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, 1998
_______________________________________________
Commission File Number 0-22517
COMMUNITY BANCSHARES, INC.
A North Carolina Corporation
(IRS Employer Identification No. 56-1693841)
1301 Westwood Lane -- Westfield Village
Wilkesboro, North Carolina 28697
(336) 903-0600
________________________________________________
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, 1998: $9,097,732
The aggregate market value of the Common Stock of the Registrant held by
nonaffiliates of the Registrant (573,662 shares) on March 15, 1999, was
approximately $4,743,000. 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, 1998. 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, 1999: 1,447,884 shares of $3.00 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
________________________________________________
Portions of the Registrant's definitive proxy statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders scheduled
to be held on May 28, 1999 are incorporated by reference to Items 9, 10, 11
and 12 of this Report.
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 1999
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 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.
The Company's operations include two primary business segments -
banking and mortgage activities. The Company, through the Bank, provides
traditional banking services, including a full range of commercial and
consumer banking services. Through its Community Mortgage Corporation
subsidiary, the Company provides mortgage services, including the origination
and sale of mortgage loans to various investors, including other financial
institutions. See Note 18 to the Company's consolidated financial statements
for certain financial information relating to these two segments.
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).
Competition among financial institutions in this area is intense.
There are 20 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, 1998, deposits at the Bank represented approximately
13.3% of total deposits of financial institutions in the Bank's primary
service area. This compares with a market share of approximately 12.5% at
June 30, 1997 and 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, 1998 and 1997. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities:
AVERAGE CONSOLIDATED ASSETS
Years Ended December 31,
------------------------
1998 1997
---- ----
(in thousands)
Cash and due from banks $ 3,306 $ 2,168
------- ------
Taxable securities 21,018 16,373
Non-taxable securities 1,431 21
Federal funds sold 1,384 1,230
Net loans 70,207 61,773
------- ------
Total earning assets 94,040 79,397
Other assets 3,060 2,080
------- ------
Total assets $100,406 $83,645
======= ======
AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY
Years Ended December 31,
------------------------
1998 1997
---- ----
Non interest-bearing deposits $ 6,384 $ 4,823
NOW and money market deposits 15,707 12,766
Savings deposits 3,418 2,420
Time deposits 61,948 52,569
Federal funds and repurchase agreements 429 286
Other liabilities 1,307 1,050
------- ------
Total liabilities 89,193 73,914
Stockholders' equity 11,213 9,731
------- ------
Total liabilities and stockholders' equity $100,406 $83,645
======= ======
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, 1998
----------------------------
Average Interest Average
Assets Amount Earned Yield
------ ------- -------- -------
(Dollars in thousands)
Taxable securities $21,018 $1,308 6.22%
Non-taxable securities 1,431 63 6.70%(3)
Federal funds sold 1,384 75 5.42%
Net loans 70,207(1) 7,122(2) 10.14%
------ -----
Total earning assets $94,040 $8,568 9.11%
====== =====
Average Interest Average
Liabilities Amount Paid Rate Paid
----------- ------- -------- ---------
NOW and money market deposits $15,707 $ 525 3.34%
Savings deposits 3,418 99 2.90%
Time deposits 61,948 3,605 5.82%
Federal funds and
repurchase agreements 429 18 4.20%
------ ------
Total interest-
bearing liabilities $81,502 $ 4,247 5.21%
====== ======
Net yield on earning assets 4.59%
====
______________________
(1) All loans were accruing interest on December 31, 1998.
(2) Interest earned on net loans includes $254 in loan fees and loan service
fees.
(3) The yield is tax equivalent.
Year Ended December 31, 1997
----------------------------
Average Interest Average
Assets Amount Earned Yield
------ ------- -------- -------
(Dollars in thousands)
Taxable securities $16,373 $1,057 6.45%
Non-taxable securities 21 1 6.67%(3)
Federal funds sold 1,230 67 5.44%
Net loans 61,773(1) 6,139(2) 9.94%
------ -----
Total earning assets $79,397 $7,264 9.15%
====== =====
Average Interest Average
Liabilities Amount Paid Rate Paid
----------- ------- -------- ---------
NOW and money market deposits $12,766 $ 443 3.47%
Savings deposits 2,420 75 3.12%
Time deposits 52,569 3,140 5.97%
Federal funds and
repurchase agreements 286 15 5.11%
------ -----
Total interest-
bearing liabilities $68,041 $ 3,673 5.40%
====== ======
Net yield on earning assets 4.52%
====
______________________
(1) Twelve loans aggregating 96 were on non-accrual status on December
31, 1997.
(2) Interest earned on net loans includes $171 in loan fees and loan
service fees.
(3) The yield is tax equivalent.
