SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-KSB
_______________________
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
________________________________________________
Commission File Number 33-36512
COMMUNITY BANCSHARES, INC.
A North Carolina Corporation
(IRS Employer Identification No. 56-1693841)
1600 Curtis Bridge Road
Wilkesboro, North Carolina 28697
(910) 838-4100
________________________________________________
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock $3.00 par value
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
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. [ ]
Revenue for the fiscal year ended December 31, 1997: $7,729,413
The aggregate market value of the Common Stock of the Registrant held by
nonaffiliates of the Registrant (616,978 shares) on March 15, 1998, was
$4,800,000. As of such date, no organized trading market existed for the
Common Stock of the registrant. The aggregate market value was computed
by reference to the book value of the Common Stock of the Registrant as
of December 31, 1997. For the purposes of this response, directors,
officers and holders of 5% or more of the Registrant's Common Stock are
considered the affiliates of the Registrant at that date.
The number of shares outstanding of the Registrant's Common Stock, as
of March 15, 1998:
1,298,756 shares of $3.00 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one)
Yes No X
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements in this Annual Report on Form 10-KSB contain "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, which statements generally can be identified by the use
of forward-looking terminology, such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "target," "plan," "project," or "continue" or the
negatives thereof or other variations thereon or similar terminology, and
are made on the basis of management's plans and current analyses of the
Company, its business and the industry as a whole. These forward-
looking statements are subject to risks and uncertainties, including,
but not limited to, economic conditions, competition, interest rate
sensitivity and exposure to regulatory and legislative changes. The
above factors, in some cases, have affected, and in the future could
affect, the Company's financial performance and could cause actual results
for fiscal 1998 and beyond to differ materially from those expressed or
implied in such forward-looking statements. The Company does not
undertake to publicly update or revise its forward-looking statements
even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized.
PART I
Item 1. Description of Business.
General
Community Bancshares, Inc. (the "Company") is a registered bank holding
company under the federal Bank Holding Company Act of 1956, as amended,
and owns 100% of the outstanding capital stock of Wilkes National Bank,
Wilkesboro, North Carolina (the "Bank"). The Company was incorporated
under the laws of the State of North Carolina on June 11, 1990 as a
mechanism to enhance the Bank's ability to serve its future customers'
requirements for financial services. The holding company structure
provides flexibility for expansion of the Company's banking business
through acquisition of other financial institutions and the provision
of additional banking-related services which the traditional commercial
bank may not provide under present laws.
The Bank commenced operations on January 17, 1992 in a permanent facility
located at 1600 Curtis Bridge Road in Wilkesboro, North Carolina. The 1,800
square foot facility is being leased by the Bank from a director of the
Company. The Bank opened full-service branches in North Wilkesboro in
June 1994, in Millers Creek in February 1996, and in Taylorsville in
August 1997.
The Bank is a full service commercial bank, without trust powers. The
Bank offers a full range of interest bearing and non-interest bearing
accounts, including commercial and retail checking accounts, money market
accounts, individual retirement and Keogh accounts, regular interest
bearing statement savings accounts, certificates of deposit, commercial
loans, real estate loans, home equity loans and consumer/installment
loans. In addition, the Bank provides such consumer services as U.S.
Savings Bonds,
travelers checks, cashier's checks, safe deposit boxes, bank by mail
services, direct deposit and automatic teller services.
In May 1995, the Company's Board of Directors declared a two-for-one
stock split, in the form of a 100% stock dividend, to all shareholders
of record as of July 3, 1995. As a consequence to the stock split, the
par value of the Common Stock was reduced from $6.00 to $3.00, while the
number of outstanding shares was doubled. In addition, in March 1996,
the Company commenced a public offering of up to 500,000 shares
of Common Stock at a purchase price of $10.00. The Company competed the
sale of 500,000 shares of Common Stock in September 1996.
Market Area and Competition
The primary service area for the Bank encompasses approximately 756
square miles in Wilkes County, North Carolina. Located in the Yadkin
Valley on the eastern slope of the Blue Ridge Mountains, Wilkes County
has a population of approximately 60,000. The largest employers in
Wilkes County include Tyson Food Service, Inc. (poultry processing),
Lowe's Companies, Inc. (home improvement retailer), and Ithaca Industries,
Inc. (hosiery manufacturer). Unemployment in Wilkes County in 1993, the
last year for which information is available, was 4.7%, having decreased
from 5.5% in 1991. Total employment in Wilkes County increased by 2.3%
during the period from 1991 to 1993, reflecting modest growth in the
Bank's primary market area during the period. According to the Wilkes
Chamber of Commerce, the average cost of housing in Wilkes County is
approximately $80,000, with real estate values being relatively stable
over the past five years.
Competition among financial institutions in this area is intense. There
are 21 banking offices and one savings and loan association office within
the primary service area of the Bank. Most of these offices are branches
of or are affiliated with major bank holding companies. Financial
institutions primarily compete with one another for deposits. In turn,
a bank's deposit base directly affects such bank's loan activities and
general growth. Primary methods of competition include interest rates
on deposits and loans, service charges on deposit accounts and the
designing of unique financial services products. The Bank is competing
with financial institutions which have much greater financial resources
than the Bank, and which may be able to offer more and unique services
and possibly better terms to their customers. However, management of
the Bank believes that the Bank will be able to attract sufficient
deposits to enable the Bank to compete effectively with other area
financial institutions. According to FDIC estimates, as of June 30,
1997, deposits at the Bank represented approximately 12.5% of total
deposits of financial institutions in the Bank's primary service area.
This compares with a market share of approximately 9.3% at June 30, 1996.
The Bank is in competition with existing area financial institutions
other than commercial banks and savings and loan associations, including
insurance companies, consumer finance companies, brokerage houses, credit
unions and other business entities which have recently been invading the
traditional banking markets. Due to the growth of Wilkes County, it is
anticipated that additional competition will continue from new entrants
to the market.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential
The following is a presentation of the average consolidated balance sheet
of the Company for the years ended December 31, 1997 and 1996. This
presentation includes all major categories of interest-earning assets
and interest-bearing liabilities:
AVERAGE CONSOLIDATED ASSETS
Years Ended December 31,
1997 1996
Cash and due from banks $ 2,168,513 $ 2,139,879
Taxable securities 16,372,924 13,738,285
Non-taxable securities 20,891 -
Federal funds sold 1,229,706 1,564,529
Net loans 61,772,934 43,335,603
Total earning assets 79,396,455 58,638,417
Other assets 2,080,058 892,628
Total assets $83,645,026 $61,670,924
AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY
Years Ended December 31,
1997 1996
Non interest-bearing
deposits $ 4,823,245 $3,206,703
NOW and money market deposits 12,766,119 9,581,245
Savings deposits 2,419,735 1,842,228
Time deposits 52,569,360 39,450,272
Federal funds and repurchase
agreements 285,564 339,825
Other liabilities 1,050,212 841,888
Total liabilities 73,914,235 55,262,161
Stockholders' equity 9,730,791 6,408,763
Total liabilities and
stockholders' equity $83,645,026 $61,670,924
The following is a presentation of an analysis of the net
interest earnings of the Company for the period indicated with
respect to each major category of interest-earning asset and each
major category of interest-bearing liability:
Year Ended December 31, 1997
Average Interest Average
Assets Amount Earned Yield
Taxable securities $16,372,924 $1,056,781 6.45%
Non-taxable securities 20,891 918 6.67 /3
Federal funds sold 1,229,706 66,940 5.44
Net loans 61,772,934 /1 6,138,953 /2 9.94
Total earning assets $79,396,683 $7,263,592 9.15
Average Interest Average
Liabilities Amount Paid Rate Paid
NOW and money market
deposits $12,766,119 $ 442,500 3.47%
Savings deposits 2,419,735 75,384 3.12
Time deposits 52,569,360 3,140,465 5.97
Federal funds and
repurchase agreements 285,564 14,586 5.11
Total interest-bearing
liabilities $68,040,778 $3,672,935 5.40
Net yield on earning assets 4.52%
_______________________
(1) Twelve loans aggregating $95,501 were on non-accrual status on
December 31, 1997.
(2) Interest earned on net loans includes $170,868 in loan fees
and loan service fees.
(3) The yield is tax equivalent.
Year Ended December 31, 1996
Average Interest Average
Assets Amount Earned Yield
Taxable securities $13,738,285 $ 879,994 6.41%
Federal funds sold 1,564,529 78,617 5.02
Net loans 43,335,603 /1 4,268,735 /2 9.85
Total earning assets $58,638,417 $5,227,346 8.91
Average Interest Average
Liabilities Amount Paid Rate Paid
NOW and money market
deposits $ 9,581,245 $ 332,714 3.47%
Savings deposits 1,842,228 56,045 3.04
Time deposits 39,450,272 2,394,053 6.07
Federal funds and
repurchase agreements 339,825 18,511 5.45
Total interest-bearing
liabilities $51,213,570 $2,801,323 5.47
Net yield on earning assets 4.14%
_______________________
(1) Eleven loans aggregating $18,781 were on non-accrual status on
December 31, 1996.
(2) Interest earned on net loans includes $100,027 in loan fees
and loan service fees.
Rate/Volume Analysis of Net Interest Income
The following shows the effect on interest income, interest
expense and net interest income due to changes in average balances
and rates for the years therein indicated. The effect of a change
in average balance has been determined by multiplying the average
rate in the earlier period by the difference in average balances
between both time periods. The change in interest due to volume and
rate has been allocated in proportion to the relationship of the
absolute dollar amounts of the change in each.
Year ended December 31, 1997
Compared to
Year ended December 31, 1996
Increase (decrease) due to:
Volume Rate Total
Interest earned on:
Taxable securities $ 171,220 $ 5,567 $ 176,787
Non-taxable securities 918 --- 918
Federal funds sold 7,495 (19,172) (11,677)
Net loans 1,830,898 39,320 1,870,218
Total interest income 2,010,531 25,715 2,036,246
Interest paid on:
NOW and money market deposits 109,786 --- 109,786
Savings deposits 17,841 1,498 19,339
Time deposits 785,316 (38,904) 746,412
Federal funds and repurchase
agreemetns (2,823) (1,102) (3,925)
Total interest expense 910,120 (38,508) 871,612
Change in net interest income $1,100,411 $64,223 $1,164,634
Year ended December 31, 1996
Compared to
Year ended December 31, 1995
Increase (decrease) due to:
Volume Rate Total
Interest earned on:
Taxable securities $ 189,834 $ 3,237 $ 193,071
Federal funds sold (27,903) (13,257) (41,160)
Net loans 1,144,668 (68,052) 1,076,616
Total interest income 1,306,599 (78,072) 1,228,527
Interest paid on:
NOW and money market deposits 27,444 (31,206) (3,762)
Savings deposits 25,880 (37,369) (11,489)
Time deposits 604,654 5,910 610,564
Federal funds and repurchase
agreemetns 12,588 (228) 12,360
Total interest expense 670,566 (62,893) 607,673
Change in net interest income $636,033 $(15,179) $620,854
Deposits
The Bank offers a full range of interest bearing and non-
interest bearing accounts, including commercial and retail
checking accounts, money market accounts, individual retirement
and Keogh accounts, regular interest bearing statement savings
accounts and certificates of deposit with fixed and variable rates
and a range of maturity date options. The sources of deposits are
residents, businesses and employees of businesses within the
Bank's market area, obtained through the personal solicitation of
the Bank's officers and directors, direct mail solicitation and
advertisements published in the local media. The Bank pays
competitive interest rates on time and savings deposits up to the
maximum permitted by law or regulation. In addition, the Bank has
implemented a service charge fee schedule competitive with other
financial institutions in the Bank's market area, covering such
matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and
the like.
The following table presents, for the periods indicated, the
average amount of and average rate paid on each of the following
deposit categories:
Year Ended
December 31, 1997
Deposit Category Average Amount Average Rate Paid
Non interest-bearing
demand deposits $ 4,823,245 Not Applicable
NOW and money
market deposits $12,766,119 3.47%
Savings deposits $ 2,419,735 3.12%
Time deposits $52,569,360 5.97%
Federal funds and
repurchase agreements $ 285,564 5.11%
Year Ended
December 31, 1996
Deposit Category Average Amount Average Rate Paid
Non interest-bearing
demand deposits $ 3,206,703 Not Applicable
NOW and money
market deposits $ 9,581,245 3.47%
Savings deposits $ 1,842,228 3.04%
Time deposits $39,450,272 6.07%
Federal funds and
repurchase agreements $ 339,825 5.45%
The following table indicates amounts outstanding of time
certificates of deposit of $100,000 or more and respective
maturities for the year ended December 31, 1997:
Time
Certificates
of Deposit
3 months or less $ 8,917,751
3-6 months 6,248,931
6-12 months 4,811,781
over 12 months 1,154,204
Total $21,132,667
Loan Portfolio
The Bank engages in a full complement of lending activities,
including commercial, consumer/installment and real estate loans.
As of December 31, 1997, the Bank had a legal lending limit for
unsecured loans of up to $1,101,985 to any one person. See "_
Supervision and Regulation."
Commercial lending is directed principally towards businesses
whose demands for funds fall within the Bank's legal lending
limits and which are potential deposit customers of the Bank.
This category of loans includes loans made to individual,
partnership or corporate borrowers, and obtained for a variety of
business purposes. Particular emphasis is placed on loans to
small and medium-sized businesses. The Bank's real estate loans
consist of residential first and second mortgage loans as well as
residential construction loans.
The Bank's consumer loans consist primarily of installment
loans to individuals for personal, family and household purposes,
including automobile loans to individuals and pre-approved lines
of credit.
While risk of loss in the Bank's loan portfolio is primarily
tied to the credit quality of the various borrowers, risk of loss
may also increase due to factors beyond the Bank's control, such
as local, regional and/or national economic downturns. General
conditions in the real estate market may also impact the relative
risk in the Bank's real estate portfolio. Of the Bank's target
areas of lending activities, commercial loans are generally
considered to have greater risk than real estate loans or consumer
installment loans.
Management of the Bank intends to originate loans and to
participate with other banks with respect to loans which exceed
the Bank's lending limits. Management of the Bank does not
believe that loan participations will necessarily pose any greater
risk of loss than loans which the Bank originates.
The following is a description of each of the major
categories of loans in the Bank's loan portfolio:
Commercial, Financial and Agricultural. These loans are
customarily granted to local business customers on a fully
collateralized basis to meet local credit needs. The loans can be
extended for periods of between one year and five years and are
usually structured to fully amortize over the term of the loan or
balloon after the third year or fifth year of the loan with an
amortization up to 10 years. The terms and loan structure are
dependent on the collateral and strength of the borrower. The
loan to value ratios range from 50% to 75%. The risks of these
types of loans depend on the general business conditions of the
local economy and the local business borrower's ability to sell
its products and services in order to generate sufficient business
profits to repay the Bank under the agreed upon terms and
conditions. The value of the collateral held by the Bank as a
measure of safety against loss is most volatile in this loan
category.
Real Estate - Construction. These loans are made for the
construction of single family residences in the Bank's market
area. The loans are granted to qualified individuals with down
payments of at least 20% of the appraised value or contract price,
whichever is less. The interest rates fluctuate at 1% to 2% above
the Bank's prime interest rate during the six month construction
period. The Bank charges a fee of 1% to 2% in addition to the
normal closing costs. These loans generally command higher rates
and fees commensurate with the risk warranted in the construction
lending field. The risk in construction lending is dependent upon
the performance of the builder in building the project to the
plans and specifications of the borrower and the Bank's ability to
administer and control all phases of the construction
disbursements. Upon completion of the construction period, the
mortgage is converted to a permanent loan and normally sold to an
investor in the secondary mortgage market.
Real Estate - Mortgage. These loans are granted to qualified
individuals for the purchase of existing single family residences
in the Bank's market area. Both fixed and variable rate loans are
offered with competitive terms and fees consistent with national
mortgage investor guidelines. For mortgage loans held for sale,
the Bank sells the mortgages within a period of 30 days to 365
days to a pre-determined mortgage investor and retains the
origination fees. The risk of this type of activity depends on
the salability of the loan to national investors and interest rate
changes. Delivering these loans to the end investor on a
mandatory basis and meeting the investor's quality control
procedures limits the Bank's risk of making adjustable rate
mortgage loans. The risk assumed by the Bank is conditioned upon
the Bank's internal controls, loan underwriting and market
conditions in the national mortgage market. The Bank retains
loans for its portfolio when it has sufficient liquidity to fund
the needs of its established customers and when rates are
favorable to retain the loans. The loan underwriting standards
and policies are generally the same for both loans sold in the
secondary market and those retained in the Bank's portfolio.
The Bank's adjustable rate mortgages include lifetime
interest rate caps. All such loans are qualified and underwritten
to meet FHLMC guidelines and no negative amortized loans are
offered. No loans carry a prepayment penalty clause and therefore
can be paid out or refinanced at a fixed rate, thus reducing the
default risk. These loans are priced according to proper index
and margin, and should not lag behind funding costs.
