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 June 30, 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 June 30, 1998
Common Stock, $.10 Par Value 4,137,924
<PAGE>
INDEX
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets-June 30,1998 and
December 31, 1997 . . . . . . . . . . 3
Consolidated statements of income and consolidated
statements of comprehensive income- Three months
ended June 30,1998 and 1997 . . . . . . . . . . 4-5
Consolidated statements of income and consolidated
statements of comprehensive income- Six months
ended June 30,1998 and 1997 . . . . . . . . . . 6-7
Consolidated statements of cash flows - Six months
ended June 30, 1998 and 1997 . . . . . . . . . . 8
Notes to consolidated financial statements-June 30, 1998. . .10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . 20
Item 6 .Exhibits and Reports on Form 8-K . . . . . . . . . . 20
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
Assets
Cash . . . . . . . . . . . . . . . . . . . . $ 7,055,499 $ 6,359,331
Due from banks . . 21,378,204 13,292,647
Interest-bearing deposits with banks . . . . . . 950,000 2,514,558
Federal funds sold . . . . . . . . . . . . . . . . 4,900,000 26,600,000
Securities available for sale . . . . . . . . . 83,722,801 85,092,069
Loans . . . . . . . . . . . . . . . . . . . . . 378,858,737 327,084,688
Less: Unearned income . . . . . . . . . . . . . 2,061,801 950,205
Allowance for loan losses . . . . . . . . . 3,363,620 2,131,354
Net Loans . . . . . . . . . . . . . 373,433,316 324,003,129
Premises and equipment, net . . . . . . . . . 25,785,832 22,362,432
Accrued interest . . . . . . . . . . . . . . . . . 5,132,233 5,089,765
Intangibles, net . . . . . . . . . . . . . . . . . 6,524,475 4,117,825
Other real estate . . . . . . . . . . . . . . . . 661,317 656,271
Other assets . . . . . . . . . . . . . . . . . . . 1,987,393 1,750,819
Total Assets . . . . . . . . . . . . . . . . . $ 531,531,070 $ 491,838,846
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing . . . . . . . . . . . . . $ 59,205,436 $ 52,356,858
Interest-bearing . . . . . . . . . . . . . . 419,499,496 388,531,773
Total Deposits . . . . . . . . . . . . . . 478,704,932 440,888,631
Other short-term borrowings . . . . . . . . . 2,552,452 2,630,387
Accrued interest . . . . . . . . . . . . . . . . . 3,431,368 2,912,286
Long-term debt . . . . . . . . . . . . . . . . . . 6,950,769 7,397,612
Other liabilities . . . . . . . . . . . . . . . . 3,206,708 2,012,500
Total Liabilities . . . . . . . . . . . . 494,846,229 455,841,416
Minority interest in consolidated subsidiary . . 0 18,382
Shareholders' equity
Common stock, par value $.10 per share,
5,000,000 shares authorized, 4,137,924 shares
issued as of June 30,1998 and 2,031,606 shares
issued as of December 31, 1997 413,792 203,161
Capital surplus . . . . . . . . . . . . . . . . 19,329,566 18,524,301
Retained earnings . . . . . . . . . . . . . . . 18,382,186 18,824,795
Unearned ESOP shares - 194,794 and 204,610
shares unreleased at June 30, 1998 and
December 31,1997 . . . . (1,940,966) (2,002,902)
Accumulated comprehensive income: unrealized
gains on investment securities available for
sale, net of deferred taxes . . . . . . . 500,263 429,693
Total Shareholders' Equity . . . . . 36,684,841 35,979,048
Total Liabilities and
Shareholders' Equity . . . . . . $ 531,531,070 $ 491,838,846
See notes to consolidated financial statements
{page 3}
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
June 30,
1998 1997
Revenue From Earning Assets
Interest and fees on loans . . . . . . . $ 9,299,780 $ 7,842,209
Interest on investment securities:
Taxable securities . . . . . . . . . . . . 1,064,830 1,089,642
Securities exempt from federal
income taxes . . . . . . . . 176,646 176,050
Interest on federal funds sold . . . . . . . . . 158,626 176,319
Interest on deposits in other banks . . . . . . . 14,988 29,193
Total Revenue From Earning Assets . . . . . 10,714,870 9,313,413
Interest Expense
Interest on deposits . . . . . . . . . . . . 5,282,496 4,678,684
Interest on other short-term borrowings . . . 23,659 35,028
Interest on long-term debt . . . . . . . . . 145,326 168,955
Total Interest Expense . . . . . . . . . 5,451,481 4,882,667
Net interest income 5,263,389 4,430,746
Provision for loan losses . 208,020 296,269
Net interest income after provision
for loan losses . . . . . . . . . . . . . 5,055,369 4,134,477
Noninterest Income
Service charges on deposits . . . . . . . . 754,069 613,676
Insurance commissions . . . . . . . . . . . . 673,612 142,405
Bank club dues . . . . . . . . . . . . . . . . . 153,187 142,123
