SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-16461
COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0868361
(State of Incorporation) (I.R.S. Employer Identification No.)
Main Street, P. O. Box 1000, Blountsville, AL 35031
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (205) 429-1000
No Change
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1997
Common Stock, $.10 Par Value 1,914,847
<PAGE>
INDEX
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1997 and
December 31, 1996 . . . . . . . . . . . . 3
Consolidated statements of income - Three months ended
September 30, 1997 and 1996; Nine months ended
September 30, 1997 and 1996 . . . . . . . . . . 4-5
Consolidated statements of cash flows - Nine months ended
September 30, 1997 and 1996. . . . . . . . . . . . 6
Notes to consolidated financial statements -September 30,1997. . . . . . 8
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K. . . . . . . . . . . . 16
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
Assets
Cash . . . . . . . . . . . . . . . . . . . . $ 5,525,490 $ 5,096,892
Due from banks . . 15,483,726 12,515,285
Interest-bearing deposits with banks . . . . . 2,503,456 1,773,778
Federal funds sold . . . . . . . . . . . . . . . 18,400,000 -0-
Securities available for sale . . . . . . . . . 81,001,163 86,911,305
Loans . . . . . . . . . . . . . . . . . . . . . 326,802,792 324,571,991
Less: Unearned income . . . . . . . . . . . . . 1,221,584 1,809,698
Allowance for loan losses . . . . . . . . . . . . 2,629,640 2,424,847
Net Loans . . . . . . . . . . . . . . . . . . . 322,951,568 320,337,446
Premises and equipment, net . . . . . . . . . 21,659,035 17,076,220
Accrued interest . . . . . . . . . . . . . . . 4,809,157 4,847,308
Intangibles, net . . . . . . . . . . . . . . . . 4,203,238 4,101,306
Other real estate . . . . . . . . . . . . . . . 646,901 791,435
Other assets . . . . . . . . . . . . . . . . . . 1,895,052 1,258,720
Total Assets . . . . . . . . . . . . . . . . . $ 479,078,786 $ 454,709,695
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing . . . . . . . . . . . . . $ 53,203,470 $ 50,245,130
Interest-bearing . . . . . . . . . . . . . . 375,761,040 350,092,545
Total Deposits . . . . . . . . . . . . . . . . 428,964,510 400,337,675
Other short-term borrowings . . . . . . . . . . 3,071,741 8,376,472
Accrued interest . . . . . . . . . . . . . . . . 3,260,095 2,542,825
Long-term debt . . . . . . . . . . . . . . . . . 7,619,723 8,281,449
Other liabilities . . . . . . . . . . . . . . . 1,936,722 2,612,488
Total Liabilities . . . . . . . . . . . . . . 444,852,791 422,150,909
Minority interest in consolidated subsidiary . . 39,526 -0-
Shareholders' equity
Common stock, par value $.10 per share,
5,000,000 shares authorized, 2,019,606 shares
issued as of September 30, 1997 and 2,000,000
shares issued as of December 31, 1996 201,961 200,000
Capital surplus . . . . . . . . . . . . . . . . 18,280,501 17,819,722
Retained earnings . . . . . . . . . . . . . . . 17,842,303 16,812,517
Unearned ESOP shares - 104,759 and 112,121
shares unreleased at September 30, 1997 and
December 31,1996 . (2,032,937) (2,119,891)
Unrealized losses on investment securities
available for sale, net of deferred taxes . . (105,359) (153,562)
Total Shareholders' Equity . . . . . . . . . . 34,186,469 32,558,786
Total Liabilities and Shareholders' Equity . . .$ 479,078,786 $ 454,709,695
See notes to consolidated financial statements
Page 3
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
September 30,
1997 1996
Revenue From Earning Assets
Interest and fees on loans . . . . . . . . . . . . $ 8,039,900 $ 7,318,760
Interest on investment securities:
Taxable securities . . . . . . . . . . . . . . . 1,084,307 1,199,881
Securities exempt from federal income taxes . . 175,950 224,993
Interest on federal funds sold . . . . . . . . . . . 289,332 56,705
Interest on deposits in other banks . . . . . . . . 36,437 48,166