Installment Loans. These loans are granted to individuals
for the purchase of personal goods such as automobiles,
recreational vehicles, mobile homes and for the improvement of
single family real estate in the form of second mortgages. The
Bank obtains a lien against the item purchased by the consumer and
holds title until the loan is repaid in full. These loans are
generally granted for periods ranging between one and five years
at fixed rates of interest 1% to 4% above the Bank's prime
interest rate. The loan to value ratios range from 60% to 80%.
Loss or decline of income by the borrower due to layoffs, divorce
or unexpected medical expenses represent unplanned occurrences
that may represent risk of default to the Bank. In the event of
default, a shortfall in the value of the collateral may pose a
loss to the Bank in this loan category.
The Bank also offers home equity loans to qualified
borrowers. The interest rate floats at one to two percent above
the prime interest rate quoted in The Wall Street Journal and it
is capped at 16%. The loan to appraised value cannot exceed 80%
and the maturity is limited to ten years. Credit quality reviews
are conducted every two years to determine if the credit is still
warranted. Monthly payments are required with the minimum payment
equaling 2% of the outstanding loan balance. The Bank requires a
first or second mortgage position and loans are made on principal
residences only.
Lease Financing. The Bank offers leases to qualified
individuals, businesses and municipalities to lease machinery,
rolling stock and equipment. Terms and fees are consistent with
local market competition. Leases are at fixed terms with "fair
market value residuals" assigned at the maturity of the lease.
The Bank works with qualified outside agents who originate leases
and obtain useful life estimates and market values of equipment
based on national averages. Terms of leases generally range from
two (2) to five (5) years. The Bank arranges competitive
purchases of specified equipment and retains title to it during
the lease. Monthly payments are required, normally in the amount
of 3% of the outstanding balance. The Bank avoids limited-use
equipment with limited resale value and frequently arranges
buyback agreements with manufacturers to reduce risks resulting
from reselling equipment.
The following table presents various categories of loans
contained in the Bank's loan portfolio for the period indicated
and the total amount of all loans for such period:
As of December 31,
Type of Loan 1997 1996
Domestic:
Commerical, financial and
agricultural $28,215,330 $18,575,306
Real estate construction 6,571,616 4,919,198
Real estate mortgage 21,088,303 17,363,240
Installment and other loans
to individuals 14,016,280 12,007,846
Lease financing 335,868 540,241
Subtotal 70,227,397 53,405,831
Less: Allowance for possible
loan losses (1,033,393) (619,133)
Total (net of allowances) $69,194,004 $52,786,698
The following is a presentation of an analysis of maturities of
loans as of December 31, 1997:
Due in 1 Due after 1 Due After
Type of Loan year or less to 5 years 5 years Total
Commercial,
financial &
agricultural $12,422 $14,164 $1,629 $28,215
Real estate
construction 4,450 2,011 111 6,572
Total $16,872 $16,175 $1,740 $34,787
For the above loans, the following is a presentation of an
analysis of sensitivities to changes in interest rates as of
December 31, 1997:
Due in 1 Due after 1 Due After
Interest Category year or less to 5 years 5 years Total
(In thousands)
Predetmined interest rate $ 2,075 $ 7,992 $ 576 $10,643
Floating interest rate 14,797 8,183 1,164 24,144
Total $16,872 $16,175 $1,740 $34,787
As of December 31, 1997, twelve loans totaling $95,501 were
accounted for on a non-accrual basis, and no loans were defined as
"troubled debt restructurings." As of December 31, 1997, non-
accrual loans represented .14% of total loans, while the ratio of
the allowance for loan losses to non-accrual loans was 10.8 to 1.0.
At December 31, 1997, there were no loans which were accruing
interest and contractually past due 90 days or more. These loans
were well secured and in the process of collection.
As of December 31, 1996, eleven loans totaling $18,781 were
accounted for on a non-accrual basis, and no loans were defined as
"troubled debt restructurings." As of December 31, 1996, non-
accrual loans represented .04% of total loans, while the ratio of
the allowance for loan losses to non-accrual loans was 33.0 to 1.0.
At December 31, 1996, there were eleven loans totaling $235,930
which were accruing interest but contractually past due 90 days or
more. These loans were well secured and in the process of
collection.
As of December 31, 1997, there are no loans not disclosed
above that are classified for regulatory purposes as doubtful,
substandard or special mention which (i) represent or result from
trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital
resources, or (ii) represent material credits about which
management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms. There are no loans not disclosed
above where known information about possible credit problems of
borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with the present loan repayment
terms.
Accrual of interest is discontinued on a loan when management
of the Bank determines upon consideration of economic and business
factors affecting collection efforts that collection of interest is
doubtful. Additional interest income of approximately $11,027 in
1997 would have been recorded if all loans accounted for on a non-
accrual basis had been current in accordance with the original
terms. No interest income has been recognized during 1997 on loans
that have been accounted for on a non-accrual basis. Additional
interest income of approximately $738 in 1996 would have been
recorded if all loans accounted for on a non-accrual basis had been
current in accordance with their original terms. No interest
income was recognized during 1996 on loans that have been accounted
for on a non-accrual basis.
Summary of Loan Loss Experience
An analysis of the Bank's loss experience is furnished in the
following table for the periods indicated, as well as a breakdown
of the allowance for possible loan losses:
Analysis of the Allowance for Possible Loan Losses
Years ended December 31,
1997 1996
Balance at beginning
of period $619,133 $418,620
Charge-offs:
Installment and other loans to
individuals (77,416) (9,311)
Commercial, financial, agricultural (5,694) (80,106)
Real estate mortgages --- (7,246)
(83,110) (96,663)
Recoveries:
Installment and other loans to
individuals 11,520 ---
Commercial, financial, agricultural 850 ---
Real estate mortgages --- 9,676
Net charge-offs (70,740) (86,987)
Additions charged to operations 485,000 287,500
Balance at end of period $1,033,393 $619,133
Ratio of net charge-offs
during the period to average loans out-
standing during the period .11% .20%
At December 31, 1997 the allowance was allocated as follows:
Percent of loans
in each category
Amount to total loans
Commercial, financial and
agricultural $ 460,000 40.2%
Real estate - construction 106,000 9.4
Real estate - mortgage 255,000 30.0
Installment and other loans to
individuals 186,000 20.0
Lease financing 7,000 0.5
Unallocated 19,393 N/A
Total $1,033,393 100.0%
At December 31, 1996 the allowance was allocated as follows:
Percent of loans
in each category
Amount to total loans
Commercial, financial and
agricultural $ 245,400 34.8%
Real estate - construction 62,000 9.2
Real estate - mortgage 157,900 32.5
Installment and other loans to
individuals 125,000 22.5
Lease financing 9,300 1.0
Unallocated 19,533 N/A
Total $ 619,133 100.0%
Loan Loss Reserve
In considering the adequacy of the Company's allowance for
possible loan losses, management has focused on the fact that as of
December 31, 1997, 40.2% of outstanding loans are in the category
of commercial loans, which includes commercial real estate loans
and agricultural loans. Commercial loans are generally considered
by management as having greater risk than other categories of loans
in the Company's loan portfolio. However, over 86% of these
commercial loans at December 31, 1997 were made on a secured basis.
Management believes that the secured condition of the preponderant
portion of its commercial loan portfolio greatly reduces any risk
of loss inherently present in commercial loans.
The Company's consumer loan portfolio is also well secured.
At December 31, 1997 the majority of the Company's consumer loans
were secured by collateral primarily consisting of automobiles,
boats and other personal property. Management believes that these
loans involve less risk than commercial loans.
Real estate mortgage loans constituted 30.0% of outstanding
loans at December 31, 1997. All loans in this category represent
residential real estate mortgages where the amount of the original
loan generally does not exceed 80% of the appraised value of the
collateral. These loans are considered by management to be well
secured with a low risk of loss.
A review of the loan portfolio by an independent firm is
conducted annually. The purpose of this review is to assess the
risk in the loan portfolio and to determine the adequacy of the
allowance for loan losses. The review includes analyses of
historical performance, the level of non-conforming and rated
loans, loan volume and activity, review of loan files and
consideration of economic conditions and other pertinent
information. Upon completion, the report is approved by the Board
and management of the Bank. In addition to the above review, the
Bank's primary regulator, the Comptroller, also conducts an annual
examination of the loan portfolio. Upon completion, the
Comptroller presents their report of findings to the Board and
management of the Bank. Information provided from the above two
independent sources, together with information provided by the
management of the Bank and other information known to members of
the Board are utilized by the Board to monitor, on a quarterly
basis, the loan portfolio. Specifically, the Board attempts to
identify risks inherent in the loan portfolio (e.g., problem loans,
potential problem loans and loans to be charged-off), assess the
overall quality and collectibility of the loan portfolio, and
determine amounts of the allowance for loan losses and the
provision for loan losses to be reported based on the results of
their review.
Investments
As of December 31, 1997, investment securities comprised
approximately 18.5% of the Bank's assets and net loans comprised
approximately 74.3% of the Bank's assets. The Bank invests
primarily in obligations of the United States or obligations
guaranteed as to principal and interest by the United States,
including mortgage-backed securities, and other taxable securities.
In addition, the Bank enters into Federal Funds transactions with
its principal correspondent banks, and acts as a net seller of such
funds. The sale of Federal Funds amounts to a short-term loan from
the Bank to another bank.
The following table presents, for the periods indicated, the
book value of the Bank's investments, reported by those available
for-sale and those held-to-maturity:
Investment
Category
December 31,
1997 1996
Available-for-sale:
Obligations of U.S. Treasury
and other U.S. Agencies $12,787,102 $11,190,080
Tax-exempt securities 478,636 --
Federal Reserve Bank Stock 112,500 112,500
Other securities 213,833 --
Total $13,592,071 $11,302,580
Investment
Category
December 31,
1997 1996
Held-to-Maturity:
Obligations of U.S. Treasury
and other U.S. Agencies $ 250,000 $3,735,832
Mortgage backed securities 898,615 --
Other securities 2,479,190 1,679,004
Total $3,627,805 $5,414,836
The following table indicates for the year ended December 31,
1997 the amount of investments due in (i) one year or less, (ii)
one to five years, (iii) five to ten years, and (iv) over ten
years:
Investment Weighted Average
Category Amount Yield(1)
Available-for-Sale:
Obligations of U.S. Treasury
and other U.S. Agencies:
0 - 1 Yr. $888,954 5.99%
Over 1 through 5 Yrs. 11,144,888 6.41%
Over 5 through 10 Yrs. 753,260 5.80%
Tax-exempt securities(1):
Over 5 through 10 Yrs. 357,831 6.67%
Over 10 Yrs. 120,807 6.97%
Other securities:
Over 1 through 5 Yrs. 162,823 6.33%
Over 10 Yrs. 51,008 6.44%
FRB Stock (no maturity) 112,500 6.00%
Total $13,592,071 6.35%
____________________
(1) The Company has invested in tax-exempt securities. The yield
on tax-exempt securities is reported at the tax-equivalent
rate.
Investment Weighted Average
Category Amount Yield(1)
Held to Maturity:
Obligations of U.S. Treasury
and other U.S. Agencies:
Over 1 through 5 Yrs. $250,000 6.48%
Mortgage-backed securities:
Over 5 through 10 Yrs. 238,876 6.60%
Over 10 Yrs. 659,739 6.67%
Other securities:
0-1 Yr. 39,651 6.25%
Over 1 through 5 Yrs. 1,134,974 6.81%
Over 5 through 10 Yrs. 866,005 6.61%
Over 10 Yrs. 438,560 6.67%
Total $ 3,627,805 6.69%
Return on Equity and Assets
Returns on average consolidated assets and average consolidated
equity for the periods indicated are as follows:
Years Ended December 31,
1997 1996
Return on Average Assets 0.75% 0.57%
Return on Average Equity 6.50% 5.50%
Average Equity to Average
Assets Ratio 11.63% 10.39%
Dividend Payout Ratio -- --
Asset/Liability Management
It is the objective of the Bank to manage assets and
liabilities to provide a satisfactory, consistent level of
profitability within the framework of established cash, loan,
investment, borrowing and capital policies. Certain of the
officers of the Bank will be responsible for monitoring policies
and procedures that are designed to ensure acceptable composition
of the asset/liability mix, stability and leverage of all sources
of funds while adhering to prudent banking practices. It is the
overall philosophy of management to support asset growth primarily
through growth of core deposits, which include deposits of all
categories made by individuals, partnerships and corporations.
Management of the Bank seeks to invest the largest portion of the
Bank's assets in commercial, consumer and real estate loans.
The Bank's asset/liability mix is monitored on a daily basis
with a monthly report reflecting interest-sensitive assets and
interest-sensitive liabilities being prepared and presented to the
Bank's Board of Directors. The objective of this policy is to
control interest-sensitive assets and liabilities so as to
minimize the impact of substantial movements in interest rates on
the Bank's earnings.
Correspondent Banking
Correspondent banking involves the providing of services by
one bank to another bank which cannot provide that service for
itself from an economic or practical standpoint. The Bank is
required to purchase correspondent services offered by larger
banks, including check collections, purchase of Federal Funds,
security safekeeping, investment services, coin and currency
supplies, overline and liquidity loan participations and sales of
loans to or participations with correspondent banks.
The Bank sells loan participations to correspondent banks with
respect to loans which exceed the Bank's lending limit. As
compensation for services provided by a correspondent, the Bank
may maintain certain balances with such correspondents in non-
interest bearing accounts. At December 31, 1997 the Bank had
outstanding participations totaling $2,407,573.
Data Processing
The Bank has entered into a data processing servicing
agreement with Central Service Corp. This servicing agreement
provides for the Bank to receive a full range of data processing
services, including an automated general ledger, deposit
accounting, commercial, real estate and installment lending data
processing, payroll, central information file and ATM processing
and investment portfolio accounting.
The Company is currently evaluating its computer systems as
well as those of its data processing vendor to determine whether
modifications and expenditures will be necessary to make its
systems as well as those of its vendor compliant with Year 2000
requirements. These requirements have arisen due to the
widespread use of computer programs that rely on two-digit date
codes to perform computations or decision-making functions. Many
of these programs may fail as a result of their inability to
properly interpret date codes beginning January 1, 2000. For
example, such programs may misinterpret "00" as the year 1900
rather than 2000. In addition, some equipment, being controlled
by microprocessor chips, may not deal appropriately with the year
"00." The Company believes that its systems are currently year
2000 compliant and does not believe that material expenditures
will be necessary to implement any further modifications.
However, there can be no assurance that all necessary
modifications will be identified and corrected or that unforeseen
difficulties or costs will not arise. In addition, there can be
no assurance that the systems of other companies on which the
Company's systems rely will be modified on a timely basis, or that
the failure by another company to properly modify its systems will
not negatively impact the Company's systems or operations.
Facilities
The Bank operates out of an approximately 1,800 square foot
facility located at 1600 Curtis Bridge Road in Wilkesboro, North
Carolina. The facility includes four teller stations, one office,
a vault, a night depository, and a drive-in window. The Bank
opened a full service branch, located in North Wilkesboro, in June
1994. This 1,700 square foot facility contains five teller
stations, a drive-in window and an operations area. The Bank
leases the 1600 Curtis Bridge Road facility and the Company
subleases the North Wilkesboro facility to the Bank at a rate
which includes reimbursement to the Company or payment of rent,
taxes, insurance, repairs and maintenance of the property. The
Company's Millers Creek branch office opened in February 1996.
This 2,000 square foot facility contains five teller stations, two
drive-in windows, a vault, a night depository and safe deposit
boxes.
On August 15, 1997, the Bank opened a full service branch in
Taylorsville, North Carolina. In connection with the opening of
this branch, the Company purchased 1.6 acres of land and a 22,000
square foot facility in Taylorsville at the intersection of
Highway 90 and Highway 16 for a purchase price of $275,000. The
Company renovated 5,600 square feet of this facility to house the
operations of the Taylorsville branch and intends to renovate and
lease the remaining space to other businesses. Approximately
3,600 square feet of the facility is used for the Bank's branch
facility and contains six teller stations, two drive-in windows,
four offices, a vault, safe deposit boxes, a night depository and
an automated teller machine. The remaining 2,000 square feet will
be used for future expansion of the Bank. The Company spent
approximately $300,000 to renovate the 5,600 square feet used to
house the Bank's Taylorsville branch office.
The Company also leases 2,000 square feet of office space in
Wilkes Mall, Wilkesboro, North Carolina. This facility houses
certain of the Company's administrative and operational functions.
Employees
The Bank presently employs 34 persons on a full-time basis,
including 12 officers and 2 persons on a part-time basis. The
Bank will hire additional persons as needed, including additional
tellers and financial service representatives.
Monetary Policies
The results of operations of the Bank will be affected by
credit policies of monetary authorities, particularly the Federal
Reserve Board. The instruments of monetary policy employed by the
Federal Reserve Board include open market operations in U.S.
Government securities, changes in the discount rate on member bank
borrowings, changes in reserve requirements against member bank
deposits and limitations on interest rates which member banks may
pay on time and savings deposits. In view of changing conditions
in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the
Federal Reserve Board, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or
the business and earnings of the Bank.