Other operating income . . . . . . . . . . . . . 472,973 246,514
Investment securities gains . . . . . . . . . 2,706 -0-
Total Noninterest Income . . . . . . . . . 2,056,547 1,144,718
Noninterest Expenses
Salaries and employee benefits . . . . . . . . 3,470,069 2,269,724
Occupancy expense . . . . . . . . . . . . . . 476,219 353,695
Furniture and equipment expense . . . . . . . 356,730 294,295
Director and committee fees . . . . . . . . . 162,950 158,995
Other operating expenses . . . . . . . . . . . 1,200,751 819,491
Total Noninterest Expenses . . . . . . . . . . 5,666,719 3,896,200
Income before income taxes . . . . . . . . . . . 1,445,197 1,382,995
Provision for income taxes 411,481 380,827
Net Income . . . . . . . . . . . . . . . . . $ 1,033,716 $ 1,002,168
Earnings Per Common Share
Net income . . . . . . . . . . . . . . . $ .27 $ .27
Earnings Per Common Share-assuming dilution
Net income . . . . . . . . . . . . . . $ .26 $ .27
See notes to consolidated financial statements
{Page 4}
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
June 30,
1998 1997
Net income . . $ 1,033,716 $ 1,002,168
Other comprehensive income, net of tax:
Realized investment security gains . . . . 2,706 (2,590)
Unrealized gains (losses) on securities . . . (17,391) 748,373
Less income tax effect . . . . . . . . . 5,874 (298,313)
Total other comprehensive income . . . (8,811 ) 447,470
Comprehensive income . . . $ 1,024,905 $ 1,449,638
See notes to consolidated financial statements
5 <PAGE>
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
Revenue From Earning Assets
Interest and fees on loans . . . . . . . . $ 17,445,895 $ 15,623,572
Interest on investment securities:
Taxable securities . . . . . . . . . . . 2,148,516 2,205,914
Securities exempt from federal income taxes . 354,016 358,927
Interest on federal funds sold . . . . . . . . . 525,301 195,681
Interest on deposits in other banks . . . . 35,426 49,434
Total Revenue From Earning Assets . . . .20,509,154 18,433,528
Interest Expense
Interest on deposits . . . . . . . . . . . . . .10,412,740 9,120,982
Interest on other short-term borrowings . . . 52,939 79,943
Interest on long-term debt . . . . . . . . . . 292,833 324,313
Total Interest Expense . . . . . . . . 10,758,512 9,525,238
Net interest income . . . . . . . . . . . . . 9,750,642 8,908,290
Provision for loan losses . 396,744 494,247
Net interest income after provision
for loan losses . . . . . . . . . . . . . . 9,353,898 8,414,043
Noninterest Income
Service charges on deposits . . . . . . . . . 1,422,773 1,236,577
Insurance commissions . . . . . . . . . . . . . 1,087,324 332,608
Bank club dues . . . . . . . . . . . . . . . . . 300,525 276,907
Other operating income . . . . . . . . . . . . . 821,124 476,480
Investment securities gains . . . . . . . . . 11,508 (2,590)
Total Noninterest Income . . . . . . . 3,643,254 2,319,982
Noninterest Expenses
Salaries and employee benefits . . . . . . . . . 6,527,220 4,917,162
Occupancy expense . . . . . . . . . . . . . . . 924,535 697,147
Furniture and equipment expense . . . . . . . 690,793 568,701
Director and committee fees . . . . . . . . . . 325,558 311,870
Other operating expenses . . . . . . . . . . . . 2,313,197 1,702,030
Total Noninterest Expenses . . . . . . . . .10,781,303 8,196,910
Income before income taxes 2,215,849 2,537,115
Provision for income taxes 622,683 712,731
Net Income before Minority Interest . . . 1,593,166 1,824,384
Minority interest in consolidated subsidiary . . 4,167 -0-
Net Income . . . . . . . . . . . . . . . . . . $ 1,588,999 $ 1,824,384
Earnings Per Common Share
Net income . . . . . . . . . . . . . . $ .41 $ .48
Earnings Per Common Share-assuming dilution
Net income . . . . . . . . . . . . . . . $ .40 $ .48
See notes to consolidated financial statements
6 <PAGE>
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
Net income . . $ 1,588,999 $ 1,824,384
Other comprehensive income, net of tax:
Realized investment security gains . . . . 11,508 (2,590)
Unrealized gains on securities . . . . . . 106,109 (223,247)
Less income tax effect . . . . . . . . . (47,047) 90,335
Total other comprehensive income . . . 70,570 (135,502)
Comprehensive income . . . $ 1,659,569 $ 1,688,882
See notes to consolidated financial statements
7 <PAGE>
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
Operating activities:
Net income . . . . . . . . . . . . . . . . . . $ 1,588,999 $ 1,824,384
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses . . . . . . . . 396,744 494,247
Provision for depreciation and
amortization . . . . . . . 926,483 724,213
