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 March 31, 1998
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 March 31,1998
Common Stock, $.10 Par Value 3,876,152
<page 1>
INDEX
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets-March 31,1998 and
December 31,1997. . . . . . . . . . . . 3
Consolidated statements of income - Three months ended
March 31, 1998 and 1997. . . . . . . . . . . . 4
Consolidated statements of comprehensive income - Three
months ended March 31, 1998 and 1997. . . . . . . . . . . . 5
Consolidated statements of cash flows - Three months ended
March 31,1998 and 1997. . . . . . . . . . . . 6
Notes to consolidated financial statements - March 31, 1998. . . . . 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
March 31, December 31,
1998 1997
Assets
Cash . . . . . . . . . . . . . . . . . . . . $ 5,957,854 $ 6,359,331
Due from banks . . 16,664,203 13,292,647
Interest-bearing deposits with banks . . . . . 1,654,978 2,514,558
Federal funds sold . . . . . . . . . . . . . . . 26,600,000 26,600,000
Securities available for sale . . . . . . . . 82,599,135 85,092,069
Loans . . . . . . . . . . . . . . . . . . . . 344,724,713 327,084,688
Less: Unearned income . . . . . . . . . . . . 2,164,103 950,205
Allowance for loan losses . . . . . . . . . . . . 3,038,028 2,131,354
Net Loans . . . . . . . . . . . . . . . . . . 339,522,582 324,003,129
Premises and equipment, net . . . . . . . . . 23,697,735 22,362,432
Accrued interest . . . . . . . . . . . . . . . . 4,791,999 5,089,765
Intangibles, net . . . . . . . . . . . . . . . . 5,026,965 4,117,825
Other real estate . . . . . . . . . . . . . . . 1,180,817 656,271
Other assets . . . . . . . . . . . . . . . . . . 2,001,588 1,750,819
Total Assets . . . . . . . . . . . . . . . $ 509,697,856 $491,838,846
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing . . . . . . . . . . . . $ 55,605,377 $ 52,356,858
Interest-bearing . . . . . . . . . . . . . . 405,984,777 388,531,773
Total Deposits . . . . . . . . . . . . . . . . 461,590,154 440,888,631
Other short-term borrowings . . . . . . . . 1,336,384 2,630,387
Accrued interest . . . . . . . . . . . . . . . 3,036,699 2,912,286
Long-term debt . . . . . . . . . . . . . . . . 7,174,174 7,397,612
Other liabilities . . . . . . . . . . . . . . . 1,779,297 2,012,500
Total Liabilities . . . . . . . . . . . . . 474,916,708 455,841,416
Minority interest in consolidated subsidiary . 22,550 18,382
Shareholders' equity
Common stock, par value $.10 per share,
10,000,000 shares authorized, 4,075,854 shares
issued as of March 31, 1998 and 4,063,212 shares
issued as of December 31, 1997 203,793 203,161
Capital surplus . . . . . . . . . . . . . . . . 18,669,052 18,524,301
Retained earnings . . . . . . . . . . . . . . . 17,348,470 18,824,795
Unearned ESOP shares - 199,702 and 204,610
shares unreleased at March 31, 1998 and
December 31,1997 . . . (1,971,791) (2,002,902)
Accumulated comprehensive income: unrealized
losses on investment securities available for
sale, net of deferred taxes . . . . . . . 509,074 429,693
Total Shareholders' Equity . . . . . . . . 34,758,598 35,979,048
Total Liabilities and Shareholders' Equity . . $ 509,697,856 $491,838,846
See notes to consolidated financial statements
{page 3}
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31
1998 1997
Revenue From Earning Assets
Interest and fees on loans . . . . . . . . . $ 8,146,115 $ 7,781,363
Interest on investment securities:
Taxable securities . . . . . . . . . . . . . . 1,083,686 1,116,272
Securities exempt from federal income taxes . . 177,370 182,877
Interest on federal funds sold . . . . . . . . . . . 366,675 19,362
Interest on deposits in other banks . . . . . . . . 20,438 20,241
Total Revenue From Earning Assets . . . . . . . . 9,794,284 9,120,115
Interest Expense
Interest on deposits . . . . . . . . . . . . . . 5,130,244 4,442,298
Interest on other short-term borrowings . . . . . 29,280 44,945
Interest on long-term debt . . . . . . . . . . . . 147,507 155,358
Total Interest Expense . . . . . . . . . . 5,307,031 4,642,601
Net interest income 4,487,253 4,477,514
Provision for loan losses . . . 188,724 197,978
Net interest income after provision for loan losses 4,298,529 4,279,536
Noninterest Income
Service charges on deposits . . . . . . . . . . . 668,704 622,901
Insurance commissions . . . . . . . . . . . . . . . 413,712 190,203
