 12,089
Originations of real estate loans held for sale ........................ (5,868) (9,963) (12,089)
Increase in real estate loans held for sale ............................ (74) (453) (363)
Net changes in operating assets and liabilities:
Accrued interest receivable ......................................... (630) (458) (75)
Other assets ........................................................ 101 289 (339)
Accrued interest payable ............................................ 454 167 93
Other liabilities ................................................... (2) 14 187
-------- -------- --------
Net cash provided by operating activities .................. 4,029 2,396 1,881
-------- -------- --------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
with banks ............................................................. 194 789 (339)
Purchases of securities held to maturity .................................. - (2,424) (19,253)
Purchases of securities available for sale ................................ (16,797) (23,050) (23,181)
Proceeds from maturities of securities
held to maturity ....................................................... 1,000 4,340 21,284
Proceeds from maturities of securities
available for sale ..................................................... 6,742 10,485 19,479
Loan originations and principal collections, net .......................... (38,188) (38,261) (26,012)
Purchases of premises and equipment ....................................... (270) (1,189) (1,530)
-------- -------- --------
Net cash used by investing activities ...................... (47,319) (49,310) (29,552)
-------- -------- --------
(Continued) - 1.
F-34
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
Cash flows from financing activities:
Net increase in demand, transaction
and savings deposit accounts ........................................... $ 16,556 $ 10,048 $ 16,544
Net increase in time deposits ............................................. 17,891 26,686 13,919
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase ..................... 6,570 (1,682) 1,913
Federal Home Loan Bank advances ........................................... 930 9,930 8,430
Repurchase of stock ....................................................... - (630) -
Proceeds from issuance of common stock .................................... 3 - 5,372
Stock issuance cost ....................................................... (10) - (87)
Proceeds from exercise of stock options ................................... 19 189 207
Dividends paid ............................................................ (645) (608) (453)
-------- -------- --------
Net cash provided by financing activities .................. 41,314 43,933 45,845
-------- -------- --------
Net change in cash and cash equivalents ...................................... (1,976) (2,981) 18,174
Cash and cash equivalents at beginning of year ............................... 20,315 23,296 5,122
-------- -------- --------
Cash and cash equivalents at end of year ..................................... 18,339 20,315 23,296
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash payments for interest ............................................. $ 9,590 $ 6,751 $ 5,461
======== ======== ========
Cash payments for income taxes ......................................... $ 1,927 $ 1,287 $ 718
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Transfers of loans receivable to other
real estate owned ................................................... $ 145 $ 99 $ -
======== ======== ========
Transfer from retained earnings to
common stock outstanding for the market
value of the 5% stock dividend ...................................... $ 1,709 $ - $ -
======== ======== ========
(Concluded) - 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
F-35
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 1 - ORGANIZATION:
Community Bankshares, Inc. (the "Corporation"), was organized under the laws of
the State of South Carolina and was chartered as a business corporation on
November 30, 1992. Pursuant to the provisions of the Federal Bank Holding
Company Act, an application was filed with and approved by the Board of
Governors of the Federal Reserve System for the Corporation to become a bank
holding company by the acquisition of Orangeburg National Bank (ONB).
In June 1996, Sumter National Bank (SNB) and in July 1998, Florence National
Bank (FNB) commenced operations in Sumter and Florence, South Carolina,
respectively, following approval by the Comptroller of the Currency and other
regulators. Upon completion of their organization, the common stock of SNB and
FNB was acquired by the Corporation.
The Banks operate as wholly-owned subsidiaries of the Corporation with separate
Boards of Directors and operating policies and provide a variety of financial
services to individuals and small businesses through their offices in South
Carolina. The primary deposit products are checking, savings and term
certificate accounts and the primary lending products are consumer, commercial
and mortgage loans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Corporation
(the Parent Holding Company) and its subsidiaries, the Banks. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the balance sheet and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of deferred tax assets.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of the Corporation's activities are with customers located within South
Carolina. Note 4 discusses the types of securities the Corporation purchases.
Note 5 discusses the types of lending that the Corporation engages in. The Banks
grant agribusiness, commercial, consumer and residential loans to customers
throughout the State of South Carolina. Although the Banks have diversified loan
portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economies of Florence, Orangeburg and Sumter
Counties, South Carolina and the surrounding areas.
ORGANIZATION, STOCK OFFERING AND PREOPENING COSTS:
Preopening costs associated with the organization of the Banks were expensed as
incurred while stock issuance costs were charged to common stock as incurred.
Organization costs were, until 1998, deferred and amortized over five years
using the straight-line method. In 1998, the Corporation adopted Statement of
F-36
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities". This SOP
requires costs of start-up activities and organization costs to be expensed as
incurred. The initial application of this SOP is reported as the cumulative
effect of a change in accounting principle.
The effect of adopting this SOP in 1998 was to decrease income before provision
for income taxes and net income by approximately $46,000 and $33,000,
respectively, and basic earnings per share and diluted earnings per share by
$0.01 and $0.01, respectively.
CASH AND CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows, the Corporation has
defined cash and cash equivalents as those amounts included in the balance
sheets under the caption, "Cash and due from banks" and "Federal funds sold",
all of which mature within ninety days.
INTEREST-BEARING DEPOSITS WITH BANKS:
Interest-bearing deposits with banks mature within one year and are carried at
cost.
SECURITIES:
Securities that management has both the ability and positive intent to hold to
maturity are classified as held to maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, changes in prepayment risk, increase in regulatory capital,
or other similar factors, are classified as available for sale and are carried
at fair value. Unrealized gains and losses on securities available for sale are
excluded from earnings and reported in other comprehensive income. Gains and
losses on the sale of securities available for sale are recorded on the trade
date and are determined using the specific identification method. Declines in
the fair value of held to maturity and available for sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on
securities.
No securities are being held for short-term resale; therefore, the Corporation
does not currently use a trading account classification.
LOAN SALES:
The Corporation originates loans for sale generally without recourse to other
financial institutions under commitments or other arrangements in place prior to
loan origination. Sales are completed at or near the loan origination date.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Gains and
losses, if any, on the sale of such loans are determined using the specific
identification method. All fees and other income from these activities are
recognized in income when loan sales are completed.
LOANS RECEIVABLE:
The Corporation grants mortgage, commercial and consumer loans to customers. The
ability of the Corporation's debtors to honor their contracts is dependent upon
the real estate and general economic conditions in its service areas. Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balance adjusted for charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. Interest income is accrued on the
unpaid principal balance.
F-37
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well collateralized and
in process of collection. Residential real estate loans are typically placed on
nonaccrual at the time the loan is 120 days delinquent. Unsecured personal
credit lines and certain consumer finance loans are typically charged off no
later than the time the loan is 180 days delinquent.
Other consumer loans are charged off at the time the loan is 120 days
delinquent. In all cases, loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established through a provision for loan losses
charged against earnings as losses are estimated to have occurred. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Management of each Bank reviews its allowance for loan losses in three broad
categories: commercial, real estate, and installment loans, and assigns an
estimated percentage factor to each in the determination of the estimate of the
allowance for loan losses. The Banks' internal and external loan review programs
identify loans that are subject to specific weaknesses, and such loans will be
reviewed for a specific loan loss allowance.
A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
F-38
ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No 25, "Accounting for Stock Issued to
Employees", whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Corporation's stock option plans have no intrinsic value at the grant date, and
under Opinion No. 25 no compensation cost is recognized for them. The
Corporation has elected to continue with the accounting methodology in Opinion
No. 25 and, as a result, has provided pro forma disclosures of net income and
earnings per share and other disclosures, as if the fair value based method of
accounting had been applied.
FORECLOSED ASSETS:
Foreclosed assets, which are recorded in other assets, include properties
acquired through foreclosure or in full or partial satisfaction of the related
loan and are held for sale.
Foreclosed assets are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value, less costs to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
other expenses.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
computed principally on the straight-line method over the estimated useful lives
of the assets. Useful lives generally used in providing for depreciation are as
follows:
Building 40 years
Building components 5-30 years
Vault doors, safe deposit boxes, night depository, etc. 40 years
Furniture, fixtures and equipment 5-25 years
INCOME TAXES:
Deferred income tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The provision (benefit) for income taxes of each
subsidiary is recorded as if each subsidiary filed a separate return.
F-39
ADVERTISING COSTS:
The cost of advertising is expensed as incurred.
FINANCIAL INSTRUMENTS:
In the ordinary course of business the Banks enter into commitments to extend
credit and grant standby letters of credit. Such off-balance-sheet financial
instruments are recorded in the consolidated financial statements when they are
funded.
SEGMENTS:
Community Bankshares, Inc. through its banking subsidiaries, ONB, SNB, and FNB,
provides a broad range of financial services to individuals and companies in
central South Carolina. These services include demand, time, and savings
deposits; lending services; ATM processing; and similar financial services.
While the Corporation's decision makers monitor the revenue streams of the
various financial products and services, operations are managed and financial
performance is evaluated on a corporate-wide basis. Accordingly, the banking
operations are not considered by management to comprise more than one reportable
operating segment.
COMPREHENSIVE INCOME:
The Corporation adopted SFAS No. 130, Reporting Comprehensive Income, as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
securities available for sale, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Corporation's net income or shareholders' equity. Currently, the
Corporation's only component of Comprehensive Income (Loss) is its unrealized
gains (losses) on securities available for sale.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts. The statement requires that all derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at fair value, and that changes in the fair value of derivatives be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. In June 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, which
delays the original effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. The adoption of SFAS No. 133 is not expected to have a
material effect on the Corporation's consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140
replaces and carries over most of the provisions of SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
and it revises those standards for accounting for securitizations and other
transfers of assets and collateral and requires additional disclosures. This
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
No. 140 is effective for transfers occurring after March 31, 2001, however, is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The effect of implementation of the Statement's
provisions at December 31, 2000 was immaterial to the Corporation's consolidated
financial statements. The Corporation does not anticipate the implementation of
the remaining provisions of the Statement effective subsequent to March 31, 2001
will have a material effect on its earnings or financial condition.
F-40
OTHER:
Certain amounts previously reported in the statements have been restated to
conform to the current year's presentation and disclosure requirements.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
The Banks are required to maintain average reserve balances with the Federal
Reserve, or in available cash. The average daily reserve balance requirements at
December 31, 2000 was approximately $540,000.
At December 31, 2000, the Corporation had cash balances with correspondent banks
totaling approximately $274,000, all fully insured by the FDIC.
NOTE 4 - SECURITIES:
Securities held to maturity consist of the following (in thousands of dollars):
DECEMBER 31, 2000
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies ........................... $12,371 $ 1 $ (155) $12,217
======= ======= ======= =======
DECEMBER 31, 1999
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies ........................... $13,369 $ 2 $ (452) $12,919
======= ======= ======= =======
Securities available for sale consist of the following (in thousands of
dollars):
DECEMBER 31, 2000
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies ........................... $38,599 $ 21 $ (216) $38,404
State and local
governments ................................ 814 1 (5) 810
Federal Home Loan
Bank stock ................................. 1,396 - - 1,396
Federal Reserve
Bank stock ................................. 408 - - 408
Equity securities ............................. 177 - - 177
------- ------- ------- -------
Total ............................. 41,394 22 (221) 41,195
======= ======= ======= =======
F-41
NOTE 4 - SECURITIES (CONTINUED):
DECEMBER 31, 1999
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and
federal agencies ........................... $28,931 $ 2 $ (782) $28,151
State and local
governments ................................ 825 1 (12) 814
Federal Home Loan
Bank stock ................................. 1,016 - - 1,016
Federal Reserve
Bank stock ................................. 408 - - 408
Equity securities ............................. 177 - - 177
------- ------- ------- -------
Total ............................. 31,357 3 (794) 30,566
======= ======= ======= =======
The amortized cost and fair value of debt securities at December 31, 2000, by
contractual maturity are detailed below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
SECURITIES SECURITIES
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED FAIR AMORTIZED FAIR
(In thousands of dollars) COST VALUE COST VALUE
---- ----- ---- -----
Due in one year or less ................................ $ - $ - $ 2,163 $ 2,153
Due after one year through
five years .......................................... 12,371 12,217 27,642 27,486
Due after five years through
ten years ........................................... - - 9,608 9,575
------- ------- ------- -------
Subtotal ................................... 12,371 12,217 39,413 39,214
Equity securities ...................................... - - 1,981 1,981
------- ------- ------- -------
Total ...................................... 12,371 12,217 41,394 41,195
======= ======= ======= =======
F-42
The following is a summary of maturities and yields of securities held to
maturity and securities available for sale as of December 31, 2000 (in thousands
of dollars):
After five years
After one year but but within ten
Within one year within five years years Over ten years Total
--------------- ----------------- ----- -------------- -----
Securities held to maturity:
Federal agency obligations ........... $ - 0.00% $12,371 6.05% $ - 0.00% $ - 0.00% $12,371 6.05%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total held to maturity ..... - 0.00% 12,371 6.05% - 0.00% - 0.00% 12,371 6.05%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Securities available for sale:
Federal agency obligations ........... 1,941 5.14% 26,888 6.07% 9,575 6.98% - 0.00% 38,404 6.25%
State and local governments .......... 212 4.14% 598 3.80% - 0.00% - 0.00% 810 3.89%
Equities ............................. - 0.00% - 0.00% - 0.00% 1,981 7.05% 1,981 7.05%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total available for sale .... 2,153 5.04% 27,486 5.99% 9,575 6.98% 1,981 7.05% 41,195 6.24%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total for portfolio .................. 2,153 5.04% 39,857 6.03% 9,575 6.98% 1,981 7.05% 53,566 6.20%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Yields on tax exempt obligations have been computed on a tax equivalent basis
using the maximum federal tax rate of 34%.
The Banks, as members of the Federal Home Loan Bank ("FHLB") of Atlanta, are
required to own capital stock in the FHLB of Atlanta based generally upon their
balances of residential mortgage loans and FHLB advances. FHLB capital stock
owned by ONB and SNB is pledged as collateral on FHLB advances. No ready market
exists for this stock, and it has no quoted market value. However, redemption of
this stock has historically been at par value.
All equity securities including investments in the FHLB stock and Federal
Reserve Bank stock (as required of the respective banks) have no contractual
maturity and are classified in the maturity category of over ten years.
At December 31, 2000 and 1999, investment securities with a carrying value of
$19,282,000 and $15,155,000, respectively, were pledged to secure public
deposits, FHLB advances, and for other purposes required and permitted by law.
At December 31, 2000 and 1999, the carrying amount of securities pledged to
secure repurchase agreements was approximately $10,051,000 and $3,134,000,
respectively.
NOTE 5 - LOANS RECEIVABLE:
The following is a summary of loans by category at December 31, 2000 and 1999
(in thousands of dollars):
2000 1999
---- ----
Commercial, financial and agricultural ................. $ 51,966 $ 39,752
Real estate - construction ............................. 15,389 9,156
Real estate - mortgage ................................. 98,154 84,680
Installment loans to individuals ....................... 29,270 23,033
Obligations of states and political subdivisions ....... 298 468
-------- --------
Total loans - gross .......................... 195,077 157,089
======== ========
F-43
The loan portfolio included fixed rate and adjustable rate loans totaling
$121,122,000 and $73,955,000, respectively, at December 31, 2000.
Overdrawn demand deposits totaling $864,000 and $492,000 have been reclassified
as loan balances at December 31, 2000 and 1999, respectively.
Gross proceeds on mortgage loans originated for resale were approximately
$5,900,000, $9,900,000, and $12,100,000 for the years ended December 31, 2000,
1999 and 1998, respectively. The Bank sold all of these loans at par; therefore,
no gain or loss was recognized on the sales.
Loans outstanding to directors, executive officers, principal holders of equity
securities, or to any of their associates totaled $7,299,000 at December 31,
2000, and $7,545,000 at December 31, 1999. A total of $5,278,000 in loans were
made or added, while a total of $5,524,000 were repaid or deducted during 2000.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. Changes in the composition of the board of directors or the
group comprising executive officers result in additions to or deductions from
loans outstanding to directors, executive officers or principal holders of
equity securities.
Changes in the allowance for loan losses and related ratios for the years ended
December 31, 2000, 1999 and 1998, were as follows (in thousands of dollars):
2000 1999 1998
---- ---- ----
Average amount of loans outstanding ................................. $179,654 $139,215 $103,349
======== ======== ========
Allowance for loan losses at beginning
of year .......................................................... $ 1,936 $ 1,459 $ 1,140
-------- -------- --------
Loan charge-offs:
Real estate ...................................................... 78 - 7
Installment ...................................................... 116 95 111
Credit cards and related plans ................................... 9 5 6
Commercial and other ............................................. 33 80 56
-------- -------- --------
Total charge-offs .......................................... 236 180 180
-------- -------- --------
Recoveries:
Real estate ...................................................... 3 - -
Installment ...................................................... 25 17 12
Credit cards and related plans ................................... 2 3 3
Commercial and other ............................................. 6 25 -
-------- -------- --------
Total recoveries ........................................... 36 45 15
-------- -------- --------
Net charge-offs ..................................................... 200 135 165
-------- -------- --------
Provision for loan losses ........................................... 688 612 484
-------- -------- --------
Allowance for loan losses at end of year ............................ 2,424 1,936 1,459
======== ======== ========
Ratios
Net charge-offs to average loans
outstanding ...................................................... 0.11% 0.10% 0.16%
Net charge-offs to loans outstanding
at end of year ................................................... 0.10% 0.09% 0.14%
Allowance for loan losses to average
loans ............................................................ 1.35% 1.39% 1.41%
Allowance for loan losses to total loans
at end of year ................................................... 1.24% 1.23% 1.24%
Net charge-offs to allowance for loan losses
8.25% 6.97% 11.31%
Net charge-offs to provision for
loan losses ...................................................... 29.07% 22.06% 34.09%
F-44
The following is a summary of information pertaining to impaired loans:
Year Ended December 31,
-----------------------
2000 1999
---- ----
(In thousands)
Impaired loans without a valuation allowance ............. $ - $ -
Impaired loans with a valuation allowance ................ 238 90
---- ----
Total impaired loans ..................................... 238 90
==== ====
Valuation allowance related to impaired loans ............ $ 36 $ 14
==== ====
Years Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Average investment in impaired loans .............. $ 331 $ 53 $74
====== ===== ===
Interest income recognized on impaired loans ...... $ - $ - $ -
====== ===== ===
Interest income recognized on a
cash basis on impaired loans ...................... $ - $ - $ -
====== ===== ===
No additional funds are committed to be advanced in connection with impaired
loans.
Nonaccrual, past due loans, and other real estate owned at December 31, 2000 and
1999, were as follows (in thousands of dollars):
2000 1999
---- ----
Nonaccrual loans ........................................... $238 $ 90
Accruing loans 90 days or more past due .................... 93 6
---- ----
Total ............................................ 331 96
==== ====
Total as a percentage of outstanding loans ....... 0.17% 0.06%
==== ====
Foreclosed assets .......................................... $ - $ -
==== ====
Gross interest income that would have been recorded for the years ended December
31, 2000, 1999 and 1998 if nonaccrual loans had been performing in accordance
with their original terms was approximately $32,600, $2,100 and $2,100,
respectively.
F-45
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 2000 and 1999, consist of the following
(in thousands of dollars):
2000 1999
---- ----
Land ............................................... $ 761 $ 761
Building and components ............................ 2,821 2,749
Furniture, fixtures and equipment .................. 3,055 2,921
------ ------
Total .................................... 6,637 6,431
Less, accumulated depreciation ..................... 2,226 1,812
------ ------
Premises and equipment - net ............. 4,411 4,619
====== ======
Depreciation expense was approximately $478,000, $462,000, and $371,000, for the
years ended December 31, 2000, 1999 and 1998, respectively.
The FNB office building was constructed on leased land. The land is being leased
under a noncancellable operating lease for an initial term of ten years. The
lease terms provide for two ten year renewal options and a third renewal of two
years. FNB is responsible for property taxes and improvements. The annual basic
rent in lease years one through five is $48,000 and in years six through ten
$53,000.
Rent expense totaled approximately $48,000, $49,500, and $25,000 in 2000, 1999,
and 1998, respectively.
NOTE 7 - DEPOSITS:
At December 31, 2000, the scheduled maturities of time deposits greater than
$100,000 are as follows (in thousands of dollars):
Maturing in
-----------
2001 ................................ $35,719
2002 ................................ 2,637
2003 ................................ 144
2004 ................................ 100
2005 ................................ 102
-------
Total 38,702
======
Deposits of directors and officers totaled approximately $3,825,000 and
$4,484,000 at December 31, 2000 and 1999, respectively.
NOTE 8 - OTHER BORROWED FUNDS:
Federal funds purchased and securities sold under agreements with customers to
repurchase generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction. The Corporation monitors the
fair value of the underlying securities on a daily basis. All securities
underlying these agreements are institution-owned securities.
F-46
Information concerning securities sold under agreements to repurchase is
summarized as follows (in thousands of dollars):
2000 1999
---- ----
Outstanding at year-end ............................ $ 9,352 $ 2,782
Interest rate at year-end .......................... 5.01% 3.50%
Interest expense ................................... $146,778 $149,274
Maximum month-end balance during the year .......... $ 9,532 $ 6,473
Average amount outstanding during the year ......... $ 4,501 $ 5,210
Weighted average interest rate during the year ..... 4.84% 3.26%
At December 31, 2000 and 1999 there were no federal funds purchased.
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES:
The Banks are members of the Federal Home Loan Bank of Atlanta and as such, have
access to long-term borrowing. The collateral for any such borrowings are
blanket liens on ONB's and SNB's one-to-four family residential loans and all
the banks' stock in the Federal Home Loan Bank. Borrowings during 2000 and 1999
are summarized as follows (in thousands of dollars):
2000 1999
---- ----
Outstanding at year-end .............................. $20,350 $19,420
Interest rate at year-end ............................ 6.04% 5.55%
Maximum amount outstanding at any month-end .......... $20,350 $19,420
Average amount outstanding during the year ........... $19,385 $12,335
Weighted average interest rate during the year ....... 6.01% 5.47%
Required principal reductions are as follows (in thousands of dollars):
YEAR ENDING:
2001 ..................... $ 2,500
2002 ..................... -
2003 ..................... -
2004 ..................... -
2005 ..................... 1,650
Thereafter .............. 16,200
-------
Total ............ 20,350
=======
NOTE 10 - COMMON STOCK:
The Company declared a five percent stock dividend in January 2000. The average
number of common shares outstanding and all earnings per common share amounts
included in the accompanying consolidated financial statements and notes are
based on the increased number of shares giving retroactive effect for the stock
dividend.
The Corporation repurchased 49,455 shares of its common stock from the
Corporation's former chief executive officer in January 1999. The repurchase
price per share was at the then market price of $12.74 and totaled approximately
$630,000.
F-47
Under the Corporation's Dividend Reinvestment Plan, shareholders may reinvest
all or part of their cash dividends in shares of common stock and also purchase
additional shares of common stock.
NOTE 11 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES:
At December 31, 2000, 285,600 common shares were reserved for issuance for
employee stock option plans and 630,000 common shares were reserved for issuance
pursuant to the dividend reinvestment and additional stock purchase plan.
During 1999, the Corporation amended its 1997 Stock Option Plan. Under the
amended Plan, up to 285,600 shares of common stock were authorized to be granted
to selected officers and other employees of the Corporation and its subsidiaries
pursuant to exercise of incentive and nonqualified stock options. Of such
shares, 190,050 were reserved for issuance pursuant to exercise of incentive
stock options and 95,550 were reserved for issuance pursuant to exercise of
nonqualified stock options.