Amortization of investment security
premiums and accretion of discounts . . . . . . 74,708 19,333
Deferred tax expense . . . . . . . . . . . . . 45,518 62,452
Loss on sale of premises and equipment . . . . 3,763 1,058
Realized investment security losses (gains) (11,508) 2,590
Increase (decrease) in accrued interest receivable (5,173) 25,014
Increase in accrued interest payable . . . . 492,391 580,197
Other . . . . . . . . . . . . . . . . . . . . (550,460) (1,332,734)
Net cash provided by operating activities . .2,961,465 2,400,754
Investing activities:
Proceeds from sales of investment securities . . 6,586,500 5,007,863
Proceeds from maturity of investment securities 4,022,319 3,137,430
Purchase of investment securities . . . . . . (9,185,134) (2,286,703)
Decrease (increase) in interest-bearing
deposits with other banks 1,564,558 (1,175,280)
Cash disbursed in acquisition of
finance offices . . (6,543,108) -0-
Cash disbursed in acquisition of
insurance operations . . . . (1,471,387) -0-
Cash received in acquisition of branch office 2,763,123 -0-
Net increase in loans to customers . . . . . . .(40,826,361) (1,295,886)
Proceeds from sale of premises and equipment . 153,951 104,855
Net proceeds from sale of other real estate . 42,500 -0-
Capital expenditures . . . . . . . . . . . . . (3,792,168) (4,056,647)
Net cash provided (used) by
investing activities (46,685,207) (564,368)
Financing activities:
Net increase in demand deposits,
NOW accounts,and savings accounts . . . . . . 15,568,586 5,299,475
Net increase in certificates of deposit . . . . 16,603,565 23,007,155
Net decrease in short-term borrowings . . . . 33,934 (5,064,519)
Issuance and sale of common stock. . . . . . . . 1,015,896 96,720
Repayment of long-term debt . . . . . . . . . . (384,907) (382,941)
Cash dividends . . . . . . . . . . . . . . . . . (2,031,607) (1,500,000)
Net cash provided by financing activities . . . 30,805,467 21,455,890
Net increase in cash and cash equivalents . . . .(12,918,275) 23,292,276
Cash and cash equivalents at beginning of period 46,251,978 17,612,177
Cash and cash equivalents at end of period . . $ 33,333,703 $ 40,612,177
See notes to consolidated financial statements
8 <PAGE>
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . .$ 10,239,430 $ 8,945,041
Income taxes . . . . . . . . . . . . . . . . . 317,658 1,290,777
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 $61,936
and $57,508 during the six month periods ended June 30, 1998 and 1997,
respectively, as a result of payments made by the Company's ESOP on the
outstanding ESOP debt.
Unrealized gains on investment securities available for sale decreased by
$117,617 during the six months ended June 30, 1998.
See notes to consolidated financial statements
9 <PAGE>
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 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 six month
period ended June 30, 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 28.0 percent and 28.1 percent for
the three months ended June 30, 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 June 30, 1998, the Company had net unrealized gains of $833,771 in
available-for-sale securities which are reflected in the presented assets
and resulted in a increase in stockholders' equity of $500,263, 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 June 30, 1998 was $70,570.
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 one-for-one
stock dividend 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.
10 <PAGE>
NOTE D - Shareholders' Equity (continued)
On March 26, 1998, March 27, 1997, and March 28, 1996, the Company
issued 191,664, 103,000, and 270,000 options, respectively, to purchase its
common shares to its directors and or senior managers.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 opions 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 51,530 shares and 14,177 shares, respectively, in 1998 and 1997. There
was no dilutive effect on book value per share at June 30, 1998, nor on the
book value of the Company s common shares at June 30, 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 Companys net income,earnings per share - basic, and
earnings per share - diluted would have been reduced by $ 236,677, $ 0.06, and
$ 0.07, respectively, for the six months ended June 30, 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, $ 0.03, 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 June 30, 1998,
there were 194,794 unreleased shares with a fair value of approximately
$3,700,000. 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 Companys
income statement.
