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 September 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 1,467,284 shares issued and
outstanding as of November 12, 1999.
(Page 1 of 15)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Consolidated Balance Sheets
ASSETS
September 30, December 31,
1999 1998
(Unaudited) (Unaudited)
------------ ------------
Cash and due from banks $ 3,961,983 $ 3,181,025
Federal funds sold 3,800,000 - -
----------- -----------
Total cash and cash equivalents $ 7,761,983 $ 3,181,025
Securities:
Available-for-sale,
at estimated market values 22,858,802 24,288,316
Held-to-maturity (Estimated market
values of $1,463,284 (09-30-99)
and $2,416,622 (12-31-98) 1,467,486 2,385,162
Loans, net 72,133,837 72,120,625
Property and equipment 2,175,410 2,214,607
Goodwill 14,988 19,984
Other assets 941,433 923,482
----------- -----------
Total Assets $107,353,939 $105,133,201
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing deposits $ 8,276,006 $ 7,959,459
Interest bearing deposits 83,521,392 83,347,077
----------- -----------
Total deposits $ 91,797,398 $ 91,306,536
Borrowings, FHLB 2,688,689 1,200,000
Other liabilities 992,114 656,731
----------- -----------
Total Liabilities $ 95,478,201 $ 93,163,267
----------- -----------
Commitments & Contingencies
Shareholders' Equity:
Common stock - $3.00 par value, 10
million shares authorized; 1,467,284
and 1,446,984 shares issued and
outstanding at September 30, 1999 and
December 31, 1998, respectively $ 4,401,852 $ 4,340,952
Paid-in-capital 4,741,893 5,769,693
Retained earnings 2,846,189 1,767,794
Unrealized gain on
securities available-for-sale (114,196) 91,495
----------- -----------
Total Shareholders' Equity $ 11,875,738 $ 11,969,934
----------- -----------
Total Liabilities
and Shareholders' Equity $107,353,939 $105,133,201
=========== ===========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Income Statements
(Unaudited)
For the nine months
ended September 30,
--------------------
1999 1998
---- ----
Interest income $6,701,808 $6,580,409
Interest expense 2,883,902 3,217,495
--------- ---------
Net interest income $3,817,906 $3,362,914
Provision for possible loan losses 120,000 190,000
--------- ---------
Net interest income after
provision for possible loan losses $3,697,906 $3,172,914
--------- ---------
Other income:
Service fees and other charges $ 243,153 $ 176,586
Gain on sale of assets 1,759 34,954
Gain/(loss) on sale of securities (15,844) 1,360
--------- ---------
Total other income $ 229,068 $ 212,900
--------- ---------
Operating expenses:
Salaries and benefits $1,134,616 $1,046,988
Legal and professional 157,847 254,390
Depreciation 84,549 65,041
Amortization 4,996 4,996
Courier and postage 80,882 72,218
Rent and land lease expense 39,569 72,136
Data processing 151,439 144,146
Regulatory assessments 46,775 47,454
Other operating expenses 496,457 451,371
--------- ---------
Total Expenses $2,197,130 $2,158,740
--------- ---------
Income before taxes $1,729,844 $1,227,074
Income tax 651,449 521,900
--------- ---------
Net income $1,078,395 $ 705,174
--------- ---------
Other comprehensive
income, net of tax:
Unrealized holding gains/(losses)
on securities available for sale $ (205,691) $ 79,694
--------- ---------
Comprehensive income $ 872,704 $ 784,868
========= =========
Basic income per share $ .74 $ .51
========= =========
Diluted income per share $ .67 $ .49
========= =========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Income Statements
(Unaudited)
For the three months
ended September 30,
--------------------
1999 1998
---- ----
Interest income $2,250,533 $2,226,678
Interest expense 946,382 1,061,290
--------- ---------
Net interest income $1,304,151 $1,165,388
Provision for possible loan losses 70,000 60,000
--------- ---------
Net interest income after
provision for possible loan losses $1,234,151 $1,105,388
--------- ---------
Other income:
Service fees and other charges $ 91,998 $ 57,510
Gain/(loss) on sale of securities (25,628) - -
--------- ---------
Total other income $ 66,370 $ 57,510
--------- ---------
Operating expenses:
Salaries and benefits $ 386,484 $ 342,387
Legal and professional 34,418 86,245
Depreciation 26,253 23,938
Amortization 1,665 1,665
Courier and postage 27,568 25,294
Rent and land lease expense 14,869 25,539
Data processing 46,411 49,825
Regulatory assessments 15,275 15,750
Other operating expenses 183,970 153,427
--------- ---------
Total Expenses $ 736,913 $ 724,070
--------- ---------
Income before taxes $ 563,608 $ 438,828
Income tax 183,426 185,000
--------- ---------
Net income $ 380,182 $ 253,828
--------- ---------
Other comprehensive
income, net of tax:
Unrealized holding gains/(losses)
on securities available for sale $ (13,872) $ 88,723
--------- ---------
Comprehensive income $ 366,310 $ 342,551
========= =========
Basic income per share $ .26 $ .18
========= =========
Diluted income per share $ .23 $ .17
========= =========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
-----------------
1999 1998
---- ----
Cash flows from operating activities: $ 1,605,372 $ 1,127,592
----------- -----------
Cash flows from investing activities:
Purchase of equipment (45,352) (110,077)
(Increase) in loans, net (133,212) (1,760,198)
Securities, available-for-sale
Sale of securities 1,767,535 504,687
Purchase of securities (10,508,344) (11,484,896)
Maturities and pay-downs 9,964,632 3,818,414
Securities, held-to-maturity
Purchase of securities (989,108) (538,462)
Maturities and pay-downs 1,906,784 1,171,144
----------- -----------
Net cash used in investing activities $ 1,962,935 $ (8,399,388)
----------- -----------
Cash flows from financing activities:
Increase in borrowings $ 1,488,689 $ 1,200,000
Increase in deposits 490,862 6,021,551
Cancellation of 82,968
warrants and 2,000 options (1,155,100) - -
Proceeds from exercise of warrants/options 188,200 838,954
----------- -----------
Net cash provided from financing activities $ 1,012,651 $ 8,060,505
----------- -----------
Net increase (decrease) in
cash and cash equivalents $ 4,580,958 $ 788,709
Cash and cash equivalents
at beginning of period 3,181,025 4,034,421
----------- -----------
Cash and cash equivalents at end of period $ 7,761,983 $ 4,823,130
=========== ===========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Notes to Consolidated Financial Statements (Unaudited)
September 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 nine-month periods ended september 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 September 30, 1999 and December 31, 1998, there were 1,467,284 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 September 30, 1999 and December 31, 1998, there
were 150,668 and 235,036 warrants outstanding, respectively. The Company also
has a stock option plan with 180,500 and 201,496 options outstanding at
September 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 increased by $2.2 million to $107.4 million during the nine-month
period ended September 30, 1999. More specifically, cash and cash equivalents
increased by $4.6 million while securities decreased by $2.4 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
September 30, 1999 financial statements evidence a satisfactory liquidity
position as total cash and cash equivalents amounted to $7.8 million,
representing 7.2% of total assets. Investment securities, which amounted to
$24.3 million or 22.7% 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
September 30, 1999 by regulator
------------------ ----------------
Leverage ratio 9.1% 4.0%
Risk weighted ratio 13.5% 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 9.1% is well above the required minimum.
During the first nine months of 1999, 20,300 warrants/options were exercised,
resulting in a $188,200 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
- ---------------------
Net income for the nine-month period ended September 30, 1999 amounted to
$1,078,395, or $.74 per diluted share. For the nine-month period ended
September 30, 1998, net income amounted to $705,174, or $.49 per diluted
share. The following four items are of significance when one compares the
September 30, 1999 results to those of September 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 $3,362,914 for the nine-month
period ended September 30, 1998 to $3,817,906 for the same period one
year later, representing an increase of $454,992, or 13.5%. This
increase was attained primarily because of a $5.6 million increase in
average earning assets, from $94.1 million for the nine-month period
ended September 30, 1998 to $99.7 million for the nine-month period
ended September 30, 1999.
b. The net interest yield, defined as net interest income divided by
average interest earning assets, has increased from 4.76% for the nine-
month period ended September 30, 1998 to 5.10% for the nine-month period
ended September 30, 1999. Below is pertinent information concerning the
yield on earning assets and the cost of funds for the nine-month period
ended September 30, 1999.
Avg. Assets/ Interest Yield/
Description Liabilities Income/Expense Cost
------------- ------------ -------------- -------
Federal funds $ 713,919 $ 25,864 4.83%
Securities 24,946,828 1,046,266 5.59%
Loans 74,012,598 5,629,678 10.14%
----------- --------- -----
Total $ 99,673,345 $6,701,808 8.96%
=========== --------- -----
Transactional
accounts $ 19,439,757 $ 395,427 2.71%
Savings 4,000,607 54,539 1.82%
CD's 60,140,192 2,373,180 5.26%
Other borrowings 1,361,588 60,756 5.95%
----------- --------- -----
Total $ 84,942,144 $2,883,902 4.53%
=========== --------- -----
Net interest income $3,817,906
=========
Net yield on earning assets 5.10%
=====
c. Total non-interest income has increased from $212,900 for the nine-month
period ended September 30, 1998 to $229,068 for the nine-month period
ended September 30, 1999. While the overall non-interest income
increased by only $16,168, or 7.6%, service fees and other charges
increased by $66,567, or 37.7%.
d. For the nine-month period ended September 30, 1999, operating expenses
amounted to $2,197,130 representing an annualized 2.76% of average
assets. By comparison, for the nine-month period ended September 30,
1998, operating expenses amounted to $2,158,740, representing an
annualized 2.86% 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.