Supervision and Regulation
The Company and the Bank operate in a highly regulated
environment, and their business activities are governed by
statute, regulation and administrative policies. The business
activities of the Company and the Bank are closely supervised by a
number of state and federal regulatory agencies, including the
Federal Reserve Board, the Comptroller and the Federal Deposit
Insurance Corporation ("FDIC").
The Company is regulated by the Federal Reserve Board under
the federal Bank Holding Company Act of 1956, which requires every
bank holding company to obtain the prior approval of the Federal
Reserve Board before acquiring more than 5% of the voting shares
of any bank or all or substantially all of the assets of a bank,
and before merging or consolidating with another bank holding
company. The Federal Reserve Board (pursuant to regulation and
published policy statements) has maintained that a bank holding
company must serve as a source of financial strength to its
subsidiary banks. In adhering to the Federal Reserve Board policy
the Company may be required to provide financial support to a
subsidiary bank at a time when, absent such Federal Reserve Board
policy, the Company may not deem it advisable to provide such
assistance.
Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, the existing restrictions on interstate
acquisitions of banks by bank holding companies have been
repealed, such that the Company and any other bank holding company
located in North Carolina is able to acquire a bank located in any
other state, and a bank holding company located outside North
Carolina can acquire any North Carolina-based bank, in either case
subject to certain deposit percentage and other restrictions. The
legislation also provides that, unless an individual state elects
beforehand either (i) to accelerate the effective date or (ii) to
prohibit out-of-state banks from operating interstate branches
within its territory, on or after June 1, 1997, adequately
capitalized and managed bank holding companies will be able to
consolidate their multistate bank operations into a single bank
subsidiary and to branch interstate through acquisitions. De novo
branching by an out-of-state bank would be permitted only if it is
expressly permitted by the laws of the host state. The authority
of a bank to establish and operate branches within a state will
continue to be subject to applicable state branching laws. The
State of North Carolina elected to accelerate the effective date
to July 1, 1995.
A bank holding company is generally prohibited from acquiring
control of any company which is not a bank and from engaging in
any business other than the business of banking or managing and
controlling banks. However, there are certain activities which
have been identified by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto and thus
permissible for bank holding companies. Effective April 21, 1997,
the Federal Reserve Board revised and expanded the list of
permissible nonbanking activities, which includes the following
activities: extending credit and servicing loans; acting as
investment or financial advisor to subsidiaries and certain
outside companies; leasing personal and real property or acting as
a broker with respect thereto; providing management and employee
benefits consulting advice and career counseling services to
nonaffiliated banks and nonbank depository institutions; operating
certain nonbank depository institutions; performing certain trust
company functions; providing certain agency transactional
services, including securities brokerage services, riskless
principal transactions, private placement services, and acting as
a futures commission merchant; providing data processing and data
transmission services; acting as an insurance agent or underwriter
with respect to limited types of insurance; performing real estate
appraisals; arranging commercial real estate equity financing;
providing check-guaranty, collection agency and credit bureau
services; engaging in asset management, servicing and collection
activities; providing real estate settlement services; acquiring
certain debt which is in default; underwriting and dealing in
obligations of the United States, the states and their political
subdivisions; engaging as a principal in foreign exchange trading
and dealing in precious metals; providing other support services
such as courier services and the printing and selling of checks;
and investing in programs designed to promote community welfare.
In determining whether an activity is so closely related to
banking as to be permissible for bank holding companies, the
Federal Reserve Board is required to consider whether the
performance of such activities by a bank holding company or its
subsidiaries can reasonably be expected to produce such benefits
to the public as greater convenience, increased competition and
gains in efficiency that outweigh such possible adverse effects as
undue concentration of resources, decreased or unfair competition,
conflicts of interest and unsound banking practices. Generally,
bank holding companies are required to obtain prior approval of
the Federal Reserve Board to engage in any new activity not
previously approved by the Federal Reserve Board.
As a national bank, the Bank is subject to the supervision of
the Comptroller and, to a limited extent, the FDIC and the Federal
Reserve Board. With respect to expansion, national banks situated
in the State of North Carolina may establish branches anywhere
within the state provided that the proposed branch will meet the
needs and promote the convenience of the community in which it is
to be located, the probable volume of business is sufficient to
assure and maintain the solvency of the branch, and certain
minimum capital requirements are met. The Bank also will be
subject to the North Carolina banking and usury laws restricting
the amount of interest which it may charge in making loans or
other extensions of credit.
Loans and extensions of credit by national banks are subject
to legal lending limitations. Under federal law, a national bank
may grant unsecured loans and extensions of credit in an amount up
to 15% of its unimpaired capital and surplus to any person if the
loans and extensions of credit are not fully secured by collateral
having a market value at least equal to their face amount. In
addition, a national bank may grant loans and extensions of credit
to a single person up to 10% of its unimpaired capital and
surplus, provided that the transactions are fully secured by
readily marketable collateral having a market value determined by
reliable and continuously available price quotations at least
equal to the amount of funds outstanding. This 10% limitation is
separate from, and in addition to, the 15% limitation for
unsecured loans. Loans and extensions of credit may exceed the
general lending limit if they qualify under one of several
exceptions. Such exceptions include certain loans or extensions
of credit arising from the discount of commercial or business
paper, the purchase of bankers' acceptances, loans secured by
documents of title, loans secured by U.S. obligations, and loans
to or guaranteed by the federal government.
Both the Company and the Bank are subject to regulatory
capital requirements imposed by the Federal Reserve Board and the
Comptroller. In 1989, both the Federal Reserve Board and the
Comptroller issued new risk-based capital guidelines for bank
holding companies and banks which make regulatory capital
requirements more sensitive to differences in risk profiles of
various banking organizations. The capital adequacy guidelines
issued by the Federal Reserve Board are applied to bank holding
companies on a consolidated basis with the banks owned by the
holding company. The Comptroller's risk capital guidelines apply
directly to national banks regardless of whether they are a
subsidiary of a bank holding company. Both agencies' requirements
(which are substantially similar), provide that banking
organizations must have capital equivalent to 8% of weighted risk
assets. The risk weights assigned to assets are based primarily
on credit risks. Depending upon the riskiness of a particular
asset, it is assigned to a risk category. For example, securities
with an unconditional guarantee by the United States government
are assigned to the lowest risk category. A risk weight of 50% is
assigned to loans secured by owner-occupied one to four family
residential mortgages, provided that certain conditions are met.
The aggregate amount of assets assigned to each risk category is
multiplied by the risk weight assigned to that category to
determine the weighted values, which are added together to
determine total risk-weighted assets. At December 31, 1997, the
Company's total risk-based capital and tier-one ratios were 15.4%
and 14.1%, respectively. Both the Federal Reserve Board and the
Comptroller have also implemented new minimum capital leverage
ratios to be used in tandem with the risk-based guidelines in
assessing the overall capital adequacy of banks and bank holding
companies. Under these rules, banking institutions are required
to maintain a ratio of 3% "Tier 1" capital to total assets (net of
goodwill). Tier 1 capital includes common stockholders equity,
noncumulative perpetual preferred stock and minority interests in
the equity accounts of consolidated subsidiaries.
Both the risk-based capital guidelines and the leverage ratio
are minimum requirements, applicable only to top-rated banking
institutions. Institutions operating at or near these levels are
expected to have well-diversified risk, high asset quality, high
liquidity, good earnings and in general, have to be considered
strong banking organizations, rated composite 1 under the CAMEL
rating system for banks. Institutions with lower ratings and
institutions with high levels of risk or experiencing or
anticipating significant growth are expected to maintain ratios
100 to 200 basis points above the stated minimums.
The Comptroller amended the risk-based capital guidelines
applicable to national banks in an effort to clarify certain
questions of interpretation and implementation, specifically with
regard to the treatment of originated and purchased mortgage
servicing rights and other intangible assets. The Comptroller's
guidelines provide that intangible assets are generally deducted
from Tier 1 capital in calculating a bank's risk-based capital
ratio. However, certain intangible assets which meet specified
criteria ("qualifying intangibles") such as mortgage servicing
rights are retained as a part of Tier 1 capital. The Comptroller
currently maintains that only mortgage servicing rights and
purchased credit card relationships meet the criteria to be
considered qualifying intangibles. The Comptroller's guidelines
formerly provided that the amount of such qualifying intangibles
that may be included in Tier 1 capital was strictly limited to a
maximum of 25% of total Tier 1 capital. The Comptroller has
amended its guidelines to increase the limitation of such
qualifying intangibles from 25% to 50% of Tier 1 capital and
further to permit the inclusion of purchased credit card
relationships as a qualifying intangible asset.
In addition, the Comptroller has adopted rules which clarify
treatment of asset sales with recourse not reported on a bank's
balance sheet. Among assets affected are mortgages sold with
recourse under Fannie Mae, Freddie Mac and Farmer Mac programs.
The rules clarify that even though those transactions are treated
as asset sales for bank Call Report purposes, those assets will
still be subject to a capital charge under the risk-based capital
guidelines.
The Comptroller, the Federal Reserve Board and the FDIC
recently adopted final regulations revising their risk-based
capital guidelines to further ensure that the guidelines take
adequate account of interest rate risk. Interest rate risk is the
adverse effect that changes in market interest rates may have on a
bank's financial condition and is inherent to the business of
banking. Under the new regulations, when evaluating a bank's
capital adequacy, the agencies' capital standards now explicitly
include a bank's exposure to declines in the economic value of its
capital due to changes in interest rates. The exposure of a
bank's economic value generally represents the change in the
present value of its assets, less the change in the value of its
liabilities, plus the change in the value of its interest rate
off-balance sheet contracts. Concurrently, the agencies issued a
joint policy statement to bankers, effective June 26, 1996, to
provide guidance on sound practices for managing interest rate
risk. In the policy statement, the agencies emphasize the
necessity of adequate oversight by a bank's Board of Directors and
senior management and of a comprehensive risk management process.
The policy statement also describes the critical factors affecting
the agencies' evaluations of a bank's interest rate risk when
making a determination of capital adequacy. The agencies' risk
assessment approach used to evaluate a bank's capital adequacy for
interest rate risk relies on a combination of quantitative and
qualitative factors. Banks that are found to have high levels of
exposure and/or weak management practices will be directed by the
agencies to take corrective action.
The Federal Deposit Insurance Corporation Improvement Act of
1991 (the "Act"), enacted on December 19, 1991, provides for a
number of reforms relating to the safety and soundness of the
deposit insurance system, supervision of domestic and foreign
depository institutions and improvement of accounting standards.
One aspect of the Act involves the development of a regulatory
monitoring system requiring prompt action on the part of banking
regulators with regard to certain classes of undercapitalized
institutions. While the Act does not change any of the minimum
capital requirements, it directs each of the federal banking
agencies to issue regulations putting the monitoring plan into
effect. The Act creates five "capital categories" ("well
capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically
undercapitalized") which are defined in the Act and which will be
used to determine the severity of corrective action the
appropriate regulator may take in the event an institution reaches
a given level of undercapitalization. For example, an institution
which becomes "undercapitalized" must submit a capital restoration
plan to the appropriate regulator outlining the steps it will take
to become adequately capitalized. Upon approving the plan, the
regulator will monitor the institution's compliance. Before a
capital restoration plan will be approved, any entity controlling
a bank (i.e., holding companies) must guarantee compliance with
the plan until the institution has been adequately capitalized for
four consecutive calendar quarters. The liability of the holding
company is limited to the lesser of five percent of the
institution's total assets or the amount which is necessary to
bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted
from paying management fees, dividends and other capital
distributions, will be subject to certain asset growth
restrictions and will be required to obtain prior approval from
the appropriate regulator to open new branches or expand into new
lines of business.
As an institution drops to lower capital levels, the extent of
action to be taken by the appropriate regulator increases,
restricting the types of transactions in which the institution may
engage and ultimately providing for the appointment of a receiver
for certain institutions deemed to be critically undercapitalized.
The Act also provides that banks will have to meet new safety
and soundness standards. In order to comply with the Act, the
Federal Reserve Board, the Comptroller and the FDIC have proposed
rules defining operational and managerial standards relating to
internal controls, loan documentation, credit underwriting,
interest rate exposure, asset growth, director and officer
compensation, asset quality, earnings and stock valuation.
Both the capital standards and the safety and soundness
standards which the Act seeks to implement are designed to bolster
and protect the deposit insurance fund.
In response to the directive issued under the Act, the
regulators have established regulations which, among other things,
prescribe the capital thresholds for each of the five capital
categories established under the Act. The following table
reflects the capital thresholds:
Total Risk - Tier 1 Risk - Tier 1
Based Capital Based Capital Leverage
Ratio Ratio Ratio
Well capitalized (1) 10% 6% 5%
Adequately capitalized (1) 8% 4% 4% (2)
Undercapitalized (4) < 8% < 4% < 4% (3)
Significantly undercapitalized (4) < 6% < 3% < 3%
Critically undercapitalized - - < 2% (5)
_________________________________
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) <3% for composite 1-rated institutions, subject to applicable federal
banking agency guidelines.
(4) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(5) Ratio of tangible equity to total assets.
As a national bank, the Bank is required to file with the
Comptroller quarterly reports of condition, as well as such
additional reports as may be required by the national banking
laws.
As a bank holding company, the Company is required to file with
the Federal Reserve Board an annual report of its operations at
the end of each fiscal year and such additional information as the
Federal Reserve Board may require pursuant to the Act. The
Federal Reserve Board may also make examinations of the Company
and each of its subsidiaries.
As a bank holding company which controls a national bank
situated in North Carolina, the Company is required to register
with the North Carolina Commissioner of Banks within 180 days
after becoming a bank holding company. North Carolina law also
restricts the acquisition by the Company of certain non-bank
banking institutions.
The scope of regulation and permissible activities of the
Company and the Bank is subject to change by future federal and
state legislation.
Item 2. Description of Property.
In June 1991, the Company entered into a lease agreement (the
"Lease Agreement") with Edward F. Greene and his wife, Frances C.
Greene to lease an approximately 1,800 square foot facility
located at 1600 Curtis Bridge Road in Wilkesboro, North Carolina.
The Lease Agreement, which expired in June 1996, provided for a
term of five years commencing on June 1, 1991, with an option to
extend the lease for an additional five-year term. In February
1997, the Bank entered into a new Lease Agreement (the "New Lease
Agreement") with Mr. and Mrs. Greene covering the 1600 Curtis
Bridge Road Facility. The New Lease Agreement provides for a two-
year term with an option to extend the lease for an additional
one-year term. The initial monthly rental for the facility under
the New Lease Agreement is $4,000, which rental rate may be
adjusted for changes in the Consumer Price Index. The facility
includes four teller stations, one office, a vault, a night
depository, and a drive-in window. During the period after the
Lease Agreement expired and prior to the execution of the New
Lease Agreement, the Company leased the facility on a month-to-
month basis.
In November 1993, the Company entered into a lease agreement
with Edward F. Greene and Joe D. Severt, directors of the Company,
to lease an approximately 1,700 square foot facility located at
the intersection of Waugh Street and Sparta Road in North
Wilkesboro, North Carolina. The Bank's North Wilkesboro branch
office is located in this facility. The lease agreement provides
for a term of five years commencing on December 1, 1993, with an
option to extend the lease for an additional five-year term. The
initial monthly rental for the facility is $1,500, with the
monthly rental rate to be adjusted annually for changes in the
Consumer Price Index. On each of the third and fifth
anniversaries of the date of commencement of the lease and at the
expiration of the renewal term (if exercised), the Company has an
option to purchase the facility at a price equal to the greater of
the fair market value of the facility as determined by an MAI
appraisal or the original purchase price of the property paid by
Messrs. Greene and Severt. The facility includes five teller
stations, a drive-in window and an operations area. The Company
subleases the facility to the Bank at a rate which includes
reimbursement to the Company or payment of rent, taxes, insurance,
repairs and maintenance of the property.
In April 1995, the Bank entered into a lease agreement with an
unrelated third party to lease an approximately 2,000 square foot
facility in Millers Creek, North Carolina. The Bank's Millers
Creek branch office is located in this facility. The leasehold
rights to this facility were purchased from First Union National
Bank of North Carolina, which operated a branch office at this
site. The lease expires in April 2004, with an option to extend
the lease term for three consecutive five-year periods. Lease
payments are currently $900 per month, with the amount to be
adjusted every five years during the term of the agreement.
In August 1997, the Bank opened a full service branch in
Taylorsville, North Carolina. In connection with the opening of
this branch, the Company purchased 1.6 acres of land and a 22,000
square foot facility in Taylorsville at the intersection of
Highway 90 and Highway 16 for a purchase price of $275,000. The
Company has renovated 5,600 square feet of this facility to house
the operations of the Taylorsville branch and intends to renovate
and lease the remaining space to other businesses. Approximately
3,600 square feet of the facility is used for the Bank's branch
facility and contains six teller stations, two drive-in windows,
four offices, a vault, safe deposit boxes, a night depository and
an automated teller machine. The remaining 2,000 square feet will
be used for future expansion of the Bank. The Company spent
approximately $300,000 to renovate the 5,600 square feet that is
used to house the Bank's Taylorsville branch office.