The exercise price of any qualified option granted is equal to the fair value of
the common stock on the date the option is granted. Nonqualified options can be
issued for less than fair value; however, the Corporation has not elected to
issue these options for less than fair value at the date of the grant.
The Corporation applies APB Opinion 25 and related Interpretations in accounting
for the stock-based compensation plans. Accordingly, no compensation cost has
been recognized for the stock-based compensation plans. Had compensation cost
for the stock-based compensation plans been recognized based on the fair value
at the grant dates for the stock options consistent with the method prescribed
by SFAS No. 123, the Corporation's net income and earnings per share would have
been adjusted to the pro forma amounts indicated below:
Year Ended
December 31, 1999
-----------------
(In thousands, except per
share data)
Net income As reported $2,182
Pro Forma 1,678
Basic earnings per share As reported $0.68
Pro Forma 0.53
Diluted earnings per share As reported $0.68
Pro Forma 0.52
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Year Ended
December 31, 1999
-----------------
Dividend yield ............................ 1.54%
Expected life ............................. 7.9 years
Expected volatility ....................... 27.5%
Risk-free interest rate ................... 5.30%
A summary of the status of the Corporation's 1994 stock option plan is presented
below:
2000 1999 1998
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Fixed options:
Outstanding at beginning of year ............ - $ - 28,875 $ 3.71 84,525 $ 3.71
Granted ..................................... - - - - - -
Exercised ................................... - - (28,875) 3.71 (55,650) 3.71
Forfeited ................................... - - - - - -
------ ------- -------
Outstanding at end of year .................. - - - - 28,875 3.71
====== ======= =======
Options exercisable at year-end ............... - - - - 28,875 3.71
F-48
NOTE 11 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES (CONTINUED):
A summary of the status of the Corporation's 1997 pre-amended stock option plan
is presented below:
2000 1999 1998
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Fixed options:
Outstanding at beginning of year ................ 63,840 $ 7.60 75,390 $ 7.60 79,590 $ 7.60
Granted ......................................... - - - - - -
Exercised ....................................... (2,520) 7.60 (10,710) 7.60 (2,310) 7.60
Forfeited ....................................... - - (840) 7.60 (1,890) 7.60
------ ------- -------
Outstanding at end of year ...................... 61,320 7.60 63,840 7.60 75,390 7.60
====== ======= =======
Options exercisable at year-end ................... 61,320 7.60 63,840 7.60 75,390 7.60
A summary of the status of the Corporation's 1997 stock option plan, as amended
in 1999, is presented below:
2000 1999
---- ----
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Fixed options:
Outstanding at beginning of year
161,700 $ 12.83 - $ -
Granted ........................................... - - 161,700 12.83
Exercised ......................................... - - - -
Forfeited ......................................... (3,780) 12.83 - -
------- --------- ------- --------
Outstanding at end of year ............................. 157,920 12.83 161,700 12.83
======= ========= ======= ========
Options exercisable at year end ........................ 157,920 $ 12.83 - $ -
======= ========= ======= ========
Weighted average fair value of
options granted during the
year ................................................. $ - $ 4.62
========= =========
Information pertaining to options outstanding at December 31, 2000 is as
follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$12.83 157,920 7.4 years $12.83 157,920 $12.83
7.60 61,320 6.3 years 7.60 61,320 7.60
------- --------
Outstanding at
end of year 219,240 7.1 years 11.37 219,240 11.37
======= =======
F-49
NOTE 12 - INCOME TAXES:
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The 2000, 1999 and 1998 provision for income taxes consists of the following (in
thousands of dollars):
2000 1999 1998
---- ---- ----
Current tax provision:
Federal ........................ $ 1,801 $ 1,065 $ 710
South Carolina ................. 154 85 80
Deferred tax benefit .............. (148) (101) (127)
------- ------- -------
Total ................... 1,807 1,049 663
======= ======= =======
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense as indicated
in the following summary (in thousands of dollars):
2000 1999 1998
---- ---- ----
Income tax at statutory rate on income
before income taxes .............................................. $ 1,684 $ 1,099 $ 769
Increase (decrease) resulting from:
Exercise of certain stock options ................................ - (89) (165)
South Carolina bank tax, net of federal
tax benefit ................................................... 147 96 67
Tax exempt interest .............................................. (17) (19) (14)
Amortization of organization costs ............................... (24) (24) -
Other ............................................................ 17 (14) 6
------- ------- -------
Provision for income taxes ................................ 1,807 1,049 663
======= ======= =======
Temporary differences, which give rise to deferred tax assets and liabilities at
December 31, 2000 and 1999, are as follows (in thousands of dollars):
2000 1999
---- ----
Deferred tax assets:
Allowance for loan losses .......................... $ 778 $ 614
Net unrealized losses on securities
available for sale .............................. 69 280
Preopening costs ................................... 39 67
State tax net operating loss carry forward ......... 58 65
Other .............................................. - 1
------- -------
Total deferred tax assets .................. 944 1,027
------- -------
Deferred tax liabilities:
Depreciation ....................................... 120 145
Accretion .......................................... 4 6
------- -------
Total deferred tax liabilities ............. 124 151
------- -------
Net deferred tax asset before valuation
allowance ............................. 820 876
Less, valuation allowance .................. (25) (18)
------- -------
Net deferred tax asset ..................... 795 858
======= =======
F-50
At December 31, 2000, the Corporation had net operating loss (NOL) carryforwards
for state income tax purposes of approximately $1,273,000 available to offset
future state taxable income. The NOL carryforwards expire primarily in the years
2007 through 2015. The Corporation and the Banks each file separate state income
tax returns. The valuation allowance represents management's estimate of the
state NOL carryforwards that will not be realized in the foreseeable future.
NOTE 13 - EMPLOYEE BENEFIT PLANS:
The Corporation provides a defined contribution plan with an Internal Revenue
Code Section 401(k) provision. All employees who have completed 500 hours of
service during a six-month period and have attained age 18 may participate in
the plan.
A participant may elect to make tax deferred contributions up to a maximum of
12% of eligible compensation. The Corporation will make matching contributions
on behalf of each participant in the amount of 100% of the elective deferral,
not exceeding 3% of the participant's compensation. The Corporation may also
make nonelective contributions determined at the discretion of the Board of
Directors.
The Corporation's contributions for the years ended December 31, 2000, 1999, and
1998 totaled approximately $242,000, $149,000, and $140,000, respectively.
NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES:
The Banks are parties to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Banks' exposure to credit loss is represented by the contractual amount of
these commitments. The Banks use the same credit policies in making commitments
as they do for on-balance-sheet instruments.
At December 31, 2000 and 1999, the following financial instruments were
outstanding whose contract amounts represent credit risk:
Contract Amount
---------------
2000 1999
---- ----
(In thousands)
Commitments to grant loans ....................... $12,822 $11,231
Unfunded commitments under lines of
credit ....................................... 12,115 11,269
Standby letters of credit ........................ 3,426 3,427
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include personal
residences, accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
F-51
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support private borrowing arrangements. All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks generally hold collateral supporting those
commitments if deemed necessary.
To reduce credit risk related to the use of both derivatives and credit-related
financial instruments, the Bank might deem it necessary to obtain collateral.
The amount and nature of the collateral obtained is based on the Banks' credit
evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant and equipment and
real estate.
NOTE 15 - EARNINGS PER COMMON SHARE:
Basic earnings per common share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the year. Diluted earnings per common share reflects additional common
shares that would have been outstanding if dilutive potential common shares had
been issued. Potential common shares that may be issued by the Corporation
relate solely to outstanding stock options, and are determined using the
treasury stock method.
Earnings per common share have been computed based on the following:
Years Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Net income ............................................................. $ 3,147 $ 2,182 $ 1,567
========== ========== ==========
Average number of common shares outstanding ............................ 3,194,129 3,189,235 3,040,512
Effect of dilutive options ............................................. 21,403 25,888 56,550
---------- ---------- ----------
Average number of common shares outstanding used to
calculate diluted earnings per common share ........................ 3,215,532 3,215,123 3,097,062
========== ========== ==========
NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) and related tax effects are
as follows:
Years Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Unrealized holding gains (losses) on available for
sale securities ......................................................... $(200) $(791) $ 56
Less: Reclassification adjustment for gains
(losses) realized in income ............................................. - - -
----- ----- -----
Net unrealized gains (losses) .............................................. (200) (791) 56
Tax effect ................................................................. 69 280 20
----- ----- -----
Net-of-tax amount .......................................................... (131) (511) 36
===== ===== =====
F-52
NOTE 17 - CREDIT RISK CONCENTRATIONS
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.
The Banks regularly monitor various segments of their credit risk portfolio to
assess potential concentration risks and to obtain collateral when considered
necessary.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented may not necessarily represent the underlying fair value
of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate fair values.
Interest-bearing deposits with banks. The carrying amounts of
interest-bearing deposits with banks approximate their fair values.
Securities available for sale and held to maturity. Fair values for
securities, excluding Federal Home Loan Bank and Federal Reserve Bank
stock, are based on quoted market prices. The carrying value of Federal
Home Loan Bank and Federal Reserve Bank stock approximates fair value based
on the redemption provisions of the Federal Home Loan Bank and Federal
Reserve Bank. The market values of state and local government securities
are established with the assistance of an independent pricing service. The
values are based on data which often reflect transactions of relatively
small size and are not necessarily indicative of the value of the
securities when traded in large volumes.
Loans held for sale. The carrying amounts approximate their fair values.
Loans receivable. For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. Fair values for certain mortgage loans (for example, one-to-four
family residential) and other consumer loans are based on quoted market
prices of similar loans sold, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for non-performing loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of variable-rate,
fixed-term money-market accounts and certificates of deposit (CDs)
approximate their fair values at the reporting date. Fair values for
fixed-rate CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
F-53
Short-term borrowings. The carrying amounts of federal funds purchased and
borrowings under repurchase agreements, approximate their fair values.
Federal Home Loan Bank advances. The fair values of the Federal Home Loan
Bank advances are estimated using discounted cash flow analyses based on
the Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
Accrued interest. The carrying amounts of accrued interest approximate fair
value.
Off-balance-sheet instruments. Fair values for off-balance-sheet
credit-related financial instruments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standings.
The estimated fair values and related carrying or notional amounts of the
Corporation's financial instruments at December 31, 2000 and 1999, are as
follows (in thousands of dollars):
2000 1999
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Cash and cash equivalents ........................................... $ 18,339 $ 18,339 $ 20,315 $ 20,315
Interest-bearing deposits with banks ................................ 594 594 788 788
Investment securities ............................................... 53,566 53,412 43,935 43,485
Loans held for sale ................................................. 343 343 269 269
Loans receivable .................................................... 192,653 197,811 155,153 152,327
Accrued interest receivable ......................................... 2,330 2,330 1,700 1,700
Financial liabilities:
Deposits ............................................................ $218,811 $218,584 $184,364 $184,228
Federal funds purchased and
securities sold under agreements
to repurchase .................................................... 9,352 9,352 2,782 2,782
Federal Home Loan Bank advances ..................................... 20,350 20,309 19,420 19,324
Accrued interest payable ............................................ 1,224 1,224 770 770
Off-balance-sheet credit related financial instruments:
Commitments to extend credit ..................................... 12,822 12,822 $ 11,231 $ 11,231
Unfunded commitments under
lines of credit ............................................... 12,115 12,115 11,269 11,269
Standby letters of credit ........................................ 3,426 3,426 3,427 3,427
NOTE 19 - CONTINGENCIES:
CLAIMS AND LAWSUITS:
The Corporation is subject at times to claims and lawsuits arising out of the
normal course of business which, in the opinion of management, will have no
material effect on the Corporation's consolidated financial statements.
NOTE 20 - REGULATORY MATTERS:
The Banks, as national banks, are subject to the dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Banks may not,
without the prior approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current year's earnings (as defined) plus the
F-54
retained earnings (as defined) from the prior two years. The dividends, at
December 31, 2000, that the Banks could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $4,518,000. In addition,
dividends paid by the Banks to the Corporation would be prohibited if the effect
thereof would cause the Banks' capital to be reduced below applicable minimum
capital requirements.
Under Federal Reserve regulation, the Banks also are limited as to the amount
they may loan to the Corporation unless such loans are collateralized by
specified obligations. The maximum amount available for transfer from the Banks
to the Corporation in the form of loans or advances totaled approximately
$4,315,000 at December 31, 2000.
The Corporation (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material adverse effect on the Corporation's and the Banks'
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Banks must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2000, and
1999, that the Corporation and the Banks met all capital adequacy requirements
to which they are subject.
As of May 31, 2000, for ONB, April 30, 2000, for SNB and January 31, 2000, for
FNB, the most recent notifications from the Office of the Comptroller of the
Currency categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since the notifications that management believes have changed the Banks'
categories.
F-55
The Corporation's and the Banks' actual capital amounts and ratios are also
presented in the table (in thousands of dollars).
MINIMUM REQUIRED MINIMUM REQUIRED
FOR CAPITAL TO BE WELL CAPITALIZED
ACTUAL ADEQUACY PURPOSES UNDER PROMPT
------ ----------------- CORRECTIVE
ACTION PROVISIONS
-----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
At December 31, 2000:
Tier I Capital (to
Average Assets):
Consolidated ........ $ 21,709 8.2% $ 10,672 4.0% $ 13,340 5.0%
ONB ................. 11,883 7.7% 6,173 4.0% 7,716 5.0%
SNB ................. 5,893 8.1% 2,910 4.0% 3,638 5.0%
FNB ................. 3,933 9.9% 1,589 4.0% 1,986 5.0%
Tier I Capital (to
Risk Weighted
Assets):
Consolidated ........ 21,709 11.1% 7,776 4.0% 11,663 6.0%
ONB ................. 11,833 11.9% 3,978 4.0% 5,966 6.0%
SNB ................. 5,893 9.7% 2,430 4.0% 3,645 6.0%
FNB ................. 3,933 11.5% 1,368 4.0% 2,052 6.0%
Total Capital (to
Risk Weighted
Assets):
Consolidated ........ 24,000 12.3% 15,560 8.0% 19,449 10.0%
ONB ................. 13,132 13.2% 7,959 8.0% 9,949 10.0%
SNB ................. 6,628 10.9% 4,865 8.0% 6,081 10.0%
FNB ................. 4,240 12.4% 2,736 8.0% 3,419 10.0%
At December 31, 1999:
Tier I Capital (to
Average Assets):
Consolidated ........ $ 20,757 9.4% $ 8,861 4.0% $ 11,077 5.0%
ONB ................. 10,667 7.8% 5,485 4.0% 6,857 5.0%
SNB ................. 4,735 7.8% 2,443 4.0% 3,054 5.0%
FNB ................. 3,855 16.5% 933 4.0% 1,166 5.0%
Tier I Capital (to
Risk Weighted
Assets):
Consolidated ........ 20,757 13.0% 6,377 4.0% 9,566 6.0%
ONB ................. 10,667 11.7% 3,647 4.0% 5,470 6.0%
SNB ................. 4,735 9.3% 2,027 4.0% 2,841 6.0%
FNB ................. 3,855 23.2% 665 4.0% 998 6.0%
Total Capital (to
Risk Weighted
Assets):
Consolidated ........ 22,694 14.2% 12,754 8.0% 15,944 10.0%
ONB ................. 11,808 13.0% 7,293 8.0% 9,117 10.0%
SNB ................. 5,266 10.4% 4,054 8.0% 5,067 10.0%
FNB ................. 4,028 24.2% 1,331 8.0% 1,664 10.0%
F-56
NOTE 21 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only) (in thousands of dollars):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
DECEMBER 31,
------------
2000 1999
---- ----
Balance Sheets:
Assets:
Cash ............................................................................... $ 1,194 $ 1,041
Investment in banking subsidiaries ................................................. 21,578 18,746
Securities available for sale, at fair value ....................................... 50 50
Premises and equipment (net of accumulated depreciation
of $520 in 2000 and $411 in 1999) ............................................... 235 292
Other assets ....................................................................... 138 166
------- -------
Total assets ........................................................... 23,195 20,295
======= =======
Liabilities and shareholders' equity:
Other liabilities .................................................................. $ 56 $ 50
Shareholders' equity ............................................................... 23,139 20,245
------- -------
Total liabilities and shareholders' equity ............................. 23,195 20,295
======= =======
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Statements of Income:
Income:
Management fees assessed banking subsidiaries ............................ $ 1,352 $ 1,176 $ 1,141
Dividends from subsidiaries .............................................. 1,027 872 700
Interest ................................................................. 67 61 138
------- ------- -------
Total ........................................................ 2,446 2,109 1,979
------- ------- -------
Expenses:
Salaries and employee benefits ........................................... 842 796 648
Premises and equipment ................................................... 272 260 230
Supplies ................................................................. 61 59 70
Director fees ............................................................ 22 22 24
Preopening - FNB ......................................................... - - 75
Other general expenses ................................................... 276 281 258
------- ------- -------
Total ........................................................ 1,473 1,418 1,305
------- ------- -------
Income before income tax (provision) benefit and equity in
undistributed earnings of banking subsidiaries .............................. 973 691 674
Applicable income tax (provision) benefit ...................................... (28) 60 8
Equity in undistributed earnings of banking subsidiaries ....................... 2,202 1,431 885
------- ------- -------
Net income ..................................................................... 3,147 2,182 1,567
======= ======= =======
F-57
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY) (CONTINUED):
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Statements of Cash Flows:
Cash flows from operating activities:
Net income .......................................................... $ 3,147 $ 2,182 $ 1,567
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................. 107 107 106
Decrease (increase) in other assets ........................... 28 (38) 46
Increase (decrease) in other liabilities ...................... 6 (90) 85
Equity in undistributed earnings of banking
subsidiaries ............................................ (2,202) (1,431) (885)
------- ------- -------
Net cash provided by operating
activities ........................................... 1,086 730 919
------- ------- -------
Cash flows from investing activities:
Investment in SNB ...................................................... (250) (500) (500)
Investment in FNB ...................................................... - - (4,500)
Purchase of premises and equipment ..................................... (50) (70) (169)
Proceeds from maturities of securities
held to maturity .................................................... - - 647
------- ------- -------
Net cash used by investing
activities .......................................... (300) (570) (4,522)
------- ------- -------
Cash flows from financing activities:
Repurchase of stock .................................................... - (630) -
Common stock issued .................................................... 22 189 5,579
Stock issuance cost .................................................... (10) - (87)
Cash dividends paid .................................................... (645) (608) (453)
------- ------- -------
Net cash provided (used) by financing
activities ........................................... (633) (1,049) 5,039
------- ------- -------
Net increase (decrease) in cash ........................................... 153 (889) 1,436
Cash at beginning of year ................................................. 1,041 1,930 494
------- ------- -------
Cash at end of year ....................................................... 1,194 1,041 1,930
======= ======= =======
Supplemental disclosures of cash flow information:
Cash payments for income taxes ......................................... $ 1,780 $ 1,214 $ 656
======= ======= =======
Supplemental schedule of non-cash investing activities:
Transfer from retained earnings to common stock
outstanding for the market value of the 5% stock
dividend ............................................................ $ 1,709 $ - $ -
======= ======= =======
F-58
NOTE 22 - QUARTERLY DATA (UNAUDITED):
YEARS ENDED DECEMBER 31,
------------------------
2000 1999
---- ----
Fourth Third Second First Fourth Third Second First
quarter quarter quarter quarter quarter quarter quarter quarter
------- ------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data)
Interest and dividend income ............... $ 5,557 $ 5,273 $ 4,888 $ 4,583 $ 4,313 $ 4,092 $ 3,730 $ 3,415
Interest expense ........................... (2,856) (2,625) (2,329) (2,165) (1,942) (1,827) (1,670) (1,519)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ........................ 2,701 2,648 2,559 2,418 2,371 2,265 2,060 1,896
Provision for loan losses .................. (198) (152) (158) (180) (173) (166) (139) (134)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses ............... 2,503 2,496 2,401 2,238 2,198 2,099 1,921 1,762
Noninterest income ......................... 519 464 448 437 323 344 345 305
Noninterest expenses ....................... (1,700) (1,625) (1,627) (1,600) (1,639) (1,530) (1,460) (1,437)
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ................. 1,322 1,335 1,222 1,075 882 913 806 630
Provision for income taxes ................. (517) (470) (439) (381) (286) (299) (263) (201)
------- ------- ------- ------- ------- ------- ------- -------
Net income ................................. 805 865 783 694 596 614 543 429
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
Basic ................................... $ 0.25 $ 0.27 $ 0.25 $ 0.22 $ 0.19 $ 0.19 $ 0.17 $ 0.13
======= ======= ======= ======= ======= ======= ======= =======
Diluted ................................. $ 0.24 $ 0.27 $ 0.25 $ 0.22 $ 0.19 $ 0.19 $ 0.17 $ 0.13
======= ======= ======= ======= ======= ======= ======= =======
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
F-59
COMMUNITY BANKSHARES, INC. - CONSOLIDATED BALANCE SHEETS
($ amounts in thousands) UNAUDITED
Sept. 30, December 31,
2001 2000
---- ----
ASSETS
Cash and due from other financial institutions:
Non-interest bearing .................................................................. $ 10,738 $ 10,209
Federal funds sold .................................................................... 18,267 8,130
--------- ---------
Total cash and cash equivalents ................................................... 29,005 18,339
Interest bearing deposits in other banks ................................................... 4,129 594
Investment securities:
Securities held to maturity ........................................................... 2,149 12,371
Securities available for sale ......................................................... 33,002 41,195
Loans held for resale ...................................................................... 154 343
Loans ...................................................................................... 219,125 195,077
Less, allowance for loan losses ....................................................... (2,761) (2,424)
--------- ---------
Net loans ......................................................................... 216,364 192,653
Premises and equipment ..................................................................... 4,423 4,411
Accrued interest receivable ............................................................... 1,780 2,330
Deferred income taxes ...................................................................... 648 795
Other real estate owned .................................................................... 267 -
Other assets ............................................................................... 360 292
--------- ---------
Total assets ...................................................................... $ 292,281 $ 273,323
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing .................................................................. $ 32,548 $ 31,219
Interest bearing ...................................................................... 201,243 187,592
--------- ---------
Total deposits .................................................................... 233,791 218,811
Federal funds purchased and securities
sold under agreements to repurchase ................................................... 10,976 9,352
Federal Home Loan Bank advances ............................................................ 20,280 20,350
Other liabilities .......................................................................... 1,688 1,671
--------- ---------
Total liabilities ................................................................. 266,735 250,184
--------- ---------
Shareholders' equity:
Common stock
No par, authorized shares 12,000,000, issued and
outstanding 3,204,220 in 2001 and 3,199,180 in 2000 ............................... 15,967 15,928
Retained earnings ..................................................................... 9,463 7,342
Accumulated other comprehensive income (loss) ......................................... 116 (131)
--------- ---------
Total shareholders' equity ........................................................ 25,546 23,139
--------- ---------
Total liabilities and shareholders' equity ........................................ $ 292,281 $ 273,323
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
F-60
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine months ended Sept. 30, Three months ended Sept. 30,
--------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
($ amounts in thousands)
Interest and dividend income:
Interest and fees on loans ................................. $ 13,694 $ 12,184 $ 4,578 $ 4,421
Deposits with other financial institutions ................. 144 53 38 25
Investment securities:
Interest - U. S. Treasury and
U. S. Government Agencies .............................. 1,602 2,159 408 727
Dividends ................................................ 118 96 49 36
---------- ---------- ---------- ----------
Total investment securities ........................... 1,720 2,255 457 763
Federal funds sold and securities
purchased under agreements to resell ..................... 642 252 188 64
---------- ---------- ---------- ----------
Total interest and dividend income .................... 16,200 14,744 5,261 5,273
---------- ---------- ---------- ----------
Interest expense:
Deposits:
Certificates of deposit of $100,000 or more .............. 1,912 1,666 602 593
Other .................................................... 5,089 4,473 1,561 1,642
---------- ---------- ---------- ----------
Total deposits ........................................ 7,001 6,139 2,163 2,235
Federal funds purchased and securities
sold under agreements to repurchase ...................... 212 117 63 53
Federal Home Loan Bank advances ............................ 861 863 265 337
---------- ---------- ---------- ----------
Total interest expense ................................ 8,074 7,119 2,491 2,625
---------- ---------- ---------- ----------
Net interest income ............................................ 8,126 7,625 2,770 2,648
Provision for loan losses ...................................... 457 490 180 152
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ............ 7,669 7,135 2,590 2,496
---------- ---------- ---------- ----------
Non-interest income:
Service charges on deposit accounts ........................ 1,490 1,059 562 363
Gain on sale of securities ................................. 14 - 14 -
Other ...................................................... 483 290 168 101
---------- ---------- ---------- ----------
Total non-interest income ............................. 1,987 1,349 744 464
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits ............................. 3,172 2,831 1,070 939
Premises and equipment ..................................... 703 690 232 234
Other ...................................................... 1,447 1,331 531 452
---------- ---------- ---------- ----------
Total non-interest expense ............................ 5,322 4,852 1,833 1,625
---------- ---------- ---------- ----------
Net income before taxes ........................................ 4,334 3,632 1,501 1,335
Provision for income taxes ..................................... 1,541 1,290 539 470
---------- ---------- ---------- ----------
Net income ..................................................... $ 2,793 $ 2,342 $ 962 $ 865
========== ========== ========== ==========
Basic earnings per common share:
Weighted average shares outstanding ........................ 3,201,560 3,194,685 3,200,867 3,194,685
Net income per common share ................................ $ 0.87 $ 0.73 $ 0.30 $ 0.27
Diluted earnings per common share:
Weighted average shares outstanding ........................ 3,222,456 3,216,207 3,220,138 3,216,207
Net income per common share ................................ $ 0.87 $ 0.73 $ 0.30 $ 0.27
F-61
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
for the nine months ended September 30, 2001 and 2000 (Unaudited)
($ amounts in thousands)
Accumulated
Common Stock Other Total
------------ Retained Comprehensive Shareholders'
Shares Amount Earnings Income (Loss) Equity
------ ------ -------- ------------- ------
(dollar amounts in thousands)
Balances at Dec. 31, 1999 ................................ 3,191,462 $ 14,207 $ 6,549 $(511) $ 20,245
Comprehensive income:
Net income .......................................... 2,342 2,342
Other comprehensive income (loss) net of tax:
Unrealized gain (loss) on securities ................ 88 88
Cash-in-lieu of shares in connection with Jan. 31,
2000 stock dividend.................................. (137)
Market value of shares issued in
five percent stock dividend.......................... - 1,709 (1,709) -
Shares issued under option agreement ..................... 2,520 19 19
Costs of stock dividend .................................. (10) (10)
Dividends paid ........................................... - - (452) - (452)
---------- ---------- ---------- ----- ----------
Balances at Sept. 30, 2000 ............................... 3,193,845 $ 15,925 $ 6,730 $(423) $ 22,232
========== ========== ========== ===== ==========
Balances at Dec. 31, 2000 ................................ 3,199,180 $ 15,928 $ 7,342 $(131) $ 23,139
Comprehensive income:
Net income .......................................... 2,793 2,793
Other comprehensive income (loss) net of tax:
Unrealized gain (loss) on securities ................ 247 247
Shares issued under option agreement ..................... 5,040 39 39
Dividends paid ........................................... - - (672) - (672)
---------- ---------- ---------- ----- ----------
Balances at September 30, 2001 ........................... 3,204,220 $ 15,967 $ 9,463 $ 116 $ 25,546
========== ========== ========== ===== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
F-62
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended Sept. 30,
2001 2000
---- ----
(Dollar amounts in thousands)
Cash flows from operating activities:
Net income ................................................................................. $ 2,793 $ 2,342
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation ......................................................................... 329 360
Provision for loan losses ............................................................ 457 490
Accretion of discounts and amortization of ........................................... (18) (7)
premiums - investment securities - net
Changes in assets and liabilities:
Proceeds of sale of loans held for resale ............................................ 9,807 4,861
Origination of loans held for resale ................................................. (9,807) (4,861)
(Increase) decrease in interest receivable ........................................... 550 (543)
Decrease in other assets ............................................................. 79 62
Increase in other liabilities ........................................................ 17 295
-------- --------
Net cash provided by operating activities .................................................. 4,207 2,999
-------- --------
Cash flows from investing activities:
Net (increase) in interest bearing deposits .......................................... (3,535) (781)
Proceeds from maturities of investment ............................................... 11,375 1,500
securities - held to maturity
Purchases of investment securities - held to ......................................... (1,153) (501)
maturity
Proceeds from maturities of investment ............................................... 69,658 3,551
securities - available for sale
Purchases of investment securities - available ....................................... (61,200) (8,468)
for sale
Net (increase) in loans to customers ................................................. (23,979) (29,205)
Purchase of premises and equipment ................................................... (341) (212)
Net (increase) in other real estate .................................................. (267) -
-------- --------
Net cash (used) in investing activities ............................................ (9,442) (34,116)
-------- --------
Cash flows from financing activities:
Net increase in demand, savings, and time ............................................ 14,980 26,927
deposits
Net increase in federal funds purchased and .......................................... 1,624 2,975
securities sold under agreements to
repurchase
(Decrease) in Federal Home Loan Bank advances ........................................ (70) (370)
Common stock issued under option plan ................................................ 39 10
Dividends paid in cash ............................................................... (672) (453)
-------- --------
Net cash provided by financing activities .......................................... 15,901 29,089
-------- --------
Net increase (decrease) in cash and cash equivalents ...................................... 10,666 (2,028)
Cash and cash equivalents-beginning of period .............................................. 18,339 20,315
-------- --------
Cash and cash equivalents-end of period .................................................... $ 29,005 $ 18,287
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
F-63
Notes to Unaudited Consolidated Financial Statements
Summary of Significant Accounting Principles
A summary of significant accounting policies and the audited financial
statements for 2000 are included in Corporation's Annual Report on Form 10-K for
the year ended December 31, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of Community
Bankshares, Inc. (CBI), the parent company, and Orangeburg National Bank, Sumter
National Bank and Florence National Bank, its wholly owned subsidiaries. All
significant intercompany items have been eliminated in the consolidated
statements.