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, 1998
Compared to
Year Ended December 31, 1997
----------------------------
Increase (decrease) due to:
Volume Rate Total
------ ---- -----
(In thousands)
Interest earned on:
Taxable securities $ 287 $ (36) $ 251
Non-taxable securities 62 -- 62
Federal funds sold 8 -- 8
Net loans 856 127 983
----- ------ -----
Total interest income 1,213 91 1,304
----- ------ -----
Interest paid on:
NOW and money market deposits 98 (16) 82
Savings deposits 29 (5) 24
Time deposits 541 (76) 465
Federal funds and
repurchase agreements 5 (2) 3
----- ------ -----
Total interest expense 673 (99) 574
----- ------ -----
Change in net interest income $ 540 $ 190 $ 730
===== ====== =====
Year Ended December 31, 1997
Compared to
Year Ended December 31, 1996
----------------------------
Increase (decrease) due to:
Volume Rate Total
------ ---- -----
(In thousands)
Interest earned on:
Taxable securities $ 171 $ 6 $ 177
Non-taxable securities 1 -- 1
Federal funds sold 7 (19) (12)
Net loans 1,831 39 1,870
----- ------ -----
Total interest income 2,010 26 2,036
----- ------ -----
Interest paid on:
NOW and money market deposits 110 -- 110
Savings deposits 18 2 19
Time deposits 785 (39) 746
Federal funds and
repurchase agreements (3) (1) (4)
----- ------ -----
Total interest expense 910 (38) 871
----- ------ -----
Change in net interest income $1,100 $ 64 $1,165
===== ====== =====
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, 1998
------------------------------------
Deposit Category Average Amount Average Rate Paid
---------------- -------------- -----------------
(Dollars in thousands)
Non interest-bearing
demand deposits $ 6,384 Not Applicable
NOW and money
market deposits $15,707 3.34%
Savings deposits $ 3,418 2.90%
Time deposits $61,948 5.82%
Federal funds and
repurchase agreements $ 429 4.20%
Year Ended
December 31, 1997
------------------------------------
Deposit Category Average Amount Average Rate Paid
---------------- -------------- -----------------
(Dollars in thousands)
Non interest-bearing
demand deposits $ 4,823 Not Applicable
NOW and money
market deposits $12,766 3.47%
Savings deposits $ 2,420 3.12%
Time deposits $52,569 5.97%
Federal funds and
repurchase agreements $ 286 5.11%
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, 1998:
Time Certificates
of Deposit
-----------------
(In thousands)
3 months or less $ 8,081
3-6 months 6,340
6-12 months 7,439
over 12 months 1,712
------
Total $23,572
======
LOAN PORTFOLIO
The Bank engages in a full complement of lending activities,
including commercial, consumer/installment and real estate loans. As of
December 31, 1998, the Bank had a legal lending limit for unsecured
loans of up to $1,279,000 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
80%. 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.
The Company provides mortgage services through its Community
Mortgage Corporation subsidiary, including the origination and sale of
mortgage loans to various investors, including other financial
institutions.
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:
Type of Loan As of December 31,
------------ ------------------
1998 1997
---- ----
Domestic: (In thousands)
Commercial, financial and agricultural $29,133 $28,215
Real estate-construction 7,699 6,572
Real estate-mortgage 20,831 21,088
Installment and other loans to individuals 15,405 14,016
Lease financing 159 336
------ ------
Subtotal 73,227 70,227
Less: Allowance for possible loan losses (1,107) (1,033)
------ ------
Total (net of allowance) $72,120 $69,194
====== ======
The following is a presentation of an analysis of maturities of
loans as of December 31, 1998:
Due in 1 Due After Due After
Type of Loan Year or Less 1 to 5 Yrs 5 Yrs Total
------------ ------------ ---------- --------- -----
(In thousands)
Commercial, financial
and agricultural $24,567 $3,642 $924 $29,133
Real estate-construction 6,260 1,439 -- 7,699
------ ----- --- ------
Total $30,827 $5,081 $924 $36,832
====== ===== === ======
For the above loans, the following is a presentation of an analysis
of sensitivities to changes in interest rates as of December 31, 1998:
Due in 1 Due After Due After
Interest Category Year or Less 1 to 5 Yrs 5 Yrs Total
----------------- ------------ ---------- --------- -----
(In thousands)
Predeterimined
interest rate $ 8,809 $1,586 $ -- $10,395
Floating interest rate 22,018 3,495 924 26,437
------ ----- --- ------
Total $30,827 $5,081 $924 $36,832
====== ===== === ======
As of December 31, 1998, all loans were accruing interest and no
loans were defined as "troubled debt restructurings." At December 31,
1998, there were no loans which were accruing interest and contractually
past due 90 days or more. No interest income has been recognized during
1998 on loans that have been accounted for on a non-accrual basis.
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 0.14% 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.
As of December 31, 1998, 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.
No interest income has been recognized during 1998 on loans that have
been accounted for on a non-accrual basis. 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.