{Page 11}
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 June 30, 1998, the Company's financial statements reflect long term debt
and a corresponding contra-equity account, as a result of the ESOP debt, of
$1,940,966.
12 <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 June 30,
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
June 30, 1998 compared to December 31, 1997
Loans
Loans comprised the largest single category of the Company's earning assets
on June 30, 1998. Loans, net of unearned income and reserve for loan losses,
were 70.3% of total assets at June 30, 1998 and 65.9% of total assets at
December 31, 1997. Total net loans were $373,433,316 at June 30, 1998,
representing a 15.2% increase from the December 31, 1997 total of $324,003,129.
Investment Securities and Other Earning Assets
Investment securities and federal funds sold decreased $ 23,069,268 or 20.7
from December 31, 1997 to June 30, 1998. This decrease 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 June 30, 1998 were $83,722,801 compared with $85,092,069 at
December 31, 1997, reflecting a 1.6% decrease of $1,369,268. Short-term
investments in the form of interest-bearing deposits with banks were $950,000
at June 30, 1998 and $2,514,558 at December 31, 1997.
Asset Quality
Between December 31, 1998 and June 30, 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 0.93. 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 $478,704,932 at June 30, 1998 increased $37,816,301 (8.6%)
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 $6,848,578 or 13.1% from year-end
1997 to June 30, 1998, and interest-bearing deposits increased $30,967,723
(8.0%) from year-end 1997. Certificates of deposit of $100,000 or more
decreased $5,102,056 (7.5%).
{Page 13}
Other Short-term Borrowings
Other short-term borrowings totaled $2,552,452 at June 30, 1998, a $77,935
decrease from the December 31, 1997 total of $2,630,387.
Long-term Debt
At June 30, 1998 and December 31, 1997, the Company had notes payable totaling
$6,950,769, 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 June 30, 1998 and December
31, 1997, the amounts outstanding were $3,201,758 and $3,557,509, 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 $1,940,966 at June 30, 1998,
secured by 194,794 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 $1,808,045 at June 30, 1998.
Maturities of long-term debt for the years ending December 31 are as follows:
1998 . . . . . . . . . $ 480,138
1999 . . . . . . . . . 907,869
2000 . . . . . . . . . 923,767
2001 . . . . . . . . . 941,467
2002 . . . . . . . . . 961,013
Thereafter . . . . . . 2,736,515
$ 6,950,769
Shareholders' Equity
Company shareholders' equity increased $705,793 from December 31, 1997
to June 301, 1998, due to: net earnings of $1,588,999, the payment of a cash
dividend of $2,031,607, the reduction of unearned ESOP shares by $61,936, the
issuance of additional common stock for $1,015,895, and the increase of
unrealized gains on securities available for sale totaling $70,570, net of
deferred tax liability.
14 <PAGE>
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 $30.8 million at
June 30, 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 $ 35.7 million at June 30, 1998.
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.
15 <PAGE>
RESULTS OF OPERATIONS
Six months ended June 30, 1998 and 1997
Summary
Net earnings of the Company for the six months ended June 30, 1998 were
$1,588,999 compared to $1,824,384 for the same period in 1997, representing
a 12.9% 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 has been made 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
$2,584,393 during the first half of 1998, as compared to the same period in
1997; net interest margin increased $842,352 during the same period, while
noninterest income increased by $1,323,272.
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
six months ended June 30, 1998 increased $2,075,626 (11.3%) 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
half of 1998 were $35,498,246 higher than during the first half of 1997.
Interest expense for the six months ended June 30, 1998 increased $1,233,274 or
13.0% over the corresponding period of 1997.As a result of these factors,
net interest income increased $842,352 or 9.5%, in the six months ended
June 30, 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 $396,744 for the six
months ended June 30, 1998 compared to $494,247 for the same period of 1997.
Charge-offs exceeded recoveries by $310,673 for the six months ended June 30,
1998. The reserve for loan losses as a percent of outstanding loans, net of
unearned income, was .89% at June 30, 1998 compared to .65% at year-end 1997.
Noninterest Income
Noninterest income for the six months ended June 30, 1998 was $3,643,254
compared to $2,319,982 for the same period of 1997. This 57.0% increase was
primarily due to an increase in insurance commissions realized of $754,716 in
the first six months of 1998 as compared to the same period of 1998.
Significant components of noninterest income are as follows: Service charges
on deposits increased $186,196 (15.1%), insurance commissions increased $754,716
(226.9%), security gains of $11,508 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 $368,262 (48.9%) to $1,121,649.
