SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File No. 0-22517
COMMUNITY BANCSHARES, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
North Carolina 56-1693841
---------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1301 Westwood Ln.-Westfield Village, Wilkesboro, NC 28697
-------------------------------------------------------------
(Address of Principal Executive Offices)
(336) 838-4100
-------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
-------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common equity as of the latest
practicable date.
Common stock, $3.00 par value per share 1,466,284 shares issued and
outstanding as of August 12, 1999.
(Page 1 of 15)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Consolidated Balance Sheets
ASSETS
------
June 30, December 31,
-------- ------------
1999 1998
---- ----
(Unaudited) (Unaudited)
--------- ---------
Cash and due from banks $ 3,880,371 $ 3,181,025
Federal funds sold - - - -
----------- -----------
Total cash and cash equivalents $ 3,880,371 $ 3,181,025
Securities:
Available-for-sale,
at estimated market values 22,003,718 24,288,316
Held-to-maturity (Estimated market
values of $1,627,861 (06-30-99)
and $2,416,622 (12-31-98) 1,627,909 2,385,162
Loans, net 73,065,988 72,120,625
Property and equipment 2,184,461 2,214,607
Goodwill 16,653 19,984
Other assets 1,038,237 923,482
----------- -----------
Total Assets $103,817,337 $105,133,201
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
- ------------
Deposits
Non-interest bearing deposits $ 8,596,130 $ 7,959,459
Interest bearing deposits 81,786,654 83,347,077
----------- -----------
Total deposits $ 90,382,784 $ 91,306,536
Other liabilities 1,940,125 1,856,731
----------- -----------
Total Liabilities $ 92,322,909 $ 93,163,267
----------- -----------
Commitments & Contingencies
Shareholders' Equity:
- ---------------------
Common stock - $3.00 par value, 10
million shares authorized; 1,466,284
and 1,446,984 shares issued and
outstanding at June 30, 1999 and
December 31, 1998, respectively $ 4,398,852 $ 4,340,952
Paid-in-capital 4,729,893 5,769,693
Retained earnings 2,466,007 1,767,794
Unrealized gain on
securities available-for-sale (100,324) 91,495
----------- -----------
Total Shareholders' Equity $ 11,494,428 $ 11,969,934
----------- -----------
Total Liabilities
and Shareholders' Equity $103,817,337 $105,133,201
=========== ===========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Income Statements
(Unaudited)
For the six months
ended June 30,
-------------------
1999 1998
---- ----
Interest and fees
on loans and investments $4,451,275 $4,353,731
Interest expense 1,937,520 2,156,205
--------- ---------
Net interest income $2,513,755 $2,197,526
Provision for possible loan losses 50,000 130,000
--------- ---------
Net interest income (loss) after
provision for possible loan losses $2,463,755 $2,067,526
--------- ---------
Other income:
Service fees and other charges $ 151,155 $ 119,076
Gain on sale of assets 1,759 34,954
Gain/(loss) on sale of securities 9,784 1,360
--------- ---------
Total Other Income $ 162,698 $ 155,390
--------- ---------
Operating expenses:
Salaries and benefits $ 748,132 $ 704,601
Legal and professional 123,429 168,145
Depreciation 58,296 41,103
Amortization 3,331 3,331
Courier and postage 53,314 46,924
Rent and land lease 24,700 46,597
Data processing 105,028 94,321
Regulatory assessments 31,500 31,704
Other operating expenses 312,487 297,944
--------- ---------
Total operating expenses $1,460,217 $1,434,670
--------- ---------
Income before taxes $1,166,236 $ 788,246
Income tax 468,023 336,900
--------- ---------
Net Income $ 698,213 $ 451,346
--------- ---------
Other comprehensive
income, net of tax:
Unrealized holding gains/(losses)
on securities available for sale $ (191,819) $ (9,029)
--------- ---------
Comprehensive income $ 506,394 $ 442,317
========= =========
Basic income per share $ .48 $ .33
========= =========
Diluted income per share $ .43 $ .30
========= =========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Income Statements
(Unaudited)
For the three months
ended June 30,
-------------------
1999 1998
---- ----
Interest and fees
on loans and investments $2,210,529 $2,212,910
Interest expense 941,308 1,093,499
--------- ---------
Net interest income $1,269,221 $1,119,411
Provision for possible loan losses 45,000 25,000
--------- ---------
Net interest income after
provision for possible loan losses $1,224,221 $1,094,411