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,
------------
1998 1997
---- ----
(Dollars in thousands)
Balance at beginning of period $1,033 $ 619
----- -----
Charge-offs:
Installment and other loans to individuals (91) (77)
Commercial, financial, agricultural (37) (6)
Real estate - mortgage (72) --
Real estate - construction -- --
Lease financing -- --
----- -----
(200) (83)
Recoveries:
Installment and other loans to individuals 16 11
Commercial, financial, agricultural -- 1
Real estate - mortgage -- --
Real estate - construction -- --
Lease financing -- --
----- -----
16 12
Net charge-offs (184) (71)
----- -----
Additions charged to operations 258 485
----- -----
Balance at end of period $1,107 $1,033
===== =====
Ratio of net charge-offs during the period to
average loans out-standing during the
period 0.26% 0.11%
==== ====
At December 31, 1998 the allowance was allocated as follows:
Percent of loans
in each category
Amount to total loans
------ ----------------
(Dollars in thousands)
Commercial, financial and agricultural $ 485 39.8%
Real estate - construction 125 10.5%
Real estate - mortgage 260 28.5%
Installment and other loans to individuals 209 21.0%
Lease financing 4 0.2%
Unallocated 24 N/A
------ -----
Total $ 1,107 100.0%
====== =====
At December 31, 1997 the allowance was allocated as follows:
Percent of loans
in each category
Amount to total loans
------ ----------------
(Dollars in thousands)
Commercial, financial and agricultural $ 460 40.2%
Real estate - construction 106 9.4%
Real estate - mortgage 255 30.0%
Installment and other loans to individuals 186 20.0%
Lease financing 7 0.5%
Unallocated 19 N/A
------ -----
Total $ 1,033 100.0%
====== =====
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, 1998, 39.8% 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 92.0% of these commercial loans
at December 31, 1998 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, 1998 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 28.5% of outstanding
loans at December 31, 1998. 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, 1998, investment securities comprised
approximately 25.4% of the Bank's assets and net loans comprised
approximately 68.6% 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:
December 31,
------------
Investment Category 1998 1997
------------------- ---- ----
(In thousands)
Available-for-Sale:
Obligations for U.S. Treasury
and other U.S. Agencies $19,648 $12,787
Tax-exempt securities 2,300 479
Federal Reserve Bank Stock 191 112
Other securities 2,149 214
------ ------
Total $24,288 $13,592
====== ======
Held-to-Maturity:
Obligations for U.S. Treasury
and other U.S. Agencies $ -- $ 250
Mortgage backed securities 1,001 899
Other securities 1,384 2,479
------ ------
Total $ 2,385 $ 3,628
====== ======
The following table indicates for the year ended December 31,
1998 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:
Weighted Average
Investment Category Amount Yield(1)
------------------- ------ ----------------
(Dollars in thousands)
Available-for-Sale:
- ------------------
Obligations of U.S. Treasury
and other U.S. Agencies:
0 - 1 Yr. $ 5,598 6.05%
Over 1 through 5 Yrs 12,641 6.02%
Over 5 through 10 Yrs 1,409 5.89%
Tax-exempt securities(1):
Over 1 through 5 Yrs. 886 6.21%
Over 5 through 10 Yrs. 1,414 7.01%
Mortgage Pools:
0-1 Yr. 319 5.77%
Over 1 through 5 Yrs. 772 5.83%
Over 5 through 10 Yrs 283 5.69%
Other securities:
0-1 Yr. 499 5.56%
Over 5 through 10 Yrs. 276 6.08%
FRB Stock (no maturity) 191 6.00%
------
Total $24,288 5.98%
======
____________________
(1) The Company has invested in tax-exempt securities. The yield on
tax-exempt securities is reported at the tax-equivalent rate.
Weighted Average
Investment Category Amount Yield(1)
------------------- ------ ----------------
(Dollars in thousands)
Held-to-Maturity:
- ----------------
Mortgage-backed securities:
0- 1 Yr. $ 192 6.86%
Over 1 through 5 Yrs. 804 6.73%
Over 10 Yrs. 5 6.78%
Mortgages Pools:
0-1 Yr. 379 5.96%
Over 1 through 5 Yrs 1,005 6.47%
------ ----
Total: $ 2,385 6.54%
====== ====
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,
------------------------
1998 1997
---- ----
Return on Average Assets 0.97% 0.75%
Return on Average Equity 8.70% 6.50%
Average Equity to Average Assets Ratio 11.17% 11.63%
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, 1998 the Bank had outstanding participations totaling
$1,344,111.
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's main office is located in 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. Both facilities are owned by the Bank.
The Company's Millers Creek branch office opened in February 1996. This
2,000 square foot leased 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. 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 also leases 5,000 square feet of office space in the
Westfield Village Shopping Center in 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 13 officers and three 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 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 Company or 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 has elected to prohibit out-of-state banks
from operating interstate branches within its territory, adequately
capitalized and managed bank holding companies may 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 remains subject to applicable state branching
laws. The State of North Carolina permits out-of-state banks to operate
branches in North Carolina.
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 any person, with certain
limitations; 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 benefits to the public such 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 activity not previously
approved by the Federal Reserve Board or to modify in any material
respect an activity for which Federal Reserve Board approval has been
obtained.
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 one 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 any one 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, loans to or guaranteed by the federal government and loans
or extensions of credit that have the approval of the Comptroller and
that are made to a financial institution or to any agent in charge of
the business and property of the financial institution.
Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the Comptroller.
Both the Federal Reserve Board and the Comptroller have issued 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 provide that
banking organizations must have capital equivalent to at least 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, while 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, 1998, the Company's total risk-based capital and tier-one
ratios were 17.0% and 15.7%, respectively. Both the Federal Reserve
Board and the Comptroller have also implemented 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
at least 3% "Tier 1" capital to total assets (net of goodwill, certain
intangible assets and certain deferred tax assets). Tier 1 capital
includes common stockholders equity, noncumulative perpetual preferred
stock and surplus and minority interests in the equity accounts of
consolidated subsidiaries.
Both the risk-based capital guidelines and the leverage ratio are
minimum requirements. They are applicable to all banking institutions
unless the applicable regulating authority determines that different
minimum capital ratios are appropriate for a particular institution
based upon its circumstances. Institutions operating at or near these
ratios are expected to have well-diversified risk, excellent control
systems, high asset quality, high liquidity, good earnings, and in
general must be considered strong banking organizations, rated composite
1 under the CAMELS rating system for banks or the BOPEC rating system
for bank holding companies. The Comptroller requires that all but the
most highly-rated banks and all banks with high levels of risk or
experiencing or anticipating significant growth will maintain ratios at
least 100 to 200 basis points above the stated minimums. The Federal
Reserve Board requires bank holding companies without a BOPEC-1 rating
to maintain a ratio of at least 4% Tier 1 capital to total assets;
furthermore, banking organizations with supervisory, financial,
operational, or managerial weaknesses, as well as organizations that are
anticipating or experiencing significant growth, are expected to
maintain capital ratios well above the 3% and 4% minimum levels.