The Company also leases 2,000 square feet of office space from
an unrelated third party in Wilkes Mall, Wilkesboro, North
Carolina. This facility houses certain of the Company's
administrative and operational functions.
Item 3. Legal Proceedings.
On December 23, 1997, the Company, along with eight of its
directors, were sued by Edward F. Greene and Joe Severt,
individually and derivatively on behalf of the Company. Messrs.
Greene and Severt are shareholders and directors of the Company.
The lawsuit is styled Edward F. Greene and Joe Severt,
Individually and Derivatively on Behalf of Community Bancshares,
Inc. v. Ronald S. Shoemaker, Dwight Pardue, Rebecca Ann Sebastian,
Colin Shoemaker, Gilbert Miller, Robert Rickets, Brent Eller, Ray
Ferguson and Community Bancshares, Inc.; In the North Carolina
General Court of Justice, Superior Court Division; File No.: 97-
CvS-2118 (the "Action").
On February 24, 1998, plaintiffs filed an Amended Complaint
against the Company and the individual directors. The Amended
Complaint asserts claims for alleged waste of corporate assets,
conversion, fraud, willful misconduct, breach of fiduciary duty
and duty to act in good faith, removal of defendant directors, an
order allowing attendance of plaintiffs' counsel at board
meetings, an order allowing plaintiffs to record board meetings,
an order sealing the court file, and declaratory judgment
concerning the 1998 election of board members.
On February 27, 1998, the Company and defendant directors filed
a joint motion to dismiss the Amended Complaint on the grounds
that plaintiffs failed to state a claim for relief, and that
plaintiffs failed to make the requisite written demand on the
Company and failed to wait the requisite 90 days before commencing
the Action. On March 3, 1998, the Company also filed its Answer,
Counterclaims and Third-Party Complaint. By its Answer, the
Company denies all liability. The Company asserted counterclaims
against plaintiffs Greene and Severt, as well as third-party
claims against Stephen Greene and Severt & Greene, for breach of
fiduciary duty, breach of duty of good faith, breach of loyalty,
misappropriation of business and corporate opportunities,
imposition of constructive trust and accounting, removal of
directors, unfair trade practices, and misappropriation of trade
secrets. The individual defendant directors have not yet been
required to file an Answer, but plan to do so denying all
liability. The Court has not yet ruled on the pending motion to
dismiss the Action.
On March 24, 1998, the plaintiffs filed an Answer to the
Company's Counterclaims and Third-Party Complaint denying all
liability.
Under the provisions of the Company's By-Laws, the Company has
agreed to advance on behalf of each of the defendant directors
their costs of defense of the claims against them in the Action.
The cost of defending litigation of this type can be significant
and will be an expense of the Company in future periods until the
matter is resolved. The Company cannot estimate the amount of
this expense.
The Company believes that the claims of the plaintiffs in the
Action are unfounded and completely without merit. The Company
denies any liability with respect to these claims and intends
vigorously to defend them. The Action is at an early procedural
stage, however, and it is not possible at this time to determine
the outcome of the lawsuit or the effect of its resolution on the
Company's financial position or operating results. Management of
the Company and the directors who are defendants in this action
believe that their defenses have merit; however, there can be no
assurance that this litigation will not have a material adverse
effect on the Company's results of operations for some period or
on the Company's financial position.
On December 12, 1997, the plaintiffs filed a lawsuit against the
Company and certain of its directors, which lawsuit was substantially
similar to the Action, with the exception that it also included a
request for injunctive relief regarding the issuance of additional
shares of common stock of the Company, which stock issuance had
previously been approved by the Board of Directors. In settlement
of this lawsuit, the Company on December 18, 1997, entered into a
settlement agreement with the plaintiffs, which provided, among
other things, for the proposed stock offering to be rescinded and
for the Company to cease and desist any and all efforts to raise
any capital stock of any kind for a period of one year unless all
parties agree to the contrary or unless an impartial expert appointed
by the parties concludes that the issuance of additional stock is in
the best interest of the Company. Notwithstanding the foregoing, in the
event that the Federal Reserve Bank or the Comptroller directs either
the Company or the Bank to raise capital, then this prohibition shall not
apply. Shortly after the settlement agreement was exerted, the
plaintiffs commenced the Action.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter ended
December 31, 1997 to a vote of security holders of the Company.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
A. Market Information
During the period covered by this report and to date, there has
been no established public trading market for the Company's Common
Stock.
B. Holders of Common Stock
As of March 15, 1998, the number of holders of record of the
Company's Common Stock was 718.
C. Dividends
To date, the Company has not paid any dividends on its Common
Stock. As the Company and the Bank are both start-up operations,
it is the policy of the Board of Directors of the Company to
reinvest earnings for such period of time as is necessary to
ensure the success of the operations of the Company and of the
Bank. There are no current plans to initiate payment of cash
dividends, and future dividend policy will depend on the Bank's
earnings, capital requirements, financial condition and other
factors considered relevant by the Board of Directors of the
Company.
The Bank is restricted in its ability to pay dividends under
the national banking laws and by regulations of the Comptroller.
Pursuant to 12 U.S.C. Section 56, a national bank may not pay dividends
from its capital. All dividends must be paid out of undivided
profits, subject to other applicable provisions of law. Payments
of dividends out of undivided profits is further limited by 12
U.S.C. Section 60(a), which prohibits a bank from declaring a dividend
on its shares of common stock until its surplus equals its stated
capital, unless there has been transferred to surplus not less
than 1/10 of the Bank's net income of the preceding two
consecutive half-year periods (in the case of an annual dividend).
Pursuant to 12 U.S.C. Section 60(b), the approval of the Comptroller is
required if the total of all dividends declared by the Bank in any
calendar year exceeds the total of its net income for that year
combined with its retained net income for the preceding two years,
less any required transfers to surplus.
D. Recent Sales of Unregistered Securities
On October 16, 1997, the Company granted options to purchase an
aggregate of 25,000 shares of Common Stock to ten employees at an
exercise price of $15.00 per share. In addition, on October 16,
1997, warrants to purchase 400 shares of Common Stock were
exercised at a price of $5.50 per share.
All issuances of securities described above were made in
reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933 as transactions by an issuer
not involving a public offering. All of the securities were
acquired by the recipients thereof for investment and with no view
toward the resale or distribution thereof. In each instance, the
offers and sales were made without any public solicitation and the
stock certificates bear restrictive legends. No underwriter was
involved in the transactions and no commissions were paid.
Item 6. Management's Discussion and Analysis or Plan of
Operation.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996
For the years ended December 31, 1997 and 1996, net income
amounted to $628,122 and $350,969, respectively. For the year
ended December 1997 and 1996, basic income per share amounted to
$.49 and $.36, respectively, and diluted income per share amounted
to $.40 and $.29, respectively. During 1997 and 1996, there were
outstanding warrants and stock options that were dilutive (i.e.,
upon exercise, they diluted earnings per share by more than 3%),
thus necessitating the disclosure of basic and diluted income per
share. Net income in 1997 increased by $277,153 primarily due to
the following reasons:
a. Average earning assets increased from $58.6 million at
December 31, 1996 to $79.4 million at December 31, 1997,
representing an increase of $20.8 million, or 35.5%. Below are
the various components of average earning assets for the periods
indicated:
December 31,
1997 1996
(In Thousands)
Federal funds sold $ 1,230 $ 1,564
Taxable securities 16,373 13,738
Non-taxable securities 21 --
Net loans 61,772 43,336
Total earning assets $79,396 $58,638
b. As a consequence of the increase in earning assets, the
net interest income also increased from $2,426,023 for the year
ended December 31, 1996 to $3,590,657 for the year ended December
31, 1997. Below are the various components of interest income and
expense, as well as their yield/costs for the periods indicated:
Years Ended
December 31, 1997 December 31, 1996
Interest Yield Interest Yield
Income/expense Cost Income/expense Cost
(Dollars in Thousands)
Interest income:
Federal funds sold $ 67 5.44% $ 78 5.02%
Taxable securities 1,057 6.45 880 6.41
Non-taxable securities 1 6.67 --- ---
Loans 6,139 9.94 4,269 9.85
Total $7,264 9.15 $5,227 8.91
Interest expense:
NOW and money market deposits $ 443 3.47% $ 333 3.47%
Savings deposits 75 3.12 56 3.04
Time deposits 3,140 5.97 2,394 6.07
Federal funds and repurchase
agreements 15 5.11 18 5.45
Total $3,673 5.40 $2,801 5.47
Net interest income $3,591 $2,426
Net yield on earning assets 4.52% 4.14%
c. Non-interest income as a percentage of average total
assets for 1997 and 1996 amounted to .56% and .35%, respectively.
These improved results are due primarily to higher service fees
and from fees earned by Community Mortgage Corporation, a wholly
owned subsidiary of the Company ("Community Mortgage"). Non-
interest expense, as a percentage of average assets for 1997 and
1996 amounted to 2.81% and 2.93%, respectively. These results
indicate that the Company attained higher efficiencies in 1997 due
to economies of scale.
Net Interest Income
The Company's results of operations are determined by its
ability to manage effectively interest income and expense, to
minimize loan and investment losses, to generate non-interest
income and to control non-interest expense. Since interest rates
are determined by market forces and economic conditions beyond the
control of the Company, the ability to generate net interest
income is dependent upon the Company's ability to maintain an
adequate spread between the rate earned on earning assets and the
rate paid on interest-bearing liabilities, such as deposits and
borrowings. Thus, net interest income is the key performance
measure of income.
The Company's net interest income for 1997 was $3,590,657 as
compared to $2,426,023 for 1996. Average yields on earning assets
were 9.15% and 8.91% for the years ended December 31, 1997 and
1996, respectively. The average costs of funds for 1997 decreased
to 5.40% from the 1996 cost of 5.47%. Net interest yield is
computed by subtracting interest expense from interest income and
dividing the resulting figure by average interest-earning assets.
Net interest yields for the years ended December 31, 1997 and 1996
amounted to 4.52% and 4.14%, respectively. Net interest income
for 1997 as compared to 1996, increased by $1,164,634 primarily
due to the increase in average earning assets, from $58.6 million
in 1996 to $79.4 million in 1997 and due to the increase in net
yield on earning assets, from 4.14% in 1996 to 4.52% in 1997.
Non-Interest Income
Non-interest income for the years ended December 31, 1997 and
1996, amounted to $465,821 and $216,872, respectively. As a
percentage of average assets, non-interest income increased from
.35% in 1996 to .56% in 1997 because of higher charges on deposit
accounts and higher fees earned by Community Mortgage. The higher
charges in 1997 were attained due to higher transactional volume
and an increase in the fee structure.
The following table summarizes the major components of non-
interest income for the periods therein indicated:
Non-Interest Income
Year Ended December 31,
1997 1996
(In Thousands)
Service fees on deposit accounts $137 $101
(Loss) on sale of securities (5) (1)
Fees from Community Mortgage 258 80
Miscellaneous, other 76 37
Total non-interest income $466 $217
Non-Interest Expense
Non-interest expense increased from $1,804,514 during 1996 to
$2,347,494 in 1997. As a percent of total average assets, non-
interest expense declined from 2.93% in 1996 to 2.81% in 1997.
Below are the components of non-interest expense for the years
1997 and 1996.
Non-Interest Expense
Year Ended December 31,
1997 1996
(In Thousands)
Salaries and other personnel benefits $1,215 $ 892
Data processing charges 138 109
Professional fees 158 89
Postage and courier fees 76 64
Supplies and printing 114 95
Rent and lease expense 117 118
Other expenses 529 438
Total non-interest expense $2,347 $1,805
During the calendar year 1997, the allowance for loan losses
grew from $619,133 to $1,033,393. The allowance for loan losses
as a percent of gross loans increased from 1.16% at December 31,
1996 to 1.47% at December 31, 1997. As of December 31, 1997,
management considers the allowance for loan losses to be adequate
to absorb possible future losses. However, there can be no
assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional provisions to the
allowance will not be required.
Liquidity and Interest Rate Sensitivity
Net interest income, the Company's primary source of
earnings, fluctuates with significant interest rate movements. To
lessen the impact of these margin swings, the balance sheet should
be structured so that repricing opportunities exist for both
assets and liabilities in roughly equivalent amounts at
approximately the same time intervals. Imbalances in these
repricing opportunities at any point in time constitute interest
rate sensitivity.
Interest rate sensitivity refers to the responsiveness of
interest-bearing assets and liabilities to changes in market
interest rates. The rate sensitive position, or gap, is the
difference in the volume of rate sensitive assets and liabilities,
at a given time interval. The general objective of gap management
is to manage actively rate sensitive assets and liabilities so as
to reduce the impact of interest rate fluctuations on the net
interest margin. Management generally attempts to maintain a
balance between rate sensitive assets and liabilities as the
exposure period is lengthened to minimize the Company's overall
interest rate risks.
The asset mix of the balance sheet is continually evaluated
in terms of several variables: yield, credit quality, appropriate
funding sources and liquidity. To effectively manage the
liability mix of the balance sheet focuses on expanding the
various funding sources. The interest rate sensitivity position
at year-end 1997 is presented below. Since all interest rates and
yields do not adjust at the same velocity, the gap is only a
general indicator of rate sensitivity.
After
After 1 year
three After 6 but
Within mos but mos but within After
three within 1 within 1 five five
months year year years years Total
EARNING ASSETS
(Dollars in Thousands)
Loans $40,169 $--- $2,707 $25,120 $2,231 $70,227
Securities 491 --- 438 12,693 3,598 17,220
Federal funds sold 1,500 --- --- --- --- 1,500
Total earning assets $42,160 $--- $3,145 $37,813 $5,829 $88,947
SUPPORTING SOURCES OF FUNDS
Interest-bearing
demand deposits &
savings $16,631 $--- $ --- $ --- $ --- $16,631
Certificates,
less than $100M 13,668 10,729 9,614 4,095 --- 38,106
Certificates,
$100M and over 8,918 6,249 4,812 1,154 --- 21,133
Total interest-
bearing liabilities $39,217 $16,978 $14,426 $5,249 $ --- $75,870
Interest rate
sensitivity gap $ 2,943 $(16,978) $(11,281) $32,564 $5,829 $13,077
Cumulative gap 2,943 (14,035) (25,316) 7,248 13,077 13,077
Interest rate
sensitivity gap ratio 1.08 --- 0.22 7.20 --- 1.17
Cumulative interest
rate sensitivity gap
ratio 1.08 0.75 0.64 1.10 1.17 1.17
As evidenced by the above table, the Company is asset
sensitive from zero to three months, liability sensitive from
three months to one year and asset sensitive thereafter. In a
declining interest rate environment, a liability sensitive
position (a gap ratio of less than 1.0) is generally more
advantageous since liabilities are repriced sooner than assets.
Conversely, in a rising interest rate environment, an asset
sensitive position (a gap ratio over 1.0) is generally more
advantageous, as earning assets are repriced sooner than
liabilities. With respect to the Company, an increase in interest
rate will result in higher earnings for the first three months,
lower earnings from three months to one year, and higher earnings
thereafter. Conversely, a decline in interest rate will lower
income for the first three months, increase earnings from three
months to one year, and lower earnings thereafter. This, however,
assumes that all other factors affecting income remain constant.
As the Company continues to grow, management will
continuously structure its rate sensitivity position to best hedge
against rapidly rising or falling interest rates. The Bank's
Asset/Liability Committee meets on a quarterly basis and develops
management's strategy for the upcoming period. Such strategy
includes anticipations of future interest rate movements.
Interest rate risk will, nonetheless, fall within previously
adopted policy parameters to contain any risk.
Liquidity represents the ability to provide steady sources of
funds for loan commitments and investment activities and to
maintain sufficient funds to cover deposit withdrawals and payment
of debt and operating obligations. These funds can be obtained by
converting assets to cash or by attracting new deposits. The
Company's primary source of liquidity comes from its ability to
maintain and increase deposits through the Bank. Deposits grew by
$17.3 million in 1997. Below are the pertinent liquidity balances
and ratios for the years ended December 31, 1997 and 1996.
December 31,
1997 1996
(Dollars in Thousands)
Cash and cash equivalents $ 4,034 $ 4,214
Marketable securities 17,220 16,717
CDS, over $100,000 to
total deposits ratio 25.8% 22.8%
Loan to deposit ratio 84.6% 81.9%
Brokered deposits -- --
Large denomination certificates during 1997 have increased
approximately $6.4 million, and reliance on such certificates to
fund normal banking operations has also increased in relation to
other sources of funds. At December 31, 1997 and 1996, large
denomination certificates accounted for 25.8% and 22.8% of total
deposits, respectively. Large denomination CDS are generally more
volatile than other deposits. As a result, management continually
monitors the competitiveness of the rates it pays on its large
denomination CDS and periodically adjusts its rates in accordance
with market demands. Significant withdrawals of large
denomination CDS may have a material adverse effect on the Bank's
liquidity. Management believes that since a majority of the above
certificates were obtained from Bank customers residing in Wilkes
County, North Carolina, the volatility of such deposits is lower
than if such deposits were obtained from depositors residing
outside of Wilkes County, as outside depositors are more likely to
be interest rate sensitive.