Total Revenue From Earning Assets . . . . . . . . 9,625,926 8,848,505
Interest Expense
Interest on deposits . . . . . . . . . . . . . . . . 4,867,064 4,250,340
Interest on other short-term borrowings . . . . . . 34,085 38,614
Interest on long-term debt . . . . . . . . . . . . . 151,957 171,447
Total Interest Expense . . . . . . . . . . . . . 5,053,106 4,460,401
Net interest income 4,572,820 4,388,104
Provision for loan losses . . . 302,477 205,453
Net interest income after provision for loan losses . 4,270,343 4,182,651
Noninterest Income
Service charges on deposits . . . . . . . . . . . . 621,825 580,252
Insurance commissions . . . . . . . . . . . . . . . . 208,489 214,676
Bank club dues . . . . . . . . . . . . . . . . . . . 144,795 125,803
Other operating income . . . . . . . . . . . . . . . . 231,650 292,999
Investment securities gains . . . . . . . . . . . . . -0- 25,710
Total Noninterest Income . . . . . . . . . . . . 1,206,759 1,239,440
Noninterest Expenses
Salaries and employee benefits . . . . . . . . . . . 2,621,206 2,301,617
Occupancy expense . . . . . . . . . . . . . . . . . 396,445 266,267
Furniture and equipment expense . . . . . . . . . . 311,086 249,261
Director and committee fees . . . . . . . . . . . . 162,450 137,175
Other operating expenses . . . . . . . . . . . . . 1,021,819 816,420
Total Noninterest Expenses . . . . . . . . . . . 4,513,006 3,770,740
Income before income taxes and minority interest . . 964,096 1,651,351
Provision for income taxes . . 255,890 517,132
Net Income before Minority Interest . . . . . . . 708,206 1,134,219
Minority Interest in consolidated subsidiaries . . . . 2,802 -0-
Net Income . . . . . . . . . . . . . . . . . . . $ 705,404 $ 1,134,219
Earnings Per Common Share - Primary and Fully-diluted
Net income per common share . . . . . . . . . . . .$ .34 $ .58
Weighted average common shares outstanding . . . . 2,081,247 1,971,671
See notes to consolidated financial statements
Page 4
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended
September 30,
1997 1996
Revenue From Earning Assets
Interest and fees on loans . . . . . . . . . . . . $ 23,663,472 $ 19,531,213
Interest on investment securities:
Taxable securities . . . . . . . . . . . . . . . 3,290,221 3,572,166
Securities exempt from federal income taxes . . 534,877 692,382
Interest on federal funds sold . . . . . . . . . . . 485,013 587,671
Interest on deposits in other banks . . . . . . . 85,871 96,993
Total Revenue From Earning Assets . . . . . . . . 28,059,454 24,480,425
Interest Expense
Interest on deposits . . . . . . . . . . . . 13,988,046 12,307,525
Interest on other short-term borrowings . . . . . . 114,028 104,025
Interest on long-term debt . . . . . . . . . . . . . 476,270 505,184
Total Interest Expense . . . . . . . . . . . . . 14,578,344 12,916,734
Net interest income 13,481,110 11,563.691
Provision for loan losses . . . 796,724 482,587
Net interest income after provision for loan losses . 12,684,386 11,081,104
Noninterest Income
Service charges on deposits . . . . . . . . . . . . 1,858,402 1,602,761
Insurance commissions . . . . . . . . . . . . . . . 541,097 444,530
Bank club dues . . . . . . . . . . . . . . . . . . . . 421,702 366,967
Other operating income . . . . . . . . . . . . . . . . 708,130 784,258
Investment securities gains (losses) . . . . . . . . . (2,590) 19,114
Total Noninterest Income . . . . . . . . . . . . 3,526,741 3,217,630
Noninterest Expenses
Salaries and employee benefits . . . . . . . . . . . . 7,538,368 6,560,768
Occupancy expense . . . . . . . . . . . . . . . . . . 1,093,592 731,310
Furniture and equipment expense . . . . . . . . . . 879,787 719,589
Director and committee fees . . . . . . . . . . . . 474,320 332,625
Other operating expenses . . . . . . . . . . . . . . 2,723,849 2,317,924
Total Noninterest Expenses . . . . . . . . . . . 12,709,916 10,662,216
Income before income taxes before minority interest. 3,501,211 3,636,518