The FDIC adopted a rule substantially similar to that issued by the
Federal Reserve Board, establishing a minimum leverage ratio of 3% and
providing that FDIC-regulated banks with anything less than a CAMELS-1
rating must maintain a ratio of at least 4%. In addition, the FDIC rule
specifies that a depository institution operating with less than the
applicable minimum leverage capital requirement will be deemed to be
operating in an unsafe and unsound manner unless the institution is in
compliance with a plan, submitted to and approved by the FDIC, to
increase the ratio to an appropriate level. Finally, the FDIC requires
any insured depository institution with a leverage ratio of less than 2%
to enter into and be in compliance with a written agreement between it
and the FDIC (or the primary regulator, with the FDIC as a party to the
agreement). Such an agreement will nearly always contemplate immediate
efforts to acquire the capital required to increase the ratio to an
appropriate level. Institutions that fail to enter into or maintain
compliance with such an agreement will be subject to enforcement action
by the FDIC.
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") are retained as a part of
Tier 1 capital. The Comptroller has modified the list of qualifying
intangibles, currently including only purchased credit card
relationships and mortgage and mon-mortgage servicing assets, whether
originated or purchased and excluding any interest-only strips
receivable related thereto. Furthermore, the Comptroller's guidelines
formerly provided that the amount of such qualifying intangibles that
may be included in Tier 1 capital was limited to a maximum of 50% of
total Tier 1 capital. The Comptroller has amended its guidelines to
increase the limitation on such qualifying intangibles from 50% to 100%
of Tier 1 capital, of which no more than 25% may consist of purchased
credit card relationships and non-mortgage servicing assets.
Furthermore, banks may now deduct from Tier 1 capital disallowed
servicing assets on a basis that is net of any associated deferred tax
liability. Deferred tax liabilities netted this way may not also be
netted against deferred tax assets when determining the amount of
deferred tax assets that are dependent upon future taxable income.
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 risk-based capital guidelines of the Comptroller, the Federal
Reserve Board and the FDIC explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest
rates to 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. 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 Comptroller, the Federal Reserve Board and the FDIC recently
added a provision to the risk-based capital guidelines that supplements
and modifies the usual risk-based capital calculations to ensure that
institutions with significant exposure to market risk maintain adequate
capital to support that exposure. Market risk is the potential loss to
an institution resulting from changes in market prices. The
modifications are intended to address two types of market risk: general
market risk, which includes changes in general interest rates, equity
prices, exchange rates, or commodity prices, and specific market risk,
which includes particular risks faced by the individual institution,
such as event and default risks. The provision defines a new category
of capital, Tier 3, which includes certain types of subordinated debt.
The provision automatically applies only to those institutions whose
trading activity, on a worldwide consolidated basis, equals either (i)
10% or more of total assets or (ii) $1 billion or more, although the
agencies may apply the provision's requirements to any institution for
which application of the new standard is deemed necessary or appropriate
for safe banking practices. For institutions to which the modifications
apply, Tier 3 capital may not be included in the calculation rendering
the 8% credit risk ratio; the sum of Tier 2 and Tier 3 capital may not
exceed 100% of Tier 1 capital; and Tier 3 capital is used in both the
numerator and denominator of the normal risk-based capital ratio
calculation to account for the estimated maximum amount that the value
of all positions in the institution's trading account, as well as all
foreign exchange and commodity positions, could decline within certain
parameters set forth in a model defined by the statute. Furthermore,
beginning no later than January 1, 1999, covered institutions must
"backtest," comparing the actual net trading profit or loss for each of
its most recent 250 days against the corresponding measures generated by
the statutory model. Once per quarter, the institution must identify
the number of times the actual net trading loss exceeded the
corresponding measure and must then apply a statutory multiplication
factor based on that number for the next quarter's capital charge for
market risk.
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.
The Bank's main office is located in 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. Both facilities are owned by the Bank.
The Company's Millers Creek branch office opened in February 1996. This
2,000 square foot leased 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. 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 also leases 5,000 square feet of office space in
the Westfield Village Shopping Center in Wilkesboro, North Carolina.
This facility houses certain of the Company's administrative and
operational functions.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the
Company is a party or of which any of its properties are subject; nor
are there material proceedings known to the Company to be contemplated
by any governmental authority; nor are there material proceedings known
to the Company in which any director, officer or affiliate or any
principal security holder of the Company, or any associate of any of the
foregoing is a party or has an interest adverse to the Company.
On December 23, 1998, the Company settled a proposed
derivative action involving the Company and eight of its directors. All
claims made by all parties have been dismissed pursuant to the
settlement. Under the terms of the settlement agreement, six of the
directors of the Company purchased substantially all of the common
stock of the Company owned by Edward F. Greene and Stephen B. Greene,
and certain of their affiliates. In addition, the Company and two of
its directors purchased from Edward F. Greene and Stephen B. Greene all
stock purchase warrants and stock options of the Company held by the
Greenes. These purchases were completed on February 18, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended
December 31, 1998 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, 1999, the number of holders of record of the
Company's Common Stock was 745.