Bank club dues . . . . . . . . . . . . . . . . . . 147,338 134,784
Other operating income . . . . . . . . . . . . . . . 348,151 229,966
Investment securities gains . . . . . . . . . . . . 8,802 (2,590)
Total Noninterest Income . . . . . . . . . . . . 1,586,707 1,175,264
Noninterest Expenses
Salaries and employee benefits . . . . . . . . . . 3,057,151 2,647,438
Occupancy expense . . . . . . . . . . . . . . . . 448,316 343,452
Furniture and equipment expense . . . . . . . . . 334,063 274,406
Director and committee fees . . . . . . . . . . . 162,608 152,875
Other operating expenses . . . . . . . . . . . . . 1,112,446 882,539
Total Noninterest Expenses . . . . . . . . . . 5,114,584 4,300,710
Income before income taxes . . . . . . . . . . . . 770,652 1,154,090
Provision for income taxes . . 211,202 331,904
Net Income before Minority Interest . . . . . . . 559,450 822,186
Minority interest in consolidated subsidiary . . . 4,167 -0-
Net Income . . . . . . . . . . . . . . . . . . $ 555,283 $ 822,186
Earnings Per Common Share
Net income . . . . . . . . . . . . . . . $ .14 $ .22
Earnings Per Common Share-assuming dilution
Net income . . . . . . . . . . . . . . . . $ .14 $ .22
See notes to consolidated financial statements
{PAGE 4}
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
Net income . . . . $ 555,283 $ 822,186
Other comprehensive income, net of tax:
Unrealized gains on securities . . . . . . . . 132,302 971,620
Less income tax effect . . . . . . . . . . . (52,921) (388,648)
Total other comprehensive income . . . . . . . 79,381 582,972
Comprehensive income $ 634,664 $ 1,405,158
See notes to consolidated financial statements
{PAGE 5}
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . $ 555,283 $ 822,186
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses . . . . . . 188,724 197,978
Provision for depreciation and amortization . . 440,572 351,119
Amortization of investment security premiums and
accretion of discounts . . . . . . . . . . . . 36,810 (7,018)
Deferred tax expense . . . . . . . . . . . . . 16,773 18,186
Loss (gain) on sale of premises and equipment . 7,019 (313)
Realized investment security losses (gains) . . (8,802) 2,590
Increase in accrued interest receivable . . . . . 297,766 529,264
Increase in accrued interest payable . . . . . . 124,413 162,934
Other . . . . . . . . . . . . . . . . . . . . .(1,623,180) (517,393)
Net cash provided by operating activities . . . 35,378 1,559,533
Investing activities:
Proceeds from sales of investment securities . . 4,382,500 5,007,863
Proceeds from maturity of investment securities .1,599,131 1,934,835
Purchase of investment securities . . . . . . . (3,384,403) (299,671)
Decrease (increase) in interest-bearing
deposits with other banks 859,580 (730,565)
Cash disbursed in acquisition of finance offices (6,543,108) -0-
Net increase in loans to customers . . . . . . (10,088,298) (3,302,119)
Proceeds from sale of premises and equipment . 102,550 70,441
Net proceeds from sale of other real estate . . 1,500 -0-
Capital expenditures . . . . . . . . . . . . . (1,538,176) (1,747,519)
Net cash provided (used) by investing activities (14,608,724) 933,265
Financing activities:
Net increase in demand deposits, NOW accounts,
and savings accounts . . . . . . . . . . . . 11,438,579 6,855,618
Net increase in certificates of deposit . . . . 9,262,944 11,435,735
Net decrease in short-term borrowings . . . . (1,079,547) (5,064,884)
Issuance and sale of common stock. . . . . . . 145,383 96,720
Repayment of long-term debt . . . . . . . . . . (192,327) (191,352)
Cash dividends . . . . . . . . . . . . . . . . (2,031,607) (1,500,000)
Net cash provided by financing activities . . 17,543,425 11,631,837
Net increase in cash and cash equivalents . . . 2,970,079 14,124,635
Cash and cash equivalents at beginning of period 46,251,978 17,612,177
Cash and cash equivalents at end of period . .$ 49,222,057 $ 31,736,812
See notes to consolidated financial statements
{PAGE 6}
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . $ 5,182,618 $ 4,113,337
Income taxes . . . . . . . . . . . . . . . . . -0- 493,689
Supplemental schedule of non-cash investing and financing activities:
Other real estate of $374,000 and $87,500 was acquired in 1998 and 1997,
respectively, from employees as a result of the Company s relocation program.