Securities, particularly securities available-for-sale,
provide a secondary source of liquidity. Approximately $0.9
million of the $17.2 million in the Bank's securities portfolio is
scheduled to mature during 1998. Additionally, several securities
have call dates prior to their maturity dates, thus enhancing the
Company's liquidity posture.
Brokered deposits are deposits instruments, such as
certificates of deposits, deposit notes, bank instrument contracts
and certain municipal investment contracts that are issued through
brokers and dealers who then offer and/or sell these deposit
instruments to one or more investors. As of December 31, 1997 and
1996, the Company had no brokered deposits in its portfolio.
In March 1996, the Company commenced a public offering of up
to 500,000 shares of Common Stock at a purchase price of $10 per
share. The Company completed the sale of 500,000 shares of Common
Stock in September 1996 for net proceeds of $4,934,243. Of the
net proceeds to the Company, $2,620,000 was injected into the
Bank's capital accounts, $1,200,000 was utilized to acquire and
improve the facility housing the Taylorsville branch, $400,000 was
utilized to acquire a branch facility in North Wilkesboro, and
$42,500 was utilized to purchase additional equity in Community
Mortgage. The remaining proceeds from the sale of stock are
currently held by the Company to fund future growth. For example,
the Bank may utilize these proceeds to fund growth through
continued penetration of the Bank's existing customers and markets
and through expansion of the Bank's branch network.
On December 23, 1997, the Company along with eight of its
directors, were sued by Edward F. Green and Joe Severt, individually
and derivatively on behalf of the Company. Se Item 3. Legal
Proceedings. The cost of defending litigation of this type can be
significant and will be an expense of the Company in the future
periods until the matter is resolved. The Company cannot estimate
the amount of this expense. The Company believes that the claims of
the plaintiffs in the Action are unfounded and completely without
merit. The Company denies any liability with respect to these claims
and intends vigorously to defend them. The Action is at any early
procedural stage, however, and it is not possible at this time to
determine the outcome of the lawsuit or the effect of its resolution
on the Company's financial position or operating results. There can
be no assurance that this litigation will not have a material adverse
effect on the Company's results of operations for some period or on
the Company's financial position.
Other than as set forth above, management knows of no trends,
demands, commitments, events or uncertainties that should result
in or are reasonably likely to result in the Company's liquidity
increasing or decreasing in any material way in the foreseeable
future.
Capital Adequacy
There are now two primary measures of capital adequacy for
banks and bank holding companies: (i) risk-based capital
guidelines; and (ii) the leverage ratio.
The risk-based capital guidelines measure the amount of a
bank's required capital in relation to the degree of risk
perceived in its assets and its off-balance sheet items. Capital
is divided into two "tiers." Tier 1 capital consists of common
shareholders' equity, non-cumulative and cumulative (bank holding
companies only), perpetual preferred stock and minority interests.
Goodwill is subtracted from the total. Tier 2 capital consists of
the allowance for loan losses, hybrid capital instruments, term
subordinated debt and intermediate term preferred stock. Banks
are required to maintain a minimum risk-based capital ratio of
8.0%, with at least 4.0% consisting of Tier 1 capital.
The second measure of capital adequacy relates to the
leverage ratio. The Comptroller has established a 3.0% minimum
leverage ratio requirement. Note that the leverage ratio is
computed by dividing Tier 1 capital into total assets. Banks that
are not rated CAMEL 1 by their primary regulator should maintain a
minimum leverage ratio of 3.0% plus an additional cushion of at
least 1 to 2 percent, depending upon risk profiles and other
factors.
A new rule was recently adopted by the Federal Reserve Board,
the Comptroller and the FDIC that adds a measure of interest rate
risk to the determination of supervisory capital adequacy.
Concurrently, the agencies issued a joint policy statement to
bankers, effective June 26, 1996, to provide guidance on sound
practices for managing interest rate risk. In the policy
statement, the agencies emphasize the necessity of adequate
oversight by a bank's Board of Directors and senior management and
of a comprehensive risk management process. The policy statement
also describes the critical factors affecting the agencies'
evaluations of a bank's interest rate risk when making a
determination of capital adequacy. The agencies' risk assessment
approach used to evaluate a bank's capital adequacy for interest
rate risk relies on a combination of quantitative and qualitative
factors. Banks that are found to have high levels of exposure
and/or weak management practices will be directed by the agencies
to take corrective action.
The table below illustrates the Bank's and Company's regulatory
capital ratios at December 31, 1997.
Minimum
December 31, Regulatory
Bank 1997 Requirement
Tier 1 Capital 10.6% 4.0%
Tier 2 Capital 1.2% n/a
Total risk-based capital ratio 11.8% 8.0%
Leverage ratio 9.1% 3.0%
Company - Consolidated
Tier 1 Capital 14.1% 4.0%
Tier 2 Capital 1.3% n/a
Total risk-based capital ratio 15.4% 8.0%
Leverage Ratio 12.0% 3.0%
The above ratios indicate that the capital positions of the Company
and the Bank are sound and that the Company is well positioned for
future growth.
Accounting Matters
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128") establishes standards for computing and presenting
earnings per share ("EPS"). SFAS 128 simplifies the previous standards
for computing and presenting EPS and makes the new standards comparable
to international EPS standards. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997; it also
requires restatement of all prior period EPS data presented. The
Company has adopted SFAS 128. The adoption of SFAS 128 did not have a
significant impact on the Company's consolidated financial condition or
results of operations.
Item 7. Financial Statements.
The following financial statements are filed with this report:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years ended December 31, 1997
and 1996
Consolidated Statements of Changes in Shareholders' Equity - Years
ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December 31,
1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
Board of Directors
Community Bancshares, Inc.
Wilkesboro, North Carolina
We have audited the accompanying consolidated balance sheets of Community
Bancshares, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Community Bancshares, Inc., and subsidiaries at December 31,
1997 and 1996, and the consolidated results of their operations and their
cash flows for each of the years in the two-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
Atlanta, Georgia
March 17, 1998
Consolidated Balance Sheets
ASSETS
As of December 31,
1997 1996
Cash and due from banks $ 2,534,421 $ 1,763,882
Federal funds sold, net (Note 3) 1,500,000 2,450,000
Total cash and cash equivalents $ 4,034,421 $ 4,213,882
Securities: (Notes 2, 4 & 5)
Available-for-sale at fair value 13,592,071 11,302,580
Held to maturity (Estimated market
values of $3,644,394 and $5,399,611 at
December 31, 1997 and 1996, respectively 3,627,805 5,414,836
Loans, net (includes loans of $2,097,432 (1997)
and $1,438,919 (1996) to insiders)
(Notes 2, 6, 7 & 16) 69,194,004 52,786,698
Property and equipment, net (Notes 2 & 8) 1,806,059 218,857
Goodwill 26,645 33,307
Other assets 794,652 745,208
Total Assets $ 93,075,657 $ 74,715,368
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing deposits $ 5,910,213 $ 5,090,509
Interest bearing deposits 75,869,351 59,364,668
Total deposits (Note 10) $ 81,779,564 $ 64,455,177
Other liabilities 1,191,085 924,292
Total Liabilities $ 82,970,649 $ 65,379,469
Commitments and Contingencies (Note 9)
Shareholders' Equity: (Notes 1, 11 & 15)
Common stock, $3.00 par value, 10,000,000 shares
authorized, 1,297,156 (1997) and 1,284,386
(1996) issued and outstanding $ 3,891,468 $ 3,853,158
Paid-in-capital 5,380,223 5,312,078
Retained earnings 791,381 163,259
Unrealized gain on securities, net 41,936 7,404
Total Shareholders' Equity $ 10,105,008 $ 9,335,899
Total Liabilities and Shareholders' Equity $ 93,075,657 $ 74,715,368
Refer to notes to the consolidated financial statements.
Consolidated Statements of Income
Years Ended December 31,
Interest Income: 1997 1996
Interest and fees on loans $ 6,138,953 $ 4,268,735
Interest on investment securities 1,057,699 879,994
Interest on federal funds sold 66,940 78,617
Total interest income $ 7,263,592 $ 5,227,346
Interest Expense:
Interest on deposits and borrowings (Note 12) $ 3,672,935 $ 2,801,323
Net interest income 3,590,657 2,426,023
Provision for possible loan losses (Note 7) 485,000 287,500
Net interest income after provision for
possible loan losses $ 3,105,657 $ 2,138,523
Other Income:
Gain/(loss) on sale of securities (Note 4) $ (4,618) $ (487)
Service fees on deposit accounts 137,070 101,354
Fees from Community Mortgage 257,996 79,063
Miscellaneous, other 75,373 36,942
Total other income $ 465,821 $ 216,872
Other Expenses:
Salaries and benefits $ 1,214,956 $ 892,100
Data processing expense 137,924 108,610
Professional fees 158,024 89,433
Supplies and printing 114,324 94,761
Rent and lease expense 116,691 118,091
Postage and courier 76,323 64,351
Other operating expenses (Note 13) 529,252 437,168
Total other expenses $ 2,347,494 $ 1,804,514
Income before income tax $ 1,223,984 $ 550,881
Income tax (Notes 2 & 14) 595,862 199,912
Net Income $ 628,122 $ 350,969
Basic earnings per share (Note 2) $ .49 $ .36
Diluted earnings per share (Note 2) $ .40 $ .29
Refer to notes to the consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997 and 1996
Number Common Paid Unrealized
Of Stock -in- Retained Gain,
Shares Par Value Capital Earnings Securities Total
Balance,
December 31,
1995 781,786 $2,345,358 $1,868,236 $(187,710) $17,242 $4,043,126
Net income,
1996 -- -- 350,969 -- 350,969
Net unrealized
(losses) - securities -- -- -- (9,838) (9,838)
Exercise of warrants
1,800 5,400 4,500 -- -- 9,900
Exercise of options
800 2,400 5,100 -- -- 7,500
Sale of stock 500,000 1,500,000 3,434,242 -- -- 4,934,242
Balance,
December 31,
1996 1,284,386 $3,853,158 $5,312,078 $ 163,259 $ 7,404 $9,335,899
Net income, 1997 -- -- -- 628,122 -- 628,122
Net unrealized
gains-securities -- -- -- -- 34,532 34,532
Exercise of 2,450 7,350 6,125 -- -- 13,475
warrants
Exercise of
options 10,320 30,960 62,020 -- -- 92,980
Balance,
December 31,
1997 1,297,156 $3,891,468 $5,380,223 $ 791,381 $41,936 $10,105,008
Refer to notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
Years Ended December 31,
Cash flows from operating activities: 1997 1996
Net income $ 628,122 $ 350,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 67,249 84,857
Net amortization of premiums on securities 36,484 42,109
(Loss) on sale or settlements of securities 4,618 487
Provisions for loan losses 485,000 287,500
(Increase) in other assets (58,111) (192,244)
Increase in liabilities 266,793 229,329
Net cash provided by operating activities $1,430,155 $ 803,007
Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sale of securities $2,051,632 $1,851,300
Proceeds from maturities and paydowns 3,005,042 2,173,400
Purchase of securities (7,355,633) (8,366,666)
Held-to-maturity securities:
Purchase of securities (1,093,283) (2,004,944)
Maturities and paydowns 2,889,874 3,399,616
Net increase in loans (16,892,306) (16,760,623)
Purchase of property and equipment (1,645,784) (54,047)
Net cash used in investing activities $(19,040,458) $(19,761,964)
Cash flows from financing activities:
Proceeds from exercise of options
and warrants $ 106,455 $ 17,400
Proceeds from sale of stock -- 4,934,242
Increase in deposits 17,324,387 16,272,011
Net cash provided from financing activities $ 17,430,842 $ 21,223,653
Net (decrease) in cash and cash equivalents $ (179,461) $ 2,264,696
Cash and cash equivalents, beginning of year 4,213,882 1,949,186
Cash and cash equivalents, end of year $ 4,034,421 $ 4,213,882
Supplemental Information:
Income taxes paid $ 563,394 $ 188,426
Interest paid $ 3,465,712 $ 2,630,401
Refer to notes to the consolidated financial statements.
Note 1 - Summary of Organization
Community Bancshares, Inc., Wilkesboro, North Carolina (the "Company") was
incorporated under the laws of the State of North Carolina on June 11, 1990,
for the purpose of becoming a bank holding company with respect to a proposed
national bank, Wilkes National Bank (the "Bank"), to be located in Wilkesboro,
North Carolina. Upon commencement of the Bank's planned principal operations
on January 17, 1992, the Company acquired 100 percent of the voting stock of
the Bank by injecting $3,750,000 into the Bank's capital accounts. Since then,
three additional branches were established, bringing the total banking offices
to four.
In 1990, during its initial stages, the Company filed a Form S-1 Registration
Statement with the Securities and Exchange Commission offering for sale a
minimum of 365,000 and a maximum of 660,000 shares of its common stock, $6.00
par value per share. During 1995, the Company's Board of Directors declared
a two-for-one stock split and reduced the par value of the Company's common
stock to $3.00 per share. During 1996, the Company completed the sale of
500,000 shares of its common stock, resulting in net proceeds of $4,934,242.
As of December 31, 1997 and 1996, there were 1,297,156 and 1,284,386 shares
of common stock, respectively, outstanding.
In the initial stock sale in 1990, the Company offered warrants to its
organizers and to a group of initial subscribers. Each warrant, when
surrendered with $5.50 to the Company, is convertible into one share of
common stock. The warrants expire ten years from January 17, 1992. At
December 31, 1997, there were 382,664 warrants outstanding. The Company also
has a stock option plan with 168,496 options outstanding as of December 31,
1997. Details of the option plan are discussed under Notes 11 & 15.
During 1994, the Company, together with four unrelated banks, established
Community Mortgage Corporation ("Community Mortgage") to engage in mortgage
related activities as allowed under the Bank Holding Company Act. The Company
invested $50,000 in Community Mortgage in exchange for 20% of Community
Mortgage's common stock. During 1996 and 1997, the Company acquired
additional shares of Community Mortgage, thereby increasing its ownership
position to 80% (1996) and 100% (1997) of the voting shares. Community
Mortgage's financial statements are included in the Company's consolidated
financial statements as of and for the years ended December 31, 1997 and 1996.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation and Reclassification. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform
to the current year presentation. Such reclassifications had no impact on
net income or shareholders' equity.
Basis of Accounting. The accounting and reporting policies of the Company
conform to generally accepted accounting principles and to general practices
in the banking industry. In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans.
Investment Securities. The Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investment in Debt and
Equity Securities" ("SFAS 115") on January 1, 1994. SFAS 115 requires
investments in equity and debt securities to be classified into three
categories:
1. Held-to-maturity securities. These are securities which the Company has
the ability and intent to hold until maturity. These securities are stated
at cost, adjusted for amortization of premiums and the accretion of discounts.
2. Trading securities. These are securities which are bought and held
principally for the purpose of selling in the near future. Trading
securities are reported at fair market value, and related unrealized gains and
losses are recognized in the income statement. As of December 31, 1997 and
1996, the Company had no securities in this category.
3. Available-for-sale securities. These are securities which are not
classified as either held-to-maturity or as trading securities. These
securities are reported at fair market value. Unrealized gains and losses
are reported, net of tax, as separate components of shareholders' equity.
Unrealized gains and losses are excluded from the income statement.
A decline in the fair value of any available for sale or held to maturity
security below cost that is deemed other than temporary, results in a charge
to income and the establishment of a new cost basis for the security.
Purchase premiums and discounts on investment securities are amortized and
accreted to interest income using the level yield method on the outstanding
principal balances. In establishing the accretion of discounts and
amortization of premiums, the Company utilizes market based prepayment
assumptions. Interest and dividend income are recognized when earned.
Realized gains and losses for securities sold are included in income and are
derived using the specific identification method for determining the costs of
securities sold.
Loans, Interest and Fee Income on Loans. Loans are stated at the principal
balance outstanding. Unearned discount, unamortized loan fees and the
allowance for possible loan losses are deducted from total loans in the
statement of condition. Interest income is recognized over the term of the
loan based on the principal amount outstanding. Points on real estate loans
are taken into income to the extent they represent the direct cost of
initiating a loan. The amount in excess of direct costs is deferred and
amortized over the expected life of the loan.
Accrual of interest on loans is discontinued either when reasonable doubt
exists as to the full or timely collection of interest or principal or when
a loan becomes contractually past due by 90 days or more with respect to
interest or principal. When a loan is placed on non-accrual status, all
interest previously accrued but not collected is reversed against current
period interest income. Income on such loans is then recognized only to the
extent that cash is received and where the future collection of principal is
probable. Loans are returned to accruing status only when they are brought
fully current with respect to interest and principal and when, in the judgment
of management, the loans are estimated to be fully collectible as to both
principal and interest.
The Company adopted the provisions of SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by SFAS No. 118, "Accounting for
Impairment of a Loan - Income Recognition and Disclosure." These standards
require impaired loans to be measured based on the present value of expected
future cash flows discounted at the loan's original effective interest rate,
or at the loan's observable market price, or the fair value of the collateral
if the loan is collateral dependent. A loan is considered impaired when,
based on current information and events, it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of the
note agreement. Cash receipts on impaired loans which are accruing interest
are applied to principal and interest under the contractual terms of the loan
agreement. Cash receipts on impaired loans for which the accrual of interest
has been discontinued are applied to reduce the principal amount of such loans
until the principal has been recovered and are recognized as interest income
thereafter.