C. Dividends
To date, the Company has not paid any dividends on its
Common Stock. 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. 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. 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. 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR
ENDED DECEMBER 31, 1997
For the years ended December 31, 1998 and 1997, net income
amounted to $976,413 and $628,122, respectively. For the years ended
December 1998 and 1997, basic income per share amounted to $0.70 and
$0.49, respectively, and diluted income per share amounted to $0.61 and
$0.40, respectively. During 1998 and 1997, 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 1998
increased by $348,291 over net income in 1997 primarily due to the
following reasons:
a. Average earning assets increased from $79.4 million at
December 31, 1997 to $94.0 million at December 31, 1998, representing an
increase of $14.6 million, or 18.4%. Below are the various components
of average earning assets for the periods indicated:
December 31,
-------------------------
1998 1997
---- ----
(In Thousands)
Federal funds sold $ 1,384 $ 1,230
Taxable securities 21,018 16,373
Non-taxable securities 1,431 21
Net loans 70,207 61,772
------ ------
Total earning assets $94,040 $79,396
====== ======
b. As a consequence of the increase in earning assets, the net
interest income also increased from $3,590,657 for the year ended
December 31, 1997 to $4,320,633 for the year ended December 31, 1998.
Below are the various components of interest income and expense, as well
as their yield/costs for the periods indicated:
Years Ended
December 31, 1998 December 31, 1997
------------------- ------------------
Interest Yield Interest Yield
Income/expense Cost Income/expense Cost
-------------- ----- -------------- -----
(Dollars in Thousands)
Interest income:
- ---------------
Federal funds sold $ 75 5.42% $ 67 5.44%
Taxable securities 1,308 6.22% 1,057 6.45%
Non-taxable securities 63 6.70% 1 6.67%
Loans 7,122 10.14% 6,139 9.94%
----- -----
Total $8,568 9.11% $7,264 9.15%
===== =====
Interest expense:
- ----------------
NOW and money market deposits $ 525 3.34% $ 443 3.47%
Savings deposits 99 2.90% 75 3.12%
Time deposits 3,605 5.82% 3,140 5.97%
Federal funds and repurchase
Agreements 18 4.20% 15 5.11%
----- ----
Total $4,247 5.21% $3,673 5.40%
===== =====
Net interest income $4,321 $3,591
===== =====
Net yield on earning assets 4.59% 4.52%
==== ====
c. Non-interest income as a percentage of average total assets
for 1998 and 1997 amounted to 0.53% and 0.56%, respectively. The 1998
results are slightly below those of 1997 because of the lower fees and
charges earned by Community Mortgage Corporation, a wholly owned
subsidiary of the Company ("Community Mortgage"). Non-interest
expense, as a percentage of average assets for 1998 and 1997, amounted
to 2.92% and 2.81%, respectively. The primary reasons for the increase
in expense in 1998, as compared to 1997 are relocation expenses
associated with the North Wilkesboro branch and the Company's
administrative office, additional personnel expenses and professional
fees paid in connection with the shareholder litigation.
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 1998 was $4,320,633 as
compared to $3,590,657 for 1997. Average yields on earning assets were
9.11% and 9.15% for the years ended December 31, 1998 and 1997,
respectively. The average costs of funds for 1998 decreased to 5.21%
from the 1997 cost of 5.40%. 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, 1998 and 1997 amounted to 4.59%
and 4.52%, respectively. Net interest income for 1998 as compared to
1997 increased by $729,976, primarily due to the increase in average
earning assets from $79.4 million in 1997 to $94.0 million in 1998 and
due to the increase in net yield on earning assets, from 4.52% in 1997
to 4.59% in 1998.
NON-INTEREST INCOME
Non-interest income for the years ended December 31, 1998 and 1997
amounted to $529,912 and $465,821, respectively. As a percentage of
average assets, non-interest income decreased from 0.56% in 1997 to
0.53% in 1998 primarily because of lower fees earned by Community
Mortgage.
The following table summarizes the major components of non-interest
income for the periods therein indicated:
Year Ended December 31,
-----------------------
1998 1997
---- ----
(In Thousands)
Service fees on deposit accounts $ 164 $ 137
Gain (Loss) on sale of securities 1 (5)
Fees from Community Mortgage 244 258
Miscellaneous, other 121 76
------ ------
Total non-interest income $ 530 $ 466
====== ======
NON-INTEREST EXPENSE
Non-interest expense increased from $2,347,494 during 1997 to
$2,930,160 in 1998. As a percent of total average assets, non-interest
expense increased from 2.81% in 1997 to 2.92% in 1998. Below are the
components of non-interest expense for the years 1998 and 1997.
Year Ended December 31,
-----------------------
1998 1997
---- ----
(In Thousands)
Salaries and other personnel benefits $1,418 $1,215
Data processing charges 197 138
Professional fees 357 158
Postage and courier fees 89 76
Supplies and printing 116 114
Rent and lease expense 123 117
Other expenses 630 529
----- -----
Total non-interest expense $2,930 $2,347
===== =====
During 1998, the allowance for loan losses grew from $1,033,393 to
$1,106,830. The allowance for loan losses as a percent of gross loans
increased from 1.47% at December 31, 1997 to 1.51% at December 31, 1998.