Provision for income taxes . . 968,621 1,059,074
Net Income before Minority Interest . . . . . . . 2,532,590 2,577,444
Minority Interest in consolidated subsidiaries . . . 2,802 -0-
Net Income . . . . . . . . . . . . . . . . . . . $ 2,529,788 $ 2,577,444
Earnings Per Common Share - Primary and Fully-diluted
Net income per common share . . . . . . . . . . . $ 1.23 $ 1.35
Weighted average common shares outstanding . . . . 2,060,925 1,915,476
See notes to consolidated financial statements
Page 5
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1997 1996
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . .$ 2,529,788 $ 2,577,444
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses . . . . . . . . . . . . 796,724 482,587
Provision for depreciation and amortization . . . . . 1,143,347 901,003
Amortization of investment security premiums and
accretion of discounts . . . . . . . . . . . . . . . 48,191 (41,809)
Realized investment security gains(losses) . . . . . . 2,590 (19,114)
Decrease in accrued interest receivable . . . . . . . . 38,151 (538,702)
Increase in accrued interest payable . . . . . . . . . . 717,270 581,393
Other . . . . . . . . . . . . . . . . . . . . . . . (1,105,465) (1,376,098)
Net cash provided (used) by operating activities 4,170,596 2,566,704
Investing activities:
Proceeds from sales of investment securities . . 5,007,863 11,715,007
Proceeds from maturity of investment securities . . 5,588,513 11,504,067
Purchase of investment securities . . . . . . . . . .(4,656,676)(42,904,154)
Decrease (increase) in interest-bearing deposits
with other banks (729,678) (853,909)
Net increase in loans to customers . . . . . . . . . .(2,577,415)(27,834,797)
Cash acquired - purchase of branches . . . . . . . . . -0- 1,289,197
Proceeds from sale of premises and equipment . . . . . 312,900 92,130
Capital expenditures . . . . . . . . . . . . . . . . .(5,673,721) (3,435,645)
Net cash used in investing activities . . . . . . (2,728,214)(50,428,104)
Financing activities:
Net increase (decrease) in demand deposits, NOW
accounts,and savings accounts . . . . . . . . . 3,821,677 20,443,389
Net increase in certificates of deposit . . . . . . 23,391,368 7,896,125
Net increase in short-term borrowings . . . . . . . (5,246,356) 2,210,079
Issuance and sale of common stock. . . . . . . . . . 462,740 3,013,493
Repayment of long-term debt . . . . . . . . . . . . . (574,772) (571,998)
Cash dividends . . . . . . . . . . . . . . . . . . . .(1,500,000) (908,788)
Net cash provided by financing activities . . . . 20,354,657 32,082,300
Net increase (decrease) in cash and cash equivalents 21,797,039 (15,779,100)
Cash and cash equivalents at beginning of period . . 17,612,177 36,438,247
Cash and cash equivalents at end of period . . . . $ 39,409,216 $20,659,147
See notes to consolidated financial statements
6 <PAGE>
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1997 1996
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . .$ 13,861,074 $ 12,009,740
Income taxes . . . . . . . . . . . . . . . . . . 1,623,340 406,207
Supplemental schedule of non-cash investing and financing activities:
Other real estate of $87,500 was acquired in 1997 from employees as a result of
the Company s relocation program.
Upon the pledging of purchased shares to obtain additional ESOP debt of
$1,126,007 on May 17, 1996 and of $137,918 on October 2, 1995, long-term
debt was increased and equity was decreased . The debt was reduced and shares
were released by $86,954 and $108,461 , respectively, during each of the nine
month periods ended September 30, 1997 and 1996 as a result of payments
made by the Company's ESOP on the outstanding ESOP debt.
Unrealized losses on investment securities available for sale decreased by
$48,203 during the nine months ended September 30, 1997, from an unrealized
loss of $153,562 at December 31, 1996, to a loss of $105,359 at September 30,
1997 (both net of the effect of deferred taxes).