For the three-month periods ended September 30, 1999 and 1998, net income
amounted to $380,182 and $253,828, respectively. On a per share basis, basic
and diluted income for the three-month period ended September 30, 1999
amounted to $.26 and $.23, respectively. For the three-month period ended
September 30, 1998, both basic and diluted income per share amounted to $.18
and $.17, respectively. The improvement in net income for the three-month
period ended September 30, 1999 as compared to the three-month period ended
September 30, 1998, is primarily due to the following:
(i) Net interest income increased by approximately $139,000, due to both a
higher level of earning assets and higher yields.
(ii) Non-interest income increased by approximately $9,000, due to a higher
volume of transaction accounts.
(iii) The increase in net interest income and non-interest income was
partially offset by increased operating expenses which were
approximately $13,000 higher, representing an annual increase of
7.1%.
During the nine-month period ended September 30, 1999, the allowance for loan
losses has grown from $1,107,000 to $1,229,362. The allowance for loan losses
as a percentage of gross loans increased from 1.51% at December 31, 1998 to
1.67% at September 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 September 30, 1999, the Company had spent approximately $17,000 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 September 20, 1999, one (1) individual exercised warrants to purchase an
aggregate of one thousand (1,000) 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 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 transaction 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 September 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: November 12, 1999 BY: /s/ Ronald S. Shoemaker
----------------- ----------------------------------------------
Ronald S. Shoemaker
President and Chief Executive Officer
(Principal Executive, Financial and Accounting
Officer)
Exhibit 27.1
- ------------
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 nine-month periods ended September 30, 1998 and 1997 and is qualified
in its entirety by reference to such financial statements.
Item Number Item Description Amount
- ----------- ---------------- September 30,
------------------
1999 1998
---- ----
9-03(1) Cash and due from banks $ 3,961,983 $ 4,823,130
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 22,858,802 20,597,548
9-03(6) Investment and mortgage backed
securities held to maturity -
carrying value 1,467,486 2,995,123
9-03(6) Investment and mortgage backed
securities held to maturity -
market value 1,463,284 3,039,094
9-03(7) Loans 73,363,199 71,862,039
9-03(7)(2) Allowance for losses 1,229,362 1,097,837
9-03(11) Total assets 107,353,939 102,053,938
9-03(12) Deposits 91,797,398 87,801,115
9-03(13) Short-term borrowings 2,688,689 1,200,000
9-03(15) Other liabilities 992,114 1,323,993
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 4,401,852 4,340,952
9-03(22) Other stockholders' equity 7,473,886 7,387,878
9-03(23) Total liabilities and
stockholders' equity 107,353,939 102,053,938
9-04(1) Interest and fees on loans 5,629,679 5,529,731
9-04(2) Interest and dividends
on investments 1,072,129 1,050,678
9-04(4) Other interest income 0 0
9-04(5) Total interest income 6,701,808 6,580,409
9-04(6) Interest on deposits 2,823,247 3,211,733
9-04(9) Total interest expense 2,883,902 3,217,495
9-04(10) Net interest income 3,817,906 3,362,914
9-04(11) Provision for loan losses 120,000 190,000
9-04(13)(h) Investment securities gains/losses (15,844) 1,360
9-04(14) Other expenses 2,197,130 2,158,740
9-04(15) Income/loss before income tax 1,729,844 1,227,074
9-04(17) Income/loss before
extraordinary items $ 1,729,844 1,227,074
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 1,078,395 705,174
9-04(21) Earnings per share - primary .74 .51
9-04(21) Earnings per share - fully diluted .67 .49
I.B.5. Net yield - interest earning
assets - actual 5.10% 4.76%
III.C.1(a) Loans on non-accrual 75,815 48,363
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 1,806,110 2,131,986
IV.A.1 Allowance for loan losses -
beginning of period 1,106,830 1,033,393
IV.A.2 Total chargeoffs 13,482 133,770
IV.A.3 Total recoveries 16,014 8,214
IV.A.4 Allowance for loan losses -
end of period 1,229,362 1,097,837
IV.B.1 Loan loss allowance allocated to
domestic loans 1,170,000 1,025,941
IV.B.2 Loan loss allowance allocated to
foreign loans 0 0
IV.B.3 Loan loss allowance - unallocated 59,362 71,896