16 <PAGE>
Noninterest Expenses
Noninterest expenses for the six months ended June 30, 1998 were $10,781,303,
reflecting a 31.5% increase over the same period of 1997. The primary
components of noninterest expenses are salaries and employee benefits, which
increased to $6,527,220 for the six months ended June 30, 1998, 32.7%
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 $227,388 (32.6%), furniture and equipment expenses
rose by $122,092 (21.5%), and director and committee fees increased by $13,688
(4.4%). Other operating expenses rose by 35.9% to $2,313,303.
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 majority of these expenses should continue at or above the levels
for the six months ended June 30, 1998, since management intends to continue its
growth policies.
The Company's strategy is to make each office of its subsidiary bank 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.
Income Taxes
The Company attempts to maximize its net income through active tax planning.
The provision for income taxes of $622,683 for the six months ended June
30, 1998 decreased $90,048 compared to the same period of 1997, due to the
decrease in income before tax. Taxes as a percent of earnings decreased from
28.1% to 28.0%. The effective tax rate of approximately 28.0% is less than the
statutory rate principally because of the effect of tax-exempt interest income.
17 <PAGE>
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With regard to quantitative and qualitative disclosures regarding the
Company s market risk, refer to Managements Discussion and Analysis and
consolidated financial statements and notes included in the Company s annual
report on Form 10-K for the year ended December 31, 1997. Based on current
market risk analysis, management believes that the change from December
31, 1997, to June 30, 1998, in the Company s net interest income sensitivity
over a one year horizon is not material.
18 <PAGE>
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company was held on Thursday,
March 26, 1998, at which the following matters were voted upon by the
stockholders of the Company.
(a) Election of Class II Directors
Glynn Debtor, John J. Lewis, Jr., Loy McGruder, Kennon R. (Chip) , Jr.,
and Bishop K. Walker, Jr., were elected to serve as Class II directors of the
Company until the annual meeting of stockholders of the Company in 2001 or
until their successors are elected and qualified. The vote with respect to such
election was as follows:
Votes Cast Abstentions
Votes Cast Against or or Broker
Name In Favor Withheld Non-Votes
Glynn Debtor 3,059,358 210
John J. Lewis, Jr. 3,059,508
Loy McGruder 3,059,568
Kennon R. (Chip) Patterson, Jr. 3,059,358 210
Bishop K. Walker, Jr. 3,059,568
The following directors continued in office following the stockholders meeting:
Name Term Expires
Kennon R. Patterson, Sr. 1999
Denny Kelly 1999
Merritt Robbins 1999
Wayne Washam 1999
Bryan A. Corr 1999
Edward Ferguson 1999
Henry Sims 1999
C.K. Copeland - Retired
Stacey W. Mann 2000
Hodge Patterson, III 2000
Robert O. Summerford 2000
(b) Selection of Independent Auditors
The stockholders of the Company ratified the appointment of Dudley,
Hopton-Jones, Sims & Freeman, PLLC, as the Company s independent auditors for
the fiscal year ending December 31, 1998, by the following vote:
Votes Cast Abstentions
Votes Cast Against or or Broker
In Favor Withheld Non-Votes
3,055,858 800 2,910
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibit Page Number
11 Computation of Earnings 20
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
June 30, 1998.
{Page 19}
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 six-month and three-month periods ended
June 30, 1998 and 1997.
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
Reported net income . . . . $ 1,588,999 $ 1,824,354 $ 1,033,716 $ 1,002,168
Earnings on common shares . $ 1,588,999 $ 1,824,354 $ 1,033,716 $ 1,002,168
Weighted average common
shares outstanding-basic 3,881,008 3,787,629 3,895,487 3,792,675
Earnings per common share-basic
Income from continuing
operations . . . . . . . $ .41 $ .48 $ .27 $ .26
Net income . . . . . . . $ .41 $ .48 $ .27 $ .26
Weighted average common
shares outstanding-diluted 3,932,538 3,801,806 4,008,174 3,825,538
Earnings per common share-diluted
Income from continuing
operations . . . . . . . . $ .40 $ .48 $ .26 $ .26
Net income . . . . . . . $ .40 $ .48 $ .26 $ .26
20 <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.
July 31, 1998 /s/ Kennon R. Patterson, Sr.
Date Kennon R. Patterson, Sr., as its
President and Chief Executive
Officer
July 31, 1998 /s/ Paul W. Williams, CPA
Date Paul W. Williams, CPA, as its Senior
Vice President and Chief
Accounting Officer
21 <PAGE>
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