SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-22517
COMMUNITY BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
North Carolina 56-1693841
(State of Incorporation) (I.R.S. Employer Identification No.)
1600 Curtis Bridge Road Wilkesboro, North Carolina 28679
(Address of Principal Executive Offices)
(910) 838-4100
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common equity as of the latest
practicable date.
Common stock, $3.00 par value per share 1,445,584 shares issued and
outstanding as of May 13, 1998.
(Page 1 of 14)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Consolidated Balance Sheets
ASSETS
March 31, December 31,
1998 1997
(Unaudited) (Unaudited)
Cash and due from banks $ 2,895,896 $ 2,534,421
Federal funds sold 4,050,000 1,500,000
Total cash and cash equivalents $ 6,945,896 $ 4,034,421
Securities:
Available-for-sale,
at estimated market values 18,150,205 13,592,071
Held-to-maturity (Estimated market
values of $3,803,851 (03-31-98)
and $3,644,394 (12-31-97) 3,783,626 3,627,805
Loans, net 69,004,364 69,194,004
Property and equipment 1,816,478 1,806,059
Goodwill 24,980 26,645
Other assets 930,889 794,652
Total Assets $100,656,438 $93,075,657
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing deposits $ 5,072,777 $ 5,910,213
Interest bearing deposits 84,103,615 75,869,351
Total deposits $ 89,176,392 $81,779,564
Other liabilities 1,129,714 1,191,085
Total Liabilities $ 90,306,106 $82,970,649
Commitments & Contingencies
Shareholders' Equity:
Common stock - $3.00 par value,
10 million shares authorized;
1,298,756 and 1,297,156
shares issued and outstanding
at March 31, 1998 and
December 31, 1997, respectively $ 3,896,268 $ 3,891,468
Paid-in-capital 5,389,623 5,380,223
Retained earnings 1,024,521 791,381
Unrealized gain on
securities available-for-sale 39,920 41,936
Total Shareholders' Equity $ 10,350,332 $10,105,008
Total Liabilities
and Shareholders' Equity $100,656,438 $93,075,657
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Consolidated Income Statements
(Unaudited)
For the quarter
ended March 31,
1998 1997
Interest and fees
on loans and investments $2,140,821 $1,638,700
Interest expense 1,062,706 815,315
Net interest income $1,078,115 $ 823,385
Provision for possible loan losses 105,000 125,000
Net interest income after
provision for possible loan losses $ 973,115 $ 698,385
Other income:
Service fees and other charges $ 60,120 $ 35,453
Gain on sale of assets 34,954 - -
Gain on sale of securities - - 643
Total other income $ 95,074 $ 36,096
Operating expenses:
Salaries and benefits $ 344,305 $ 233,030
Legal and professional 62,979 18,321
Depreciation 19,290 12,420
Amortization 1,665 3,671
Courier and postage 24,864 13,545
Rent and land lease expense 23,318 23,044
Data processing 41,649 31,160
Other operating expenses 148,078 110,517
Total operating expenses $ 666,148 $ 445,708
Net income before taxes $ 402,041 $ 288,773
Income taxes 168,900 128,620
Net income $ 233,141 $ 160,153
Basic income per share $ .18 $ .11
Diluted income per share $ .15 $ .10
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
1998 1997
Cash flows from operating activities: $ 154,265 $ 75,172
Cash flows from Investing Activities:
Purchase of fixed assets (29,709) (276,914)
Decrease in loans 84,640 (5,964,362)
Securities: Available-for-sale
Sale of securities - - 764,336
Purchase of securities (5,542,928) (757,310)
Maturity and paydowns 990,000 504,875
Securities: Held-to-maturity
Purchase of securities (538,462) - -
Maturity and paydowns 382,641 612,350
Net cash used in investing activities $(4,653,818) $(5,117,025)
Cash flows from Financing Activities:
Increase in deposits $ 7,396,828 $ 3,757,952
Exercise of warrants/options 14,200 19,700
Cash provided from financing activities 7,411,028 $ 3,777,652
Net increase in cash and cash equivalents $ 2,911,475 $(1,264,201)
Cash and cash equivalents,
beginning of period 4,034,421 4,213,882
Cash and cash equivalents, end of period $ 6,945,896 $ 2,949,681
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES, INC.
Wilkesboro, North Carolina
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1998
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998. For further information, refer to the financial statements and
footnotes thereto included in Form 10-KSB for the year ended December 31,
1997.
Note 2 - Summary of Organization
Community Bancshares, Inc., Wilkesboro, North Carolina (the "Company"),
was incorporated under the laws of the State of North Carolina on June 11,
1990, for the purpose of becoming a bank holding company with respect to a
proposed national bank, Wilkes National Bank (the "Bank"), located in
Wilkesboro, North Carolina. Upon commencement of the Bank's 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.
As of March 31, 1998 and December 31, 1997, there were 1,298,756 and
1,297,156 shares of common stock outstanding, respectively.