Management Opinion
The interim financial statements in this report are unaudited. In the
opinion of management, all the adjustments necessary to present a fair statement
of the results for the interim period have been made. Such adjustments are of a
normal and recurring nature.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for an entire year. These interim
financial statements should be read in conjunction with the annual financial
statements and notes thereto contained in the 2000 Annual Report on Form 10-K.
Changes in Comprehensive Income Components
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," effective for
fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Disclosure as required by the Statement
is as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ............................. $(640,000) $217,000 $(423,000)
--------- -------- ---------
Other comprehensive income, Sept. 30, 2000 ........................................... $(640,000) $217,000 $(423,000)
========= ======== =========
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period .............................. $176,000 $(60,000) $116,000
-------- --------- --------
Other comprehensive income, Sept. 30, 2001 ........................................... $176,000 $(60,000) $116,000
======== ========= ========
F-64
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma combined condensed balance sheet
as of September 30, 2001 and unaudited pro forma combined statements of income
for the nine months ended September 30, 2001 and the year ended December 31,
2000 combine the historical financial statements of Community Bankshares and
Ridgeway Bancshares. The pro forma combined condensed statements give effect to
the proposed merger of Ridgeway Bancshares into Community Bankshares as if the
merger occurred on September 30, 2001 with respect to the balance sheet and on
January 1, 2001 or January 1, 2000, respectively, with respect to the statements
of income for the nine months ended September 30, 2001 and the year ended
December 31, 2000, respectively. The pro forma combined condensed statements
give effect to the proposed merger under the purchase method of accounting.
The purchase method of accounting requires that all of Ridgeway
Bancshares assets and liabilities be adjusted to their estimated fair market
values as of the date of acquisition. For purposes of the pro forma combined
condensed statements, fair market value of September 30, 2001 assets and
liabilities has been estimated by management of Community Bankshares using
market information on January 30, 2002. Accordingly, these adjustments are only
approximations. Upon consummation of the merger, Community Bankshares will make
adjustments as of the date of consummation based on more precise appraisals and
estimates.
The pro forma combined condensed statements also contain adjustments
based on assumed interest rates and estimates by Community Bankshares management
regarding changes in revenues and expenses that management believes will be
achieved after consummation of the merger. Of course, there can be no assurance
that such changes will be of the magnitude estimated or that they will occur at
all.
The pro forma financial statements are provided for informational
purposes. The pro forma combined condensed statements of income are not
necessarily indicative of actual results that would have been achieved had the
merger been consummated at the beginning of the periods presented, and is not
indicative of future results.
F-65
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
September 30, 2001
(Dollars in thousands)
Community
Bankshares
Pro Forma
Community Bankshares Ridgeway Bancshares Adjustments Combined
-------------------- ------------------- ----------- --------
ASSETS
Cash and federal funds ............................ $ 33,134 $ 7,227 $ (4,150)(1) $ 36,211
Investments ....................................... 35,151 27,222 180(2) 62,553
Loans, net of allowance ........................... 216,518 40,291 806(2) 257,615
Premises and equipment ............................ 4,423 756 249(2) 5,428
Goodwill .......................................... 4,907(3) 4,907
Core deposit intangible ........................... 1,785(4) 1,785
Other assets ...................................... 3,055 1,167 4,222
-------- -------- --------
Total assets ................................ $292,281 $ 76,663 $ 3,777 $372,721
======== ======== ======== ========
LIABILITIES AND EQUITY
Deposits .......................................... $233,791 $ 64,899 $ 324(2) $299,014
Short-term borrowings ............................. 10,976 2,833 13,809
Long-term borrowings .............................. 20,280 - 20,280
Other liabilities ................................. 1,688 334 2,022
Shareholder equity ................................ 25,546 8,597 3,453(5) 37,596
-------- -------- -------- --------
Total liabilities and equity ................ $292,281 $ 76,663 $ 3,777 $372,721
======== ======== ======== ========
__________________
(1) To record payment of $4 million to Ridgeway shareholders and $150,000 in
estimated direct costs associated with purchase.
(2) To record estimated market value adjustment.
(3) To record goodwill resulting from purchase plus $150,000 in estimated
direct costs associated with purchase.
(4) To record estimated core deposit intangible.
(5) To record issuance of $12.05 million in Community Bankshares common stock
and elimination of $8.597 million in Ridgeway Bancshares equity.
F-66
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Nine Months Ended September 30, 2001
(Dollars in thousands)
Community
Bankshares
Pro Forma
Community Bankshares Ridgeway Bancshares Adjustments Combined
-------------------- ------------------- ----------- --------
Interest income ................................. $ 16,200 $ 3,987 $ (78)(1) $ 20,109
Interest expense ................................ (8,074) (1,689) (9,763)
-------- -------- --------
Net interest income ....................... 8,126 2,298 (78) 10,346
Provision for loan losses ....................... (457) (54) (511)
Other income .................................... 1,987 538 300 (2) 2,825
Other expenses .................................. (5,322) (1,685) (17)(3) (7,024)
-------- -------- -------- --------
Income before taxes ....................... 4,334 1,097 205 5,636
Income taxes .................................... (1,541) (305) (74)(4) (1,920)
-------- -------- -------- --------
Net income ................................ $ 2,793 $ 792 $ 131 $ 3,716
======== ======== ======== ========
________________
(1) To record opportunity cost of $4,150,000 in cash disbursed at an assumed
federal funds rate of 2.5%.
(2) To record estimated income from introduction of new products.
(3) To record estimated reduction in operating expenses subsequent to
consolidation and amortization of core deposit intangible.
(4) To record estimated tax effect of projected income increase.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 2000
(Dollars in thousands)
Community
Bankshares
Pro Forma
Community Bankshares Ridgeway Bancshares Adjustments Combined
-------------------- ------------------- ----------- --------
Interest income ................................. $ 20,301 $ 4,990 $ (104)(1) $ 25,187
Interest expense ................................ (9,975) (2,043) (12,018)
-------- -------- --------
Net interest income ....................... 10,326 2,947 (104) 13,169
Provision for loan losses ....................... (688) (75) ____ (763)
Other income .................................... 1,868 671 400 (2) 2,939
Other expenses .................................. (6,552) (2,138) (23)(3) (8,713)
-------- -------- -------- --------
Income before taxes ....................... 4,954 1,405 273 6,632
Income taxes .................................... (1,807) (376) (98)(4) (2,281)
-------- -------- -------- --------
Net income ................................ $ 3,147 $ 1,029 $ 175 $ 4,351
======== ======== ======== ========
_____________
(1) To record opportunity cost of $4,150,000 in cash disbursed at an assumed
federal funds rate of 2.5%.
(2) To record estimated income from introduction of new products.
(3) To record estimated reduction in operating expenses subsequent to
consolidation and amortization of core deposit intangible.
(4) To record estimated tax effect of projected income increase.
F-67
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
RIDGEWAY BANCSHARES, INC.
AND
COMMUNITY BANKSHARES, INC.
DATED AS OF NOVEMBER 20, 2001
A-1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of November 20, 2001, by and between RIDGEWAY BANCSHARES, INC.
("Ridgeway"), a corporation organized and existing under the Laws of the State
of South Carolina, with its principal office located in Ridgeway, South
Carolina; and COMMUNITY BANKSHARES, INC. ("CBI"), a corporation organized and
existing under the Laws of the State of South Carolina, with its principal
office located in Orangeburg, South Carolina.
PREAMBLE
The Boards of Directors of Ridgeway and CBI believe that the
transactions described herein are in the best interests of the parties to this
Agreement and their respective shareholders. This Agreement provides for the
acquisition of Ridgeway by CBI pursuant to the merger of Ridgeway with and into
CBI. At the effective time of the merger, the outstanding shares of the capital
stock of Ridgeway shall be converted into shares of the common stock of CBI and
cash (except as provided herein). As a result, shareholders of Ridgeway shall
become shareholders of CBI, and each of the subsidiaries of Ridgeway shall
continue to conduct its business and operations as a subsidiary of CBI. The
transactions described in this Agreement are subject to the approvals of the
shareholders of CBI and Ridgeway, the Board of Governors of the Federal Reserve
System and state regulatory authorities, and the satisfaction of certain other
conditions described in this Agreement. It is the intention of the parties to
this Agreement that the Merger for federal income tax purposes shall qualify as
a "reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code and that this Agreement shall constitute a "plan of reorganization" for
purposes of Sections 354 and 361 of the Internal Revenue Code.
As a condition and inducement to CBI's willingness to enter into this
Agreement, Ridgeway's directors are executing and delivering to CBI an agreement
(a "Support Agreement"), in substantially the form of Exhibit 1. As a condition
and inducement to Ridgeway 's willingness to enter into this Agreement, CBI 's
directors are executing and delivering to Ridgeway an agreement (a "Support
Agreement"), in substantially the form of Exhibit 2.
Certain terms used in this Agreement are defined in Section 11.1 of
this Agreement.
NOW, THEREFORE, in consideration of the above and the mutual
warranties, representations, covenants, and agreements set forth herein, and
intending to be legally bound hereby, the Parties agree as follows:
ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER
1.1 Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time, Ridgeway shall be merged with and into CBI in accordance
with the provisions of Section 33-11-101 of the SCBCA and with the effect
provided in Section 33-11-106 of the SCBCA (the "Merger"). CBI shall be the
Surviving Corporation resulting from the Merger. The Merger shall be consummated
pursuant to the terms of this Agreement, which has been approved and adopted by
the respective Boards of Directors of Ridgeway and CBI.
1.2 Time and Place of Closing. The consummation of the Merger (the
"Closing") shall take place at 9:00 A.M. on the date that the Effective Time
occurs (or the immediately preceding day if the Effective Time is earlier than
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9:00 A.M.), or at such other time as the Parties, acting through their duly
authorized officers, may mutually agree. The place of Closing shall be at such
location as may be mutually agreed upon by the Parties.
1.3 Effective Time. The Merger and the other transactions contemplated
by this Agreement shall become effective on the date and at the time the
Articles of Merger containing the Plan of Merger attached hereto as Exhibit 3
shall become effective with the Secretary of State of the State of South
Carolina (the "Effective Time"). Subject to the terms and conditions hereof,
unless otherwise mutually agreed upon by the duly authorized officers of each
Party, the Parties shall use their reasonable efforts to cause the Effective
Time to occur on the last business day of the month in which the last of the
following occurs: (i) the effective date (including expiration of any applicable
waiting period) of the last required Consent of any Regulatory Authority having
authority over and approving or exempting the Merger, (ii) the date on which the
shareholders of Ridgeway approve the matters relating to this Agreement required
to be approved by such shareholders by applicable Law or, (iii) the date on
which the shareholders of CBI approve the matters relating to this Agreement
required to be approved by such shareholders by applicable Law, or such later
day within 30 days thereof as may be specified by CBI.
1.4 Execution of Support Agreements. Simultaneously with the execution
of this Agreement and as a condition hereto, the directors of Ridgeway are each
executing and delivering to CBI, and the directors of CBI are each executing and
delivering to Ridgeway, a Support Agreement.
ARTICLE 2
TERMS OF MERGER
2.1 Articles of Incorporation. The Articles of Incorporation of CBI in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation after the Effective Time until
otherwise amended or repealed.
2.2 Bylaws. The Bylaws of CBI in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation after the
Effective Time until otherwise amended or repealed.
2.3 Directors and Officers. The directors of CBI in office immediately
prior to the Effective Time, together with such additional persons as may
thereafter be elected, shall serve as the directors of the Surviving Corporation
from and after the Effective Time in accordance with the Bylaws of the Surviving
Corporation. The officers of CBI in office immediately prior to the Effective
Time, together with such additional persons as may thereafter be elected, shall
serve as the officers of the Surviving Corporation from and after the Effective
Time in accordance with the Bylaws of the Surviving Corporation.
ARTICLE 3
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article 3,
at the Effective Time, by virtue of the Merger and without any action on the
part of CBI or Ridgeway, or the shareholders of either of the foregoing, the
shares of the constituent corporations shall be converted as follows:
(a) Each share of CBI Common Stock issued and outstanding immediately
prior to the Effective Time shall remain issued and outstanding from and after
the Effective Time.
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(b) Each share of Ridgeway Common Stock, excluding shares held by any
Ridgeway Company or any CBI Company, in each case other than in a fiduciary
capacity or as a result of debts previously contracted, issued and outstanding
at the Effective Time shall be converted into 25 shares of CBI Common Stock plus
the right to receive $100.00 cash (subject to the election as set forth in
Section 3.1(c) of the Agreement, the "Exchange Ratio").
(c) Holders of Ridgeway Common Stock shall be provided with an
opportunity to elect to receive either (i) cash in lieu of receiving CBI Common
Stock with respect to a specified number of shares of Ridgeway Common Stock
("Cash Election Shares") or (ii) CBI Common Stock in lieu of receiving cash with
respect to a specified number of shares of Ridgeway Common Stock ("Stock
Election Shares") in accordance with the procedures set forth below. An election
form and other appropriate and customary transmittal materials (which shall
specify that delivery shall be effected, and risk of loss and title to the
certificates theretofore representing Ridgeway Common Stock (the "Old
Certificates") shall pass, only upon proper delivery of such Old Certificates to
an exchange agent designated by CBI (the "Exchange Agent")) in such form as CBI
and Ridgeway shall mutually agree (the "Election Form") shall be mailed as soon
as reasonably practicable after the Effective Time or on such other date as
Ridgeway and CBI shall mutually agree (the "Mailing Date") to each holder of
record of Ridgeway Common Stock as of five business days prior to the Mailing
Date (the "Election Form Record Date"). Ridgeway shall provide to the Exchange
Agent all information reasonably necessary for it to perform as specified
herein. Each Election Form shall permit a holder (or the beneficial owner
through appropriate and customary documentation and instructions) of Ridgeway
Common Stock to elect to designate all or a portion of such holder's Ridgeway
Common Stock as either Cash Election Shares or Stock Election Shares. Any shares
of Ridgeway Common Stock with respect to which the holder (or the beneficial
owner, as the case may be) shall not have submitted to the Exchange Agent an
effective, properly completed Election Form on or before 5:00 p.m. on the 20th
day following the Mailing Date (or such other time and date as CBI and Ridgeway
may mutually agree) (the "Election Deadline") shall be converted into the
Exchange Ratio as set forth in Section 3.1(b) of this Agreement (such shares
being referred to as "No Election Shares"). Any such election shall have been
properly made only if the Exchange Agent shall have actually received a properly
completed Election Form by the Election Deadline. An Election Form shall be
deemed properly completed only if accompanied by one or more certificates (or
customary affidavits and bond regarding the loss or destruction of such
certificates or the guaranteed delivery of such certificates) representing all
shares of Ridgeway Common Stock covered by such Election Form, together with
duly executed transmittal materials included in the Election Form. Any Election
Form may be revoked or changed by the person submitting such Election Form at or
prior to the Election Deadline. In the event an Election Form is revoked prior
to the Election Deadline, the shares of Ridgeway Common Stock represented by
such Election Form shall become No Election Shares. Subject to the terms of this
Agreement and of the Election Form, the Exchange Agent shall have reasonable
discretion to: determine whether any election, revocation or change has been
properly or timely made; disregard immaterial defects in the Election Forms; and
determine the amount of any proration of stock or cash. Any good faith decisions
of the Exchange Agent regarding such matters shall be binding and conclusive.
Neither CBI nor the Exchange Agent shall be under any obligation to notify any
person of any defect in an Election Form. Within five business days after the
Election Deadline, unless the Effective Time has not yet occurred, in which case
as soon after the Effective Time as practicable, CBI shall cause the Exchange
Agent to effect the allocation among the holders of Ridgeway Common Stock in
accordance with the Election Forms as follows:
(i) The Exchange Agent will (x) multiply the product of 25 times the
number of Cash Election Shares (the "Available Stock") by the Average
Closing Price to determine the value of the Available Stock (the
"Available Stock Value") and (y) multiply the number of Stock Election
Shares by $100.00 to determine the amount of available cash (the
"Available Cash").
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(ii) If the amount of Available Cash exceeds the Available Stock Value,
then the Available Stock shall be distributed pro rata to the Stock
Election Shares pursuant to a formula or process agreed upon by CBI and
the Bank of Ridgeway. To the extent that the value of CBI Common Stock
(computed using the Average Closing Price) so distributed to a holder
of Stock Election Shares is less than $100.00 per Stock Election Share
held, such holder shall receive the difference in cash.
(iii) If the Available Stock Value exceeds the amount of Available
Cash, then the Available Cash shall be distributed pro rata to the Cash
Election Shares pursuant to a formula or process agreed upon by CBI and
the Bank of Ridgeway. To the extent that the number of shares of CBI
Common Stock distributed to a holder of Cash Election Shares is less
than 25 shares per Cash Election Share held, such holder shall receive
the value of the difference (computed using the Average Closing Price)
in cash in addition to $100.00 per share of the Cash Election Shares.
3.2 Anti-Dilution Provisions. In the event Ridgeway changes the number
of shares of Ridgeway Common Stock issued and outstanding prior to the Effective
Time as a result of a stock split, reverse stock split, stock dividend, or
similar recapitalization with respect to such stock, the Exchange Ratio shall be
proportionately adjusted. In the event CBI changes the number of shares of CBI
Common Stock issued and outstanding prior to the Effective Time as a result of a
stock split, reverse stock split, stock dividend, or similar recapitalization
with respect to such stock and the record date therefor (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split or similar
recapitalization for which a record date is not established) shall be prior to
the Effective Time, the Exchange Ratio shall be proportionately adjusted.