Upon the pledging of purchased shares to obtain additional ESOP debt 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 $31,111 and $28,933 during the
three month periods ended March 31, 1998 and 1997, respectively, as a result of
payments made by the Company's ESOP on the outstanding ESOP debt.
Unrealized or losses on investment securities available for sale increased by
$132,302 during the three months ended March 31, 1998.
See notes to consolidated financial statements
{PAGE 7}
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1998
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
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1998. 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,
1997.
NOTE B - Income Taxes
The effective tax rates of approximately 27.6 percent and 28.8 percent for the
three months ended March 31, 1998 and 1997 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 requires that 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 March 31, 1998, the Company had net unrealized gains of $848,457 in
available-for-sale securities which are reflected in the presented assets
and resulted in a increase in stockholders' equity of $509,074, 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,
1997 to March 31, 1998 was $79,381.
NOTE D - Shareholders' Equity
In January of 1997, the Board of Directors of the Company declared a dividend
of $.75 per share to shareholders of record as of January 8, 1997, and
another dividend of $1.00 per share was declared in January of 1998 to
shareholders of record as of January 26, 1998. Additionally, a two-for-one
stock split was declared and distributed to stockholders of record as of the
same date. 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.
All per share disclosures have been adjusted to reflect the impact of the
one-for-one stock dividend in the first quarter of 1998.
{PAGE 8}
Note D - Shareholders' Equity (continued)
On March 26, 1998, March 27, 1997, and March 28, 1996, the Company issued
198,333, 103,000, and 270,000 options, respectively, to purchase its common
shares to its directors. The options were distributed among the directors and
or senior managers 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 $15.00 per share (1998 issuance), $12.50 per share (1997
issuance) or $10.00 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, 2003, 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.
These options have been treated as common stock equivalents and have been
included in the calculation of average common shares outstanding, for the
purpose of calculating diluted earnings per share, in Exhibit 11, causing the
equivalent average number of shares outstanding for the first quarter to rise
by 42,075 shares and 13,416 shares, respectively, in 1998 and 1997. There was
no dilutative effect on book value per share at March 31, 1998, nor on the
book value of the Company s common shares at March 31, 1997.
In October 1995, the Financial Accounting Standards Board ( FASB ) issued
Statement of Financial Accounting Standards No. 123, Accounting and Disclosure
of Stock-Based Compensation ( SFAS 123"). SFAS 123 is effective for years
beginning after December 15, 1995, and allows for the option of continuing
to follow Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and the related Interpretations or selecting the minimum
value method of expense recognition as described in SFAS 123. The Company
has elected to apply APB Opinion No. 25 in accounting for its incentive stock
options; accordingly, no compensation expense cost has been recognized
by the Company. The Company s net income, earnings per share - basic, and
earnings per share - diluted would have been reduced by $ 230,861, $ 0.06,
and $ 0.06, respectively, for the quarter ended March 31, 1998, had
compensation cost for the Company s stock option plan been determined based on
the fair value ( minimum value method ) at the grant date for options
under the plan.The effect would have been $ 129,162, $ 0.04, and $ 0.04,
respectively, for the same period in 1997.
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 ($160,000 in 1998) 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 March 31, 1999,there
were 199,702 unreleased shares with a fair value of approximately $3,800,000.