Allowance for Loan Losses. The allowance for loan losses is established
through provisions charged to operations. Such provisions are based on
management's evaluation of the loan portfolio under current economic
conditions, past loan loss experience, adequacy of underlying collateral,
changes in the nature and volume of the loan portfolio, review of specific
problem loans, and such other factors which, in management's judgment, deserve
recognition in estimating loan losses. Loans are charged off when, in the
opinion of management, such loans are deemed to be uncollectible. Subsequent
recoveries are added to the allowance.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination.
Property and Equipment. Building, furniture, equipment and leasehold
improvements are stated at cost, net of accumulated depreciation. Depreciation
is computed using the straight line method over the estimated useful lives of
the related assets. Maintenance and repairs are charged to operations, while
major improvements are capitalized. Upon retirement, sale or other
disposition of property and equipment, the cost and accumulated depreciation
are eliminated from the accounts, and gain or loss is included in income from
operations.
Other Real Estate. Other real estate represents property acquired through
foreclosure or in satisfaction of loans. Other real estate is carried at the
lower of: (i) cost; or (ii) fair value less estimated selling costs. Fair
value is determined on the basis of current appraisals, comparable sales and
other estimates of value obtained principally from independent sources. Any
excess of the loan balance at the time of foreclosure or acceptance in
satisfaction of loans over the fair value of the real estate held as
collateral is treated as a loan loss and charged against the allowance for
loan losses. Gain or loss on sale and any subsequent adjustments to reflect
changes in fair value and selling costs are recorded as a component of
income. Costs of improvements to other real estate are capitalized, while
costs associated with holding other real estate are charged to operations.
Income Taxes. The consolidated financial statements have been prepared on
the accrual basis. When income and expenses are recognized in different
periods for financial reporting purposes and for purposes of computing income
taxes currently payable, deferred taxes are provided on such temporary
differences. The Company files a consolidated income tax return. Taxes are
accounted for in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Restriction on Cash and Due from Banks. The Bank is required to maintain
reserve funds in cash or on deposits with the Federal Reserve System. The
required reserves at December 31, 1997 and 1996 were approximately $286,000
and $198,000, respectively.
Statement of Cash Flows. For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are purchased or sold for one day periods.
Stock Options and Warrants. There are two major accounting standards that
address the accounting for stock options/warrants. Entities are allowed to
freely choose between the two distinct standards. The first standard, APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
measures stock options/warrants by the intrinsic value method. Under the
above method, if the exercise price is the same or above the quoted market
price at the date of grant, no compensation expense is recognized. The second
standard, SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
may recognize a compensation expense even in cases where the exercise price is
the same or above the quoted market price. SFAS 123 takes into account the
time value of the options/warrants; that is, the value of being able to defer a
decision on whether or not to exercise the option/warrants until the
expiration date. The Company follows the accounting standards of APB 25.
Had the Company followed the accounting standards of SFAS 123, net income for
the years ended December 31, 1997 and 1996 would have been reduced by $23,734
and $9,743, respectively. On a per share basis, basic and diluted earnings
per share would have been reduced by $.02 (1997) and $.01 (1996).
Earnings Per Share ("EPS"). The Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
establishes standards for computing and presenting EPS. Because the Company
has a complex capital structure, it is required to report: (i) basic EPS; and
(ii) diluted EPS. Basic EPS is defined as the amount of earnings available to
each share of common stock outstanding during the reporting period. Diluted
EPS is defined as the amount of earnings available to each share of common
stock outstanding during the reporting period and to each share that would
have been outstanding assuming the issuance of common stock for all dilutive
potential common stock outstanding during the reporting period.
Basic EPS is computed by dividing income available to common shareholders by
the weighted-average number of common shares outstanding during the period.
Diluted EPS is computed assuming the conversion of all warrants and options.
For the year ended December 31, 1997, basic EPS and diluted EPS were computed
as follows :
Basic EPS Diluted EPS
Numerator Denominator Numerator Denominator
Net income $ 628,122 $ 628,122
Weighted average shares 1,292,264 1,292,264
Options, warrants 273,674
Totals $ 628,122 1,292,264 $ 628,122 1,565,938
EPS $.49 $.40
Note 3 - Federal Funds Sold
The Bank is required to maintain legal cash reserves computed by applying
prescribed percentages to its various types of deposits. When the Bank's cash
reserves are in excess of the required amount, the Bank may lend the excess to
other banks on a daily basis. At December 31, 1997 and 1996, the Bank sold
$1,500,000 and $2,450,000, respectively, to other banks through the federal
funds market.
Note 4 - Securities Available-for-Sale
The amortized costs and estimated market values of securities available-for-
sale as of December 31, 1997 follow:
Gross
Amortized Unrealized Estimated
Description Costs Gains Losses Market Values
U.S. Treasury securities $ 3,273,964 $ 26,544 $ -- $ 3,300,508
U.S. Agency securities 9,449,439 41,827 (4,672) 9,486,594
FRB stock 112,500 -- -- 112,500
Municipal securities 476,585 2,051 -- 478,636
Other securities 216,043 -- (2,210) 213,833
Total securities $13,528,531 $ 70,422 $ (6,882) $13,592,071
The amortized costs and estimated market values of securities available-for-
sale as of December 31, 1996 follow:
Gross
Amortized Unrealized Estimated
Description Costs Gains Losses Market Values
U.S. Treasury securities $ 3,276,042 $ 27,060 $ -- $ 3,303,102
U.S. Agency securities 8,015,320 17,209 (33,051) 7,999,478
Total securities $11,291,362 $ 44,269 $(33,051) $11,302,580
All national banks are required to hold FRB stock. No ready market exists
for the FRB stock nor does the stock have a quoted market value. Accordingly,
FRB stock is reported at cost.
The amortized costs and estimated market values of securities available-for-
sale at December 31, 1997, by contractual maturity, are shown in the following
chart. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Amortized Estimated
Costs Market Values
Due in one year or less $ 887,722 $ 888,954
Due after one through five years 11,246,778 11,307,711
Due after five through ten years 1,108,411 1,111,091
Due after ten years 173,120 171,815
FRB stock (no maturity) 112,500 112,500
Total securities $ 13,528,531 $ 13,592,071
Proceeds form sales of securities during 1997 and 1996 were $2,051,632 and
$1,851,300, respectively. Gross losses on $4,618 (1997) and $487 (1996) were
realized on those sales..
As of December 31, 1997 and 1996, securities with an aggregate par value
$2,166,109 and $250,000, respectively, were pledged as collateral to secure
public funds.
Note 5 - Securities Held-to-Maturity
The amortized costs and estimated market values of securities held-to-
maturity as of December 31, 1997 follow:
Gross
Amortized Unrealized Estimated
Description Costs Gains Losses Market Values
U.S. Agency securities $ 250,000 $ 625 $ -- $ 250,625
Other securities 988,146 10,800 (2,638) 996,308
Mortgaged backed
securities 898,615 -- (6,067) 892,548
Mortgage pools 1,491,044 17,531 (3,662) 1,504,913
Total securities $ 3,627,805 $28,956 $ (12,367) $3,644,394
The amortized costs and estimated market values of securities held-to-maturity
as of December 31, 1996 follow:
Gross
Amortized Unrealized Estimated
Description Costs Gains Losses Market Values
U.S. Agency securities $ 3,735,832 $ 10,417 $ (26,322) $ 3,719,927
Other securities 1,679,004 5,190 ( 4,510) 1,679,684
Total securities $ 5,414,836 $ 15,607 $ (30,832) $ 5,399,611
The amortized costs and estimated market values of securities held-to-
maturity at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Estimated
Description Costs Market Values
Due in one year or less $ 39,651 $ 40,893
Due after one year through five years 1,384,974 1,397,741
Due after five years through ten years 1,104,881 1,109,448
Due after ten years 1,098,299 1,096,312
Total securities $3,627,805 $3,644,394
At December 31, 1997 and 1996, securities with an aggregate par value of
$250,000 and $500,000, respectively, were pledged to secure public deposits.
Note 6 - Loans
The composition of net loans by major loan category, as of December 31, 1997
and 1996, follows:
December 31,
1997 1996
Commercial, financial, agricultural $ 28,215,330 $ 18,575,306
Real estate - construction 6,571,616 4,919,198
Real estate - mortgage 21,088,303 17,363,240
Installment 14,016,280 12,007,846
Lease financing 335,868 540,241
Loans, gross $ 70,227,397 $ 53,405,831
Deduct:
Allowance for loan losses (1,033,393) (619,133)
Loans, net $ 69,194,004 $ 52,786,698
Loans in nonaccrual status amounted to $95,501 and $18,781 at December 31,
1997 and 1996 respectively. If interest had been accrued on those loans,
interest income would have increased by $11,027 and $738 for the years ended
December 31, 1997 and 1996, respectively. The above nonaccruing loans were
the only impaired loans at December 31, 1997 and 1996. The amount included
in the allowance for loan losses relating to these impaired loans was $34,600
and $2,800 at December 31, 1997 and 1996, respectively. The average recorded
investment in impaired loans during 1997 and 1996 was $148,053 and $34,916,
respectively. Interest income recognized for impaired loans during 1997 and
1996 was approximately $12,400 and $2,100 respectively.
Note 7 - Allowance for Possible Loan Losses
The allowance for possible loan losses is a valuation reserve available to
absorb future loan charge-offs. The allowance is increased by provisions
charged to operating expenses and by recoveries of loans which were
previously written-off. The allowance is decreased by the aggregate loan
balances, if any, which were deemed uncollectible during the year.
Activity within the allowance for loan losses accounts for the years ended
December 31, 1997 and 1996 follows:
Years ended December 31,
1997 1996
Balance, beginning of year $ 619,133 $ 418,620
Add: Provision for loan losses 485,000 287,500
Add: Recoveries of previously charged
off amounts 12,370 9,676
Total $ 1,116,503 $ 715,796
Deduct: Amount charged-off (83,110) (96,663)
Balance, end of year $ 1,033,393 $ 619,133
Note 8 - Property and Equipment
Building, furniture, equipment, land and leasehold improvements are stated at
cost less accumulated depreciation. Components of property and equipment
included in the consolidated balance sheets at December 31, 1997 and 1996
follow:
December 31,
1997 1996
Land $ 350,000 $ --
Leasehold improvement 68,938 70,295
Building 1,337,332 87,527
Furniture and equipment 276,423 229,984
Property and equipment, gross $ 2,032,693 $ 387,806
Deduct:
Accumulated depreciation (226,634) (168,949)
Property and equipment, net $ 1,806,059 $ 218,857
Depreciation expenses for the years ended December 31, 1997 and 1996 amounted
to $58,582 and $60,787, respectively. Depreciation is charged to operations
over the estimated useful lives of the assets. The estimated useful lives
and methods of depreciation for the principal items follow:
Type of Asset Life in Years Depreciation Method
Furniture and equipment 1 to 7 Straight-line
Building 32 Straight-line
Leasehold improvements 5 Straight-line
Note 9 - Commitments and Contingencies
In December 1997, the Company and certain specifically named directors
thereof became defendants in a lawsuit brought by other directors on behalf
of the Company. The claim includes, among other things, assertions of
alleged waste of assets, conversion, breach of duty and an action to remove
the defendant directors from the board. The Company and the defendant
directors have denied all liability and have countersued. It is not possible
to presently determine with precision the probable outcome of the amount of
liability, if any, under the lawsuits.
Please refer to Notes 1,11,15 and 16 concerning warrants and options earned
by directors, organizers and executive officers.
Please refer to Note 16 concerning a contract the Company executed with the
Bank's CEO.
Please refer to Note 16 for the discussion concerning the leases of the Bank's
operating facilities.
Note 10 - Deposits
The following details deposit accounts at December 31, 1997 and 1996:
December 31,
1997 1996
Non-interest bearing deposits $ 5,910,213 $ 5,090,509
Interest bearing deposits:
NOW accounts 6,241,531 4,663,522
Money market accounts 7,699,956 6,352,548
Savings 2,689,560 2,097,100
Time, less than $100,000 38,105,637 31,545,175
Time, $100,000 and over 21,132,667 14,706,323
Total deposits $81,779,564 $64,455,177
Note 11 - Shareholders' Equity
In May 1995, the Company's Board of Directors (the "Board) declared a
two-for-one stock split, in the form of a 100% stock dividend, to all
shareholders of record as of July 3, 1995. As a consequence to the stock
split, the par value of the common stock was reduced from $6.00 to
$3.00, while the number of outstanding shares was doubled. The Company
currently has 10.0 million shares of common stock authorized, 1,297,156
shares of which were issued and outstanding at December 31, 1997. The
holders of common stock have no preemptive rights with respects to the
issuance of any shares by the Company.
At December 31, 1997 and 1996, there were 382,664 and 385,114 stock warrants,
respectively, outstanding. During 1997 and 1996, 2,450 and 1,800 warrants,
respectively, were exercised for $5.50 per share.
The Company adopted an incentive stock option plan covering 400,000 stock
options. At December 31, 1997 and 1996, there were 168,496 and 116,816 stock
options, respectively, outstanding. Please refer to Notes 15 & 16 for
additional details concerning stock options.
The Company is authorized to issue up to 1,000,000 shares of preferred stock,
$6.00 par value, issuable in series, the relative rights and preferences of
which shall be designated by the Board of Directors. The preferred stock may
have senior dividend and/or liquidation preferences superior to those of
common stock.
Note 12 - Interest on Deposits and Borrowings
A summary of interest expense for the years ended December 31, 1997 and 1996
follows:
December 31,
1997 1996
Interest on NOW accounts $ 170,656 $ 130,452
Interest on money market accounts 271,844 202,262
Interest on savings accounts 75,384 56,045
Interest on CDs under $100,000 2,081,309 1,756,178
Interest on CDs $100,000 and over 1,059,156 637,875
Interest, other borrowings 14,586 18,511
Total interest on deposits and borrowings $3,672,935 $2,801,323
Note 13 - Other Operating Expenses
A summary of other operating expenses for the years ended December 31, 1997
and 1996 follows:
December 31,
1997 1996
Advertising and public relations $ 75,199 $ 57,745
Depreciation and amortizaton 67,249 84,857
Insurance 46,314 23,252
Utilities and telephone 65,069 49,834
Repairs and maintenance 61,352 73,384
Taxes and licenses 38,117 21,467
Regulatory assessments 45,724 60,245
All other operating expenses 130,228 66,384
Total other operating expenses $ 529,252 $ 437,168
Note 14 - Income Taxes
As of December 31, 1997 and 1996, the Company's provision for income taxes
consisted of the following:
December 31,
1997 1996
Current $ 447,284 $ 232,525
Deferred 148,578 (32,613)
Federal income tax expense $ 595,862 $ 199,912
Deferred income taxes for the year ended December 31, 1997 consist of the
following:
1997
Provision for loan losses $ 137,448
Community Mortgage 13,940
Other (2,810)
Total $ 148,578
The Company's provision for income taxes differs from the amounts computed by
applying the federal income tax statutory rates to income before income taxes.
A reconciliation of federal statutory income taxes to the Company's actual
income tax provision follows for the year ended December 31, 1997:
1997
Income taxes at statutory rate $ 416,154
State tax, net of Federal benefits 11,108
Change in valuation allowance 153,884
Tax-free income 19,666
Other (4,950)
Total $ 595,862
The tax effects of the temporary differences that comprise the net deferred
tax assets at December 31, 1997 is presented below:
1997
Deferred tax assets:
Allowance for loan losses $ 323,548
Community Mortgage 30,600
Unrealized gain, securities (21,604)
Deferred asset, depreciation 1,411
Valuation reserve (353,239)
Net deferred tax asset $ (19,284)
There was a net change in the valuation allowance during 1997. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projection for future taxable
income over the periods which the temporary differences resulting in the
deferred tax assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of those deductible
differences, net of the existing valuation allowance at December 31, 1997.
Note 15 - Benefit Plans
The Company has a savings plan (the "Savings Plan") administered under the
provisions of the Internal Revenue Code Section 401(k). During 1997 and
1996, the Company made contributions totaling $29,000 and $24,000
respectively, to the Savings Plan.
On November 18, 1993, the Bank's Board of Directors adopted a profit sharing
plan ("Profit Plan") for the benefit of its employees. There were no
transactions relating to this Profit Plan during either1997 or 1996.
The shareholders of the Company voted to adopt an incentive stock option plan
("Incentive Plan") for directors and key employees. The Incentive Plan became
effective March 18, 1993 and covers 400,000 options. The exercise price of
options granted must be at least the average market price as of the date of
the grant. The above options expire between five to ten years from the date
of the grant. In May, 1994, the Incentive Plan was amended to, among other
things, provide for the automatic annual grant of options to purchase 2,000
shares of common stock to each of the Company's outside directors. The
following table summarizes the activities within the Company's Incentive
Plan, including those discussed in Note 11.