3.3 Shares Held by Ridgeway or CBI. Each of the shares of Ridgeway
Common Stock held by any Ridgeway Company or by any CBI Company, in each case
other than in a fiduciary capacity or as a result of debts previously
contracted, shall be canceled and retired at the Effective Time and no
consideration shall be issued in exchange therefor.
3.4 Dissenting Shareholders. Any holder of shares of Ridgeway Common
Stock who perfects such holder's dissenters' rights of appraisal in accordance
with and as contemplated by Chapter 13 of the SCBCA shall be entitled to receive
the value of such shares in cash as determined pursuant to such provision of
Law; provided, however, that no such payment shall be made to any dissenting
shareholder unless and until such dissenting shareholder has complied with the
applicable provisions of the SCBCA and surrendered to the Surviving Corporation
the certificate or certificates representing the shares for which payment is
being made. In the event that after the Effective Time a dissenting shareholder
of Ridgeway fails to perfect, or effectively withdraws or loses, such holder's
right to appraisal and of payment for such holder's shares, CBI shall issue and
deliver the consideration to which such holder of shares of Ridgeway Common
Stock is entitled under this Article 3 (without interest) upon surrender by such
holder of the certificate or certificates representing shares of Ridgeway Common
Stock held by such holder. Ridgeway will establish an escrow account with an
amount sufficient to satisfy the maximum aggregate payment that may be required
to be paid to dissenting shareholders. Upon satisfaction of all claims of
dissenting shareholders, the remaining escrowed amount, reduced by payment of
the fees and expenses of the escrow agent, will be returned to Ridgeway or the
Surviving Corporation.
3.5 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of Ridgeway Common Stock exchanged pursuant to
the Merger who would otherwise have been entitled to receive a fraction of a
share of CBI Common Stock shall receive, in lieu thereof, cash (without
interest) in an amount equal to a fractional part of a share of CBI Common Stock
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multiplied by the market value of one share of CBI Common Stock at the Effective
Time. The market value of one share of CBI Common Stock at the Effective Time
shall be the last sale price of CBI Common Stock at the close of regular trading
on the AMEX (as reported by The Wall Street Journal or, if not reported thereby,
any other authoritative source agreed to by Ridgeway and CBI) on the last
trading day preceding the Effective Time on which shares of CBI Common Stock
were traded. No such holder will be entitled to dividends, voting rights, or any
other rights as a shareholder in respect of any fractional shares.
ARTICLE 4
EXCHANGE OF SHARES
4.1 Exchange Procedures.
(a) As soon as reasonably practicable after the Effective Time or such
other date as Ridgeway and CBI shall mutually agree, CBI and Ridgeway shall
cause the Exchange Agent to mail to the former shareholders of Ridgeway
appropriate transmittal materials described in Section 3.1(c). After the
Effective Time, each holder of shares of Ridgeway Common Stock (other than
shares to be canceled pursuant to Section 3.3 of this Agreement or as to which
dissenters' rights of appraisal as contemplated by Section 3.4 of this Agreement
have been perfected and not withdrawn or forfeited under Section 33-13-210 of
the SCBCA) issued and outstanding at the Effective Time promptly upon surrender
of the certificate or certificates representing such shares to the Exchange
Agent, shall receive in exchange therefor the consideration provided in Sections
3.1 and 3.5 of this Agreement, together with all undelivered dividends and other
distributions in respect of such shares (without interest thereon) pursuant to
Section 4.2 of this Agreement. To the extent required by Section 3.5 of this
Agreement, each holder of shares of Ridgeway Common Stock issued and outstanding
at the Effective Time also shall receive, upon surrender of the certificate or
certificates representing such shares, cash in lieu of any fractional share of
CBI Common Stock to which such holder may be otherwise entitled (without
interest). Until so surrendered, each outstanding certificate of Ridgeway Common
Stock shall be deemed for all purposes, other than as provided below with
respect to the payment of dividends or other distributions payable to the
holders of shares of CBI Common Stock, to represent the consideration into which
the number of shares of Ridgeway Common Stock represented thereby prior to the
Effective Time shall have been converted. CBI shall not be obligated to deliver
the consideration to which any former holder of Ridgeway Common Stock is
entitled as a result of the Merger until such holder surrenders such holder's
certificate or certificates representing the shares of Ridgeway Common Stock for
exchange as provided in this Section 4.1. The certificate or certificates of
Ridgeway Common Stock so surrendered shall be duly endorsed as the Exchange
Agent may require. Any other provision of this Agreement notwithstanding,
neither the Surviving Corporation, Ridgeway, nor the Exchange Agent shall be
liable to a holder of Ridgeway Common Stock for any amounts paid or properly
delivered in good faith to a public official pursuant to any applicable
abandoned property Law.
4.2 Rights of Former Ridgeway Shareholders. At the Effective Time, the
stock transfer books of Ridgeway shall be closed as to holders of Ridgeway
Common Stock immediately prior to the Effective Time and no transfer of Ridgeway
Common Stock by any such holder shall thereafter be made or recognized. Until
surrendered for exchange in accordance with the provisions of Section 4.1 of
this Agreement, each certificate theretofore representing shares of Ridgeway
Common Stock (other than shares to be canceled pursuant to Section 3.3 of this
Agreement or as to which dissenters' rights of appraisal as contemplated by
Section 3.4 of this Agreement have been perfected and not withdrawn or forfeited
under Section 33-13-210 of the SCBCA) shall from and after the Effective Time
represent for all purposes only the right to receive the consideration provided
in Sections 3.1 and 3.5 of this Agreement in exchange therefor, subject,
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however, to the Surviving Corporation's obligation to pay any dividends or make
any other distributions with a record date prior to the Effective Time which
have been declared or made by Ridgeway in respect of such shares of Ridgeway
Common Stock in accordance with the terms of this Agreement and which remain
unpaid at the Effective Time. To the extent permitted by Law, former
shareholders of record of Ridgeway Common Stock at the Effective Time (other
than holders of shares as to which dissenters' rights of appraisal as
contemplated by Section 3.4 of this Agreement have been perfected and not
withdrawn or forfeited under Section 33-13-210 of the SCBCA) shall be entitled
to vote after the Effective Time at any meeting of CBI shareholders the number
of whole shares of CBI Common Stock into which their respective shares of
Ridgeway Common Stock are converted, regardless of whether such holders have
exchanged their certificates representing Ridgeway Common Stock for certificates
representing CBI Common Stock in accordance with the provisions of this
Agreement. Whenever a dividend or other distribution is declared by CBI on the
CBI Common Stock, the record date for which is at or after the Effective Time,
the declaration shall include dividends or other distributions on all shares of
CBI Common Stock issuable pursuant to this Agreement, but no dividend or other
distribution payable to the holders of record of CBI Common Stock as of any time
subsequent to the Effective Time shall be delivered to the holder of any
certificate representing shares of Ridgeway Common Stock issued and outstanding
at the Effective Time until such holder surrenders such certificate for exchange
as provided in Section 4.1 of this Agreement. However, upon surrender of such
Ridgeway Common Stock certificate, both the CBI Common Stock certificate
(together with all such undelivered dividends or other distributions without
interest) and any undelivered dividends and cash payments to be paid for
fractional share interests (without interest) shall be delivered and paid with
respect to each share represented by such certificate.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF RIDGEWAY
Ridgeway hereby represents and warrants, except as specifically
disclosed in a section of the Ridgeway Disclosure Memorandum corresponding to
the relevant section of this Article 5, to CBI as follows:
5.1 Organization, Standing, and Power. Ridgeway is a corporation
duly organized, validly existing, and in good standing under the Laws of the
State of South Carolina, and has the corporate power and authority to carry on
its business as now conducted and to own, lease, and operate its Material
Assets. Ridgeway is duly qualified or licensed to transact business as a foreign
corporation in good standing in the States of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Ridgeway.
5.2 Authority; No Breach of Agreement.
(a) Ridgeway has the corporate power and authority necessary to
execute, deliver, and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery, and
performance of this Agreement, and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly authorized
by all necessary corporate action (including valid authorization and adoption of
this Agreement by Ridgeway's duly constituted Board of Directors) in respect
thereof on the part of Ridgeway, subject to the approval of this Agreement by
the holders of two-thirds of the outstanding shares of Ridgeway Common Stock
entitled to vote thereon, which is the only shareholder vote required for
approval of this Agreement and consummation of the Merger by Ridgeway. Subject
to such requisite shareholder approval, this Agreement represents a legal,
valid, and binding obligation of Ridgeway, enforceable against Ridgeway in
accordance with its terms (except in all cases as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium, or similar Laws affecting the enforcement of
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creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by Ridgeway,
nor the consummation by Ridgeway of the transactions contemplated hereby, nor
compliance by Ridgeway with any of the provisions hereof, will (i) conflict with
or result in a breach of any provision of Ridgeway's Articles of Incorporation
or Bylaws, or (ii) constitute or result in a Default under, or require any
Consent pursuant to, or result in the creation of any Lien on any Asset of any
Ridgeway Company under, any Contract or Permit of any Ridgeway Company, where
such Default or Lien, or any failure to obtain such Consent, is reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Ridgeway, or (iii) subject to receipt of the requisite Consents referred to in
Section 9.1(b) of this Agreement, violate any Law or Order applicable to any
Ridgeway Company or any of their respective Material Assets, which violation is
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Ridgeway.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and other than
Consents required from Regulatory Authorities, and other than notices to or
filings with the Internal Revenue Service or the Pension Benefit Guaranty
Corporation or both with respect to any employee benefit plans, or under the HSR
Act, and other than Consents, filings, or notifications which, if not obtained
or made, are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Ridgeway, no notice to, filing with, or Consent of,
any public body or authority is necessary for the consummation by Ridgeway of
the Merger and the other transactions contemplated in this Agreement.
5.3 Capital Stock.
(a) The authorized capital stock of Ridgeway consists, as of the date
of this Agreement, of 40,000 shares of Ridgeway Common Stock, of which, as of
the date of this Agreement, (i) 40,000 shares were issued and outstanding, no
shares held in treasury and (ii) no shares of Ridgeway Common Stock were
issuable pursuant to outstanding awards under stock plans, and not more than
40,000 shares of Ridgeway Common Stock will be issuable or issued and
outstanding at the Effective Time. All of the issued and outstanding shares of
Ridgeway Common Stock are duly and validly issued and outstanding and are fully
paid and, except as expressly provided otherwise under applicable Law,
nonassessable under the SCBCA. None of the outstanding shares of Ridgeway Common
Stock has been issued in violation of any preemptive rights of the current or
past shareholders of Ridgeway.
(b) There is no Ridgeway Stock Plan and there are no shares of capital
stock or other equity securities of Ridgeway outstanding and no outstanding
Rights relating to the capital stock of Ridgeway.
5.4 Ridgeway Subsidiaries. Ridgeway has disclosed in Section 5.4 of the
Ridgeway Disclosure Memorandum all of the Ridgeway Subsidiaries as of the date
of this Agreement. Ridgeway or one of its Subsidiaries owns all of the issued
and outstanding shares of capital stock of each Ridgeway Subsidiary. No equity
securities of any Ridgeway Subsidiary are or may become required to be issued
(other than to another Ridgeway Company) by reason of any Rights, and there are
no Contracts by which any Ridgeway Subsidiary is bound to issue (other than to
another Ridgeway Company) additional shares of its capital stock or Rights or by
which any Ridgeway Company is or may be bound to transfer any shares of the
capital stock of any Ridgeway Subsidiary (other than to another Ridgeway
Company). There are no Contracts relating to the rights of any Ridgeway Company
to vote or to dispose of any shares of the capital stock of any Ridgeway
Subsidiary. All of the shares of capital stock of each Ridgeway Subsidiary held
by a Ridgeway Company are fully paid and, except as expressly provided otherwise
under applicable Law, nonassessable under the applicable corporate or banking
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Law of the jurisdiction in which such Subsidiary is incorporated or organized
and are owned by the Ridgeway Company, except as set forth in Section 5.4 of the
Ridgeway Disclosure Memorandum, free and clear of any Lien. Each Ridgeway
Subsidiary is a bank or a corporation, and is duly organized, validly existing,
and (if applicable) in good standing under the Laws of the jurisdiction in which
it is incorporated or organized, and has the corporate power and authority
necessary for it to own, lease, and operate its Assets and to carry on its
business as now conducted. Each Ridgeway Subsidiary is duly qualified or
licensed to transact business as a foreign corporation in good standing in the
States of the United States and foreign jurisdictions where the character of its
Assets or the nature or conduct of its business requires it to be so qualified
or licensed, except for such jurisdictions in which the failure to be so
qualified or licensed is not reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Ridgeway. Each Ridgeway Subsidiary that
is a depository institution is an "insured depository institution" as defined in
the Federal Deposit Insurance Act and applicable regulations thereunder, and the
deposits in which are insured by the Bank Insurance Fund to the fullest extent
permitted by Law.
5.5 Financial Statements. Ridgeway has disclosed in Section 5.5 of the
Ridgeway Disclosure Memorandum, and has delivered to CBI copies of, all Ridgeway
Financial Statements prepared for periods ended prior to the date of this
Agreement and will deliver to CBI copies of all Ridgeway Financial Statements
prepared subsequent to the date of this Agreement. The Ridgeway Financial
Statements (as of the dates thereof and for the periods covered thereby) (i) are
or, if dated after the date of this Agreement, will be in accordance with the
books and records of the Ridgeway Companies, which are or will be, as the case
may be, complete and correct and which have been or will have been, as the case
may be, maintained in accordance with past business practices, and (ii) present
or will present, as the case may be, fairly the consolidated financial position
of the Ridgeway Companies as of the dates indicated and the consolidated results
of operations, changes in shareholders' equity, and cash flows of the Ridgeway
Companies for the periods indicated, in accordance with GAAP (subject to any
exceptions as to consistency specified therein or as may be indicated in the
notes thereto or, in the case of interim financial statements, to normal
recurring year-end or audit adjustments which were not or are not expected to be
Material in amount or effect).
5.6 Absence of Undisclosed Liabilities. No Ridgeway Company has any
Liabilities that are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Ridgeway, except Liabilities to the
extent accrued or reserved against in the consolidated balance sheets of
Ridgeway as of September 30, 2001, included in the Ridgeway Financial Statements
or reflected in the notes thereto, Liabilities incurred in the ordinary course
of business subsequent to September 30, 2001, and Liabilities to be incurred in
connection with the transactions contemplated by this Agreement. No Ridgeway
Company has incurred or paid any Liability since September 30, 2001, except for
such Liabilities incurred or paid in the ordinary course of business consistent
with past business practices and which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Ridgeway.
5.7 Absence of Certain Changes or Events. Since September 30, 2001,
except as disclosed in the Ridgeway Financial Statements delivered prior to the
date of this Agreement or as otherwise disclosed in the Ridgeway Disclosure
Memorandum, there have been no events, changes, or occurrences which have had,
or are reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Ridgeway.
5.8 Tax Matters.
(a) Since December 31, 1994, all Tax Returns required to be filed by or
on behalf of any of the Ridgeway Companies have been timely filed, or requests
for extensions have been timely filed, granted, and have not expired for periods
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ended on or before December 31, 2000, and all Tax Returns filed are complete and
accurate in all Material respects. All Tax Returns for periods ending on or
before the date of the most recent fiscal year end immediately preceding the
Effective Time will be timely filed or requests for extensions will be timely
filed. All Taxes shown on filed Tax Returns have been paid. There is no audit
examination, deficiency, or refund Litigation with respect to any Taxes that is
reasonably likely to result in a determination that would have, individually or
in the aggregate, a Material Adverse Effect on Ridgeway, except to the extent
reserved against in the Ridgeway Financial Statements dated prior to the date of
this Agreement. All Taxes due with respect to completed and settled examinations
or concluded Litigation with respect to Taxes have been paid.
(b) None of the Ridgeway Companies has executed an extension or waiver
of any statute of limitations on the assessment or collection of any Tax due
(excluding such statutes that relate to years currently under examination by the
Internal Revenue Service or other applicable taxing authorities) that is
currently in effect.
(c) Adequate provision for any Material Taxes due or to become due for
any of the Ridgeway Companies for the period or periods through and including
the date of the respective Ridgeway Financial Statements has been made in
accordance with GAAP and is reflected on such Ridgeway Financial Statements.
(d) Each of the Ridgeway Companies is in Material compliance with, and
its records contain the information and documents (including properly completed
IRS Forms W-9) necessary to comply with, in all Material respects, applicable
information reporting and Tax withholding requirements under federal, state, and
local Tax Laws, and such records identify with specificity all accounts subject
to backup withholding under Section 3406 of the Internal Revenue Code.
(e) None of the Ridgeway Companies has made any payments, is obligated
to make any payments, or is a party to any contract, agreement, or other
arrangement that could obligate it to make any payments that would be disallowed
as a deduction under Section 280G or 162(m) of the Internal Revenue Code.
(f) There are no Material Liens with respect to Taxes upon any of the
Assets of the Ridgeway Companies.
(g) There has not been an ownership change, as defined in Internal
Revenue Code Section 382(g), of the Ridgeway Companies that occurred during or
after any Taxable Period in which the Ridgeway Companies incurred a net
operating loss that carries over to any Taxable Period ending after December 31,
2000.
(h) After the date of this Agreement, no Material election with respect
to Taxes will be made without the prior consent of CBI, which consent will not
be unreasonably withheld.
(i) No Ridgeway Company has or has had a permanent establishment in any
foreign country, as defined in any applicable tax treaty or convention between
the United States and such foreign country.
(j) No Ridgeway Company has filed any consent under Section 341(f) of
the Internal Revenue Code concerning collapsible corporations.
5.9 Assets. The Ridgeway Companies have good and marketable title, free
and clear of all Liens, to all of their respective Assets other than such
defects and Liens which are not reasonably likely to have a Material Adverse
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Effect on Ridgeway. All tangible properties used in the businesses of the
Ridgeway Companies are in good condition, reasonable wear and tear excepted, and
are usable in the ordinary course of business consistent with Ridgeway's past
practices, except as would not be reasonably likely to have a Material Adverse
Effect on Ridgeway. All Assets which are Material to Ridgeway's business on a
consolidated basis, held under leases or subleases by any of the Ridgeway
Companies, are held under valid Contracts enforceable in accordance with their
respective terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other Laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceedings may be brought), and
each such Contract is in full force and effect. The Ridgeway Companies currently
maintain insurance in amounts, scope and coverage reasonably necessary for their
operations. None of the Ridgeway Companies has received notice from any
insurance carrier that (i) such insurance will be canceled or that coverage
thereunder will be Materially reduced or eliminated, or (ii) premium costs with
respect to such policies of insurance will be substantially increased. The
Assets of the Ridgeway Companies include all Material Assets required to operate
the business of the Ridgeway Companies as presently conducted.
5.10 Environmental Matters.
(a) Each Ridgeway Company, its Participation Facilities, and its Loan
Properties are, and have been, in compliance with all Environmental Laws, except
those instances of non-compliance which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Ridgeway.
(b) There is no Litigation pending or, to the Knowledge of Ridgeway,
threatened before any court, governmental agency, or authority, or other forum
in which any Ridgeway Company or any of its Participation Facilities has been
or, with respect to threatened Litigation, may reasonably be expected to be
named as a defendant (i) for alleged noncompliance (including by any
predecessor) with any Environmental Law or (ii) relating to the release into the
environment of any Hazardous Material, whether or not occurring at, on, under,
or involving a site owned, leased, or operated by any Ridgeway Company or any of
its Participation Facilities, except for such Litigation pending or threatened
that is not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Ridgeway.
(c) There is no Litigation pending, or to the Knowledge of Ridgeway,
threatened before any court, governmental agency, or board, or other forum in
which any of its Loan Properties (or Ridgeway in respect of such Loan Property)
has been or, with respect to threatened Litigation, may reasonably be expected
to be named as a defendant or potentially responsible party (i) for alleged
noncompliance (including by any predecessor) with any Environmental Law or (ii)
relating to the release into the environment of any Hazardous Material, whether
or not occurring at, on, under, or involving a Loan Property, except for such
Litigation pending or threatened that is not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Ridgeway.
(d) To the Knowledge of Ridgeway, there is no reasonable basis for any
Litigation of a type described in subsections (b) or (c), except such as is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Ridgeway.
(e) To the Knowledge of Ridgeway, during the period of (i) any Ridgeway
Company's ownership or operation of any of their respective current properties,
(ii) any Ridgeway Company's participation in the management of any Participation
Facility, or (iii) any Ridgeway Company's holding of a security interest in a
Loan Property, there have been no releases of Hazardous Material in, on, under,
or affecting (or potentially affecting) such properties, except such as are not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Ridgeway. Prior to the period of (i) any Ridgeway Company's ownership
or operation of any of their respective current properties, (ii) any Ridgeway
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Company's participation in the management of any Participation Facility, or
(iii) any Ridgeway Company's holding of a security interest in a Loan Property,
to the Knowledge of Ridgeway, there were no releases of Hazardous Material in,
on, under, or affecting any such property, Participation Facility, or Loan
Property, except such as are not reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on Ridgeway.
5.11 Compliance with Laws. Ridgeway is duly registered as a bank
holding company under the BHC Act. Each Ridgeway Company has in effect all
Permits necessary for it to own, lease, or operate its Material Assets and to
carry on its business as now conducted, except for those Permits the absence of
which are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Ridgeway, and there has occurred no Default under any
such Permit, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Ridgeway. None of
the Ridgeway Companies:
(a) is in violation of any Material Laws, Orders, or Permits applicable
to its business or employees conducting its business, except for violations
which are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Ridgeway; and
(b) has received any written notification or communication from any
agency or department of federal, state, or local government or any Regulatory
Authority or the staff thereof (i) asserting that any Ridgeway Company is not in
compliance with any of the Laws or Orders which such governmental authority or
Regulatory Authority enforces, where such noncompliance is reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Ridgeway,
(ii) threatening to revoke any Permits, the revocation of which is reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Ridgeway, or (iii) requiring any Ridgeway Company (x) to enter into or consent
to the issuance of a cease and desist order, formal agreement, directive,
commitment, or memorandum of understanding, or (y) to adopt any Board resolution
or similar undertaking, which restricts Materially the conduct of its business,
or in any Material manner relates to its capital adequacy, its credit or reserve
policies, its management, or the payment of dividends.
5.12 Labor Relations. No Ridgeway Company is the subject of any
Litigation asserting that it or any other Ridgeway Company has committed an
unfair labor practice (within the meaning of the National Labor Relations Act or
comparable state Law) or seeking to compel it or any other Ridgeway Company to
bargain with any labor organization as to wages or conditions of employment, nor
is any Ridgeway Company a party to or bound by any collective bargaining
agreement, Contract, or other agreement or understanding with a labor union or
labor organization, nor is there any strike or other labor dispute involving any
Ridgeway Company, pending or, to the Knowledge of Ridgeway, threatened, or to
the Knowledge of Ridgeway, is there any activity involving any Ridgeway
Company's employees seeking to certify a collective bargaining unit or engaging
in any other organization activity.