As of December 31, 1998, 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 1998 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
three After six
months months After one
Within but but year but After
three within within within five
months one year one year five years years Total
------ -------- -------- ---------- ----- -----
EARNING ASSETS (Dollars in Thousands)
Loans $42,762 $ 4,230 $ 10,727 $13,861 $ 1,647 $73,227
Securities 327 501 6,159 16,108 3,578 26,673
------ ------ ------- ------ ------ ------
Total earning assets $43,089 $ 4,731 $ 16,886 $29,969 $ 5,225 $99,900
====== ====== ======= ====== ====== ======
SUPPORTING SOURCES OF FUNDS
Interest-bearing demand
deposit and savings $21,021 $ -- $ -- $ -- $ -- $21,021
Certificates,
less than $100M 9,257 11,779 12,397 5,321 -- 38,754
Certificates,
$100M and over 8,081 6,340 7,439 1,712 -- 23,572
------ ------ ------- ------ ------ ------
Total interest-
bearing liabilities $38,359 $ 18,119 $ 19,836 $ 7,033 $ -- $83,347
====== ====== ======= ====== ====== ======
Interest rate
sensitivity gap $4,730 $(13,388) $ (2,950) $22,936 $ 5,225 $16,553
Cumulative gap 4,730 (8,658) (11,608) 11,328 16,553 16,553
Interest rate
sensitivity gap ratio 1.12 0.26 0.85 4.26 N.A. 1.20
Cumulative interest rate
sensitivity gap ratio 1.12 0.85 0.85 1.14 1.20 1.20
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 $9.5 million in 1998. Below are the
pertinent liquidity balances and ratios for the years ended December 31,
1998 and 1997.
December 31,
--------------------
1998 1997
---- ----
(Dollars in Thousands)
Cash and cash equivalents $ 3,181 $ 4,034
Marketable securities 26,673 17,220
CDS, over $100,000 to total deposits ratio 25.8% 25.8%
Loan to deposit ratio 79.0% 84.6%
Brokered deposits -- --
Large denomination certificates during 1998 have increased
approximately $2.5 million, but reliance on such certificates to fund
normal banking operations has been maintained at a constant level in
relation to other sources of funds. At December 31, 1998 and 1997,
large denomination certificates accounted for 25.8% of total deposits
for each of the above two years. 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 $7.0 million of the $26.7
million in the Bank's securities portfolio is scheduled to mature during
1999. 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, 1998 and 1997, the Company had no
brokered deposits in its portfolio.
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. This lawsuit was dismissed on
September 24, 1998. Shortly after the lawsuit was dismissed, the
plaintiffs threatened to refile their lawsuit against the Company. On
December 23, 1998, the Company settled the proposed derivative action
involving the Company and eight of its directors. All claims made by
all parties have been dismissed pursuant to the settlement. Under the
terms of the settlement agreement, six of the directors of the Company
purchased substantially all of the common stock of the Company owned by
Edward F. Greene and Stephen B. Greene, and certain of their affiliates.
In addition, the Company and two of its directors purchased from Edward
F. Greene and Stephen B. Greene all stock purchase warrants and stock
options of the Company held by the Greenes. These purchases were
completed on February 18, 1999. In connection therewith, the Company
repurchased 82,986 common stock purchase warrants and options to
purchase 20,000 shares of common stock, for a total purchase price of
$1,155,100.
Pursuant to the terms of the settlement agreement, the Company
purchased its Curtis Bridge Road bank premises from Edward F. Greene in
December 1998 at a purchase price of $314,100, which represents the appraised
value of this property.
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, 1998.
Minimum
Regulatory
December 31, 1998 Requirement
----------------- -----------
Bank
- ----
Tier 1 Capital 11.6% 4.0%
Tier 2 Capital 1.2% N/A
---- ---
Total risk-based capital ratio 12.8% 8.0%
==== ===
Leverage ratio 8.7% 3.0%
=== ===
Company - Consolidated
- ----------------------
Tier 1 Capital 15.7% 4.0%
Tier 2 Capital 1.3% N/A
---- ---
Total risk-based capital ratio 17.0% 8.0%
==== ===
Leverage ratio 11.9% 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.
YEAR 2000
A critical issue affecting companies that rely extensively on
electronic data processing systems, such as the Company, is the Year
2000 issue. The Year 2000 issue has 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 the year 2000. In addition, some
equipment being controlled by microprocessor chips may not deal
appropriately with the year "00." This could result in a system failure
or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions or engage in
similar, normal business activities.
The Bank primarily uses a third-party vendor for processing its
primary banking applications. During 1997, the Bank formed an internal
task force, chaired by its Operations Executive, to address the Year
2000 issue, conduct a comprehensive review of the Bank's systems and
ensure that the Bank takes any necessary measures. The Bank is
currently involved in testing its systems to ensure that they are Year
2000 compliant. Management estimates that the Bank will incur
approximately $50,000 in expenditures relating to Year 2000 compliance.
As of December 31, 1998, the Company had spent approximately $1,500 to
upgrade its software and hardware systems to help ensure that they would
be Year 2000 complaint. Further, all third-party vendors have been
contacted to provide assurances that their data processing programs and
systems are Year 2000 compliant now or will be well in advance of the
year 2000. The Company believes that its systems and those of its data
processing vendors 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
unforseen difficulties or costs will not arise. In addition, there can
be no assurance that systems of other companies on which the Company's
systems rely, such as the Bank's data processing vendor, 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.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are filed with this report:
Report of Independent Accountants
Consolidated Balance Sheet - December 31, 1998
Consolidated Statements of Income - Years ended December 31, 1998
and 1997
Consolidated Statements of Changes in Shareholders' Equity - Years
ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1998
and 1997
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,
1998 and 1997, 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, 1998
and 1997, and the consolidated results of their operations and their cash flows
for each of the years in the two-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Francis & Company, CPAs
Atlanta, Georgia
March 10, 1999
COMMUNITY BANCSHARES,INC.