On January 16,1996, the Company acquired the assets and assumed the liabilities
of the Haleyville, Alabama branch of a regional bank .The liabilities assumed
in the transaction totaled $33,366,553 and non-cash assets acquired totaled
$12,227,125 . Accordingly, the resultant cash receipt by the Company, net
of the premium of $2,328,288 paid for the branch s deposits, was $18,811,140.
On July 12,1996, the Company acquired the assets and assumed the liabilities of
the Uniontown, Alabama branch of a regional bank .The liabilities assumed in
the transaction totaled $12,320,393 and non-cash assets acquired totaled
$29,580,944 . Accordingly, the resultant cash disbursement by the Company,
including of the premium of $261,392 paid for the branch s deposits, was
$17,521,943.
See notes to consolidated financial statements.
7 <PAGE>
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1997
NOTE A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consist-
ing of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine month period ended September
30, 1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE B - Income Taxes
The effective tax rates of approximately 27.7 percent and 28.1 percent for
the nine months ended September 30, 1997 and 1996 are less than the statutory
rate principally because of the effect of tax-exempt interest income.
NOTE C - Investment Securities
Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"). This
pronouncement requiresthat all investments in debt securities be classified
as either held-to-maturity securities, which are reported at amortized cost;
trading securities, which are reported at fair value, with unrealized
gains and losses included in earnings; or available-for-sale securities, which
are reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders' equity (net of
deferred tax effect).
At September 30, 1997, the Company had net unrealized losses of $175,498 in
available-for-sale securities which are reflected in the presented assets and
resulted in a decrease in stockholders' equity of $105,359, net of deferred tax
liability. There were no trading securities. The net increase in stockholders
equity as a result of the SFAS 115 adjustment from December 31,1996 to September
30, 1997 was $48,203.
NOTE D - Shareholders' Equity
On January 9, 1996, the Board of Directors of the Company declared a dividend
of $.50 per share to shareholders of record as of January 12, 1996, and
another dividend of $.75 per share was declared in January of 1997 to share-
holders of record as of January 8, 1997. The payment of dividends on common
stock is subject to the prior payment of principal and interest on the Company's
long-term debt, maintenance of sufficient earnings and capital of the
subsidiaries and to regulatory restrictions.
On January 9, 1995, the Board of Directors passed a resolution authorizing the
preparation of a Registration Statement for the proposed sale of 312,161
shares of the Company's $.10 par value common stock, consisting of the Company's
115,978 shares of treasury stock and 196,183 newly issued shares. On June 13,
1996, the offering was closed upon full subscription of all shares offered for
sale raising $6,175,898 of capital after reduction for offering costs.
8 <PAGE>
NOTE D - Shareholders' Equity (continued)
On March 27, 1997 and March 28, 1996, the Company issued 41,500 and 135,000
options, respectively, to purchase its common shares to its directors. The
options were distributed among the directors based upon their years of
service and their positions of leadership with the Company. Each of the
stock option agreements contained an option price of $25.00 per share (1997
issuance) or $20.00 per share (1996 issuance), the market value of the shares
at the time of issuance. The options are exercisable between April 1, 1996
and March 31, 2002,and are treated as non-qualified options under the provisions
of the Internal Revenue Code. The agreements also contain a provision whereby
the Company shall compensate the optionee in cash for any federal or state tax
liability incurred upon the exercise of the options.
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation , on
January 1, 1996. This statement defines a fair value based method of accounting
for an employee stock option or similar equity instrument. However, SFAS No. 123
allows an entity to continue to measure compensation costs for these plans
using the intrinsic value method based method of accounting prescribed in APB
Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to
remain with the accounting in Opinion No. 25 must make pro forma disclosures
of net income and earnings per share as if the fair value based method of
accounting defined in SFAS No. 123 had been applied. Under the fair value
based method, 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. Under the intrinsic value based method, 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. The Company has elected to continue to measure compensation cost for
their stock option plan under the provisions in APB Opinion 25.
These options have been treated as common stock equivalents and have been
included in the calculation of average common shares outstanding in Exhibit 11,
causing the equivalent average number of shares outstanding for the first three
quarters of 1997 to rise by 163,426 shares. There was no dilutative effect on
book value per share at either September 30, 1997 or September 30, 1996.