5.13 Employee Benefit Plans.
(a) Ridgeway has disclosed in Section 5.13 of the Ridgeway Disclosure
Memorandum, and has delivered or made available to CBI prior to the execution of
this Agreement correct and complete copies in each case of all Ridgeway Benefit
Plans. For purposes of this Agreement, "Ridgeway Benefit Plans" means all
Material written pension, retirement, profit-sharing, deferred compensation,
stock option, employee stock ownership, severance pay, vacation, bonus, or other
incentive plan, all other Material written employee programs or agreements, all
medical, vision, dental, or other written health plans, all life insurance
plans, and all other Material written employee benefit plans or fringe benefit
plans, including written "employee benefit plans" as that term is defined in
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Section 3(3) of ERISA, maintained by, sponsored in whole or in part by, or
contributed to by, any Ridgeway Company for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
and under which employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries are eligible to participate. Any of the
Ridgeway Benefit Plans which is an "employee welfare benefit plan," as that term
is defined in Section 3(l) of ERISA, or an "employee pension benefit plan," as
that term is defined in Section 3(2) of ERISA, is referred to herein as a
"Ridgeway ERISA Plan." Any Ridgeway ERISA Plan which is also subject to Section
412 of the Internal Revenue Code or Section 302 of ERISA, is referred to herein
as a "Ridgeway Pension Plan." Neither Ridgeway nor any Ridgeway Company has an
"obligation to contribute" (as defined in ERISA Section 4212) to a
"multiemployer plan" (as defined in ERISA Sections 4001(a)(3) and 3(37)(A)).
Each "employee pension benefit plan," as defined in Section 3(2) of ERISA, ever
maintained by any Ridgeway Company, that was intended to qualify under Section
401(a) of the Internal Revenue Code is disclosed as such in Section 5.13 of the
Ridgeway Disclosure Memorandum.
(b) Ridgeway has delivered or made available to CBI prior to the
execution of this Agreement correct and complete copies of the following
documents: (i) all trust agreements or other funding arrangements for such
Ridgeway Benefit Plans (including insurance contracts), and all amendments
thereto, (ii) with respect to any such Ridgeway Benefit Plans or amendments, the
most recent determination letters, and all Material rulings, Material opinion
letters, Material information letters, or Material advisory opinions issued by
the Internal Revenue Service, the United States Department of Labor, or the
Pension Benefit Guaranty Corporation after December 31, 1994, (iii) annual
reports or returns, audited or unaudited financial statements, actuarial
valuations and reports, and summary annual reports prepared for any Ridgeway
Benefit Plan with respect to the most recent plan year and (iv) the most recent
summary plan descriptions and any Material modifications thereto.
(c) All Ridgeway Benefit Plans are in compliance with the applicable
terms of ERISA, the Internal Revenue Code, and any other applicable Laws, other
than instances of noncompliance which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Ridgeway. Each
Ridgeway ERISA Plan which is intended to be qualified under Section 401(a) of
the Internal Revenue Code has received a favorable determination letter from the
Internal Revenue Service, and to the Knowledge of Ridgeway, there are no
circumstances likely to result in revocation of any such favorable determination
letter. Each trust created under any Ridgeway ERISA Plan has been determined to
be exempt from Tax under Section 501(a) of the Internal Revenue Code and
Ridgeway is not aware of any circumstance which will or could reasonably result
in revocation of such exemption. With respect to each Ridgeway Benefit Plan to
the Knowledge of Ridgeway, no event has occurred which will or could reasonably
give rise to a loss of any intended Tax consequences under the Internal Revenue
Code or to any Tax under Section 511 of the Internal Revenue Code that is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on Ridgeway. There is no Material pending or, to the Knowledge of
Ridgeway, threatened Litigation relating to any Ridgeway ERISA Plan.
(d) No Ridgeway Company has engaged in a transaction with respect to
any Ridgeway Benefit Plan that, assuming the Taxable Period of such transaction
expired as of the date of this Agreement, would subject any Ridgeway Company to
a Material tax or penalty imposed by either Section 4975 of the Internal Revenue
Code or Section 502(i) of ERISA in amounts which are reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Ridgeway. Neither
Ridgeway nor, to the knowledge of Ridgeway, any administrator or fiduciary of
any Ridgeway Benefit Plan (or any agent of any of the foregoing) has engaged in
any transaction, or acted or failed to act in any manner with respect to any
Ridgeway Benefit Plan which could subject Ridgeway to any direct or indirect
Liability (by indemnity or otherwise) for breach of any fiduciary, co-fiduciary,
or other duty under ERISA, where such Liability, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on Ridgeway.
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No oral or written representation or communication with respect to any aspect of
the Ridgeway Benefit Plans has been made to employees of any Ridgeway Company
which is not in conformity with the written or otherwise preexisting terms and
provisions of such plans, where any Liability resulting from such non-conformity
is reasonably likely to have a Material Adverse Effect on Ridgeway.
(e) No Ridgeway Pension Plan has any "unfunded current liability," as
that term is defined in Section 302(d)(8)(A) of ERISA, and the fair market value
of the Assets of any such plan is equal to or exceeds the actuarial present
value of all accrued benefits under such plans (whether vested or not), based
upon the actuarial assumptions used to prepare the most recent actuarial reports
for such plans; and to the Knowledge of Ridgeway, since the date of the most
recent actuarial valuation, no event has occurred which would be reasonably
expected to change any such funded status in a way that is reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Ridgeway.
Neither any Ridgeway Pension Plan nor any "single-employer plan," within the
meaning of Section 4001(a)(15) of ERISA, currently maintained by any Ridgeway
Company, or the single-employer plan of any entity which is considered one
employer with Ridgeway under Section 4001 of ERISA or Section 414 of the
Internal Revenue Code or Section 302 of ERISA (whether or not waived) (a
"Ridgeway ERISA Affiliate") has an "accumulated funding deficiency" within the
meaning of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
based upon the actuarial assumptions used to prepare the most recent actuarial
reports for such plans. All required contributions with respect to any Ridgeway
Pension Plan or any single-employer plan of an Ridgeway ERISA Affiliate have
been timely made and there is no lien or expected to be a lien under Internal
Revenue Code Section 412(n) or ERISA Section 302(f) or Tax under Internal
Revenue Code Section 4971. No Ridgeway Company has provided, or is required to
provide, security to an Ridgeway Pension Plan or to any single-employer plan of
an Ridgeway ERISA Affiliate pursuant to Section 401(a)(29) of the Internal
Revenue Code. All premiums required to be paid under ERISA Section 4006 have
been timely paid by Ridgeway, except to the extent any failure to timely pay
would not have a Material Adverse Effect on Ridgeway.
(f) No Liability under Title IV of ERISA has been or is expected to be
incurred by any Ridgeway Company with respect to any defined benefit plan
currently or formerly maintained by any of them or by any Ridgeway ERISA
Affiliate that has not been satisfied in full (other than Liability for Pension
Benefit Guaranty Corporation premiums which have been paid when due, except for
Liabilities that, individually or in the aggregate, would not have a Material
Adverse Effect on Ridgeway).
(g) No Ridgeway Company has any obligations for retiree health and
retiree life benefits under any of the Ridgeway Benefit Plans other than with
respect to benefit coverage mandated by applicable Law.
(h) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will, by themselves, (i)
result in any payment (including, without limitation, severance, golden
parachute, or otherwise) becoming due to any director or any employee of any
Ridgeway Company from any Ridgeway Company under any Ridgeway Benefit Plan or
otherwise, other than by operation of Law, (ii) increase any benefits otherwise
payable under any Ridgeway Benefit Plan, or (iii) result in any acceleration of
the time of payment or vesting of any such benefit.
5.14 Material Contracts. Except as set forth in Section 5.14 of the
Ridgeway Disclosure Memorandum, none of the Ridgeway Companies, nor any of their
respective Assets, businesses, or operations, is a party to, or is bound or
affected by, or receives benefits under, (i) any employment, severance,
termination, consulting, or retirement Contract providing for aggregate payments
to any Person in any calendar year in excess of $50,000, (ii) any Contract
relating to the borrowing of money by any Ridgeway Company or the guarantee by
any Ridgeway Company of any such obligation (other than Contracts evidencing
deposit liabilities, purchases of federal funds, fully-secured repurchase
agreements, and Federal Home Loan Bank advances of depository institution
Subsidiaries, trade payables, and Contracts relating to borrowings or guarantees
made in the ordinary course of business), and (iii) any other Contract or
amendment thereto that would be required to be filed as an exhibit to a Form
10-K filed by Ridgeway with the SEC as of the date of this Agreement if Ridgeway
were required to file a Form 10-K with the SEC (together with all Contracts
referred to in Sections 5.9 and 5.13(a) of this Agreement, the "Ridgeway
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Contracts"). With respect to each Ridgeway Contract: (i) the Contract is in full
force and effect; (ii) no Ridgeway Company is in Default thereunder, other than
Defaults which are not reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Ridgeway; (iii) no Ridgeway Company has
repudiated or waived any Material provision of any such Contract; and (iv) no
other party to any such Contract is, to the Knowledge of Ridgeway, in Default in
any respect, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Ridgeway, or has
repudiated or waived any Material provision thereunder. Except for Federal Home
Loan Bank advances, all of the indebtedness of any Ridgeway Company for money
borrowed is prepayable at any time by such Ridgeway Company without penalty or
premium.
5.15 Legal Proceedings.
(a) There is no Litigation instituted or pending, or, to the Knowledge
of Ridgeway, threatened against any Ridgeway Company, or against any Asset,
interest, or right of any of them, that is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Ridgeway, nor are
there any Orders of any Regulatory Authorities, other governmental authorities,
or arbitrators outstanding against any Ridgeway Company, that are reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Ridgeway.
(b) Section 5.15(b) of the Ridgeway Disclosure Memorandum includes a
summary report of all Litigation as of the date of this Agreement to which any
Ridgeway Company is a party and which names a Ridgeway Company as a defendant or
cross-defendant.
5.16 Reports. Since December 31, 1996, or the date of organization if
later, each Ridgeway Company has timely filed all reports and statements,
together with any amendments required to be made with respect thereto, that it
was required to file with any Regulatory Authorities, except failures to file
which are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Ridgeway.
5.17 Statements True and Correct. None of the information supplied or
to be supplied by any Ridgeway Company or any Affiliate thereof regarding
Ridgeway or such Affiliate for inclusion in the Registration Statement to be
filed by CBI with the SEC will, when the Registration Statement becomes
effective, contain any untrue statement of a Material fact, or omit to state any
Material fact required to be stated thereunder or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the information supplied or to be supplied by any
Ridgeway Company or any Affiliate thereof for inclusion in the Proxy Statement
to be mailed to Ridgeway's shareholders in connection with the Shareholders'
Meeting will, when first mailed to the shareholders of Ridgeway, contain any
misstatement of Material fact, or omit to state any Material fact required to be
stated thereunder or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or, in the case of the
Proxy Statement or any amendment thereof or supplement thereto, at the time of
the Shareholders' Meeting, omit to state any Material fact required to be stated
thereunder or necessary to correct any Material statement in any earlier
communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. All documents that any Ridgeway Company or any Affiliate
thereof is responsible for filing with any Regulatory Authority in connection
with the transactions contemplated hereby will comply as to form in all Material
respects with the provisions of applicable Law.
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5.18 Tax and Regulatory Matters. No Ridgeway Company or any Affiliate
thereof has taken or agreed to take any action, and Ridgeway has no Knowledge of
any fact or circumstance that is reasonably likely to (i) prevent the Merger
from qualifying as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, or (ii) Materially impede or delay receipt of any
Consents of Regulatory Authorities referred to in Section 9.1(b) of this
Agreement. To the Knowledge of Ridgeway there exists no fact, circumstance, or
reason why the requisite Consents referred to in Section 9.1(b) of this
Agreement cannot be received in a timely manner.
5.19 Intellectual Property. All of the Intellectual Property rights of
Ridgeway and the Ridgeway Subsidiaries are in full force and effect and, if
applicable, constitute legal, valid, and binding obligations of the respective
parties thereto, and there have not been, and, to the Knowledge of Ridgeway,
there currently are not, any Defaults thereunder by Ridgeway or a Ridgeway
Subsidiary. Ridgeway or a Ridgeway Subsidiary owns or is the valid licensee of
all such Intellectual Property rights free and clear of all Liens or claims of
infringement, except for such Liens or claims of infringement which would not
reasonably be expected to have a Material Adverse Effect on Ridgeway. Neither
Ridgeway nor any of the Ridgeway Subsidiaries nor, to the Knowledge of Ridgeway,
their respective predecessors has infringed the Intellectual Property rights of
others and, to the Knowledge of Ridgeway, none of the Intellectual Property
rights as used in the business conducted by Ridgeway or the Ridgeway
Subsidiaries infringes upon or otherwise violates the rights of any Person, nor
has any Person asserted a claim of such infringement, in each case, except as
would not reasonably be expected to have a Material Adverse Effect on Ridgeway.
Neither Ridgeway nor any of the Ridgeway Subsidiaries is obligated to pay any
royalties to any Person with respect to any such Intellectual Property other
than in the ordinary course of business. Ridgeway or a Ridgeway Subsidiary owns
or has the valid right to use all of the Intellectual Property rights which it
is presently using, or in connection with performance of any Material Contract
to which it is a party. No officer, director, or employee of Ridgeway or the
Ridgeway Subsidiaries is party to any Contract which requires such officer,
director, or employee to assign any interest in any Intellectual Property or
keep confidential any trade secrets, proprietary data, customer information, or
other business information or which restricts or prohibits such officer,
director, or employee from engaging in activities competitive with any Person,
in each case, other than with Ridgeway or any of the Ridgeway Subsidiaries.
5.20 State Takeover Laws. Subject to Ridgeway's right to alter its
recommendation in accordance with the proviso set forth in the fourth sentence
of Section 8.1 of this Agreement, each Ridgeway Company has taken all necessary
action, if any, to exempt the transactions contemplated by this Agreement from
any applicable "moratorium," "control share," "fair price," "business
combination," or other anti-takeover laws and regulations of the State of South
Carolina (collectively, "Takeover Laws").
5.21 Charter Provisions. Each Ridgeway Company has taken all action so
that the entering into of this Agreement and the consummation of the Merger and
the other transactions contemplated by this Agreement do not and will not result
in the grant of any rights to any Person under the Articles of Incorporation or
Bylaws or, subject to Ridgeway's right to alter its recommendation in accordance
with the proviso set forth in the fourth sentence of Section 8.1 of this
Agreement, restrict or impair the ability of CBI to vote, or otherwise to
exercise the rights of a shareholder with respect to, shares of any Ridgeway
Company that may be directly or indirectly acquired or controlled by it.
5.22 Support Agreements. Each of the directors of Ridgeway has executed
and delivered to CBI a Support Agreement in substantially the form attached as
Exhibit 1 to this Agreement.
5.23 Derivatives. All interest rate swaps, caps, floors, option
agreements, futures and forward contracts, and other similar risk management
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arrangements, whether entered into for Ridgeway's own account, or for the
account of one or more the Ridgeway Subsidiaries or their customers, were
entered into (i) in accordance with prudent business practices and all
applicable Laws, and (ii) with counterparties believed to be financially
responsible.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF CBI
CBI hereby represents and warrants to Ridgeway as follows:
6.1 Organization, Standing, and Power. CBI is a corporation duly
organized, validly existing, and in good standing under the Laws of the State of
South Carolina, and has the corporate power and authority to carry on its
business as now conducted and to own, lease, and operate its Material Assets.
CBI is duly qualified or licensed to transact business as a foreign corporation
in good standing in the States of the United States and foreign jurisdictions
where the character of its Assets or the nature or conduct of its business
requires it to be so qualified or licensed, except for such jurisdictions in
which the failure to be so qualified or licensed is not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on CBI.
6.2 Authority; No Breach of Agreement.
(a) CBI has the corporate power and authority necessary to execute,
deliver, and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery, and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of CBI, subject to the approval
of this Agreement by the holders of two-thirds of the outstanding shares of CBI
Common Stock entitled to vote thereon, which is the only shareholder vote
required for approval of this Agreement and consummation of the Merger by CBI.
This Agreement represents a legal, valid, and binding obligation of CBI,
enforceable against CBI in accordance with its terms (except in all cases as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, receivership, conservatorship, moratorium, or similar Laws
affecting the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought).
(b) Neither the execution and delivery of this Agreement by CBI, nor
the consummation by CBI of the transactions contemplated hereby, nor compliance
by CBI with any of the provisions hereof, will (i) conflict with or result in a
breach of any provision of CBI's Articles of Incorporation or Bylaws, (ii)
constitute or result in a Default under, or require any Consent pursuant to, or
result in the creation of any Lien on any Asset of any CBI Company under, any
Contract or Permit of any CBI Company, where such Default or Lien, or any
failure to obtain such Consent, is reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on CBI, or (iii) subject to receipt of
the requisite Consents referred to in Section 9.1(b) of this Agreement, violate
any Law or Order applicable to any CBI Company or any of their respective
Material Assets.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the AMEX, and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue Service or the
Pension Benefit Guaranty Corporation with respect to any employee benefit plans,
or under the HSR Act, and other than Consents, filings, or notifications which,
if not obtained or made, are not reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on CBI, no notice to, filing with, or
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Consent of, any public body or authority is necessary for the consummation by
CBI of the Merger and the other transactions contemplated in this Agreement.
6.3 Capital Stock. The authorized capital stock of CBI consists, as of
the date of this Agreement, of 12,000,000 shares of CBI Common Stock, of which
3,299,674 shares were issued and outstanding as of November 1, 2001. All of the
issued and outstanding shares of CBI Common Stock are, and all of the shares of
CBI Common Stock to be issued in exchange for shares of Ridgeway Common Stock
upon consummation of the Merger, when issued in accordance with the terms of
this Agreement, will be, duly and validly issued and outstanding and fully paid
and, except as expressly provided otherwise under applicable Law, nonassessable
under the SCBCA. None of the outstanding shares of CBI Common Stock has been,
and none of the shares of CBI Common Stock to be issued in exchange for shares
of Ridgeway Common Stock upon consummation of the Merger will be, issued in
violation of any preemptive rights of the current or past shareholders of CBI.
6.4 CBI Subsidiaries. CBI or one of its Subsidiaries owns all of the
issued and outstanding shares of capital stock of each CBI Subsidiary. No equity
securities of any CBI Subsidiary are or may become required to be issued (other
than to another CBI Company) by reason of any Rights, and there are no Contracts
by which any CBI Subsidiary is bound to issue (other than to another CBI
Company) additional shares of its capital stock or Rights or by which any CBI
Company is or may be bound to transfer any shares of the capital stock of any
CBI Subsidiary (other than to another CBI Company). There are no Contracts
relating to the rights of any CBI Company to vote or to dispose of any shares of
the capital stock of any CBI Subsidiary. All of the shares of capital stock of
each CBI Subsidiary held by a CBI Company are fully paid and, except as provided
in statutes pursuant to which depository institution Subsidiaries are organized,
except as expressly provided otherwise under applicable Law, nonassessable under
the applicable corporate or banking Law of the jurisdiction in which such
Subsidiary is incorporated or organized and are owned by the CBI Company free
and clear of any Lien. Each CBI Subsidiary is either a bank or a corporation,
and is duly organized, validly existing, and (as to corporations) in good
standing under the Laws of the jurisdiction in which it is incorporated or
organized, and has the corporate power and authority necessary for it to own,
lease, and operate its Assets and to carry on its business as now conducted.
Each CBI Subsidiary is duly qualified or licensed to transact business as a
foreign corporation in good standing in the States of the United States and
foreign jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on CBI. Each CBI Subsidiary that is a depository institution is an
"insured depository institution" as defined in the Federal Deposit Insurance Act
and applicable regulations thereunder, and the deposits in which are insured by
the Bank Insurance Fund to the fullest extent permitted by Law.
6.5 SEC Filings; Financial Statements.
(a) CBI has filed and made available to Ridgeway all forms, reports,
and documents required to be filed by CBI with the SEC since January 1 of the
second complete fiscal year preceding the date of this Agreement (collectively,
the "CBI SEC Reports"). The CBI SEC Reports (i) at the time filed, complied in
all Material respects with the applicable requirements of the 1933 Act and the
1934 Act, as the case may be, and (ii) did not at the time they were filed (or
if amended or superseded by a filing prior to the date of this Agreement, then
on the date of such filing) contain any untrue statement of a Material fact or
omit to state a Material fact required to be stated in such CBI SEC Reports or
necessary in order to make the statements in such CBI SEC Reports, in light of
the circumstances under which they were made, not misleading. Except for CBI
Subsidiaries that are registered as a broker, dealer, or investment adviser or
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filings required due to fiduciary holdings of the CBI Subsidiaries, none of CBI
Subsidiaries is required to file any forms, reports, or other documents with the
SEC.
(b) Each of the CBI Financial Statements (including, in each case, any
related notes) contained in the CBI SEC Reports, including any CBI SEC Reports
filed after the date of this Agreement until the Effective Time, complied or
will comply as to form in all Material respects with the applicable published
rules and regulations of the SEC with respect thereto, was or will be prepared
in accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes to such financial statements
or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC),
and fairly presented or will fairly present the consolidated financial position
of CBI and its Subsidiaries as at the respective dates and the consolidated
results of its operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal and
recurring year-end and audit adjustments which were not or are not expected to
be Material in amount or effect.
6.6 Absence of Undisclosed Liabilities. No CBI Company has any
Liabilities that are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on CBI, except Liabilities which are
accrued or reserved against in the consolidated balance sheets of CBI as of
September 30, 2001, included in the CBI Financial Statements or reflected in the
notes thereto, Liabilities incurred in the ordinary course of business
subsequent to September 30, 2001, and Liabilities to be incurred in connection
with the transactions contemplated by the Agreement. No CBI Company has incurred
or paid any Liability since September 30, 2001, except for such Liabilities
incurred or paid in the ordinary course of business consistent with past
business practice and which are not reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on CBI.
6.7 Absence of Certain Changes or Events. Since September 30, 2001,
except as disclosed in the CBI Financial Statements delivered prior to the date
of this Agreement, there have been no events, changes or occurrences which have
had, or are reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on CBI.
6.8 Compliance with Laws. CBI is duly registered as a bank holding
company under the BHC Act. Each CBI Company has in effect all Permits necessary
for it to own, lease, or operate its Material Assets and to carry on its
business as now conducted, except for those Permits the absence of which are not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on CBI, and there has occurred no Default under any such Permit, other
than Defaults which are not reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on CBI. None of the CBI Companies:
(a) is in violation of any Laws, Orders, or Permits applicable to its
business or employees conducting its business, except for violations which are
not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on CBI; and
(b) has received any notification or communication from any agency or
department of federal, state, or local government or any Regulatory Authority or
the staff thereof (i) asserting that any CBI Company is not in compliance with
any of the Laws or Orders which such governmental authority or Regulatory
Authority enforces, where such noncompliance is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on CBI, (ii)
threatening to revoke any Permits, the revocation of which is reasonably likely
to have, individually or in the aggregate, a Material Adverse Effect on CBI, or
(iii) requiring any CBI Company (x) to enter into or consent to the issuance of
a cease and desist order, formal agreement, directive, commitment, or memorandum
of understanding, or (y) to adopt any Board resolution or similar undertaking,
which restricts Materially the conduct of its business, or in any manner relates
to its capital adequacy, its credit or reserve policies, its management, or the
payment of dividends.
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6.9 Legal Proceedings. There is no Litigation instituted or pending,
or, to the Knowledge of CBI, threatened against any CBI Company, or against any
Asset, employee benefit plan, interest, or right of any of them, that is
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on CBI, nor are there any Orders of any Regulatory Authorities, other
governmental authorities, or arbitrators outstanding against any CBI Company,
that are reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on CBI.
6.10 Reports. Since December 31, 1996, or the date of organization if
later, each CBI Company has timely filed all reports and statements, together
with any amendments required to be made with respect thereto, that it was
required to file with any Regulatory Authorities, except failures to file which
are not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on CBI. As of their respective dates, each of such reports and
documents, including the financial statements, exhibits, and schedules thereto,
complied in all Material respects with all applicable Laws.