The Company offered warrants to its organizers and to a group of initial
subscribers. Each warrant, when surrendered with $5.50 to the Company, is
convertible into one share of common stock. The warrants expire ten years
from January 17, 1992. At March 31, 1998 and December 31, 1997, there were
382,264 and 382,664 warrants outstanding, respectively. The Company also has
a stock option plan with 167,296 and 168,496 options outstanding at March 31,
1998 and December 31, 1997, respectively.
Note 3 - Summary of Significant Accounting Policies
Basis of Presentation and Reclassification. The consolidated financial
statements include the accounts of the Company and the Bank. 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"). 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 March 31, 1998, 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 below cost in the fair value of any available-for sale or
held-to-maturity security 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 accrual 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 Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS 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 Possible 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 losses of loans,
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 for loan losses based on their judgments about information
available to them at the time of their examination.
Property and Equipment. Building, furniture and equipment 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.
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 expected 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.
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.
Earnings Per Share ("EPS"). The Company adopted Statement of Financial
Accounting Standard 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 both 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 three-month period ended March 31, 1998, basic and diluted EPS
amounted to $.18 and $.15, respectively. For the three-month period ended
March 31, 1997, basic and diluted EPS amounted to $.11 and $.10, respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company commenced its planned principal operations on January 17, 1992
when its subsidiary Bank opened for business. During the period from February
1, 1990 to January 17, 1992, the Company was in the development stage as it
devoted most of its efforts to organizing, incorporating, planning, raising
capital and recruiting personnel. During the development stage, the Company
funded its operations principally through borrowings. However, by December
31, 1991, all outstanding loans were paid-off with funds raised through the
sale of the Company's common stock.
Total assets increased by $7.6 million to $100.7 million during the three-
month period ended March 31, 1998. The increase was generated primarily
through a $7.4 million increase in deposits and a $.2 million increase in
retained earnings. These funds were utilized to expand the securities
portfolio by $4.7 million and increase federal funds sold and other assets by
$2.6 million and $.2 million, respectively.
Liquidity and Sources of Capital
Liquidity is the Company's ability to meet all deposit withdrawals
immediately, while also providing for the credit needs of customers. The
March 31, 1998 financial statements evidence a satisfactory liquidity position
as total cash and cash equivalents amounted to $6.9 million, representing 6.9%
of total assets. Investment securities, which amounted to $21.9 million or
21.8% of total assets, provide a secondary source of liquidity because they
can be converted into cash in a timely manner. The subsidiary Bank is a
member of the Federal Reserve System and is maintaining relationships with
several correspondent banks and, thus, could obtain funds on short notice. In
addition, subsequent to March 31, 1998, 146,828 warrants were exercised for
$807,554. These funds represent additional capital for the Company and will
enhance its liquidity position. The Company's management closely monitors and
maintains appropriate levels of interest earning assets and interest bearing
liabilities, so that maturities of assets are such that adequate funds are
provided to meet customer withdrawals and loan demand. There are no trends,
demands, commitments, events or uncertainties that will result in or are
reasonably likely to result in the Company's liquidity increasing or
decreasing in any material way. The Bank maintains an adequate level of
capitalization as measured by the following capital ratios and the respective
minimum capital requirements by the Bank's primary regulator, the Office of
the Comptroller of the Currency.
Bank's Minimum required
March 31, 1998 by regulator
Leverage ratio 8.0% 4.0%
Risk weighted ratio 11.6% 8.0%
With respect to the leverage ratio, the regulator expects a minimum of 5.0% to
6.0% ratio for banks that are not rated CAMEL 1. Although the Bank is not
rated CAMEL 1, its leverage ratio of 8.0% is well above the required minimum.
Results of Operations
Net income for the three-month period ended March 31, 1998 amounted to
$233,141, or $.15 per diluted share. For the three-month period ended March
31, 1997, net income amounted $160,153, or $.10 per diluted share. The
following four items are of significance when one compares the March 31, 1998
results to those of March 31, 1997.
a. Net interest income, which represents the difference between interest
received on interest earning assets and interest paid on interest
bearing liabilities, has increased from $823,385 for the three-month
period ended March 31, 1997 to $1,078,115 for the same period one year
later, representing an increase of $254,730, or 30.9%. This increase
was attained primarily because of a $17.8 million increase in average
earning assets, from $74.2 million for the three-month period ended
March 31, 1997 to $92.0 million for the three-month period ended March
31, 1998.
b. The net interest yield, defined as net interest income divided by
average interest earning assets, has increased from 4.4% for the three-
month period ended March 31, 1997 to 4.7% for the three-month period
ended March 31, 1998. Below is pertinent information concerning the
yield on earning assets and the cost of funds as of March 31, 1998.