Earnings per average share outstanding were diluted by $ 0.10 per share and
$ 0.04 per share, respectively, for the nine months ended September 30, 1997 and
1996.
NOTE E - Employee Stock Ownership Plan
The Company adopted an Employee Stock Ownership Plan (the "ESOP") effective
as of January 1, 1985, which enables eligible employees of the Company and its
subsidiaries to own Company common stock. Employees who work 1,000 hours in any
consecutive twelve month period become participants in the ESOP on December 31
of that year, and remain eligible in every subsequent year in which 1,000 hours
of work are completed. Employer contributions, which are made at the discretion
of the Company's Board of Directors, are allocated to eligible participants in
proportion to their eligible pay, which equals W-2 wages plus pre-tax reductions
for the Company's cafeteria plan. The Internal Revenue Service imposes a limit
($150,000 in 1997) on the maximum amount of eligible pay under the plan.
On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock from the Company's public offering
of new common stock. The note was originally secured by 80,000 shares of
purchased stock. On October 2, 1995, the ESOP acquired 7,455 additional
shares with the proceeds of a second promissory note, collateralized by the
acquired shares. On May 17, 1996, these two notes were refinanced and an
additional 58,000 shares of stock were obtained by the ESOP. These shares were
funded with the same promissory note which provided funds to refinance the
previously executed notes. This new note was originally secured by 117,847
shares of the Company s common stock. The shares securing the note are released
proratably by the lender as monthly payments of principal and interest
are made. The note is guaranteed by the Company. As of September 30, 1997,
there were 104,759 unreleased shares with a fair value of approximately
$3,137,000. These shares are subtracted from outstanding shares for earnings per
share calculations.
Effective January 1, 1994, the Company applied the accounting and reporting
requirements of Statement of Position No. 93-6, Employers' Accounting for
Employee Stock Ownership Plans ("SOP 93-6"). Under the provisions of SOP 93-6,
the employer must recognize the indebtedness of its sponsored ESOP on its
financial statement and reduce its stockholder's equity for shares of stock
which have not been released by a lender to the ESOP for allocation to its
participating employees. The portion of payments made by the Company to the ESOP
on behalf of its participating employees which are used to pay interest on the
ESOP debt is classified as interest expense on the Company s income statement.
Page 9
NOTE E - Employee Stock Ownership (continued)
Dividends paid on released ESOP shares are credited to the accounts of the
participants to whom the shares are allocated.Dividends on unreleased shares are
treated as other income of the ESOP.
At September 30, 1997, the Company's financial statements reflect long term
debt and a corresponding contra-equity account, as a result of the ESOP debt, of
$2,032,937.
10 <PAGE>
Item 2.
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is intended to assist an understanding of the Company and its
Subsidiaries' financial condition and results of operations. Unless the
context otherwise indicates, "the Company" shall include the Company and its
Subsidiaries. This analysis should be read in conjunction with the financial
statements and related notes appearing in Item 1 of the September 30, 1997
Form 10-Q and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
FINANCIAL CONDITION
September 30, 1997 compared to December 31, 1996
Loans
Loans comprised the largest single category of the Company's earning assets
on September 30, 1997. Loans, net of unearned income and reserve for loan
losses, were 67.4% of total assets at September 30, 1997 and 70.4% of total
assets at December 31, 1996. Total net loans were $322,951,568 at September 30,
1997, representing a 0.8% increase from the December 31, 1996 total of
$320,337,446. This increase of approximately $2.6 million was relatively modest,
as management has made deposit growth a priority over loan growth over the last
several months.
Investment Securities and Other Earning Assets
Investment securities and federal funds sold increased $12,489,858 or 14.3%
from December 31,1996 to September 30, 1997. This increase was due primarily
to deposit growth in excess of loan growth .The investment securities portfolio
is used to make various term investments, to provide a source of liquidity
and to serve as collateral to secure certain government deposits. Investment
securities at September 30, 1997 were $81,001,163 compared with $86,911,305
at December 31, 1996, reflecting a 6.8% decrease of $5,910,142. Short-term
investments in the form of interest-bearing deposits with banks were $2,503,456
at September 30, 1997 and $1,773,778 at December 31, 1996.