6.11 Statements True and Correct. None of the information supplied or
to be supplied by any CBI Company or any Affiliate thereof regarding CBI or such
Affiliate for inclusion in the Registration Statement to be filed by CBI with
the SEC will, when the Registration Statement becomes effective, contain any
untrue statement of a Material fact, or omit to state any Material fact required
to be stated thereunder or necessary to make the statements therein not
misleading. None of the information supplied or to be supplied by any CBI
Company or any Affiliate thereof for inclusion in the Proxy Statement to be
mailed to Ridgeway's shareholders in connection with the Shareholders' Meeting,
will, when first mailed to the shareholders of Ridgeway, contain any
misstatement of Material fact, or omit to state any Material fact required to be
stated thereunder or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or, in the case of the
Proxy Statement or any amendment thereof or supplement thereto, at the time of
the Shareholders' Meeting, omit to state any Material fact required to be stated
thereunder or necessary to correct any Material statement in any earlier
communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. All documents that any CBI Company or any Affiliate
thereof is responsible for filing with any Regulatory Authority in connection
with the transactions contemplated hereby will comply as to form in all Material
respects with the provisions of applicable Law.
6.12 Tax and Regulatory Matters. No CBI Company or any Affiliate
thereof has taken or agreed to take any action, and CBI has no Knowledge of any
fact or circumstance that is reasonably likely to (i) prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, or (ii) Materially impede or delay receipt of any
Consents of Regulatory Authorities referred to in Section 9.1(b) of this
Agreement. To the Knowledge of CBI there exists no fact, circumstance, or reason
why the requisite Consents referred to in Section 9.1(b) of this Agreement
cannot be received in a timely manner.
6.13 Support Agreements. Each of the directors of CBI has executed and
delivered to Ridgeway a Support Agreement in substantially the form attached as
Exhibit 2 to this Agreement.
6.14 Derivatives. All interest rate swaps, caps, floors, option
agreements, futures and forward contracts, and other similar risk management
arrangements, whether entered into for CBI's own account, or for the account of
one or more the CBI Subsidiaries or their customers, were entered into (i) in
accordance with prudent business practices and all applicable Laws, and (ii)
with counterparties believed to be financially responsible.
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ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION
7.1 Affirmative Covenants of Both Parties. Unless the prior written
consent of the other Party shall have been obtained, and except as otherwise
expressly contemplated herein, each Party shall and shall cause each of its
Subsidiaries to (i) operate its business only in the usual, regular, and
ordinary course, (ii) use its reasonable efforts to preserve intact its business
organization and Assets and maintain its rights and franchises, (iii) use its
reasonable efforts to maintain its current employee relationships, and (iv) take
no action which would: (a) adversely affect the ability of any Party to obtain
any Consents required for the transactions contemplated hereby; (b) adversely
affect the ability of any Party to perform its covenants and agreements under
this Agreement; provided, that the foregoing shall not prevent any CBI Company
from discontinuing or disposing of any of its Assets or business, or from
acquiring or agreeing to acquire any other Person or any Assets thereof, if such
action is, in the reasonable good faith judgment of CBI, desirable in the
conduct of the business of CBI and its Subsidiaries; or (c) require the approval
of the shareholders of CBI, other than the election of directors or the approval
of any employee benefit plan, unless Ridgeway has consented to such action in
writing.
7.2 Negative Covenants of Ridgeway. From the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement,
except as specifically contemplated by this Agreement, Ridgeway covenants and
agrees that it will not do or agree or commit to do, or permit any of its
Subsidiaries to do or agree or commit to do, any of the following without the
prior written consent of CBI, which consent shall not be unreasonably withheld:
(a) amend the Articles of Incorporation, Bylaws, or other governing
instruments of any Ridgeway Company; or
(b) incur, guarantee, or otherwise become responsible for, any
additional debt obligation or other obligation for borrowed money (other than
indebtedness of a Ridgeway Company to another Ridgeway Company) in excess of an
aggregate of $50,000 (for the Ridgeway Companies on a consolidated basis),
except in the ordinary course of business consistent with past practices (which
shall include entry into repurchase agreements or other fully secured
securities), or impose, or suffer the imposition, on any Asset of any Ridgeway
Company of any Material Lien, except in the ordinary course of business
consistent with past practices; or
(c) except as contemplated by Section 7.1 of this Agreement,
repurchase, redeem, or otherwise acquire or exchange (other than exchanges in
the ordinary course under employee benefit plans), directly or indirectly, any
shares, or any securities convertible into any shares, of the capital stock of
any Ridgeway Company, or declare or pay any dividend or make any other
distribution in respect of Ridgeway's capital stock; provided that Ridgeway may
(to the extent legally able to do so), but shall not be obligated to declare and
pay regular semi-annual cash dividends on the Ridgeway Common Stock in an amount
of $4.00 per share and with the usual and regular record and payment dates as
disclosed in Section 7.2(c) of the Ridgeway Disclosure Memorandum, and provided,
that, notwithstanding the provisions of Section 1.3 of this Agreement, the
Parties shall cooperate in selecting the Effective Time or in permitting
Ridgeway to pay a special dividend to ensure that, with respect to the
semi-annual period in which the Effective Time occurs, the holders of Ridgeway
Common Stock do not become entitled to receive both a dividend in respect of
their Ridgeway Common Stock and a dividend in respect of their CBI Common Stock
or fail to be entitled to receive dividends or less than a pro rata portion of
the semi-annual dividend; or
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(d) except for this Agreement or pursuant to the exercise of Rights
outstanding as of the date of this Agreement and pursuant to the terms thereof
in existence on the date of this Agreement, (i) issue, sell, pledge, encumber,
authorize the issuance of, (ii) enter into any Contract to issue, sell, pledge,
encumber, or authorize the issuance of, or (iii) otherwise permit to become
outstanding, any additional shares of Ridgeway Common Stock or any capital stock
of any Ridgeway Company, or any stock appreciation rights, or any option,
warrant, conversion, or other right to acquire any such stock, or any security
convertible into any such stock; or
(e) adjust, split, combine, or reclassify any capital stock of any
Ridgeway Company or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of Ridgeway Common Stock, or sell,
lease, mortgage, or otherwise dispose of or otherwise encumber (i) any shares of
capital stock of any Ridgeway Subsidiary (unless any such shares of stock are
sold or otherwise transferred to another Ridgeway Company), or (ii) any Asset
other than in the ordinary course of business for reasonable and adequate
consideration and other than dispositions in the ordinary course of business
consistent with past practice; or
(f) (i) except in connection with waiver agreements with employees who
have written employment contracts on the date hereof, grant any increase in
compensation or benefits to the employees, officers, or directors of any
Ridgeway Company, except as required by Law or as may be consistent with the
prior practices of such Ridgeway Company, (ii) pay any severance or termination
pay or any bonus other than pursuant to written policies or written Contracts in
effect on the date of this Agreement, (iii) enter into or amend any severance
agreements with officers of any Ridgeway Company, (iv) grant any increase in
fees or other increases in compensation or other benefits to directors of any
Ridgeway Company; or (v) voluntarily accelerate the vesting of any stock options
or other stock-based compensation or employee benefits; or
(g) enter into or amend any employment Contract between any Ridgeway
Company and any Person (unless such amendment is required by Law) that the
Ridgeway Company does not have the unconditional right to terminate without
Liability (other than Liability for services already rendered and in accordance
with the Ridgeway Benefit Plans), at any time on or after the Effective Time; or
(h) adopt any new employee benefit plan of any Ridgeway Company or make
any Material change in or to any existing employee benefit plans of any Ridgeway
Company other than any such change that is required by Law or that, in the
opinion of counsel, is necessary or advisable to maintain the tax qualified
status of any such plan; or
(i) make any significant change in any Tax or accounting methods,
Material elections, or systems of internal accounting controls, except as may be
appropriate to conform to changes in Tax Laws or regulatory accounting
requirements or GAAP; or
(j) commence any Litigation other than as deemed necessary or advisable
in the good faith judgment of management for the prudent operation of its
business or settle any Litigation involving any Liability of any Ridgeway
Company for Material money damages or restrictions upon the operations of any
Ridgeway Company; or
(k) except in the ordinary course of business, modify, amend, or
terminate any Material Contract or waive, release, compromise, or assign any
Material rights or claims.
7.3 Adverse Changes in Condition. Each Party agrees to give written
notice promptly to the other Party upon becoming aware of the occurrence or
impending occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on it, or (ii) would cause or constitute a
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Material breach of any of its representations, warranties, or covenants
contained herein, and to use its reasonable efforts to prevent or promptly to
remedy the same.
7.4 Reports. Each Party and its Subsidiaries shall file all reports
required to be filed by it with Regulatory Authorities between the date of this
Agreement and the Effective Time and shall deliver to the other Party copies of
all such reports promptly after the same are filed.
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 Registration Statement; Proxy Statement; Shareholder Approval. As
soon as reasonably practicable after execution of this Agreement, CBI shall file
the Registration Statement with the SEC, and shall use its reasonable efforts to
cause the Registration Statement to become effective under the 1933 Act and take
any action required to be taken under the applicable state Blue Sky or
securities Laws in connection with the issuance of the shares of CBI Common
Stock upon consummation of the Merger. Ridgeway shall furnish all information
concerning it and the holders of its capital stock as CBI may reasonably request
for inclusion in the Registration Statement. CBI and Ridgeway shall each call a
Shareholders' Meeting, to be held as soon as reasonably practicable after the
Registration Statement is declared effective by the SEC, for the purpose of
voting upon approval of the Plan of Merger and such other related matters as it
deems appropriate. In connection with the respective Shareholders' Meetings, (i)
CBI and Ridgeway shall prepare and file with the SEC a joint Proxy Statement and
mail such Proxy Statement to their respective shareholders, (ii) the Parties
shall furnish to each other all information concerning them that they may
reasonably request in connection with such Proxy Statement, (iii) the Boards of
Directors of CBI and Ridgeway shall recommend to their respective shareholders
the approval of the matters submitted for approval, and (iv) the Boards of
Directors and officers of CBI and Ridgeway shall use their respective reasonable
efforts to obtain such shareholders' approvals, provided that either may
withdraw, modify, or change in an adverse manner to the other its
recommendations if its Board of Directors, after having consulted with and based
upon the advice of outside counsel, determines in good faith that the failure to
so withdraw, modify, or change its recommendation could reasonably constitute a
breach of the fiduciary duties of its Board of Directors under applicable Law.
In addition, nothing in this Section 8.1 or elsewhere in this Agreement shall
prohibit accurate disclosure by either of information that is required to be
disclosed in the Registration Statement or the Proxy Statement or in any other
document required to be filed with the SEC (including, without limitation, a
Solicitation/Recommendation Statement on Schedule 14D-9) or otherwise required
to be publicly disclosed by applicable Law or regulations or, in the case of
CBI, rules of the AMEX.
8.2 Applications. As soon as reasonably practicable after the execution
of this Agreement, CBI shall prepare and file, and Ridgeway shall cooperate in
the preparation and, where appropriate, filing of, applications with all
Regulatory Authorities having jurisdiction over the transactions contemplated by
this Agreement seeking the requisite Consents necessary to consummate the
transactions contemplated by this Agreement. CBI shall use all reasonable
efforts to obtain the requisite Consents of all Regulatory Authorities as soon
as reasonably practicable after the filing of the appropriate applications. CBI
will promptly furnish to Ridgeway copies of applications filed with all
Regulatory Authorities and copies of written communications received by CBI from
any Regulatory Authorities with respect to the transactions contemplated hereby.
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8.3 Filings with Secretary of State. Upon the terms and subject to the
conditions of this Agreement, CBI shall execute and file the Articles of Merger
with the Secretary of State of the State of South Carolina in connection with
the Closing.
8.4 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as
reasonably practicable after the date of this Agreement, the transactions
contemplated by this Agreement, including, without limitation, using its
reasonable efforts to lift or rescind any Order adversely affecting its ability
to consummate the transactions contemplated herein and to cause to be satisfied
the conditions referred to in Article 9 of this Agreement; provided, that
nothing herein shall preclude either Party from exercising its rights under this
Agreement. Each Party shall use, and shall cause each of its Subsidiaries to
use, its reasonable efforts to obtain as promptly as practicable all Consents
necessary or desirable for the consummation of the transactions contemplated by
this Agreement.
8.5 Investigation and Confidentiality.
(a) Prior to the Effective Time, each Party shall keep the other Party
advised of all Material developments relevant to its business and to
consummation of the Merger and shall permit the other Party to make or cause to
be made such investigation of the business and properties of it and its
Subsidiaries and of their respective financial and legal conditions as the other
Party reasonably requests, provided that such investigation shall be reasonably
related to the transactions contemplated hereby and shall not interfere
unnecessarily with normal operations. No investigation by a Party shall affect
the representations and warranties of the other Party.
(b) Each Party shall, and shall cause its advisers and agents to,
maintain the confidentiality of all confidential information furnished to it by
the other Party concerning its and its Subsidiaries' businesses, operations, and
financial positions to the extent required by, and in accordance with
confidentiality agreements between the Parties, and shall not use such
information for any purpose except in furtherance of the transactions
contemplated by this Agreement. If this Agreement is terminated prior to the
Effective Time, each Party shall promptly return or certify the destruction of
all documents and copies thereof, and all work papers containing confidential
information received from the other Party.
(c) Each Party agrees to give the other Party notice as soon as
practicable after any determination by it of any fact or occurrence relating to
the other Party which it has discovered through the course of its investigation
and which represents, or is reasonably likely to represent, either a Material
breach of any representation, warranty, covenant, or agreement of the other
Party or which has had or is reasonably likely to have a Material Adverse Effect
on the other Party; provided, however, that the giving of such notice shall not
be dispositive of the occurrence of such breach or a Material Adverse Effect.
(d) Neither Party nor any of their respective Subsidiaries shall be
required to provide access to or to disclose information where such access or
disclosure would violate or prejudice the rights of its customers, jeopardize
the attorney-client or similar privilege with respect to such information or
contravene any Law, rule, regulation, Order, judgment, decree, fiduciary duty,
or agreement entered into prior to the date of this Agreement. The Parties will
use their reasonable efforts to make appropriate substitute disclosure
arrangements, to the extent practicable, in circumstances in which the
restrictions of the preceding sentence apply.
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8.6 Press Releases. Prior to the Effective Time, CBI and Ridgeway shall
consult with each other as to the form and substance of any press release
Materially related to this Agreement or any other transaction contemplated
hereby; provided, that nothing in this Section 8.6 shall be deemed to prohibit
any Party from making any disclosure which its counsel deems necessary or
advisable in order to satisfy such Party's disclosure obligations imposed by
Law.
8.7 No Solicitation. Except with respect to this Agreement and the
transactions contemplated hereby, Ridgeway agrees that it shall not, and shall
use its reasonable efforts to cause its officers, directors, agents, Affiliates,
and Representatives not to, directly or indirectly, initiate, solicit, encourage
or knowingly facilitate (including by way of furnishing confidential
information) any inquiries or the making of any Acquisition Proposal.
Notwithstanding anything herein to the contrary, Ridgeway and its Board of
Directors shall be permitted (i) to the extent applicable, to comply with Rule
14d-9 and Rule 14e-2 promulgated under the 1934 Act with regard to an
Acquisition Proposal, (ii) to engage in any discussions or negotiations with, or
provide any information to, any Person in response to an unsolicited bona fide
written Acquisition Proposal by any such Person, if and only to the extent that
(a) Ridgeway's Board of Directors concludes in good faith and consistent with
its fiduciary duties to Ridgeway's shareholders under applicable Law that such
Acquisition Proposal could reasonably be expected to result in a Superior
Proposal, (b) prior to providing any information or data to any Person in
connection with an Acquisition Proposal by any such Person, Ridgeway's Board of
Directors receives from such Person an executed confidentiality agreement, and
(c) prior to providing any information or data to any Person or entering into
discussions or negotiations with any Person, Ridgeway's Board of Directors
notifies CBI promptly of such inquiries, proposals, or offers received by, any
such information requested from, or any such discussions or negotiations sought
to be initiated or continued with, any of its Representatives indicating, in
connection with such notice, the name of such Person and the Material terms and
conditions of any inquiries, proposals or offers. Ridgeway agrees that it will
promptly keep CBI informed of the status and terms of any such proposals or
offers and the status and terms of any such discussions or negotiations.
Ridgeway agrees that it will, and will cause its officers, directors and
Representatives to, immediately cease and cause to be terminated any activities,
discussions, or negotiations existing as of the date of this Agreement with any
parties conducted heretofore with respect to any Acquisition Proposal. Ridgeway
agrees that it will use reasonable best efforts to promptly inform its
directors, officers, key employees, agents, and Representatives of the
obligations undertaken in this Section 8.7. Nothing in this Section 8.7 shall
(i) permit Ridgeway to terminate this Agreement (except as specifically provided
in Article 10 of this Agreement) or (ii) affect any other obligation of CBI or
Ridgeway under this Agreement.
8.8 Tax Treatment. Each of the Parties undertakes and agrees to use its
reasonable efforts to cause the Merger, and to take no action which would cause
the Merger not, to qualify for treatment as a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code for federal income tax
purposes.
8.9 Agreement of Affiliates. Ridgeway has disclosed in Section 8.9 of
the Ridgeway Disclosure Memorandum each Person whom it reasonably believes may
be deemed an "affiliate" of Ridgeway for purposes of Rule 145 under the 1933
Act. Ridgeway shall use its reasonable efforts to cause each such Person to
deliver to CBI not later than the Effective Time, a written agreement, in
substantially the form of Section 4 of Exhibit 1, providing that such Person
will not sell, pledge, transfer, or otherwise dispose of the shares of Ridgeway
Common Stock held by such Person except as contemplated by such agreement or by
this Agreement and will not sell, pledge, transfer, or otherwise dispose of the
shares of CBI Common Stock to be received by such Person upon consummation of
the Merger except in compliance with applicable provisions of the 1933 Act and
the rules and regulations thereunder. Shares of CBI Common Stock issued to such
affiliates of Ridgeway in exchange for shares of Ridgeway Common Stock shall not
be transferable, regardless of whether each such affiliate has provided the
written agreement referred to in this Section 8.9 (and CBI shall be entitled to
place restrictive legends upon certificates for shares of CBI Common Stock
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issued to affiliates of Ridgeway pursuant to this Agreement to enforce the
provisions of this Section 8.9), except as provided herein. CBI shall not be
required to maintain the effectiveness of the Registration Statement under the
1933 Act for the purposes of resale of CBI Common Stock by such affiliates.
8.10 Continuation of Certain Benefits. Subsequent to the Closing, the
CBI shall offer or cause the Bank of Ridgeway to continue to offer to employees
and former employees (to the extent required by COBRA and other laws governing
post-employment benefits) of the Bank of Ridgeway receiving benefits from the
Bank of Ridgeway benefits substantially similar to those described in Section
8.10 of the Ridgeway Disclosure Memorandum. In the event that CBI transfers the
Bank of Ridgeway's employees into CBI's existing 401(k), profit sharing,
vacation, health, dental or other employee benefit plans (collectively, the "CBI
Plans") the CBI agrees to: (i) provide full credit for prior service with the
Bank of Ridgeway for purposes of eligibility and vesting under all any and all
such CBI Plans; and (ii) waive any preexisting conditions and waiting periods
with respect to the coverage requirements of any and all such CBI Plans. Nothing
in this Agreement shall prohibit CBI from terminating the Bank of Ridgeway's
existing defined benefit plan as permitted by applicable law. Bank of Ridgeway
employees shall be eligible to participate in CBI stock option plans on the same
basis as employees of CBI Companies.
8.11 Indemnification.
(a) From and after the Effective Time, in the event of any threatened
or actual claim, action, suit, proceeding, or investigation, whether civil,
criminal, or administrative, including, without limitation, any such claim,
action, suit, proceeding or investigation in which any person who is now, or has
been at any time prior to the date of this Agreement, or who becomes prior to
the Effective Time, a director or officer of Ridgeway or any Ridgeway Subsidiary
(the "Indemnified Parties") is, or is threatened to be, made a party based in
whole or in part on, or arising in whole or in part out of, or pertaining to (i)
the fact that he is or was a director, officer, or employee of Ridgeway, any of
the Ridgeway Subsidiaries, or any of their respective predecessors, or (ii) this
Agreement or any of the transactions contemplated hereby, whether in any case
asserted or arising before or after the Effective Time, CBI shall indemnify and
hold harmless, as and to the fullest extent permitted by Law, each such
Indemnified Party against any Liability (including reasonable attorneys' fees
and expenses in advance of the final disposition of any claim, suit, proceeding,
or investigation to each Indemnified Party to the fullest extent permitted by
Law upon receipt of any undertaking required by applicable Law), judgments,
fines, and amounts paid in settlement in connection with any such threatened or
actual claim, action, suit, proceeding, or investigation, and in the event of
any such threatened or actual claim, action, suit, proceeding, or investigation
(whether asserted or arising before or after the Effective Time), the
Indemnified Parties may retain counsel reasonably satisfactory to them;
provided, however, that (a) CBI shall have the right to assume the defense
thereof and upon such assumption CBI shall not be liable to any Indemnified
Party for any legal expenses of other counsel or any other expenses subsequently
incurred by any Indemnified Party in connection with the defense thereof, except
that if CBI elects not to assume such defense or counsel for the Indemnified
Parties reasonably advises the Indemnified Parties that there are issues which
raise conflicts of interest between CBI and the Indemnified Parties, the
Indemnified Parties may retain counsel reasonably satisfactory to them, and CBI
shall pay the reasonable fees and expenses of such counsel for the Indemnified
Parties, (b) CBI shall not be liable for any settlement effected without its
prior written consent (which consent shall not be unreasonably withheld), and
(c) CBI shall have no obligation hereunder to any Indemnified Party when and if
a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and nonappealable, that indemnification of
such Indemnified Party in the manner contemplated hereby is prohibited by
applicable Law. CBI's obligations under this Section 8.11(a) continue in full
force and effect for a period of six years after the Effective Time; provided,
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however, that all rights to indemnification in respect of any claim (a "Claim")
asserted or made within such period shall continue until the final disposition
of such Claim.
(b) CBI agrees that all rights to indemnification and all limitations
on Liability existing in favor of the directors, officers, and employees of
Ridgeway and its Subsidiaries (the "Covered Parties") as provided in their
respective Articles of Incorporation, Bylaws, or similar governing instruments
as in effect as of the date of this Agreement with respect to matters occurring
prior to the Effective Time shall survive the Merger and shall continue in full
force and effect, and shall be honored by such entities or their respective
successors as if they were the indemnifying party thereunder, without any
amendment thereto, for a period of six years after the Effective Time; provided,
however, that all rights to indemnification in respect of any Claim asserted or
made within such period shall continue until the final disposition of such
Claim; provided, further, however, that nothing contained in this Section
8.11(b) shall be deemed to preclude the liquidation, consolidation, or merger of
Ridgeway or any Ridgeway Subsidiary, in which case all of such rights to
indemnification and limitations on Liability shall be deemed to so survive and
continue notwithstanding any such liquidation, consolidation, or merger. Without
limiting the foregoing, in any case in which approval by CBI is required to
effectuate any indemnification, CBI shall direct, at the election of the
Indemnified Party, that the determination of any such approval shall be made by
independent counsel mutually agreed upon between CBI and the Indemnified Party.