Avg. Assets/ Interest Yield/
Description Liabilities Income/Expense Cost
Federal funds $ 3,629,436 $ 48,613 5.36%
Securities 18,438,714 298,939 6.49%
Loans 69,947,550 1,793,269 10.25%
Total $92,015,700 $2,140,821 9.31%
Transactional
accounts $14,728,554 $ 128,814 3.50%
Savings 2,991,546 22,063 2.95%
CD's 61,668,208 911,829 5.91%
Total $79,388,308 $1,062,706 5.35%
Net interest income $1,078,115
Net yield on earning assets 4.69%
c. Total non-interest income has increased from $36,096 for the three month
period ended March 31, 1997 to $95,074 for the three-month period ended
March 31, 1998. If one excludes a $34,954 gain on sale of assets, non-
interest income for the three-month period ended March 31, 1998 would
have been $24,024 or 66.5% higher than non-interest income during the
three-month period ended March 31, 1997. The increase is attributable
primarily to higher volumes and fees with respect to transactional
accounts.
d. For the three-month period ended March 31, 1998, operating expenses
amounted to $666,148 representing an annualized 2.8% of average assets.
By comparison, for the three-month period ended March 31, 1997,
operating expenses amounted to $445,708, representing an annualized
2.4% of average assets. The increase in operating expense during 1998
is attributed mainly to salaries, benefits and professional fees.
During the three-month period ended March 31, 1998, the allowance for loan
losses has grown from $1,033,393 to $1,056,284. The allowance for loan losses
as a percentage of gross loans increased from 1.47% at December 31, 1997 to
1.51% at March 31, 1998. Management considers the allowance for loan losses
to be adequate and sufficient to absorb possible future losses; however, there
can be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional provisions to the allowance will
not be required.
The Company is not aware of any current recommendation by the regulatory
authorities which, if they were to be implemented, would have a material
effect on the Company's liquidity, capital resources, or results of
operations.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits.
27.1 - Financial data schedule (for SEC use only).
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during
the quarter ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANCSHARES, INC.
(Registrant)
Date: May 13, 1998 BY: /s/ Ronald S. Shoemaker
Ronald S. Shoemaker
President and Chief Executive Officer
(Principal Executive, Financial
and Accounting Officer)
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 periods
ended March 31, 1998 and 1997 and is qualified in its entirety by reference
to such financial statements.
Item Number Item Description Amount
March 31,
1998 1997
9-03(1) Cash and due from banks $ 2,895,896 $ 1,479,681
9-03(2) Interest bearing deposits 0 0
9-03(3) Federal funds sold - purchased
securities for sale 4,050,000 1,470,000
9-03(4) Trading account assets 0 0
9-03(6) Investment and mortgage backed
securities held for sale 18,150,205 10,954,616
9-03(6) Investment and mortgage backed
securities held to maturity -
carrying value 3,783,626 4,802,486
9-03(6) Investment and mortgage backed
securities held to maturity -
market value 3,803,851 4,753,341
9-03(7) Loans 70,060,648 58,626,060
9-03(7)(2) Allowance for losses 1,056,284 744,265
9-03(11) Total assets 100,656,438 78,626,096
9-03(12) Deposits 89,176,392 68,213,129
9-03(13) Short-term borrowings 0 0
9-03(15) Other liabilities 1,129,714 957,260
9-03(16) Long-term debt 0 0
9-03(19) Preferred stock -
mandatory redemption 0 0
9-03(20) Preferred stock -
no mandatory redemption 0 0
9-03(21) Common stock 3,896,268 3,860,658
9-03(22) Other stockholders' equity 6,454,064 5,595,049
9-03(23) Total liabilities and
stockholders' equity 100,656,438 78,626,096
9-04(1) Interest and fees on loans 1,793,269 1,365,310
9-04(2) Interest and dividends
on investments 347,552 273,390
9-04(4) Other interest income 0 0
9-04(5) Total interest income 2,140,821 1,638,700
9-04(6) Interest on deposits 1,062,706 807,387
9-04(9) Total interest expense 1,062,706 815,315
9-04(10) Net interest income 1,078,115 823,385
9-04(11) Provision for loan losses 105,000 125,000
9-04(13)(h) Investment securities gains/losses 0 643
9-04(14) Other expenses 666,148 445,708
9-04(15) Income/loss before income tax 402,041 288,773
Item Number Item Description Amount
March 31,
1998 1997
9-04(17) Income/loss before
extraordinary items $ 402,041 $ 288,773
9-04(18) Extraordinary items, less tax 0 0
9-04(19) Cumulative change in
accounting principles 0 0
9-04(20) Net income or loss 233,141 160,153
9-04(21) Earnings per share - basic .18 .11
9-04(21) Earnings per share - diluted .15 .10
I.B.5. Net yield - interest earning
assets - actual 4.69% 4.44%
III.C.1(a) Loans on non-accrual 2,485 108,634
III.C.1(b) Accruing loans past due
90 days or more 17,113 16,222
III.C.1(c) Troubled debt restructuring 0 0
III.C.2. Potential problem loans 1,446,000 108,634
IV.A.1 Allowance for loan losses -
beginning of period 1,033,393 619,133
IV.A.2 Total chargeoffs 85,111 4,416
IV.A.3 Total recoveries 3,002 4,548
IV.A.4 Allowance for loan losses -
end of period 1,056,284 744,265
IV.B.1 Loan loss allowance allocated to
domestic loans 1,045,000 735,000
IV.B.2 Loan loss allowance allocated to
foreign loans 0 0
IV.B.3 Loan loss allowance - unallocated 11,284 9,265