Asset Quality
Between December 31, 1996 and December 30, 1997, the Company experienced a
slight decline in the quality of its assets as measured by three key ratios.
The ratio of loan loss allowance to total nonperforming assets (defined as
nonaccrual loans, loans past due 90 days or greater, restructured loans,
nonaccruing securities, and other real estate) declined from 1.33 to 1.08. The
ratio of total nonperforming assets to total assets rose from 0.004 to 0.005,
and the ratio of nonperforming loans to total loans increased to 0.006 from
0.003 at 12/31/96. These ratios declined due to an increase in past due and n
nonaccrual loans, and an increase in other real estate due to the purchase
of employees homes who were relocated by the Company. All three of these
ratios remain within an acceptable range, as compared with industry averages,
and management is aware of no factors which would suggest that they are prone to
erosion in future periods.
Deposits
Total deposits of $428,964,510 at September 30, 1997 increased $28,626,835
(7.2%) over total deposits of $400,337,675 at year-end 1996.Deposits are the
Company's primary source of funds with which to support its earning assets.
Noninterest-bearing deposits increased $2,958,340 or 5.9% from year-end
1996 to September 30, 1997, and interest-bearing deposits increased $25,668,495
(7.3%) from year-end 1996.Certificates of deposit of $100,000 or more increased
$2,047,309 (2.8%).
Page 11
Other Short-term Borrowings
Other short-term borrowings totaled $3,071,741 at September 30, 1997, a
$5,304,731 decrease from the December 31, 1996 total of $8,376,472.
Long-term Debt
At September 30, 1997 and December 31, 1996, the Company had notes payable
totaling $7,619,723, and $8,281,449, respectively.
On December 17, 1992, the Company entered into a loan agreement with a
regional bank for amounts up to $6,500,000. At September 30, 1997 and December
31, 1996, the amounts outstanding were $3,735,384 and $4,269,010, respectively,
due December 17,2002, bearing interest at a floating prime, and collateralized
by 100% of the common stock of the subsidiary banks. The note agreement
contains provisions which limit the Company's right to transfer or issue shares
of subsidiary banks'stock. Principal payments of $59,292 are due monthly;
however, the Company has the option of postponing up to twenty-four monthly
principal payments, provided that no more than six consecutively scheduled
installments are deferred.
On November 3, 1993, the ESOP's Trustees executed a promissory note of
$1,200,000 in order to purchase common stock from the Company's public offering
of new common stock. The note was originally secured by 80,000 shares of
purchased stock. On October 2, 1995, the ESOP acquired 7,455 additional
shares with the proceeds of a second promissory note, collateralized by the
acquired shares. On May 17, 1996, these two notes were refinanced and an
additional 58,000 shares of stock were obtained by the ESOP with a promissory
note with a beginning balance of $2,183,805.The Company has guaranteed this
debt; accounting and reporting guidelines mandate that the debt be
recognized on the Company's statement of condition, with an offsetting charge
against equity. As principal payments are made by the ESOP, the debt and
offsetting charge against equity are reduced. This note was originally secured
by 117,847 shares of the Company s common stock. The note bears interest at a
floating rate, with principal and interest payments of $23,948 due monthly
through June 17, 2018, with all remaining principal, if any, due upon that
date. The shares securing the note are released proratably by the lender
as monthly payments of principal and interest are made. The outstanding balance
of this note was $2,032,937 at September 30, 1997, secured by 104,759 of
unreleased shares of Company stock .
On October 4, 1994, the Company entered into a twenty year, subordinated
installment capital note due October 1, 2014 for the purchase of treasury
stock. Monthly principal and interest payments of $15,506 are made on the note,
which bears interest at the fixed rate of 7 %. The Company maintains the right
to prepay the note at its sole discretion.The balance of the note was $1,851,402
at September 30, 1997.