(c) CBI, from and after the Effective Time, will directly or indirectly
cause the persons who served as directors or officers of Ridgeway at or before
the Effective Time to be covered by Ridgeway's existing directors' and officers'
liability insurance policy (provided that CBI may substitute therefor policies
of at least the same coverage and amounts containing terms and conditions which
are not less advantageous than such policy). Such insurance coverage, shall
commence at the Effective Time and will be provided for a period of no less than
three years after the Effective Time.
(d) If CBI or any of its successors or assigns shall consolidate with
or merge into any other Person and shall not be the continuing or surviving
Person of such consolidation or merger or shall transfer all or substantially
all of its Assets to any Person, then and in each case, proper provision shall
be made so that the successors and assigns of CBI shall assume the obligations
set forth in this Section 8.11.
(e) The provisions of this Section 8.11 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives.
8.12 Boards of Directors. After the Effective Time, the Bank of
Ridgeway will increase its board of directors by two members by adding two
directors designated by CBI. After the Effective Time, CBI will increase its
board of directors by three members. The vacancies will be filled by the Board
of Directors of CBI from the members of Ridgeway's current board of directors
and shall include the Chairman of the Board and the President of the Bank of
Ridgeway. The Chairman of the Board and the President of the Bank of Ridgeway
will become members of the executive committee of CBI's board of directors.
After the Effective Time, board fees for all outside directors of the Bank of
Ridgeway will be set at $300 per month.
8.13 Employment Agreement. CBI shall enter into the employment
agreement with William A. Harwell which is attached hereto as Exhibit 4 to be
effective at the Effective Time.
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ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
9.1 Conditions to Obligations of Each Party. The respective obligations
of each Party to perform this Agreement and to consummate the Merger and the
other transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parties pursuant to Section 11.6 of
this Agreement:
(a) Shareholder Approval. The shareholders of CBI and Ridgeway shall
have approved the Plan of Merger attached hereto as Exhibit 3, and the
consummation of the transactions contemplated hereby, as and to the extent
required by Law and by the provisions of any governing instruments.
(b) Regulatory Approvals. All Consents of, filings and registrations
with, and notifications to, all Regulatory Authorities required for consummation
of the Merger shall have been obtained or made and shall be in full force and
effect and all waiting periods required by Law shall have expired. No Consent
obtained from any Regulatory Authority which is necessary to consummate the
transactions contemplated hereby shall be conditioned or restricted in a manner
(excluding requirements relating to the raising of additional capital or the
disposition of Assets or deposits) which in the reasonable good faith judgment
of the Board of Directors of CBI would so Materially adversely impact the
economic or business benefits of the transactions contemplated by this Agreement
so as to render inadvisable the consummation of the Merger.
(c) Consents and Approvals. Each Party shall have obtained any and all
Consents required for consummation of the Merger (other than those referred to
in Section 9.1(b) of this Agreement) or for the preventing of any Default under
any Contract or Permit of such Party which, if not obtained or made, is
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on such Party after the Effective Time and no Consent obtained which is
necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner which in the reasonable good faith
judgment of the Board of Directors of CBI would so Materially adversely impact
the economic or business benefits of the transactions contemplated by this
Agreement so as to render inadvisable the consummation of the Merger.
(d) Legal Proceedings. No court or governmental or Regulatory Authority
of competent jurisdiction shall have enacted, issued, promulgated, enforced, or
entered any Law or Order (whether temporary, preliminary, or permanent) which is
then in effect which prohibits, restrains, or makes illegal consummation of the
transactions contemplated by this Agreement.
(e) Registration Statement. The Registration Statement shall be
effective under the 1933 Act, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, and no action, suit, proceeding,
or investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing.
(f) Tax Opinion. Each Party shall have received a written opinion from
Haynsworth Sinkler Boyd, P.A. in a form reasonably satisfactory to such Party
(the "Tax Opinion"), dated the date of the Effective Time, substantially to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Internal Revenue Code and the following tax
consequences will apply to the following groups. With respect to a holder of
Ridgeway Common Stock who exchanges all of such holder's Ridgeway Common Stock
solely for CBI Common Stock in the Merger (i) no gain or loss will be recognized
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by such holder (except with respect to any cash received in lieu of a fractional
share interest in CBI Common Stock), (ii) the tax basis of the CBI Common Stock
received (including fractional shares deemed received and redeemed) by holders
of Ridgeway Common Stock who exchange all of their Ridgeway Common Stock solely
for CBI Common Stock in the Merger will be the same as the tax basis of the
Ridgeway Common Stock surrendered in exchange for the CBI Common Stock (reduced
by an amount allocable to a fractional share interest in CBI Common Stock deemed
received and redeemed), and (iii) the holding period of the CBI Common Stock
received (including fractional shares deemed received and redeemed) by such
holder will be the same as the holding period of the Ridgeway Common Stock
surrendered in exchange therefor, provided that such Ridgeway Common Stock is
held as a capital Asset at the Effective Time. With respect to a holder of
Ridgeway Common Stock who exchanges all of such holder's Ridgeway Common Stock
for a combination of CBI Common Stock and cash pursuant to the Merger, (i) gain
(but not loss) will be recognized by such holder to the extent of the lesser of
(A) the realized gain of the holder with respect to all Ridgeway Common Stock
surrendered by such holder in the Merger and (B) the amount of cash received by
such holder; (ii) if the exchange with the holder does not have the effect of
the distribution of a dividend, the gain shall be treated as gain received from
the sale or exchange of an asset, and the holder will be treated as if CBI
issued to such holder (in addition to the number of shares of CBI Common Stock
actually received by such holder in the Merger) the number of shares of CBI
Common Stock that such holder could have received instead of the cash
distribution and then redeemed such shares for the amount of cash distributed to
such holder; (iii) if the exchange with the holder does not have the effect of
the distribution of a dividend, any such gain shall be treated as capital gain
if the Ridgeway Common Stock surrendered by such holder was held by such holder
as a capital asset at the Effective Time; (iv) the aggregate tax basis of the
CBI Common Stock received by such holder will equal (A) the aggregate tax basis
of the Ridgeway Common Stock surrendered by such holder in the Merger, reduced
by (B) the amount of cash received and (C) increased by the amount of any gain
recognized by such holder; and (v) the holding period of the CBI Common Stock
received (including shares deemed received and then redeemed) will be the same
as the holding period of the Ridgeway Common Stock surrendered by such holder in
the Merger, if such Ridgeway Common Stock is held by such holder as a capital
asset at the Effective Time. With respect to a holder of Ridgeway Common Stock
who exchanges all of such holder's Ridgeway Common Stock for cash pursuant to
the Merger, more likely than not, (i) such holder will be treated as if (A) such
holder sold all of such holder's Ridgeway Common Stock to CBI for cash or (B)
CBI issued to such holder the number of shares of CBI Common Stock that such
holder could have received instead of the cash distribution and then redeemed
such shares for the amount of cash distributed to such holder or CBI; (ii) if
the exchange with the holder is not essentially equivalent to a dividend, such
holder will recognize the full amount of such holder's realized gain or loss in
the Ridgeway Common Stock surrendered in the Merger. In rendering such Tax
Opinions, such counsel shall be entitled to rely upon representations of
officers of Ridgeway and CBI reasonably satisfactory in form and substance to
such counsel.
9.2 Conditions to Obligations of CBI. The obligations of CBI to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by CBI pursuant to Section 11.6(a) of this Agreement:
(a) Representations and Warranties. For purposes of this Section
9.2(a), representations and warranties of Ridgeway set forth in this Agreement
shall be accurate as of the date of this Agreement and as of the Effective Time
with the same effect as though all such representations and warranties had been
made on and as of the Effective Time (provided that representations and
warranties which speak as of the date of this Agreement or some other date shall
speak only as of such date). The representations and warranties of Ridgeway set
forth in Section 5.3 of this Agreement shall be true and correct (except for
inaccuracies which are de minimis in amount). The representations and warranties
of Ridgeway set forth in Sections 5.18, 5.20, and 5.21 of this Agreement shall
be true and correct in all Material respects. There shall not exist inaccuracies
in the representations and warranties of Ridgeway set forth in this Agreement
(including the representations and warranties set forth in Sections 5.3, 5.18,
5.20, and 5.21 of this Agreement) such that the aggregate effect of such
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inaccuracies has, or is reasonably likely to have, a Material Adverse Effect on
Ridgeway; provided that, for purposes of this sentence only, those
representations and warranties which are qualified by references to "Material,"
"Material Adverse Effect," or variations thereof, or to the "Knowledge" of
Ridgeway or to a matter being "known" by Ridgeway shall be deemed not to include
such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of Ridgeway to be performed and complied with pursuant
to this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all Material
respects.
(c) Certificates. Ridgeway shall have delivered to CBI (i) a
certificate, dated as of the Effective Time and signed on Ridgeway's behalf by
its duly authorized officers, to the effect that the conditions set forth in
Sections 9.2(a) and 9.2(b) of this Agreement have been satisfied, and (ii)
certified copies of resolutions duly adopted by (1) Ridgeway's Board of
Directors evidencing the taking of all corporate action necessary to authorize
the execution, delivery, and performance of this Agreement, and the consummation
of the transactions contemplated hereby, and (2) Ridgeway's shareholders
evidencing the approval of this Agreement, all in such reasonable detail as CBI
and its counsel shall request.
(d) Dissenting Shareholders. The number of shares of Ridgeway Common
Stock as to which dissenter's rights have been and remain perfected shall not
exceed 4,000 shares.
9.3 Conditions to Obligations of Ridgeway. The obligations of Ridgeway
to perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following conditions,
unless waived by Ridgeway pursuant to Section 11.6(b) of this Agreement:
(a) Representations and Warranties. For purposes of this Section
9.3(a), the representations and warranties of CBI set forth in this Agreement
shall be accurate as of the date of this Agreement and as of the Effective Time
with the same effect as though all such representations and warranties had been
made on and as of the Effective Time (provided that representations and
warranties which speak as of the date of this Agreement or some other date shall
speak only as of such date). The representations and warranties of CBI set forth
in Section 6.3 of this Agreement shall be true and correct (except for
inaccuracies which are de minimis in amount). The representations and warranties
of CBI set forth in Section 6.12 of this Agreement shall be true and correct in
all Material respects. There shall not exist inaccuracies in the representations
and warranties of CBI set forth in this Agreement (including the representations
and warranties set forth in Sections 6.3 and 6.12 of this Agreement) such that
the aggregate effect of such inaccuracies has, or is reasonably likely to have,
a Material Adverse Effect on CBI; provided that, for purposes of this sentence
only, those representations and warranties which are qualified by references to
"Material," "Material Adverse Effect," or variations thereof, or to the
"Knowledge" of CBI or to a matter being "known" by CBI shall be deemed not to
include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of CBI to be performed and complied with pursuant to
this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all Material
respects.
(c) Certificates. CBI shall have delivered to Ridgeway (i) a
certificate, dated as of the Effective Time and signed on CBI's behalf by its
duly authorized officers, to the effect that the conditions set forth in
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Sections 9.3(a) and 9.3(b) of this Agreement have been satisfied, and (ii)
certified copies of resolutions duly adopted by CBI's Board of Directors
evidencing the taking of all corporate action necessary to authorize the
execution, delivery, and performance of this Agreement, and the consummation of
the transactions contemplated hereby, all in such reasonable detail as Ridgeway
and its counsel shall request.
ARTICLE 10
TERMINATION
10.1 Termination. Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement by the
shareholders of Ridgeway, this Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time:
(a) By mutual consent of the Board of Directors of CBI and the Board of
Directors of Ridgeway; or
(b) By the Board of Directors of either Party (provided that the
terminating Party is not then in breach of any representation or warranty
contained in this Agreement under the applicable standard set forth in Section
9.2(a) of this Agreement in the case of Ridgeway and Section 9.3(a) of this
Agreement in the case of CBI or in Material breach of any covenant or other
agreement contained in this Agreement) in the event of an inaccuracy of any
representation or warranty of the other Party contained in this Agreement which
cannot be or has not been cured within 30 days after the giving of written
notice to the breaching Party of such inaccuracy and which inaccuracy would
provide the terminating Party the ability to refuse to consummate the Merger
under the applicable standard set forth in Section 9.2(a) of this Agreement in
the case of Ridgeway and Section 9.3(a) of this Agreement in the case of CBI; or
(c) By the Board of Directors of either Party (provided that the
terminating Party is not then in breach of any representation or warranty
contained in this Agreement under the applicable standard set forth in Section
9.2(a) of this Agreement in the case of Ridgeway and Section 9.3(a) in the case
of CBI or in Material breach of any covenant or other agreement contained in
this Agreement) in the event of a Material breach by the other Party of any
covenant or agreement contained in this Agreement which cannot be or has not
been cured within 30 days after the giving of written notice to the breaching
Party of such breach; or
(d) By the Board of Directors of either Party in the event (i) any
Consent of any Regulatory Authority required for consummation of the Merger and
the other transactions contemplated hereby shall have been denied by final
nonappealable action of such authority, or (ii) the shareholders of CBI or
Ridgeway fail to vote their approval of this Agreement at the Shareholders'
Meeting where this Agreement was presented to such shareholders for approval and
voted upon; or
(e) By the Board of Directors of either Party in the event that the
Merger shall not have been consummated by December 31, 2002, if the failure to
consummate the transactions contemplated hereby on or before such date is not
caused by any breach of this Agreement by the Party electing to terminate
pursuant to this Section 10.1(e).
10.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 10.1 of this Agreement, this
Agreement shall become void and have no effect, and none of CBI, Ridgeway, any
of their respective Subsidiaries, or any of the officers or directors of any of
them, shall have any Liability of any nature whatsoever hereunder or in
conjunction with the transactions contemplated hereby, except that (i) the
provisions of Section 8.5(b) of this Agreement, this Section 10.2, Section 10.3,
Section 10.4 and Article 11 of this Agreement shall survive any such termination
and abandonment, and (ii) a termination of this Agreement shall not relieve the
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breaching Party from Liability for an uncured willful breach of a
representation, warranty, covenant, or agreement of such Party contained in this
Agreement.
10.3 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time, except for those covenants and
agreements which by their terms apply in whole or in part after the Effective
Time.
10.4 Termination Fee. Ridgeway shall pay to CBI upon demand a
termination fee of $300,000 if a Triggering Event shall occur. For the purposes
of this letter, a Triggering Event shall occur if (a) the transaction
contemplated by this Agreement is not consummated (other than as a result of a
material breach of the Agreement by CBI, or as a result of a failure by CBI to
enter into the employment contract required in Section 8.13, or as a result of a
failure to obtain regulatory approval of the Merger on terms acceptable to the
boards of directors of Ridgeway and CBI, or as a result of Ridgeway's good faith
exercise of any right to terminate the Agreement that is available to Ridgeway
therein), and (b) within one year of the date of this Agreement any of the
following events occur: (i) Ridgeway is acquired by merger or otherwise by any
person other than a receiver appointed by state or federal regulatory
authorities or CBI or any of its affiliates (an "Acquiror"); (ii) any Acquiror
acquires more than 25% in value of the consolidated total assets of Ridgeway,
or, if such Acquiror who already owns 25% in value of the consolidated total
assets of Ridgeway, acquires any more than 25%; (iii) Ridgeway adopts a plan of
liquidation or a restructuring or recapitalization plan involving the
disposition to any such party of more than 25% in value of the consolidated
total assets of Ridgeway; (iv) Ridgeway declares an extraordinary dividend or
distribution, whether in cash or other property, equal to more than 25% of its
consolidated net worth; (v) Ridgeway or any subsidiary of Ridgeway repurchases
more than 25% of the then outstanding shares of common stock of Ridgeway; (vi) a
transaction or transactions occur involving the transfer to any Acquiror of
direct or indirect beneficial ownership (as defined in Rule 13d-3 promulgated
under the 1934 Act) of securities representing, or the right to acquire
beneficial ownership of or to vote securities (or which could result in the
acquisition of beneficial ownership of or the right to vote securities)
representing, more than 25% of the then outstanding voting securities of
Ridgeway; or (vii) Ridgeway enters into an agreement with an Acquiror other than
CBI or any of its affiliates to effectuate any of the foregoing transactions.
ARTICLE 11
MISCELLANEOUS
11.1 Definitions.
(a) Except as otherwise provided herein, the capitalized terms set
forth below shall have the following meanings:
"Acquisition Proposal" with respect to a Party shall mean any tender
offer or exchange offer or any proposal for a merger, acquisition of all of the
stock or Assets of, or other business combination involving such Party or any of
its Subsidiaries or the acquisition of a substantial equity interest in, or a
substantial portion of the Assets of, such Party or any of its Subsidiaries.
"Affiliate" of a Person shall mean any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person.
"Agreement" shall mean this Agreement and Plan of Merger, including the
Exhibits delivered pursuant hereto and incorporated herein by reference.
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"AMEX" shall mean the American Stock Exchange.
" Articles of Merger" shall mean the Articles of Merger executed by CBI
and filed with the Secretary of State of the State of South Carolina relating to
the Merger as contemplated by Section 1.1 of this Agreement.
"Assets" of a Person shall mean all of the assets, properties,
businesses, and rights of such Person of every kind, nature, character, and
description, whether real, personal, or mixed, tangible or intangible, accrued
or contingent, or otherwise relating to or utilized in such Person's business,
directly or indirectly, in whole or in part, whether or not carried on the books
and records of such Person, and whether or not owned in the name of such Person
or any Affiliate of such Person and wherever located.
"Average Closing Price" shall mean the average of the daily last sales
prices of CBI Common Stock as reported on the AMEX (as reported by The Wall
Street Journal or, if not reported thereby, another authoritative source agreed
to by Ridgeway and CBI) for the ten consecutive full trading days in which such
shares are traded on the AMEX which end five business days before the mailing of
the Proxy Statement for the Shareholders' Meetings.
"BHC Act" shall mean the federal Bank Holding Company Act of 1956, as
amended.
"CBI Common Stock" shall mean the no par value common stock of CBI.
"CBI Companies" shall mean, collectively, CBI and all CBI Subsidiaries.
"CBI Financial Statements" shall mean (i) the consolidated statements
of condition (including related notes and schedules, if any) of CBI as of
September 30, 2001 and as of December 31, 2000 and 1999, and the related
statements of income, changes in shareholders' equity, and cash flows (including
related notes and schedules, if any) for the three months ended September 30,
2001 and for each of the three years ended December 31, 2000, 1999, and 1998, as
filed by CBI in SEC Documents, and (ii) the consolidated statements of condition
of CBI (including related notes and schedules, if any) and related statements of
income, changes in shareholders' equity, and cash flows (including related notes
and schedules, if any) included in SEC Documents filed with respect to periods
ended subsequent to September 30, 2001.
"CBI Subsidiaries" shall mean the Subsidiaries of CBI and any
corporation, bank, savings association, or other organization acquired as a
Subsidiary of CBI in the future and owned by CBI at the Effective Time.
"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"Contract" shall mean any written or oral agreement, arrangement,
commitment, contract, indenture, instrument, lease, understanding, or
undertaking of any kind or character to which any Person is a party or that is
binding on any Person or its capital stock, Assets, or business.
"Default" shall mean (i) any breach or violation of or default under
any Contract, Order, or Permit, (ii) any occurrence of any event that with the
passage of time or the giving of notice or both would constitute a breach or
violation of or default under any Contract, Order, or Permit, or (iii) any
occurrence of any event that with or without the passage of time or the giving
of notice would give rise to a right to terminate or revoke, change the current
terms of, or renegotiate, or to accelerate, increase, or impose any Liability
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under, any Contract, Order, or Permit, where, in any such event, such Default is
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on a Party.
"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface, or subsurface strata) and which are
administered, interpreted, or enforced by the United States Environmental
Protection Agency and state and local agencies with jurisdiction over, and
including common law in respect of, pollution or protection of the environment,
including the Comprehensive Environmental Response Compensation and Liability
Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource Conservation
and Recovery Act, as amended, 42 U.S.C. 6901 et seq., and other Laws relating to
emissions, discharges, releases, or threatened releases of any Hazardous
Material, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of any Hazardous
Material.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Exhibits" 1, 2, 3 and 4, inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be referred to
in this Agreement and any other related instrument or document without being
attached hereto.
"GAAP" shall mean generally accepted accounting principles,
consistently applied during the periods involved.
"Hazardous Material" shall mean (i) any hazardous substance, hazardous
material, hazardous waste, regulated substance, or toxic substance (as those
terms are defined by any applicable Environmental Laws), and (ii) any chemicals,
pollutants, contaminants, petroleum, petroleum products that are or become
regulated under any applicable local, state, or federal Law (and specifically
shall include asbestos requiring abatement, removal, or encapsulation pursuant
to the requirements of governmental authorities and any polychlorinated
biphenyls).
"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title
II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations promulgated thereunder.
"Intellectual Property" shall mean copyrights, patents, trademarks,
service marks, service names, trade names, applications therefor, technology
rights and licenses, computer software (including any source or object codes
therefor or documentation relating thereto), trade secrets, franchises,
know-how, inventions and other intellectual property rights.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder.
"Investment Company" shall have the meaning set forth in the Investment
Company Act.
"Knowledge" as used with respect to a Person (including references to
such Person being aware of a particular matter) shall mean the personal
knowledge of the chairman, president, or chief financial officer of such Person.
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"Law" shall mean any code, law, ordinance, regulation, rule, or statute
applicable to a Person or its Assets, Liabilities, or business, including those
promulgated, interpreted, or enforced by any Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost, or expense (including costs
of investigation, collection, and defense), claim, deficiency, or guaranty of
any type, whether accrued, absolute or contingent, liquidated or unliquidated,
matured or unmatured, or otherwise.
"Lien" shall mean any mortgage, pledge, reservation, restriction (other
than a restriction on transfers arising under the Securities Laws), security
interest, or claim, lien, or encumbrance of any nature whatsoever of, on, or
with respect to any property or property interest, other than (i) Liens for
property Taxes not yet due and payable, and (ii) for depository institution
Subsidiaries of a Party, pledges to secure deposits, and other Liens incurred in
the ordinary course of the banking business.
"Litigation" shall mean any action, arbitration, cause of action,
claim, complaint, criminal prosecution, demand letter, governmental or other
examination or investigation, hearing, inquiry, administrative or other
proceeding, or notice (written or oral) by any Person alleging potential
Liability, but shall not include regular, periodic examinations of depository
institutions and their Affiliates by Regulatory Authorities.
"Loan Property" shall mean any property owned, leased, or operated by
the Party in question or by any of its Subsidiaries or in which such Party or
Subsidiary holds a security or other interest (including an interest in a
fiduciary capacity), and, where required by the context, includes the owner or
operator of such property, but only with respect to such property.
"Material" for purposes of this Agreement shall be determined in light
of the facts and circumstances of the matter in question; provided that any
specific monetary amount stated in this Agreement shall determine materiality in
that instance.
"Material Adverse Effect" on a Party shall mean an event, change, or
occurrence which, individually or together with any other event, change, or
occurrence, has a Material adverse impact on (i) the financial condition,
results of operations, or business of such Party and its Subsidiaries, taken as
a whole, or (ii) the ability of such Party to perform its obligations under this
Agreement or to consummate the Merger or the other transactions contemplated by
this Agreement, provided that "Material Adverse Effect" shall not be deemed to
include the impact of (a) changes in banking and similar Laws of general
applicability or interpretations thereof by courts or governmental authorities,
(b) changes in GAAP or regulatory accounting principles generally applicable to
banks, investment banks, broker-dealers, and their holding companies, (c)
actions and omissions of a Party (or any of its Subsidiaries) taken with the
prior informed consent of the other Party in contemplation of the transactions
contemplated hereby, (d) general economic or market conditions or the securities
industry in general, and (e) this Agreement or the announcement thereof.
"1933 Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
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"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or writ
of any federal, state, local, or foreign or other court, arbitrator, mediator,
tribunal, administrative agency, or Regulatory Authority.