--------- ---------
Other income:
Service fees and other charges $ 82,504 $ 58,956
Gain on sale of assets - - - -
Gain (loss) on sale of securities 4,600 1,360
--------- ---------
Total other income $ 87,104 $ 60,316
--------- ---------
Operating expenses:
Salaries and benefits $ 371,061 $ 360,296
Legal and professional 54,074 105,166
Depreciation 29,626 21,813
Amortization 1,666 1,666
Courier and postage 26,032 22,060
Rent expense 12,374 23,279
Data processing 52,957 52,672
Regulatory assessments 15,750 15,954
Other operating expenses 136,921 165,616
--------- ---------
Total operating expenses $ 700,461 $ 768,522
--------- ---------
Net Income before taxes $ 610,864 $ 386,205
Income taxes 251,220 168,000
--------- ---------
Net Income $ 359,644 $ 218,205
--------- ---------
Other comprehensive
income, net of tax:
Unrealized holding gains/(losses)
on securities available for sale $ (126,729) $ (7,013)
--------- ---------
Comprehensive income $ 232,915 $ 211,192
========= =========
Basic income per share $ .25 $ .15
========= =========
Diluted income per share $ .23 $ .15
========= =========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
-----------------
1999 1998
---- ----
Cash flows from operating activities: $ 844,619 $ 495,552
---------- ----------
Cash flows from investing activities
Purchase of equipment (28,150) (75,181)
(Increase) in loans, net (995,363) (1,417,919)
Securities, available-for-sale
Sale of securities 1,769,535 504,687
Purchase of securities (5,282,774) (7,569,020)
Maturities and pay-downs 5,606,018 2,195,375
Securities, held-to-maturity
Purchase of securities - - (538,462)
Maturities and pay-downs 757,253 728,109
---------- ----------
Net cash used in investing activities $ 1,826,519 $(6,172,411)
---------- ----------
Cash flows from financing activities
(Decrease) in deposits $ (923,752) $ 4,643,775
Cancellation of 82,968 stock
warrants and 20,000 stock options (1,155,100) - -
Proceeds from exercise
of warrants/options 173,200 821,754
---------- ----------
Net cash (used by) financing activities $(1,905,652) $ 5,465,529
---------- ----------
Net increase in cash and cash equivalents $ 57,280 $ (211,330)
Cash and cash equivalents
at beginning of period 3,823,091 4,034,421
---------- ----------
Cash and cash equivalents at end of period $ 3,880,371 $ 3,823,091
========== ==========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month and six-month periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. These statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in Form 10-
KSB for the year ended December 31, 1998.
NOTE 2 - SUMMARY OF ORGANIZATION
Community Bancshares, Inc., Wilkesboro, North Carolina (the "Company"),
was incorporated under the laws of the State of North Carolina on June 11,
1990, for the purpose of becoming a bank holding company with respect to a
proposed national bank, Wilkes National Bank (the "Bank"), located in
Wilkesboro, North Carolina. Upon commencement of the Bank's principal
operations on January 17, 1992, the Company acquired 100 percent of the voting
stock of the Bank by injecting $3,750,000 into the Bank's capital accounts.
As of June 30, 1999 and December 31, 1998, there were 1,466,284 and
1,446,984 shares of common stock outstanding, respectively.
The Company offered warrants to its organizers and to a group of initial
subscribers. Each warrant, when surrendered with $5.50 to the Company, is
convertible into one share of common stock. The warrants expire ten years
from January 17, 1992. At June 30, 1999 and December 31, 1998, there were
151,668 and 235,036 warrants outstanding, respectively. The Company also has
a stock option plan with 162,596 and 201,496 options outstanding at June 30,
1999 and December 31, 1998, respectively.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Beginning January 1, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which is effective for annual and interim periods beginning
after December 15, 1997. This Statement establishes standards for the method
that public entities are to use when reporting information about operating
segments in annual financial statements and requires that those enterprise
reports be issued to shareholders, beginning with annual financial statements
in 1998 and for interim and annual financial statements thereafter. SFAS 131
also established standards for related disclosures about products and
services, geographic areas and major customers.
SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" revises and standardizes certain disclosures which
were required under SFAS Nos. 87, 88 and 106. Generally, the new Statement
uses a separate but parallel format, eliminates less useful information,
requires additional data deemed useful by analysts, and allows some
aggregation of presentation. This Statement was adopted by the Company during
1998.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June, 1998 and is effective for all calendar-year
entities beginning in January, 2000. This Statement applies to all entities
and requires that all derivatives be recognized as assets or liabilities in
the balance sheet, at fair values. Gains and losses of derivative instruments
not designated as hedges will be recognized in the income statement. The
Company has not made an assessment of the expected impact that SFAS No. 133
will have on its financial statements.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
Total assets decreased by $1.3 million to $103.8 million during the six-month
period ended June 30, 1999. More specifically, cash and cash equivalents
increased by $.7 million, net loans increased by $1.0 million but securities
decreased by $3.0 million.
Liquidity and Sources of Capital
- --------------------------------
Liquidity is the Company's ability to meet all deposit withdrawals
immediately, while also providing for the credit needs of customers. The June
30, 1999 financial statements evidence a satisfactory liquidity position as
total cash and cash equivalents amounted to $3.9 million, representing 3.7% of
total assets. Investment securities, which amounted to $23.6 million or 22.8%
of total assets, provide a secondary source of liquidity because they can be
converted into cash in a timely manner. The subsidiary Bank is a member of
the Federal Reserve System and is maintaining relationships with several
correspondent banks and, thus, could obtain funds on short notice. The
Company's management closely monitors and maintains appropriate levels of
interest earning assets and interest bearing liabilities, so that maturities
of assets are such that adequate funds are provided to meet customer
withdrawals and loan demand. There are no trends, demands, commitments,
events or uncertainties that will result in or are reasonably likely to result
in the Company's liquidity increasing or decreasing in any material way. The
Bank maintains an adequate level of capitalization as measured by the
following capital ratios and the respective minimum capital requirements by
the Bank's primary regulator, the Office of the Comptroller of the Currency.
Bank's Minimum required
June 30, 1999 by regulator
------------- ----------------
Leverage ratio 8.7% 4.0%
Risk weighted ratio 12.8% 8.0%
With respect to the leverage ratio, the regulator expects a minimum of 5.0% to
6.0% ratio for banks that are not rated CAMEL 1. Although the Bank is not
rated CAMEL 1, its leverage ratio of 8.7% is well above the required minimum.
During the first six months of 1999, 19,300 warrants/options were exercised,
resulting in a $173,200 increase in the Company's capital accounts. These
funds can be injected into the Bank's capital accounts as management deems
appropriate.
Results of Operations
- ---------------------
For the three-month periods ended June 30, 1999 and 1998, net income amounted
to $359,644 and 218,205, respectively. On a per share basis, basic and
diluted income for the three-month period ended June 30, 1999 amounted to $.25
and $.23, respectively. For the three-month period ended June 30, 1998, both
basic and diluted income per share amounted to $.15. The improvement in net
income for the three-month period ended June 30, 1999 as compared to the
three-month period ended June 30, 1998, is primarily due to the following:
(i) Net interest income increased by approximately $150,000, due to both a
higher level of earning assets and higher yields.
(ii) Non-interest income increased by approximately $27,000, due to a higher
volume of transaction accounts.
(iii) Operating expenses were approximately $68,000 lower primarily due
to lower professional fees (no shareholder litigation in 1999) and
no branch rent expense.
Net income for the six-month period ended June 30, 1999 amounted to $698,213,
or $.43 per diluted share. For the six-month period ended June 30, 1998, net
income amounted to $451,346, or $.30 per diluted share. The following four
items are of significance when one compares the June 30, 1999 results to those
of June 30, 1998.
a. Net interest income, which represents the difference between interest
received on interest earning assets and interest paid on interest
bearing liabilities, has increased from $2,197,526 for the six-month
period ended June 30, 1998 to $2,513,755 for the same period one year
later, representing an increase of $316,229, or 14.4%. This increase
was attained primarily because of a $6.6 million increase in average
earning assets, from $93.6 million for the six-month period ended June
30, 1998 to $100.2 million for the six-month period ended June 30, 1999.
b. The net interest yield, defined as net interest income divided by
average interest earning assets, has increased from 4.69% for the six-
month period ended June 30, 1998 to 5.01% for the six-month period ended
June 30, 1999. Below is pertinent information concerning the yield on
earning assets and the cost of funds for the six month period ended June
30, 1999.