Maturities of long-term debt for the years ending December 31 are as follows:
1997 . . . . . . . . . $ 217,533
1998 . . . . . . . . . 892,430
1999 . . . . . . . . . 907,467
2000 . . . . . . . . . 923,328
2001 . . . . . . . . . 941,388
Thereafter . . . . . . 3,737,577
$ 7,619,723
Shareholders' Equity
Company shareholders' equity increased $1,627,683 from December 31, 1996
to September 30, 1997, due to: net earnings of $2,529,788, the payment of a
cash dividend of $1,500,000, the reduction of unearned ESOP shares by $86,953,
the issuance of additional common stock for $462,740 and the decrease
of unrealized losses on securities available for sale totaling $48,202, net of
deferred tax liability.
Page 12
Capital Resources
A strong capital position is vital to the continued profitability of the
Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth of the organization. The Company has provided
the majority of its capital requirements through the retention of earnings.
Bank regulatory authorities are placing increased emphasis on the maintenance
of adequate capital. In 1990, new risk-based capital requirements became
effective. The guidelines take into consideration risk factors, as defined
by regulators, associated with various categories of assets, both on and off
the balance sheet. Under the guidelines, capital strength is measured in two
tiers which are used in conjunction with risk-adjusted assets to determine the
risk-based capital ratios. The Company's Tier I capital, which consists of
common equity less goodwill, amounted to $31.3 million at September 30, 1997.
Tier II capital components include supplemental capital components such as
qualifying allowance for loan losses and qualifying subordinated debt. Tier
I capital plus the Tier II capital components is referred to as Total Risk-Based
capital and was $35.6 million at September 30, 1997.
The Company's current capital positions exceed the new guidelines. Management
has reviewed and will continue to monitor the Company's asset mix and product
pricing, and the loan loss allowance, which are the areas determined to be most
affected by these new requirements.
13 <PAGE>
RESULTS OF OPERATIONS
Nine months ended September 30, 1997 and 1996
Summary
Net earnings of the Company for the nine months ended September 30, 1997 were
$2,529,788 compared to $2,577,444 for the same period in 1996, representing
a 1.7% decrease. This increase was due principally to the increase of
noninterest expense in excess of noninterest revenue, which is a direct result
of the Company's expansion activity, with three new banking facilities being
opened in 1994, two new locations opening in 1995, four new locations opening
in 1996, plus the purchase of the assets and assumption of liabilities of
the Haleyville and Uniontown, Alabama branches of a regional bank during 1996.
Of all of these new banking locations, only the acquired mature offices of
Haleyville and Uniontown are of an adequate size and maturity to provide profit
consistently. Management has made a conscious decision to provide for future
earnings by developing these new markets, even at the sacrifice of some
current earnings stream. Additionally, the Company has increased its staffing
levels within its support functions to a level which not only allows quality
service to current banking customers but which also anticipates continued
growth in the future. Net interest income increased $1,917,418 during the
first nine months of 1997, as compared to the same period in 1996;
noninterest expenses increased $2,047,700 during the same period, while
noninterest income increased by $309,111.
Net Interest Income
Net interest income, the difference between interest earned on assets and
the cost of interest-bearing liabilities, is the largest component of the
Company's net income. Revenue from earning assets of the Company during the
nine months ended September 30, 1997 increased $3,579,028 (14.6%) from the
same period in 1996. This increase was primarily due to higher average
outstanding balances of earning assets. Average earning assets outstanding
during the first three quarters of 1997 were $46,269,481 higher than during
the first three quarters of 1996. Interest expense for the nine months ended
September 30, 1997 increased $1,661,610 or 12.9% over the corresponding
period of 1996. As a result of these factors, net interest income increased
$1,917,418 or 16.6%, in the nine months ended September 30, 1997, compared to
the same period of 1996.
Provision for Loan Losses
The provision for loan losses represents the charge against current earnings
necessary to maintain the reserve for loan losses at a level which management
considers appropriate. This level is determined based upon Community Bank's
historical charge-offs, management's assessment of current economic
conditions, the composition of the loan portfolio and the levels of
nonaccruing and past due loans. The provision for loan losses was $796,724
for the nine months ended September 30, 1997 compared to $482,587 for the
same period of 1996. Charge-offs exceeded recoveries by $600,706 for the nine
months ended September 30, 1997. The reserve for loan losses as a percent
of outstanding loans, net of unearned income, was .81% at September 30, 1997
compared to .75% at year-end 1996.