WILKESBORO, NORTH CAROLINA
Consolidated Balance Sheets
ASSETS
As of December 31,
---------------------------
1998 1997
---- ----
Cash and due from banks $ 3,181,025 $ 2,534,421
Federal funds sold, net (Note 3) -- 1,500,000
----------- -----------
Total cash and cash equivalents $ 3,181,025 $ 4,034,421
Securities: (Notes 2, 4 & 5)
Available-for-sale at fair value 24,288,316 13,592,071
Held to maturity (Estimated market
values of $2,416,622 and $3,644,394 at
December 31, 1998 and 1997, respectively 2,385,162 3,627,805
Loans, net (includes loans of $1,013,866
(1998) and $2,097,432 (1997) to insiders)
(Notes 2, 6, 7 & 16) 72,120,625 69,194,004
Property and equipment, net (Notes 2 & 8) 2,214,607 1,806,059
Goodwill 19,984 26,645
Other assets 923,482 794,652
----------- ----------
Total Assets $105,133,201 $93,075,657
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing deposits $ 7,959,459 $ 5,910,213
Interest bearing deposits 83,347,077 75,869,351
----------- ----------
Total deposits (Note 10) $ 91,306,536 $81,779,564
Other liabilities 1,856,731 1,191,085
----------- ----------
Total Liabilities $ 93,163,267 $82,970,649
----------- ----------
Commitments and Contingencies (Note 9)
Shareholders' Equity: (Notes 1, 11 & 15)
Common stock, $3.00 par value, 10,000,000
shares authorized, 1,446,984 (1998) and
1,297,156 (1997) issued and outstanding $ 4,340,952 $ 3,891,468
Paid-in-capital 5,769,693 5,380,223
Retained earnings 1,767,794 791,381
Unrealized gain on securities, net 91,495 41,936
----------- ----------
Total Shareholders' Equity $ 11,969,934 $10,105,008
----------- ----------
Total Liabilities and Shareholders' Equity $105,133,201 $93,075,657
=========== ==========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES,INC.
WILKESBORO, NORTH CAROLINA
Consolidated Statements of Income
Years Ended December 31,
-------------------------
1998 1997
Interest Income: ---- ----
Interest and fees on loans $ 7,121,587 $ 6,138,953
Interest on investment securities 1,370,889 1,057,699
Interest on federal funds sold 75,344 66,940
---------- ----------
Total interest income $ 8,567,820 $ 7,263,592
---------- ----------
Interest Expense:
Interest on deposits and borrowings (Note 12) $ 4,247,187 $ 3,672,935
---------- ----------
Net interest income 4,320,633 3,590,657
Provision for possible loan losses (Note 7) 258,257 485,000
---------- ----------
Net interest income after provision for
possible loan losses $ 4,062,376 $ 3,105,657
---------- ----------
Other Income:
Gain/(loss) on sale of securities (Note 4) $ 1,360 $ (4,618)
Service fees on deposit accounts 164,058 137,070
Fees from Community Mortgage 243,632 257,996
Miscellaneous, other 120,862 75,373
---------- ----------
Total other income $ 529,912 $ 465,821
---------- ----------
Other Expenses:
Salaries and benefits $ 1,418,436 $ 1,214,956
Data processing expense 196,876 137,924
Professional fees 356,612 158,024
Supplies and printing 115,719 114,324
Rent and lease expense 123,333 116,691
Postage and courier 89,441 76,323
Other operating expenses (Note 13) 629,743 529,252
---------- ----------
Total other expenses $ 2,930,160 $ 2,347,494
---------- ----------
Income before income tax $ 1,662,128 $ 1,223,984
Income tax (Notes 2 & 14) 685,715 595,862
---------- ----------
Net income $ 976,413 $ 628,122
Other comprehensive income, net of tax
Unrealized holding gains, securities 49,559 34,532
---------- ----------
Comprehensive income $ 1,025,972 $ 662,654
========== ==========
Basic earnings per share (Note 2) $ .70 $ .49
========== ==========
Diluted earnings per share (Note 2) $ .61 $ .40
========== ==========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES,INC.
WILKESBORO, NORTH CAROLINA
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997
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
Warrants 2,450 7,350 6,125 - - - - 13,475
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
--------- --------- --------- --------- ------ ----------
Net income,
1998 - - - - - - 976,413 - - 976,413
Net unrealized
gains
- securities - - - - - - - - 49,559 49,559
Exercise of
warrants 147,628 442,884 369,070 - - - - 811,954
Exercise of
options 2,200 6,600 20,400 - - - - 27,000
--------- --------- --------- --------- ------ ----------
Balance,
December 31,
1998 1,446,984 $4,340,952 $5,769,693 $1,767,794 $91,495 $11,969,934
========= ========= ========= ========= ====== ==========
Refer to notes to the consolidated financial statements.
COMMUNITY BANCSHARES,INC.