Avg. Assets/ Interest Yield/
Description Liabilities Income/Expense Cost
- ----------- ----------- -------------- ------
Federal funds $ 619,061 $ 14,723 4.76%
Securities 25,606,672 710,344 5.55%
Loans 74,004,234 3,726,208 10.07%
----------- --------- -----
Total $100,229,967 $4,451,275 8.88%
----------- --------- -----
Transactional
accounts $ 20,196,501 $ 222,404 2.20%
Savings 4,000,004 37,107 1.86%
CD's 61,266,815 1,632,219 5.33%
Other borrowings 1,639,675 45,790 5.59%
----------- --------- -----
Total $ 87,102,995 $1,937,520 4.45%
=========== ========= =====
Net interest income $2,513,755
=========
Net yield on earning assets 5.01%
====
c. Total non-interest income has increased from $155,390 for the six-month
period ended June 30, 1998 to $162,698 for the six-month period ended
June 30, 1999. While the overall non-interest income increased by only
$7,308, or 4.7%, service fees and other charges increased by $32,079, or
26.9%.
d. For the six-month period ended June 30, 1999, operating expenses
amounted to $1,460,217 representing an annualized 2.83% of average
assets. By comparison, for the six-month period ended June 30, 1998,
operating expenses amounted to $1,434,670, representing an annualized
3.00% of average assets. The decline in operating expenses during 1999
when compared with 1998 is attributed mainly to (i) lower professional
expenses and (ii) lower rent expense due to the purchase, in December,
1998 of a banking facility which had been previously rented.
During the six-month period ended June 30, 1999, the allowance for loan losses
has grown from $1,107,000 to $1,159,000. The allowance for loan losses as a
percentage of gross loans increased from 1.51% at December 31, 1998 to 1.56%
at June 30, 1999. Management considers the allowance for loan losses to be
adequate and sufficient to absorb possible future losses; however, there can
be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional provisions to the allowance will
not be required.
The Company is not aware of any current recommendation by the regulatory
authorities which, if they were to be implemented, would have a material
effect on the Company's liquidity, capital resources, or results of
operations.
Year 2000
- ---------
A critical issue affecting companies that rely extensively on electronic
data processing systems, such as the Company, is the Year 2000 issue. The
Year 2000 issue has arisen due to the widespread use of computer programs that
rely on two-digit date codes to perform computations or decision making
functions. Many of these programs may fail as a result of their inability to
properly interpret date codes beginning January 1, 2000. For example, such
programs may misinterpret "00" as the year 1900 rather than the year 2000. In
addition, some equipment being controlled by microprocessor chips may not deal
appropriately with the year "00". This could result in a system failure or
miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions or engage in similar,
normal business activities.
The Bank primarily uses a third-party vendor for processing its primary
banking applications. During 1997, the Bank formed an internal task force,
chaired by its Operations Executive, to address the Year 2000 issue, conduct a
comprehensive review of the Bank's systems and ensure that the Bank takes any
necessary measures. The Company has completed testing its systems to ensure
that they are Year 2000 compliant. Management estimates that the Bank will
incur approximately $50,000 in expenditures relating to Year 2000 compliance.
As of June 30, 1999, the Company had spent approximately $15,000 to upgrade
its software and hardware systems to help ensure that they would be Year 2000
compliant. Further, all third-party vendors have provided the Company with
documentation confirming that their data processing programs and systems are
indeed Year 2000 compliant. The Company does not believe that material
expenditures will be necessary to implement any further modifications.
However, there can be no assurances that unforseen difficulties or costs will
not arise. In addition, there can be no assurance that systems of other
companies on which the Company's systems rely, such as the Bank's data
processing vendor, will be modified on a timely basis, or that the failure by
another company to properly modify its systems will not negatively impact the
Company's systems or operations.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Uses of Proceeds
------------------------------------------
On May 26, 1999, one (1) individual exercised warrants to purchase an
aggregate of four hundred (400) shares of the Company's common stock. These
warrants were exercised at a price of $5.50 per share. The warrants were
originally issued in connection with the Company's initial public offering
to its organizers and a group of the Company's initial shareholders.