Stock Options
1997 1996
Options granted in past years 125,096 91,000
Options granted this year 62,000 34,096
Options exercised in previous years (7,080) (6,280)
Options exercised this year (10,320) (800)
Options forfeited in previous years (1,200) (800)
Options forfeited this year --- (400)
Balance, end of year 168,496 116,816
Options available for grant 212,904 274,904
The options entitle their holders to purchase one share of the Company's
common stock foran amount between $5.50 to $15.00 each, at a weighted average
price of $10.81.
Note 16 - Related Party Transactions
Employment Agreement with CEO. On February 1, 1995, the Company entered into
an Employment Agreement (the "Agreement") with one of its directors pursuant
to which he would continue to serve as the President and Chief Executive
Officer ("CEO") of both the Company and the Bank. The Agreement is for a
term of five years; provided, however, that during each of the first five
years, an additional year will be added to the term of the agreement so that
the Agreement will expire on February 1, 2005. The Agreement provides for an
annual base salary of $84,000, with bonuses to be determined at the discretion
of the Board of Directors. The Agreement also provides for certain severance
payments to be paid to the CEO in the event of a change in control of the
Company. In the events of a change in control and the hiring of a different
CEO, the present CEO would be entitled to receive a lump sum cash payment
equal to $300,000. In addition, in the event the CEO is terminated by the
Company without cause, he would receive during the balance of his term of
employment the annual base salary which would otherwise be payable to him
had he remained in the employ of the Company. The Agreement also entitles
the CEO to other customary benefits, including an automobile allowance,
health, life and disability insurance. During the calendar years 1997 and
1996, the CEO was granted options to purchase 10,000 and 10,264 shares,
respectively, of the Company's common stock. Options granted in 1997 and
1996, are exercisable at $10.00 per share. For the years ended December 31,
1997 and 1996, the Company incurred costs of approximately $133,432 and
$120,435 respectively, in salary and various benefits relating to the CEO's
employment agreements.
Leases with Directors. On June 27, 1991, the Company executed a lease
arrangement for its main operating facility with the owner who also serves
as a director of the Company. The lease expired on June 27, 1996. A new
lease was executed to mature on March 1, 1999. The new lease requires a
monthly payment of $4,000 plus an annual increase tied to the increase in
the Consumer Price Index. Lease expense for the years ended December 31,
1997 and 1996 amounted to $51,658 and $53,333, respectively. Future minimum
rental commitments under the lease follow:
Years Ending December 31, Amount
1998 $48,000
1999 8,000
Total $56,000
On November 17, 1993, the Company also entered into a lease arrangement for
its North Wilkesboro branch with the owners, who also serve as directors of
the Company. The lease is for a five-year term beginning June, 1994, at a
cost of $1,500 per month. Rent increases are tied to the Consumer Price
Index. The lease contains a renewal option for an additional five-year
term. It also provides for the purchase of the property at the end of the
third, fifth or tenth year, assuming the renewal option is exercised, at the
then prevailing market value. Lease expenses for the years ended December
31, 1997 and 1996 amounted to $21,291 and $18,777 respectively. Future
minimum rental commitments under the above lease follow:
Years Ending December 31, Amount
1998 $18,972
1999 7,905
Total $26,877
Borrowings and Deposits by Directors and Executive Officers. Certain
directors, principal, officers and companies with which they are affiliated
are customers of and have banking transactions with the Bank in the ordinary
course of business. As of December 31, 1997 and 1996, loans outstanding to
directors, their related interest and executive officers aggregated
$2,097,432 and $1,438,919, respectively. These loans were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
parties.
A summary of the related party loan transactions during 1997 and 1996 follows:
Insider Loan Transactions
1997 1996
Balance, beginning of year $ 1,438,919 $ 839,550
New loans 1,965,055 1,206,111
Less: principal reductions (1,306,542) (606,742)
Balance, end of year $ 2,097,432 $ 1,438,919
Deposits by directors and their related interests, as of December 31, 1997
and 1996 approximated $1,629,722 and $1,409,490, respectively.
Directors/Organizers Stock Warrants: Please refer to Notes 1, 11 and 15 for
additional details concerning warrants to directors and organizers.
Incentive Stock Option Plan to Directors and Key Employees: Please refer to
Notes 11 and 15 for additional details.
Note 17 - Financial Instruments with Off-Balance Sheet Risk
In the ordinary course of business, and to meet the financing needs of its
customers, the Company is a party to various financial instruments with off-
balance sheet risk. These financial instruments, which include commitments
to extend credit and standby letters of credit, involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the balance sheets. The contract amount of those instruments reflects the
extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any material condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. At December 31, 1997 and 1996, unfunded
commitments to extend credit were $11,977,150 and $9,095,155, respectively.
The Company evaluates each customer's credit worthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation
of the borrower. Collateral varies but may include accounts receivable,
inventory, property, plant and equipment, farm products, livestock and income
producing commercial properties.
At December 31, 1997 and 1996, commitments under letters of credit aggregated
approximately $25,000 and $150,000, respectively. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Collateral varies but may include
accounts receivable, inventory, equipment, marketable securities and
property. Since most of the letters of credit are expected to expire without
being drawn upon, they do not necessarily represent future cash requirements.
The Company makes commercial, agricultural, real estate and consumer loans to
individuals and businesses located in and around Wilkes County, North
Carolina. The Company does not have a significant concentration of credit
risk with any individual borrower. However, a substantial portion of the
Company's loan portfolio is collateralized by real estate located in and
around Wilkes County, North Carolina.
Note 18 - Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the company's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weighting and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 1997,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as Well Capitalized. To be
categorized as Adequately Capitalized or Well Capitalized, the Bank must
maintain minimum total risk based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events
since that notification that management believes have changed the Company's
capital category. The actual capital amounts and ratios are also presented
in the table below:
Minimum Regulatory Capital Guidelines for Banks
Adequately Well
(Dollars in thousands) Actual Capitalized Capitalized
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
Total capital-risk-based
(to risk-weighted assets):
Bank $ 8,214 11.8% $5,559 * 8% $6,949 * 10%
Consolidated 10,925 15.4% 5,691 * 8% N/A * N/A
Tier 1 capital-risk-based
(to risk-weighted assets):
Bank $ 7,346 10.6% $2,780 * 4% $4,169 * 6%
Consolidated 10,036 14.1% 2,846 * 4% N/A N/A
Tier 1 capital-leverage
(to average assets):
Bank $ 7,346 9.1% $3,228 * 4% $4,035 * 5%
Consolidated 10,036 12.0% 3,356 * 4% N/A N/A
Minimum Regulatory Capital Guidelines for Banks
Adequately Well
(Dollars in thousands) Actual Capitalized Capitalized
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996
Total capital-risk-based
(to risk-weighted assets):
Bank $6,290 11.4% $4,408 * 8% $5,510 * 10%
Consolidated 9,948 18.0% 4,418 * 8% N/A N/A
Tier 1 capital-risk-based
(to risk-weighted assets):
Bank $5,671 10.3% $2,204 * 4% $3,306 * 6%
Consolidated 9,329 16.9% 2,209 * 4% N/A N/A
Tier 1 capital-leverage
(to average assets):
Bank $5,671 7.6% $2,961 * 4% $3,703 * 5%
Consolidated 9,329 12.5% 2,985 * 4% N/A N/A
Note 19 - Dividends
The primary source of funds available to the Company to pay shareholder
dividends and other expenses is from the Bank. Bank regulatory authorities
impose restrictions on the amounts of dividends that may be declared by the
Bank. Further restrictions could result from a review by regulatory
authorities of the Bank's capital adequacy. The amount of cash dividends
available from the Bank for payment in 1998 is $672,936 plus 1998 net
earnings of the Bank. At December 31, 1997, $6,715,564 of the Company's
investment in the Bank is restricted as to dividend payments from the Bank
to the Company. For the years ended December 31, 1997 and 1996, no
dividends were paid to shareholders.
Note 20 - Parent Company Financial Information
This information should be read in conjunction with the other notes to the
consolidated financial statements.
Parent Company Balance Sheets
December 31,
Assets 1997 1996
Cash $ 1,089,954 $ 3,619,438
Investment in Community Mortgage (2,765) 8,037
Investment in Bank 7,388,500 5,678,147
Property and equipment 1,594,663 2,800
Other assets 57,016 34,677
Total Assets $10,127,368 $ 9,343,099
Liabilities and Shareholders' Equity:
Accounts payable $ 22,360 $ 7,200
Total Liabilities $ 22,360 $ 7,200
Common stock $ 3,891,468 $ 3,853,158
Paid-in-capital 5,380,223 5,312,078
Retained earnings 791,381 163,259
Unrealized gain on securities 41,936 7,404
Total Shareholders' equity $10,105,008 $ 9,335,899
Total Liabilities and
Shareholders' equity $10,127,368 $ 9,343,099
Parent Company Statements of Income
Years Ended December 31,
Revenues: 1997 1996
Interest income $ 106,896 $ 59,432
Rental income 6,600 --
Total revenues $ 113,496 $ 59,432
Expenses:
Depreciation and amortization $ 15,075 $ 6,092
Professional fees 103,606 11,172
Other expenses 53,868 48,834
Total expenses $ 172,549 $ 66,098
(Loss) before taxes and equity in undistributed
earnings of subsidiaries $ (59,053) $ (6,666)
Tax (benefit) (24,655) (18,783)
(Loss) before equity in undistributed earnings
of subsidiaries $ (34,398) $ 12,117
Equity in undistributed earnings of
subsidiaries 662,520 338,852
Net Income $ 628,122 $ 350,969
Parent Company Statements of Cash Flows
Years Ended December 31,
Cash flows from operating activities: 1997 1996
Net income $ 628,122 $ 350,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiaries (662,520) (338,852)
Depreciation and amortization 15,075 6,092
(Increase) in receivables and other assets (29,470) 57,879
Increase in payables 15,160 (3,800)
Net cash provided by operating activities $ (33,633) $ 72,288
Cash flows from investing activities:
Purchase of property and equipment $(1,599,806) $ (2,800)
Investment in Bank (1,000,000) (1,620,000)
Investment in Community Mortgage (2,500) (40,000)
Net cash used by financing activities $(2,602,306) $(1,662,800)
Cash flows from financing activities:
Proceeds from sale of stock $ -- $ 4,934,242
Exercise of warrants/options 106,455 17,400
Net cash used by financing activities $ 106,455 $ 4,951,642
Net (decrease) in cash and cash equivalents $(2,529,484) $ 3,361,130
Cash and cash equivalents, beginning of
the year 3,619,438 258,308
Cash and cash equivalents, end of year $ 1,089,954 $ 3,619,438
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There has been no occurrence requiring a response to this Item.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a)
of the Exchange Act.
The directors and executive officers of the Company and the Bank
are as follows:
Name Position with Company Position with Bank
Brent F. Eller Secretary, Treasurer Director
and Class II Director
Jack Ray Ferguson Class II Director Director
Edward F. Greene Class II Director Director
Stephen B. Greene Class I Director Director
Gilbert R. Miller Class I Director Director
Dwight E. Pardue Chairman of the Board Director
and Class III Director
Robert F. Ricketts, DDS Class II Director Director
Rebecca Ann Sebastian Class I Director Director
Joe D. Severt Class III Director Director
R. Colin Shoemaker Class III Director Director
Ronald S. Shoemaker President, Chief Executive Chairman of the Board
Officer and Class II Director President and
Chief Executive
Officer
Each of the above persons (with the exception of Messrs. Ferguson,
S. Greene and Severt) has been a director of the Company since June
1990. Messrs. Ferguson, S. Greene and Severt have been directors of the
Company since June 1991. The Company has a classified Board of
Directors, whereby one-third of the members are elected each year at the
Company's annual meeting of shareholders. Upon such election, each
director of the Company will serve for a term of three years. The
Company's officers are appointed by its Board of Directors and hold
office at the will of the Board.
Brent F. Eller, age 58, has served as Secretary and Treasurer of
the Company since June 1990. Mr. Eller served as an operations
specialist with Lowes Companies, Inc., a retail building materials and
home center chain, from 1980 until his retirement in 1994.
Jack R. Ferguson, age 71, is presently retired. From 1954 to 1985,
he served in various capacities with Lowe's Companies, Inc., including
most recently as manager of the Hendersonville, North Carolina store.
Edward F. Greene, age 68, is presently retired. Mr. Greene
currently serves as Chairman of the Board of the Bank. From 1954
to 1984, Mr. Greene served in various capacities with Lowes
Companies, Inc., including most recently, Senior Vice President.
Stephen B. Greene, age 40, has been self-employed as an
insurance agent in North Wilkesboro since 1988. From 1987 to
1988, Mr. Greene served as a life insurance salesman and financial
planner with McNeill Financial Group and from 1982 to 1987, he
served as a life insurance salesman and financial planner with New
York Life.
Gilbert R. Miller, age 68, is presently retired. From 1947
to 1986, Mr. Miller served as President and Chief Executive
Officer of Miller Brothers Lumber Company.
Dwight E. Pardue, age 69, is presently retired. Mr. Pardue
currently serves as Chairman of the Board of the Company. From
1956 to January 1990, Mr. Pardue served in various capacities with
Lowes Companies, Inc., including most recently Senior Executive
Vice President.
Robert F. Ricketts, DDS, age 47, is a dentist who has been
engaged in private practice in North Wilkesboro since 1976.
Rebecca Ann Sebastian, age 62, is presently retired. Ms.
Sebastian served as Media Coordinator at the North Wilkesboro
Elementary School from 1972 until her retirement in 1994.
Joe D. Severt, age 67, has been retired since 1971. From
1956 to 1971, Mr. Severt served in various capacities with Lowes
Companies, Inc., including most recently as office and credit
manager of its Roanoke, Virginia store.
R. Colin Shoemaker, age 54, has served as Controller and
Officer Manager of Key City Furniture Company, Inc. since 1985.
Ronald S. Shoemaker, age 57, has served as President of the
Company since June 1990, and has been engaged in the organization
of the Company and the Bank since February 1990. Mr. Shoemaker
served as Senior Vice President and City Executive for Southern
National Bank of North Carolina from 1985 to 1988.
Ronald S. Shoemaker, President and a director of the Company,
is the brother of R. Colin Shoemaker, a director of the Company.
Stephen B. Greene is the son of Edward F. Greene, both of whom are
directors of both the Company and the Bank.
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors, certain officers and persons who own more
than 10% of the outstanding common stock of the Company, to file
with the Securities and Exchange Commission reports of changes in
ownership of the common stock of the Company held by such persons.
Officers, directors and greater than 10% shareholders are also
required to furnish the Company with copies of all forms they file
under this regulation. To the Company's knowledge, based solely
on a review of the copies of such reports furnished to the Company
and representations that no other reports were required, during
fiscal 1997, the Company has complied with all Section 16(a)
filing requirements applicable to its officers, directors and
greater than 10% shareholders, except as follows: R. Colin
Shoemaker, Brent F. Eller, Jack R. Ferguson, Rebecca Ann
Sebastian, Robert F. Ricketts, Dwight E. Pardue, Gilbert R.
Miller, Rebecca Lowe, Edward F. Greene, Stephen B. Greene and Joe
D. Severt each had a late filing relating to the grant of non-
employee director options in July 1997. In addition, Edward F.
Greene failed to file on a timely basis one report relating to one
transaction, and Stephen B. Greene failed to file on a timely
basis three reports relating to a total of three transactions.
Item 10. Executive Compensation.
The following table provides certain summary information for
the fiscal years ended December 31, 1997, 1996 and 1995 concerning
compensation paid or accrued by the Company to or on behalf of the
Company's Chief Executive Officer. None of the other executive
officers of the Company had total annual salary and bonus which
exceeded $100,000 during the last fiscal year.
Summary Compensation Table
Long-term
Compensation
Name and Other Number of
Principal Annual Options All Other
Position Year Salary Bonus Comp Awarded Comp(2)
Ronald S. Shoemaker, 1997 $89,406 $18,000 $13,462(1) 10,000 $4,470
President & 1996 88,830 18,000 11,659(1) 10,264 4,333
Chief Executive 1995 79,443 18,000 -- 7,332 4,112
Officer
_____________
(1) Includes an annual automobile allowance of $6,600 and disability
insurance premiums of $3,940
and $3,184 paid by the Company in 1997 and 1996, respectively.
(2) Represents the Company's matching contribution under its 401(k)
Plan.
Currently, the directors of the Company receive no cash
compensation for their services. Each of the Company's outside
directors receives an automatic annual grant of options to
purchase 2,000 shares of Common Stock of the Company on each July
1, provided that such director has served on the Board of
Directors of the Company during the twelve month period
immediately preceding the option grant. All new directors will
also receive an option to purchase 2,000 shares of Common Stock
upon their election to the Board of Directors of the Company.
Employment Agreement
In February 1995, the Company entered into an Employment
Agreement with Ronald S. Shoemaker, pursuant to which Mr.