"Participation Facility" shall mean any facility or property in which
the Party in question or any of its Subsidiaries participates in the management,
as such term is defined in CERCLA (including, but not limited to, participating
in a fiduciary capacity), and, where required by the context, said term means
the owner or operator of such facility or property, but only with respect to
such facility or property.
"Party" shall mean either Ridgeway or CBI, and "Parties" shall mean
both Ridgeway and CBI.
"Permit" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license, or
permit from governmental authorities that is required for the operation of a
Party's respective businesses.
"Person" shall mean a natural person or any legal, commercial, or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"Proxy Statement" shall mean the joint proxy statement used by Ridgeway
and CBI to solicit the approval of their respective shareholders of the
transactions contemplated by this Agreement, which shall include the prospectus
of CBI relating to the issuance of the CBI Common Stock to holders of Ridgeway
Common Stock.
"Reasonable Efforts" shall mean the reasonable best efforts of a Party,
but shall not require any Party to take any commercially unreasonable action.
"Registration Statement" shall mean the Registration Statement on Form
S-4, or other appropriate form, including any pre-effective or post-effective
amendments or supplements thereto, filed with the SEC by CBI under the 1933 Act
with respect to the shares of CBI Common Stock to be issued to the shareholders
of Ridgeway in connection with the transactions contemplated by this Agreement.
"Regulatory Authorities" shall mean, collectively, the Federal Trade
Commission, the United States Department of Justice, the Board of the Governors
of the Federal Reserve System, the Office of the Comptroller of the Currency,
the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the
Internal Revenue Service, all state regulatory agencies having jurisdiction over
the Parties and their respective Subsidiaries, the NASD, the AMEX, and the SEC.
"Representative" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative of a Person.
"Ridgeway Common Stock" shall mean no par value common stock of
Ridgeway.
"Ridgeway Companies" shall mean, collectively, Ridgeway and all
Ridgeway Subsidiaries including The Bank of Ridgeway.
"Ridgeway Disclosure Memorandum" shall mean the written information
entitled "Ridgeway Disclosure Memorandum" delivered prior to the execution of
this Agreement to CBI describing in reasonable detail the matters contained
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therein and, with respect to each disclosure made therein, specifically
referencing each Section or subsection of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section or
subsection shall not be deemed to be disclosed for any other Section or
subsection of this Agreement. The inclusion of any matter in this document shall
not be deemed an admission or otherwise to imply that any such matter is
Material for purposes of this Agreement.
"Ridgeway Financial Statements" shall mean (i) the consolidated
statements of condition (including related notes and schedules, if any) of
Ridgeway as of September 30, 2001, and as of December 31, 2000, and 1999, and
the related statements of income, changes in shareholders' equity, and cash
flows (including related notes and schedules, if any) for the three months ended
September 30, 2001 and for each of the three years ended December 31, 2000,
1999, and 1998, included in the Ridgeway Disclosure Memorandum, and (ii) the
consolidated statements of condition of Ridgeway (including related notes and
schedules, if any) and related statements of income, changes in shareholders'
equity, and cash flows (including related notes and schedules, if any) with
respect to periods ended subsequent to September 30, 2001.
"Ridgeway Stock Plans" shall mean any existing stock option and other
stock-based compensation plans of Ridgeway, including, without limitation, the
stock option plans and programs of any Persons acquired by Ridgeway or a
Ridgeway Subsidiary.
"Ridgeway Subsidiaries" shall mean the Subsidiaries of Ridgeway, which
shall include the Ridgeway Subsidiaries described in Section 5.4 of this
Agreement and any corporation, bank, savings association, or other organization
acquired as a Subsidiary of Ridgeway in the future and owned by Ridgeway at the
Effective Time.
"Rights" shall mean, with respect to any Person, securities, or
obligations convertible into or exercisable for, or giving any Person any right
to subscribe for or acquire, or any options, calls, or commitments relating to,
or any stock appreciation right or other instrument the value of which is
determined in whole or in part by reference to the market price or value of,
shares of capital stock of such Person.
"SCBCA" shall mean the South Carolina Business Corporation Act, as
amended.
"SEC" shall mean the United States Securities and Exchange Commission.
"SEC Documents" shall mean all forms, proxy statements, registration
statements, reports, schedules, and other documents filed, or required to be
filed, by a Party or any of its Subsidiaries with the SEC.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the Investment
Company Act, the Investment Advisers Act, the Trust Indenture Act of 1939, as
amended, and the rules and regulations of any Regulatory Authority promulgated
thereunder.
"Shareholders' Meeting" shall mean the meeting of the shareholders of
CBI or Ridgeway to be held pursuant to Section 8.1 of this Agreement, including
any adjournment or adjournments thereof.
"Subsidiaries" shall mean all those corporations, banks, associations,
or other entities of which the entity in question owns or controls 50% or more
of the outstanding equity securities either directly or through an unbroken
chain of entities as to each of which 50% or more of the outstanding equity
securities is owned directly or indirectly by its parent; provided, there shall
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not be included any such entity acquired through foreclosure or any such entity
the equity securities of which are owned or controlled in a fiduciary capacity.
"Superior Proposal" means, with respect to Ridgeway, any written
Acquisition Proposal made by a Person other than CBI which is for (i) (a) a
merger, reorganization, consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution, or similar transaction involving
Ridgeway as a result of which either (1) Ridgeway's shareholders prior to such
transaction (by virtue of their ownership of Ridgeway's shares) in the aggregate
cease to own at least 50% of the voting securities of the entity surviving or
resulting from such transaction (or the ultimate parent entity thereof) or (2)
the individuals comprising the Board of Directors of Ridgeway prior to such
transaction do not constitute a majority of the board of directors of such
ultimate parent entity, (b) a sale, lease, exchange, transfer, or other
disposition of at least 50% of the Assets of Ridgeway and its Subsidiaries,
taken as a whole, in a single transaction or a series of related transactions,
or (c) the acquisition, directly or indirectly, by a Person of beneficial
ownership of 25% or more of the common stock of Ridgeway whether by merger,
consolidation, share exchange, business combination, tender, or exchange offer
or otherwise, and (ii) which is otherwise on terms which the Board of Directors
of Ridgeway in good faith concludes (after consultation with its financial
advisors and outside counsel), taking into account, among other things, all
legal, financial, regulatory, and other aspects of the proposal and the Person
making the proposal, (a) would, if consummated, result in a transaction that is
more favorable to its shareholders (in their capacities as shareholders), from a
financial point of view, than the transactions contemplated by this Agreement,
and (b) is reasonably capable of being completed.
"Support Agreement" shall mean the various support agreements, each in
substantially the form of Exhibit 1 (as to Ridgeway directors) or Exhibit 2 (as
to CBI directors).
"Surviving Corporation" shall mean CBI as the surviving corporation
resulting from the Merger.
"Tax" or "Taxes" shall mean all federal, state, local, and foreign
taxes, levies, imposts, duties, or other like assessments, including income,
gross receipts, excise, employment, sales, use, transfer, license, payroll,
franchise, severance, stamp, occupation, windfall profits, environmental,
federal highway use, commercial rent, customs duties, capital stock, paid-up
capital, profits, withholding, Social Security, single business and
unemployment, disability, real property, personal property, registration, ad
valorem, value added, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever, imposed or required to be withheld by the United States or
any state, local, or foreign government or subdivision or agency thereof,
including any related interest and penalties, or additions thereto.
"Tax Return" shall mean any report, return, information return, or
other information required to be supplied to a taxing authority in connection
with Taxes, including any return of an affiliated or combined or unitary group
that includes a Party or its Subsidiaries.
"Taxable Period" shall mean any period prescribed by any governmental
authority, including the United States or any state, local, or foreign
government or subdivision or agency thereof for which a Tax Return is required
to be filed or Tax is required to be paid.
(b) The terms set forth below shall have the meanings ascribed thereto
in the referenced sections:
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CBI SEC Reports Section 6.5(a)
Claim Section 8.11(a)
Closing Section 1.2
Continuing Employees Section 8.10
Covered Parties Section 8.11(b)
Effective Time Section 1.3
Exchange Agent Section 4.1
Exchange Ratio Section 3.1(b)
Indemnified Parties Section 8.11(a)
Merger Section 1.1
Ridgeway Benefit Plans Section 5.13(a)
Ridgeway Contracts Section 5.14(a)
Ridgeway ERISA Affiliate Section 5.13(e)
Ridgeway ERISA Plan Section 5.13(a)
Ridgeway Options Section 3.6(a)
Ridgeway Pension Plan Section 5.13(a)
Takeover Laws Section 5.20
Tax Opinion Section 9.1(f)
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes," or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses.
(a) Except as otherwise provided in this Section 11.2, each of the
Parties shall bear and pay all direct costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
filing, registration, and application fees, printing fees, and fees and expenses
of its own financial or other consultants, investment bankers, accountants, and
counsel, except that CBI shall bear and pay the filing fees payable in
connection with the Registration Statement and the Proxy Statement and the
printing costs incurred in connection with the printing of the Registration
Statement and the Proxy Statement.
(b) Nothing contained in this Section 11.2 shall constitute or shall be
deemed to constitute liquidated damages for the willful breach by a Party of the
terms of this Agreement or otherwise limit the rights of the nonbreaching Party.
11.3 Brokers and Finders. Each of the Parties represents and warrants
that neither it nor any of its officers, directors, employees, or Affiliates has
employed any broker or finder or incurred any Liability for any financial
advisory fees, investment bankers' fees, brokerage fees, commissions, or
finders' fees in connection with this Agreement or the transactions contemplated
hereby. In the event of a claim by any broker or finder based upon his, her, or
its representing or being retained by or allegedly representing or being
retained by Ridgeway or CBI, each of Ridgeway and CBI, as the case may be,
agrees to indemnify and hold the other Party harmless of and from any Liability
in respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided herein,
this Agreement (including the Ridgeway Disclosure Memorandum) constitutes the
entire agreement between the Parties with respect to the transactions
contemplated hereunder and supersedes all prior arrangements or understandings
with respect thereto, written or oral. Nothing in this Agreement expressed or
implied, is intended to confer upon any Person, other than the Parties or their
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respective successors, any rights, remedies, obligations, or liabilities under
or by reason of this Agreement other than as provided for in Sections 8.9 and
8.11 of this Agreement.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of the Boards of Directors of each of the Parties, whether before or after
shareholder approval of this Agreement has been obtained; provided, that the
provisions of this Agreement relating to the manner or basis in which shares of
Ridgeway Common Stock will be exchanged for CBI Common Stock or cash shall not
be amended after the Shareholders' Meeting without the requisite approval of the
holders of the issued and outstanding shares of Ridgeway Common Stock entitled
to vote thereon.
11.6 Waivers.
(a) Prior to or at the Effective Time, CBI, acting through its Board of
Directors, chief executive officer, chief financial officer, or other officer
designated by CBI's Board of Directors, shall have the right to waive any
Default in the performance of any term of this Agreement by Ridgeway, to waive
or extend the time for the compliance or fulfillment by Ridgeway of any and all
of its obligations under this Agreement, and to waive any or all of the
conditions precedent to the obligations of CBI under this Agreement, except any
condition which, if not satisfied, would result in the violation of any Law. No
such waiver shall be effective unless in writing signed by a duly authorized
officer of CBI except that any unfulfilled conditions shall be deemed to have
been waived at the Effective Time.
(b) Prior to or at the Effective Time, Ridgeway, acting through its
Board of Directors, chief executive officer, chief financial officer, or other
officer designated by Ridgeway's Board of Directors, shall have the right to
waive any Default in the performance of any term of this Agreement by CBI, to
waive or extend the time for the compliance or fulfillment by CBI of any and all
of its obligations under this Agreement, and to waive any or all of the
conditions precedent to the obligations of Ridgeway under this Agreement, except
any condition which, if not satisfied, would result in the violation of any Law.
No such waiver shall be effective unless in writing signed by a duly authorized
officer of Ridgeway except that any unfulfilled conditions shall be deemed to
have been waived at the Effective Time.
(c) The failure of any Party at any time or times to require
performance of any provision hereof shall in no manner affect the right of such
Party at a later time to enforce the same or any other provision of this
Agreement. No waiver of any condition or of the breach of any term contained in
this Agreement in one or more instances shall be deemed to be or construed as a
further or continuing waiver of such condition or breach or a waiver of any
other condition or of the breach of any other term of this Agreement.
11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other Party. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by the Parties and their respective successors and assigns.
11.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth below
(or at such other address as may be provided hereunder), and shall be deemed to
have been delivered as of the date so delivered:
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Ridgeway:
Ridgeway Bancshares, Inc.
100 Palmer Street
Ridgeway, South Carolina 29130
Facsimile Number: (803) 337-8268
Attention: William A. Harwell, President
Copy to Counsel:
M. Craig Garner, Jr., Esquire
McNair Law Firm, P.A.
17th Floor
1301 Gervais Street
Columbia, South Carolina 29201
Facsimile Number (803) 376-2277
CBI:
Community Bankshares, Inc.
791 Broughton Street
Orangeburg, South Carolina 29115
Facsimile Number: (803) 535-1065
Attention: E. J. Ayers, Chairman
Copy to Counsel:
George S. King, Jr., Esquire
Haynsworth Sinkler Boyd, P.A.
12th Floor
1426 Main Street
Columbia, South Carolina 29201
Facsimile Number (803) 765-1243
11.9 Governing Law. This Agreement shall be governed by and construed
in accordance with the Laws of the State of South Carolina, without regard to
any applicable principles of conflicts of Laws.
11.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.11 Captions. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
11.12 Interpretations. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any Party, whether under
any rule of construction or otherwise. No Party to this Agreement shall be
considered the draftsman. The Parties acknowledge and agree that this Agreement
has been reviewed, negotiated, and accepted by all Parties and their attorneys
and shall be construed and interpreted according to the ordinary meaning of the
words used so as fairly to accomplish the purposes and intentions of the
Parties.
11.13 Enforcement of Agreement. The Parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the Parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
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enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
11.14 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers thereunto and delivered as of the day and year first above
written.
RIDGEWAY BANCSHARES, INC COMMUNITY BANKSHARES, INC.
By:----------------------------------- By:----------------------------------
J. V. Nicholson, Jr., DMD E. J. Ayers, Jr.
Chairman of the Board of Directors Chairman of the Board of Directors
By:------------------------------------- By:----------------------------------
William A. Harwell William W. Traynham
President President
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APPENDIX B
CHAPTER 13.
DISSENTERS' RIGHTS
ARTICLE 1.
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
SECTION 33-13-101. Definitions.
In this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter before the
corporate action, or the surviving or acquiring corporation by merger or share
exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under Section 33-13-102 and who exercises that right when and in the
manner required by Sections 33-13-200 through 33-13-280.
(3) "Fair value", with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action to which the dissenter objects, excluding any appreciation
or depreciation in anticipation of the corporate action unless exclusion would
be inequitable. The value of the shares is to be determined by techniques that
are accepted generally in the financial community.
(4) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are registered in
the records of a corporation or the beneficial owner of shares to the extent of
the rights granted by a nominee certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
SECTION 33-13-102. Right to dissent.
(A) A shareholder is entitled to dissent from, and obtain payment of the fair
value of, his shares in the event of any of the following corporate actions:
(1)consummation of a plan of merger to which the corporation is a party (i) if
shareholder approval is required for the merger by Section 33-11-103 or the
articles of incorporation and the shareholder is entitled to vote on the merger
or (ii) if the corporation is a subsidiary that is merged with its parent under
Section 33-11-104 or 33-11-108 or if the corporation is a parent that is merged
with its subsidiary under Section 33-11-108;
(2) consummation of a plan of share exchange to which the corporation is a party
as the corporation whose shares are to be acquired, if the shareholder is
entitled to vote on the plan;
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(3) onsummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale must be distributed to the shareholders within one
year after the date of sale;
(4) an amendment of the articles of incorporation that materially and adversely
affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of the shares;
(ii) creates, alters, or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of the
shares;
(iii) alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities;
(iv) excludes or limits the right of the shares to vote on any matter, or to
cumulate votes, other than a limitation by dilution through issuance of shares
or other securities with similar voting rights; or
(v) reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
Section 33-6-104; or
(5) in the case of corporations which are not public corporations, the approval
of a control share acquisition under Article 1 of Chapter 2 of Title 35;
6) any corporate action to the extent the articles of incorporation, bylaws, or
a resolution of the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their shares.
(B) Notwithstanding subsection (A), no dissenters' rights under this section are
available for shares of any class or series of shares which, at the record date
fixed to determine shareholders entitled to receive notice of a vote at the
meeting of shareholders to act upon the agreement of merger or exchange, were
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc.
SECTION 33-13-103. Dissent by nominees and beneficial owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares to which he dissents and his other shares were registered in
the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held on
his behalf only if he dissents with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote. A
beneficial shareholder asserting dissenters' rights to shares held on his behalf
shall notify the corporation in writing of the name and address of the record
shareholder of the shares, if known to him.
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ARTICLE 2.
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
SECTION 33-13-200. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under Section 33-13-102 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in Section 33-13-220.
SECTION 33-13-210. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights (1) must give to the corporation before the
vote is taken written notice of his intent to demand payment for his shares if
the proposed action is effectuated and (2) must not vote his shares in favor of
the proposed action. A vote in favor of the proposed action cast by the holder
of a proxy solicited by the corporation shall not disqualify a shareholder from
demanding payment for his shares under this chapter.
(b) A shareholder who does not satisfy the requirements of subsection (a) is not
entitled to payment for his shares under this chapter.
SECTION 33-13-220. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Section 33-13-210(a).
(b) The dissenters' notice must be delivered no later than ten days after the
corporate action was taken and must:
(1) state where the payment demand must be sent and where certificates for
certificated shares must be deposited;
(2) inform holders of uncertificated shares to what extent transfer of the
shares is to be restricted after the payment demand is received;
(3) supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he or, if he is a nominee asserting dissenters' rights on
behalf of a beneficial shareholder, the beneficial shareholder acquired
beneficial ownership of the shares before that date;
(4) set a date by which the corporation must receive the payment demand, which
may not be fewer than thirty nor more than sixty days after the date the
subsection (a) notice is delivered and set a date by which certificates for
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certificated shares must be deposited, which may not be earlier than twenty days
after the demand date; and (5) be accompanied by a copy of this chapter.
SECTION 33-13-230. Shareholders' payment demand.
(a) A shareholder sent a dissenters' notice described in Section 33-13-220 must
demand payment, certify whether he (or the beneficial shareholder on whose
behalf he is asserting dissenters' rights) acquired beneficial ownership of the
shares before the date set forth in the dissenters' notice pursuant to Section
33-13-220(b)(3), and deposit his certificates in accordance with the terms of
the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not comply substantially with the requirements that
he demand payment and deposit his share certificates where required, each by the
date set in the dissenters' notice, is not entitled to payment for his shares
under this chapter.
SECTION 33-13-240. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from the
date the demand for payment for them is received until the proposed corporate
action is taken or the restrictions are released under Section 33-13-260.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
SECTION 33-13-250. Payment.
(a) Except as provided in Section 33-13-270, as soon as the proposed corporate
action is taken, or upon receipt of a payment demand, the corporation shall pay
each dissenter who substantially complied with Section 33-13-230 the amount the
corporation estimates to be the fair value of his shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) the corporation's balance sheet as of the end of a fiscal year ending not
more than sixteen months before the date of payment, an income statement for
that year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
(2) a statement of the corporation's estimate of the fair value of the shares
and an explanation of how the fair value was calculated;
(3) an explanation of how the interest was calculated;
(4) a statement of the dissenter's right to demand additional payment under
Section 33-13-280; and
(5) a copy of this chapter.
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SECTION 33-13-260. Failure to take action.
(a) If the corporation does not take the proposed action within sixty days after
the date set for demanding payment and depositing share certificates, the
corporation, within the same sixty-day period, shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Section 33-13-220 and repeat the payment demand
procedure.
SECTION 33-13-270. After-acquired shares.
(a) A corporation may elect to withhold payment required by section 33-13-250
from a dissenter as to any shares of which he (or the beneficial owner on whose
behalf he is asserting dissenters' rights) was not the beneficial owner on the
date set forth in the dissenters' notice as the date of the first announcement
to news media or to shareholders of the terms of the proposed corporate action,
unless the beneficial ownership of the shares devolved upon him by operation of
law from a person who was the beneficial owner on the date of the first
announcement.
(b) To the extent the corporation elects to withhold payment under subsection
(a), after taking the proposed corporate action, it shall estimate the fair
value of the shares, plus accrued interest, and shall pay this amount to each
dissenter who agrees to accept it in full satisfaction of his demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the fair value and interest were
calculated, and a statement of the dissenter's right to demand additional
payment under Section 33-13-280.
SECTION 33-13-280. Procedure if shareholder dissatisfied with payment or offer.
(a) A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due and demand payment of his
estimate (less any payment under Section 33-13-250) or reject the corporation's
offer under Section 33-13-270 and demand payment of the fair value of his shares
and interest due, if the:
(1) dissenter believes that the amount paid under Section 33-13-250 or offered
under Section 33-13-270 is less than the fair value of his shares or that the
interest due is calculated incorrectly;
(2) corporation fails to make payment under Section 33-13-250 or to offer
payment under Section 33-13-270 within sixty days after the date set for
demanding payment; or
(3) corporation, having failed to take the proposed action, does not return the
deposited certificates or release the transfer restrictions imposed on
uncertificated shares within sixty days after the date set for demanding
payment.
(b) A dissenter waives his right to demand additional payment under this section
unless he notifies the corporation of his demand in writing under subsection (a)
within thirty days after the corporation made or offered payment for his shares.
B-5
ARTICLE 3.
JUDICIAL APPRAISAL OF SHARES
SECTION 33-13-300. Court action.
(a) If a demand for additional payment under Section 33-13-280 remains
unsettled, the corporation shall commence a proceeding within sixty days after
receiving the demand for additional payment and petition the court to determine
the fair value of the shares and accrued interest. If the corporation does not
commence the proceeding within the sixty-day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit court of the
county where the corporation's principal office (or, if none in this State, its
registered office) is located. If the corporation is a foreign corporation
without a registered office in this State, it shall commence the proceeding in
the county in this State where the principal office (or, if none in this State,
the registered office) of the domestic corporation merged with or whose shares
were acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of this
State) whose demands remain unsettled parties to the proceeding as in an action
against their shares and all parties must be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or by publication, as
provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (b) is plenary and exclusive. The court may appoint persons as
appraisers to receive evidence and recommend decisions on the question of fair
value. The appraisers have the powers described in the order appointing them or
in any amendment to it. The dissenters are entitled to the same discovery rights
as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment for
the amount, if any, by which the court finds the fair value of his shares, plus
interest, exceeds the amount paid by the corporation.
SECTION 33-13-310. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Section 33-13-300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess costs against all or
some of the dissenters, in amounts the court finds equitable, to the extent the
court finds the dissenters acted arbitrarily, vexatiously, or not in good faith
in demanding payment under Section 33-13-280.
(b) The court also may assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable: (1) against the
corporation and in favor of any or all dissenters if the court finds the
corporation did not comply substantially with the requirements of Sections
33-13-200 through 33-13-280; or (2) against either the corporation or a
dissenter, in favor of any other party, if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously,
or not in good faith with respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
(d) In a proceeding commenced by dissenters to enforce the liability under
Section 33-13-300(a) of a corporation that has failed to commence an appraisal
proceeding within the sixty-day period, the court shall assess the costs of the
proceeding and the fees and expenses of dissenters' counsel against the
corporation and in favor of the dissenters.
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