All issuances of described above were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities
Act of 1933 as transactions by an issuer not involving a public offering.
No underwriter was involved in the transactions and no commissions were
paid.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
27.1 - Financial data schedule (for SEC use only).
(b) Reports on Form 8-K. There were no reports on Form 8-K filed
during the quarter ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANCSHARES, INC.
--------------------------------------
(Registrant)
Date: August 13, 1999 BY: /s/ Ronald S. Shoemaker
--------------- -------------------------------------
Ronald S. Shoemaker
President and Chief Executive Officer
(Principal Executive, Financial and
Accounting Officer)
Financial Data Schedule Submitted Under Item 601(a)(27) of Regulation S-B
This schedule contains summary financial information extracted from Community
Bancshares, Inc. unaudited consolidated financial statements for the six-month
periods ended June 30, 1999 and 1998 and is qualified in its entirety by
reference to such financial statements.
Item Number Item Description Amount
- ----------- ---------------- ------
June 30,
--------
1999 1998
---- ----
9-03(1) Cash and due from banks $ 3,880,371 $ 3,823,091
9-03(2) Interest bearing deposits 0 0
9-03(3) Federal funds sold - purchased
securities for sale 0 0
9-03(4) Trading account assets 0 0
9-03(6) Investment and mortgage backed
securities held for sale 22,003,718 18,451,704
9-03(6) Investment and mortgage backed
securities held to maturity -
carrying value 1,627,909 3,406,000
9-03(6) Investment and mortgage backed
securities held to maturity -
market value 1,627,861 3,415,000
9-03(7) Loans 74,225,486 71,548,915
9-03(7)(2) Allowance for losses 1,159,498 1,066,992
9-03(11) Total assets 103,817,337 98,960,169
9-03(12) Deposits 90,382,784 86,423,339
9-03(13) Short-term borrowings 992,385 0
9-03(15) Other liabilities 947,740 1,167,751
9-03(16) Long-term debt 0 0
9-03(19) Preferred stock -
mandatory redemption 0 0
9-03(20) Preferred stock -
no mandatory redemption 0 0
9-03(21) Common stock 4,398,852 4,336,752
9-03(22) Other stockholders' equity 7,095,576 7,032,327
9-03(23) Total liabilities and
stockholders' equity 103,817,337 98,960,169
9-04(1) Interest and fees on loans 3,726,208 3,654,202
9-04(2) Interest and dividends
on investments 725,067 699,529
9-04(4) Other interest income 0 0
9-04(5) Total interest income 4,451,275 4,353,731
9-04(6) Interest on deposits 1,891,730 2,147,156
9-04(9) Total interest expense 1,937,520 2,156,205
9-04(10) Net interest income 2,513,755 2,197,526
9-04(11) Provision for loan losses 50,000 130,000
9-04(13)(h) Investment securities gains/losses 1,759 1,360
9-04(14) Other expenses 1,460,217 1,434,670
9-04(15) Income/loss before income tax 1,166,236 788,246
9-04(17) Income/loss before
extraordinary items $ 1,166,236 $ 788,246
9-04(18) Extraordinary items, less tax 0 0
9-04(19) Cumulative change in
accounting principles 0 0
9-04(20) Net income or loss 698,213 451,346
9-04(21) Basic earnings per share .48 .33
9-04(21) Diluted earnings per share .43 .30
I.B.5. Net yield - interest earning
assets - actual 5.01% 4.69%
III.C.1(a) Loans on non-accrual 0 0
III.C.1(b) Accruing loans past due
90 days or more 0 0
III.C.1(c) Troubled debt restructuring 0 0
III.C.2. Potential problem loans 2,928,425 2,114,739
IV.A.1 Allowance for loan losses -
beginning of period 1,106,830 1,033,393
IV.A.2 Total chargeoffs 10,948 104,301
IV.A.3 Total recoveries 13,616 7,900
IV.A.4 Allowance for loan losses -
end of period 1,159,498 1,066,992
IV.B.1 Loan loss allowance allocated to
domestic loans 1,140,000 1,050,000
IV.B.2 Loan loss allowance allocated to
foreign loans 0 0
IV.B.3 Loan loss allowance - unallocated 19,498 16,992