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 Plan (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 March 31, 1998, the Company's financial statements reflect long term debt
and a corresponding contra-equity account, as a result of the ESOP debt, of
$1,971,791.
{PAGE 10}
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 ofoperations. 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 March 31,1998
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, 1997.
FINANCIAL CONDITION
March 31, 1998 compared to December 31, 1997
Loans
Loans comprised the largest single category of the Company's earning assets on
March 31, 1998. Loans, net of unearned income and reserve for loan losses,
were 66.6% of total assets at March 31, 1998 and 65.9% of total assets at
December 31, 1997.Total net loans were $339,522,582 at March 31, 1998,
representing a 4.8% increase from the December 31, 1997 total of $324,003,129.
Investment Securities and Other Earning Assets
Investment securities and federal funds sold decreased $ 2,492,934 or
2.2% from December 31, 1997 to March 31, 1998. This increase was due
primarily to loan growth in excess of deposit 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 March 31, 1998 were $82,599,135 compared
with $85,092,069 at December 31, 1997, reflecting a 2.9% decrease of $2,492,934.
Short-term investments in the form of interest-bearing deposits with banks were
$1,654,978 at March 31, 1998 and $2,514,558 at December 31, 1997.
Asset Quality
Between December 31, 1998 and March 31, 1997, the Company experienced
a slight decline in the quality of its assets as measured by two key ratios,
but saw another strengthen. 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)
increased from 0.78 to 0.81. The ratio of total nonperforming assets to total
assets increased from 0.006 to 0.007,and the ratio of nonperforming loans to
total loans increased to 0.008 from 0.006 at 12/31/97. These ratios declined due
to an increase in past due and 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 favorable 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 $461,590,154 at March 31, 1998 increased $20,701,523 (4.7%)
over total deposits of $440,888,631 at year-end 1997. Deposits are the
Company's primary source of funds with which to support its earning assets.
Noninterest-bearing deposits increased $3,248,519 or 6.2% from year-end
1997 to March 31, 1998, and interest-bearing deposits increased $17,453,004
(4.5%) from year-end 1997. Certificates of deposit of $100,000 or more
increased $3,405,985 (3.9%).
{PAGE 11}
Other Short-term Borrowings
Other short-term borrowings totaled $1,336,384 at March 31, 1998, a
$1,294,003 decrease from the December 31, 1997 total of $2,630,387.
Long-term Debt
At March 31, 1998 and December 31, 1997, the Company had notes payable totaling
$7,174,174, and $7,397,612, 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, 1996 and
December 31, 1995, the amounts outstanding were $4,446,886 and $4,980,512,
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 $1,971,791 at March 31, 1998, secured
by 199,702 of unreleased shares of Company stock (adjusted for the one-for-
one stock split in March of 1998.).
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
$1,822,750 at March 31, 1998.
Maturities of long-term debt for the years ending December 31 are as follows:
1998 . . . . . . . . $ 670,376
1999 . . . . . . . . 907,869
2000 . . . . . . . . 923,767
2001 . . . . . . . . 941,467
2002 . . . . . . . . 961,013
Thereafter . . . . . 2,769,682
$ 7,174,174
Shareholders' Equity
ompany shareholders' equity decreased $1,220,450 from December 31, 1997 to
March 31, 1998, due to: net earnings of $555,283, the payment of a cash
dividend of $2,031,607, the reduction of unearned ESOP shares by $31,111, the
issuance of additional common stock for $145,384, and the increase of
unrealized gains on securities available for sale totaling $79,381, 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 $30.4 million at
March 31, 1998. 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 $ 35.1 million at March 31,
1998.
The Company's current capital positions exceed the new guidelines.
Management has reviewed and will continue to monitor theCompany's asset mix
and product pricing, and the loan loss allowance, which are the areas
determined to be most affected by these new requirements.
{PAGE 13}
RESULTS OF OPERATIONS
Three months ended March 31, 1997 and 1996
Summary
Net earnings of the Company for the three months ended March 31, 1998 were
$555,283 compared to $822,186 for the same period in 1997, representing a
32.0% decrease. This decrease was due principally to the increase of
noninterest expenses in excess of interest margin and noninterest income.