Noninterest Income
Noninterest income for the nine months ended September 30,1997 was $3,526,741
compared to $3,217,630 for the same period of 1996. This 9.6% increase was
primarily due to an increase in service charges on deposit accounts of $255,641
in the firstnine months of 1997 as compared to the same period of 1996.
Significant components of noninterest income are as follows: Service charges
on deposits increased $255,641 (16.0%), insurance commissions increased
$96,567 (21.7%), security losses totaled $2,590 as opposed to gains of $19,114
in 1996, and other operating income, primarily dues for the bank club account,
fees on debt cancellation contracts,and appraisal fees, decreased $76,128 (9.7%)
to $708,130.
14 <PAGE>
Noninterest Expenses
Noninterest expenses for the nine months ended September 30, 1997 were
$12,709,916, reflecting a 19.2% increase over the same period of 1996. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $7,538,368 for the nine months ended September 30, 1997,
14.9% higher than in the same period of 1996. The increases in salaries and
employee benefits are due to staffing for new banking locations and future
expansion as well as merit increases and incentive payments. Occupancy costs
increased $362,282 (49.5%), furniture and equipment expenses rose by $160,198
(22.3%), and director and committee fees increased by $141,695 (42.6%). The
increase in director and committee fees is a reflection of the expansion of the
boards of directors of both the parent company and the Alabama subsidiary bank.
Other operating expenses rose by 17.5% to $2,723,849.
The majority of these expenses should continue at or near the levels for
the nine months ended September 30, 1997, since management intends to continue
its growth policies.
The Company remains dependent upon the earnings of its principal subsidiary,
Community Bank , for its earnings.
The substantial increase in the Company's size has necessitated increased
expenditures for data processing and other support activities and personnel,
which will continue.
The Company's strategy is to make each office of its subsidiary banks a vital
part of the community it serves. Each office has management and personnel as
similar to a full service,stand-alone bank as possible. Although more expensive,
we believe this strategy has been successful for Community Bank, and will best
serve our communities, customers and shareholders. The Company will remain
dependent upon Community Bank for the bulk of its earnings. Management will
strive to build Community Bank's business in a profitable manner and to
minimize any losses and adverse effects on the Company's earnings. Our strategy
for long-term success in these areas will not be sacrificed for immediate gain.
Income Taxes
The Company attempts to maximize its net income through active tax planning.
The provision for income taxes of $968,621 for the nine months ended September
30, 1997 decreased $90,453 compared to the same period of 1996, due primarily
to the decrease in income before tax. Taxes as a percent of pretax
earnings decreased from 29.1% to 27.7%. The effective tax rate of approximately
27.7% is less than the statutory rate principally because of the effect of
tax-exempt interest income.
15 <PAGE>
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibit Page Number
11 Computation of Earnings 17
Per Share
27 Financial Data Schedule
(for the SEC use only)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1997.
16 <PAGE>
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
The following tabulation presents the calculation of primary and fully
diluted earnings per common share for the nine-month and three-month periods
ended September 30, 1997 and 1996.
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
Reported net income . . . .$ 2,529,788 $ 2,577,444 $ 705,404 $ 1,134,219
Earnings on common shares .$ 2,529,788 $ 2,577,444 $ 705,404 $ 1,134,219
Weighted average common
shares outstanding . . . 2,060,925 1,915,476 2,081,247 1,971,671
Earnings per common share-
primary and fully-diluted:
Income from continuing
operations . . . . . . .$ 1.23 $ 1.35 $ .34 $ .58
Net income . . . . . . $ 1.23 $ 1.35 $ .34 $ .58
17 <PAGE>
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.
November 10, 1997 /s/ Kennon R. Patterson, Sr.
Date Kennon R. Patterson, Sr., as its
President and Chief Executive
Officer
November 10, 1997 /s/ Paul W. Williams, CPA
Date Paul W. Williams, CPA, as its Senior
Vice President and Chief
Accounting Officer
18 <PAGE>
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