Shoemaker serves as President and Chief Executive Officer of the
Company and the Bank. The Employment Agreement is for a term of
five years, provided, however, that during each of the first five
years, an additional year will be added to the term of the
agreement, so that the Employment Agreement will expire on
February 1, 2005. The Employment Agreement provides for an annual
base salary of $84,000 and bonuses to be determined in the
discretion of the Board of Directors. Mr. Shoemaker has also been
granted an option to purchase 40,000 shares of Common Stock of the
Company, exercisable over a term of ten years at an exercise price
of $10.00 per share. The Employment Agreement requires the Bank
to maintain a key man life insurance policy on Mr. Shoemaker in
the amount of $500,000. The Employment Agreement provides for
certain severance payments to be paid to Mr. Shoemaker in the
event of a change of control of the Company. In the event of a
change in control, if Mr. Shoemaker cannot reach agreement with
respect to his employment arrangements following such change in
control, Mr. Shoemaker will be entitled to receive a lump sum cash
payment equal to $300,000. In addition, in the event Mr.
Shoemaker is terminated by the Company without cause, he will
receive during the balance of his term of employment the annual
base salary which would otherwise be payable to Mr. Shoemaker had
he remained in the employ of the Company.
The Employment Agreement contains noncompete provisions,
effective through the actual date of termination of the Employment
Agreement and for a period of one year thereafter in the event Mr.
Shoemaker terminates his employment with the Company. The
noncompete provisions of the Employment Agreement may not be
enforceable under North Carolina law if judicially deemed to be
unreasonable.
Stock Option Plan
On May 28, 1993, the Company's shareholders adopted a 1993
Incentive Stock Option Plan (the "Plan") for employees who are
contributing significantly to the management or operation of the
business of the Company or its subsidiaries as determined by the
committee administering the Plan. The Plan provides for the grant
of up to 400,000 options at the discretion of the Board of
Directors or a committee designated by the Board of Directors to
administer the Plan. The option exercise must be at least 100%
(110% in the case of a holder of 10% or more of the Common Stock)
of the fair market value of the stock on the date the option is
granted and the options are exercisable by the holder thereof in
full at any time prior to their expiration in accordance with the
terms of the Plan. Stock options granted pursuant to the Plan
will expire on or before (1) the date which is the tenth
anniversary of the date the option is granted, or (2) the date
which is the fifth anniversary of the date the option is granted
in the event that the option is granted to a key employee who owns
more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiary of the Company.
In May 1994, the Plan was amended to, among other things,
provide for the automatic annual grant of options to purchase
2,000 shares of Common Stock to each of the Company's outside
directors.
The following table provides certain information concerning
individual grants of stock options under the Plan made during the
fiscal year ended December 31, 1997, to Ronald S. Shoemaker:
Option Grants in Last Fiscal Year
Individual Grants
Number of Options
Securities Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted (1) Year ($ per share) Date
Ronald S.
Shoemaker 10,000 16.1% $10.00 01/01/07
____________________________
(1) Options vest immediately.
The following table presents information regarding the value of
unexercised options and warrants held at December 31, 1997 by
Ronald S. Shoemaker. No stock options or warrants were exercised
by Mr. Shoemaker and there were no SARs outstanding during fiscal
1997.
Number of
Unexercised Options Value of Unexercised
at FY-End In-the-Money Options
# at FY-End(1)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
Ronald S. Shoemaker 57,096(2)/0 $475,326/$0
__________________
(1) Dollar values calculated by determining the difference
between the estimated fair market value of the Company's
Common Stock at December 31, 1997 ($16.00) and the exercise
price of such options.
(2) Includes 9,500 stock purchase warrants granted in
connection with the Company's initial stock offering.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth certain information as of
March 15, 1998 with respect to ownership of the outstanding Common
Stock of the Company by (i) all persons known by the Company to
beneficially own more than 5% of the outstanding shares of Common
Stock of the Company, (ii) each director of the Company, and (iii)
all executive officers and directors of the Company as a group.
Amount and
Nature of Percent of
Beneficial Outstanding
Beneficial Owner Ownership (1) Shares
Brent F. Eller (2)........................... 27,524 2.1%
Jack R. Ferguson (3)....................... 74,738 5.6
Edward F. Greene (4)...................... 276,226 20.2
Stephen B. Greene (5)...................... 133,726 9.8
Gilbert R. Miller (6)........................ 66,828 5.0
Dwight E. Pardue (7)....................... 84,096 6.0
Robert F. Ricketts, DDS (8).............. 45,786 3.5
Rebecca Ann Sebastian (9)................ 64,310 4.8
Joe D. Severt (10)........................... 278,226 20.4
R. Colin Shoemaker (11)................... 21,424 1.0
Ronald S. Shoemaker (12)................. 79,696 5.8
All executive officers and directors
as a group (11 persons).................. 1,137,130 64.3
_______________
(1) Except as otherwise indicated, each person named in this table
possesses sole voting and investment power with respect to the
shares beneficially owned by such person. "Beneficial
Ownership" includes shares for which an individual, directly
or indirectly, has or shares voting or investment power or
both and also includes warrants and options which are
exercisable within sixty days of the date hereof. Beneficial
ownership as reported in the above table has been determined
in accordance with Rule 13d-3 of the Securities Exchange Act
of 1934. The percentages are based upon 1,298,756 shares
outstanding, except for certain parties who hold presently
exercisable warrants or options to purchase shares. The
percentages for those parties who hold presently exercisable
warrants or options are based upon the sum of 1,298,756 shares
plus the number of shares subject to presently exercisable
warrants or options held by them, as indicated in the
following notes.
(2) Includes 8,724 shares subject to presently exercisable stock
purchase warrants granted in connection with the Company's
initial stock offering and 8,000 shares subject to presently
exercisable stock options. Of the 27,524 shares beneficially
owned by Mr. Eller, 8,800 are owned jointly with his wife and
2,000 are owned by his IRA.
(3) Includes 31,538 shares subject to presently exercisable stock
purchase warrants granted in connection with the Company's
initial stock offering and 8,000 shares subject to presently
exercisable stock options. Of the 74,738 shares beneficially
owned by Mr. Ferguson, 33,200 shares are owned by Mr. Ferguson
jointly with his spouse and 2,000 shares are held by the
Ferguson Educational Trust. Mr. Ferguson's address is 71
Beaverdam Road, Candler, North Carolina 28715.
(4) Includes 1,600 shares held by a corporation in which Mr.
Greene has a 50% ownership interest, 800 shares owned by Mr.
Greene's wife, 62,226 shares subject to presently exercisable
stock purchase warrants granted in connection with the
Company's initial stock offering and 8,000 shares subject to
presently exercisable stock options. Mr. Greene's address is
216 Fairway Lane, Wilkesboro, North Carolina 28697.
(5) Includes 62,226 shares subject to presently exercisable stock
purchase warrants granted in connection with the Company's
initial stock offering and 8,000 shares subject to presently
exercisable stock options. Mr. Greene's address is P.O. Box
1943, North Wilkesboro, North Carolina 28659.
(6) Includes 20,190 shares subject to presently exercisable stock
purchase warrants granted in connection with the Company's
initial stock offering and 8,000 shares subject to presently
exercisable stock options Shares are owned by Mr. Miller
jointly with his spouse.
(7) Includes 34,096 shares subject to presently exercisable stock
purchase warrants granted in connection with the Company's
initial stock offering and 8,000 shares subject to presently
exercisable stock options. Mr. Pardue's address is 817
Country Club Rd. Ext., Wilkesboro, North Carolina 28697.
(8) Includes 12,786 shares subject to presently exercisable stock
purchase warrants granted in connection with the Company's
initial stock offering and 8,000 shares subject to presently
exercisable stock options.
(9) Includes 21,310 shares subject to presently exercisable stock
purchase warrants granted in connection with the Company's
initial stock offering and 8,000 shares subject to presently
exercisable stock options and 5,000 shares held jointly with a
relative.
(10) Includes 1,600 shares held by a corporation in which Mr.
Severt has a 50% ownership interest, 62,226 shares subject to
presently exercisable stock purchase warrants granted in
connection with the Company's initial stock offering and 8,000
shares subject to presently exercisable stock options. Mr.
Severt's address is 4460 North Carolina Highway 163, West
Jefferson, North Carolina 28694.
(11) Includes 5,824 shares subject to presently exercisable
stock purchase warrants granted in connection with the
Company's initial stock offering and 8,000 shares subject to
presently exercisable stock options. Of the 21,424 shares
beneficially owned by Mr. Shoemaker, 4,180 shares are owned
jointly with his wife, 1,210 shares are owned by Mr.
Shoemaker's IRA and 1,210 shares are owned by his wife's IRA.
(12) Includes 9,500 shares subject to presently exercisable
stock purchase warrants granted in connection with the
Company's initial stock offering and 57,596 shares subject to
presently exercisable stock options. Mr. Shoemaker's address
is 924 Pleasant Home Church Road, Miller's Creek, North
Carolina 28651.
Item 12. Certain Relationships and Related Transactions.
On June 27, 1991, the Company entered into a Lease Agreement
with Edward F. Greene and his wife, Frances C. Greene to lease an
approximately 1,700 square foot facility in Wilkesboro, North
Carolina. On June 27, 1996, this Lease Agreement expired and the
Bank entered into a New Lease Agreement with Mr. and Mrs. Greene
to lease the same facility. On November 17, 1993, the Company
also entered into a lease agreement with Edward F. Greene and Joe
D. Severt to lease an approximately 1,100 square foot facility in
North Wilkesboro, North Carolina. See "Item 2. Properties."
Lease payments by the Company pursuant to these agreements,
including property taxes, totalled $72,949 during 1997 and $72,110
during 1996. Edward F. Greene and Joe D. Severt are directors of
both the Company and the Bank.
The Company's subsidiary, Wilkes National Bank, has
outstanding loans to certain of the Company's directors, executive
officers, their associates and members of the immediate families
of such directors and executive officers. These loans were made
in the ordinary course of business, on substantially the same
terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with persons
not affiliated with the Company or the Bank and do not involve
more than the normal risk of collectibility or present other
unfavorable features.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are filed with or
incorporated by reference into this report. The exhibits which
are denominated by an asterisk (*) were previously filed as a part
of, and are hereby incorporated by reference from either (i) a
Registration Statement on Form S-1 under the Securities Act of
1933 for the Company, Registration Number 33-36512 (referred to as
"S-1"), (ii) the Annual Report on Form 10-K of the Company for the
year ended December 31, 1991 (referred to as "1991 10-K"), (iii)
the Annual Report on Form 10-KSB of the Company for the year ended
December 31, 1993 (referred to as "1993 10-K"), (iv) the Quarterly
Report on Form 10-KSB of the Company for the quarter ended
September 30, 1995 (referred to as "10-Q"), (v) a Registration
Statement on Form S-2 under the Securities Act of 1933 for the
Company, Registration Number 33-99416 (referred to as "S-2") or
(vi) the Annual Report on Form 10-KSB for the year ended December
31, 1996 (referred to as "1996 10-K"). The exhibit numbers
correspond to the exhibit numbers in the referenced document.
Exhibit No. Description of Exhibit
*3.1 - Articles of Incorporation dated June 11, 1990 (S-1).
*3.2 - Articles of Amendment dated August 21, 1990 (S-1).
*3.2.1 - Articles of Amendment dated November 13, 1995 (10-Q).
*3.3 - Bylaws adopted August 4, 1989(S-1).
*10.4 - Lease Agreement dated June 27, 1991 by and between
Registrant and Edward F. and Frances C. Greene,
for facility located in Wilkesboro, North Carolina
(1991 10-K).
*10.5 - Lease Agreement dated November 17, 1993 by and
between Registrant and Edward F. Greene
and Joe D. Severt for facility located in North
Wilkesboro, North Carolina (1993 10-K).
*10.6 - Employment Agreement, dated February 1, 1995, by
and among Community Bancshares, Inc., Wilkes
National Bank and Ronald S. Shoemaker (S-2).
*10.7 - Lease Agreement dated February 25, 1997 by and
between Wilkes National Bank and Edward F. and
Francis C. Greene, for facility located at 1600
Curtis Bridge Road, Wilkesboro, North Carolina
(1996 10-K).
*21.1 - Subsidiaries of the Registrant. (1996 10-K).
23.1 - Consent of Francis & Co.
27.1 - Financial Data Sheet (for SEC use only).
(b) Reports on Form 8-K. No reports on Form 8-K were required
to be filed for the fourth quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
Dated: March 19, 1998 By: /s/ Ronald S.
Shoemaker
Ronald S. Shoemaker
President and Chief Executive
Officer (chief
executive, financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Date
/s/ Brent F. Eller March 19,1998
BRENT F. ELLER
Secretary, Treasurer and Class I Director
/s/ Jack R. Ferguson March 19,1998
JACK R. FERGUSON
Class II Director
/s/ Edward F. Greene March 19, 1998
EDWARD F. GREENE
Class II Director
/s/ Stephen R. Greene March 19, 1998
STEPHEN B. GREENE
Class I Director
/s/ Gilbert R. Miller March 19, 1998
GILBERT R. MILLER
Class I Director
[SIGNATURES CONTINUED ON NEXT PAGE
Signature Date
/s/ Dwight E. Pardue March 19, 1998
DWIGHT E. PARDUE
Class III Director
/s/ Robert F. Ricketts, D.D.S. March 19, 1998
ROBERT F. RICKETTS, D.D.S.
Class II Director
/s/ Rebecca Ann Sebastian March 19, 1998
REBECCA ANN SEBASTIAN
Class I Director
/s/ Joe D. Severt March 19, 1998
JOE D. SEVERT
Class III Director
/s/ R. Colin Shoemaker March 19, 1998
R. COLIN SHOEMAKER
Class III Director
/s/ Ronald S. Shoemaker March 19, 1998
RONALD S. SHOEMAKER
President and Class III Director
EXHIBIT INDEX
Exhibit Sequential
Number Description of Exhibit Page No.
23.1 Consent of Francis & Co.
27.1 Financial Data Schedule (for SEC use only)
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference into the Form S-8
Registration Statement of Community Banchares, Inc. of our report
dated March 17, 1998, appearing in the Annual Report on Form 10-
KSB of Community Bancshares, Inc. for the year ended December 31,
1997.
/s/ Francis & Co., CPAs
Atlanta, Georgia
March 30, 1998
Exhibit 27.1
Financial Data Schedule Submitted Under Item 601(a)(27) of Regulation S-B
This schedule contains summary financial information extracted from Community
Bancshares, Inc. unaudited consolidated financial statements for the period
ended December 31, 1997 and is qualified in its entirety by reference to
such financial statements.
Item Number Item Description Amount
9-03(1) Cash and due from banks $ 2,534,421
9-03(2) Interest bearing deposits 0
9-03(3) Federal funds sold - purchased
securities for sale 1,500,000
9-03(4) Trading account assets 0
9-03(6) Investment and mortgage backed
securities held for sale 13,592,071
9-03(6) Investment and mortgage backed
securities held to maturity -
carrying value 3,627,805
9-03(6) Investment and mortgage backed
securities held to maturity -
market value 3,644,394
9-03(7) Loans 70,227,397
9-03(7)(2) Allowance for losses 1,033,393
9-03(11) Total assets 93,075,657
9-03(12) Deposits 81,779,564
9-03(13) Short-term borrowings 0
9-03(15) Other liabilities 1,191,085
9-03(16) Long-term debt 0
9-03(19) Preferred stock -
mandatory redemption 0
9-03(20) Preferred stock -
no mandatory redemption 0
9-03(21) Common stock 3,891,468
9-03(22) Other stockholders' equity 6,213,540
9-03(23) Total liabilities and
stockholders' equity 93,075,657
9-04(1) Interest and fees on loans 6,138,953
9-04(2) Interest and dividends
on investments 1,124,639
9-04(4) Other interest income 0
9-04(5) Total interest income 7,263,592
9-04(6) Interest on deposits 3,658,349
9-04(9) Total interest expense 3,672,935
9-04(10) Net interest income 3,590,657
9-04(11) Provision for loan losses 485,000
9-04(13)(h) Investment securities gains/losses (4,618)
9-04(14) Other expenses 2,347,494
9-04(15) Income/loss before income tax 1,223,984
Item Number Item Description Amount
9-04(17) Income/loss before
extraordinary items 1,223,984
9-04(18) Extraordinary items, less tax 0
9-04(19) Cumulative change in
accounting principles 0
9-04(20) Net income or loss 628,122
9-04(21) Earnings per share - primary .49
9-04(21) Earnings per share - fully diluted .40
I.B.5. Net yield - interest earning
assets - actual 4.52%
III.C.1(a) Loans on non-accrual 95,501
III.C.1(b) Accruing loans past due
90 days or more 0
III.C.1(c) Troubled debt restructuring 0
III.C.2. Potential problem loans 645,690
IV.A.1 Allowance for loan losses -
beginning of period 619,133
IV.A.2 Total chargeoffs 83,110
IV.A.3 Total recoveries 12,370
IV.A.4 Allowance for loan losses -
end of period 1,033,393
IV.B.1 Loan loss allowance allocated to
domestic loans 1,014,000
IV.B.2 Loan loss allowance allocated to
foreign loans 0
IV.B.3 Loan loss allowance - unallocated 19,393