This 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,
five 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. Additionally, a commitment to open four de novo
banks in Marshall County, Alabama and Marengo County, Alabama, and noninterest
expenses have already begun to be incurred. The decline in earnings is expected
to be purely short-term, as most of the start-up banks, with the exclusion
of the four de novo banks, are approaching a size at which they will
contribute to profits. Noninterest expenses increased $813,874 during the first
quarter of 1998, as compared to the same period in 1997; net interest margin
increased $18,993 during the same period, while noninterest income increased
by $411,443.
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
three months ended March 31, 1998 increased $674,169 (7.4%) from the
same period in 1997. This increase was due to higher average outstanding
balances of earning assets. Average earning assets outstanding during the
first quarter of 1998 were $89,860,901 higher than during the first quarter
of 1997. Interest expense for the three months ended March 31, 1998 increased
$664,430 or 14.3% over the corresponding period of 1997. As a result of
these factors, net interest income increased $18,993 or 0.4%, in the three
months ended March 31, 1998, compared to the same period of 1997.
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 $188,724
for the three months ended March 31, 1998 compared to $197,978 for the
same period of 1997. Charge-offs exceeded recoveries by $182,050 for the three
months ended March 31,1998. The reserve for loan losses as a percent of
outstanding loans, net of unearned income, was .89% at March 31, 1998 compared
to .74% at year-end 1997.
Noninterest Income
Noninterest income for the three months ended March 31, 1998 was $1,586,707
compared to $1,175,264 for the same period of 1997. This 35.0% increase was
primarily due to an increase in insurance commissions realized of $223,509 in
the first quarter of 1998 as compared to the same period of 1998. Significant
components of noninterest income are as follows: Service charges on deposits
increased $45,803 (7.4%), insurance commissions increased $223,509
(117.5%), security gains of $8,802 were realized, as opposed to $2,590
of losses in the first quarter of 1997, and other operating income, primarily
dues for the bank club account, fees on debt cancellation contracts, and
appraisal fees, increased $118,185 (51.4%) to $348,151.
{PAGE 14}
Noninterest Expenses
oninterest expenses for the three months ended March 31, 1998 were
$5,114,584, reflecting a 18.9% increase over the same period of 1997.
The primary components of noninterest expenses are salaries and employee
benefits, which increased to $3,505,467 for the three months ended March 31,
1998, 17.2% higher than in the same period of 1997. 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 $104,864 (30.5%), furniture and equipment expenses rose by
$59,657 (21.7%), and director and committee fees increased by $9,733 (6.4%).
Other operating expenses rose by 26.1% to $1,112,446.
The majority of these expenses should continue at or above the levels
for the three months ended March 31, 1998, 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 $211,202 for the three months ended March
31, 1998 decreased $120,702 compared to the same period of 1997, due primarily
to the decrease in income before tax. Taxes as a percent of earnings decreased
from 28.8% to 27.6%. The effective tax rate of approximately 27.6% is less
than the statutory rate principally because of the effect of tax-exempt interest
income.
{PAGE 15}
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
March 31, 1998.
{PAGE 16}
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 three-month periods ended March 31,
1998 and 1997.
Three Months Ended
March 31,
1998 1997
Reported net income . . . . . . . . . . . . $ 555,283 $ 822,186
Earnings on common shares . . . . . . $ 555,283 $ 822,186
Weighted average common shares outstanding - basic 3,866,706 3,782,509
Earnings per common share - basic
Income from continuing operations . . . . . . . $ .14 $ .22
Net income . . . . . . . . . . . . . . . . . . $ .14 $ .22
Weighted average common shares
outstanding - diluted . . . . . . . . . . . . . 3,908,781 3,795,925
Earnings per common share - diluted
Income from continuing operations . . . . . . . $ .14 $ .22
Net income . . . . . . . . . . . . . . . . . . $ .14 $ .22
{PAGE 17}
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.
May 12, 1998 /s/ Kennon R. Patterson, Sr.
Date Kennon R. Patterson, Sr., as its
President and Chief Executive
Officer
May 12, 1998 /s/ Paul W. Williams, CPA
Date Paul W. Williams, CPA, as its
Senior Vice President and Chief
Accounting Officer
}
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