WILKESBORO, NORTH CAROLINA
Consolidated Statements of Cash Flows
Years Ended December 31,
--------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 976,413 $ 628,122
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 104,385 67,249
Net amortization of premiums on securities 51,214 36,484
(Gain) on sale or settlements of securities (1,360) 4,618
Provisions for loan losses 258,257 485,000
(Increase) in other assets (129,317) (58,111)
(Decrease) in liabilities (34,354) 266,793
----------- -----------
Net cash provided by operating activities $ 1,225,238 $ 1,430,155
----------- -----------
Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sale of securities $ 504,687 $ 2,051,632
Proceeds from maturities and paydowns 3,973,984 3,005,042
Purchase of securities (15,175,211) (7,355,633)
Held-to-maturity securities:
Purchase of securities (538,462) (1,093,283)
Maturities and paydowns 1,781,105 2,889,874
Net increase in loans (3,184,878) (16,892,306)
Purchase of property and equipment (505,785) (1,645,784)
----------- -----------
Net cash used in investing activities $(13,144,560) $(19,040,458)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of options
and warrants $ 838,954 $ 106,455
Borrowings, FHLB 700,000 - -
Increase in deposits 9,526,972 17,324,387
----------- -----------
Net cash provided from financing activities $ 11,065,926 $ 17,430,842
----------- -----------
Net (decrease) in cash and cash equivalents $ (853,396) $ (179,461)
Cash and cash equivalents, beginning of year 4,034,421 4,213,882
----------- -----------
Cash and cash equivalents, end of year $ 3,181,025 $ 4,034,421
=========== ===========
Supplemental Information:
Income taxes paid $ 653,516 $ 563,394
=========== ===========
Interest paid $ 4,339,941 $ 3,465,712
=========== ===========
Refer to notes to the consolidated financial statements
COMMUNITY BANCSHARES,INC.
WILKESBORO, NORTH CAROLINA
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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, 1998 and 1997, there were 1,446,984 and 1,297,156 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,
1998, there were 235,036 warrants outstanding. The Company also has a stock
option plan with 201,496 options outstanding as of December 31, 1998. 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, eventually increasing its ownership position to
100% 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, 1998 and 1997.
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, 1998 and 1997, 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. Income tax expense consists of current and deferred taxes.
Current income tax provisions approximate taxes to be paid or refunded for the
applicable year. Deferred tax assets and liabilities are recognized on the
temporary differences between the bases of assets and liabilities as measured
by tax laws and their bases as reported in the financial statements. Deferred
tax expense or benefit is then recognized for the change in deferred tax assets
or liabilities between periods.
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax benefit
associated with certain temporary differences, tax operating loss
carryforwards, and tax credits will be realized. A valuation allowance is
recorded for those deferred tax items for which it is more likely than not that
realization will not occur.
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, 1998 and 1997 would have been reduced by $22,340 and $23,734,
respectively. On a per share basis, basic and diluted earnings per share would
have been reduced in each of the above years by $.02.
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.
The following is a reconciliation of net income (the numerator) and the
weighted average shares outstanding (the denominator) used in determining basic
and diluted EPS for each of the following periods:
Year Ended December 31, 1998
----------------------------
Basic EPS Diluted EPS
----------------------- -----------------------
Numerator Denominator Numerator Denominator
--------- ----------- --------- -----------
Net income $ 976,413 $ 976,413
Weighted average shares 1,397,041 1,397,041
Dilutive options,
warrants, net 206,178
-------- --------- -------- ---------
Totals $ 976,413 1,397,041 $ 976,413 1,603,219
======== ========= ======== =========
EPS $.70 $.61
=== ===
Year Ended December 31, 1997
----------------------------
Basic EPS Diluted EPS
----------------------- -----------------------
Numerator Denominator Numerator Denominator
--------- ----------- --------- -----------
Net income $ 628,122 $ 628,122
Weighted average shares 1,292,264 1,292,264
Dilutive options,
warrants, net 273,674
-------- --------- -------- ---------
Totals $ 628,122 1,292,264 $ 628,122 1,565,938
======== ========= ======== =========
EPS $.49 $.40
=== ===
Recent Accounting Pronouncements. Beginning January 1, 1998, the
Company adopted the provisions of SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which is effective for annual and
interim periods beginning after December 15, 1997. This Statement establishes
standards for the method that public entities are to use when reporting
information about operating segments in annual financial statements and
requires that those enterprise reports be issued to shareholders, beginning
with annual financial statements in 1998 and for interim and annual financial
statements thereafter. SFAS 131 also established standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 132, "Employers' Disclosures About Pensions and Other Postretirement
Benefits" revises and standardizes certain disclosures which were required
under SFAS 87, 88 and 106. Generally, the new Statement uses a separate but
parallel format, eliminates less useful information, requires additional data
deemed useful by analysts, and allows some aggregation of presentation. This
Statement was adopted by the Company during 1998.
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June, 1998 and is effective for all calendar-year entities
beginning in January, 2000. This Statement applies to all entities and
requires that all derivatives be recognized as assets or liabilities in the
balance sheet, at fair values. Gains and losses of derivative instruments not
designated as hedges will be recognized in the income statement. The Company
has not made an assessment of the expected impact that SFAS 133 will have on
its financial statements.
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, 1998 and 1997, the
Bank sold zero and $1,500,000, 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, 1998 follow:
Gross
Amortized Unrealized Estimated
Description Costs Gains Losses Market Values
----------- -------- -------- -------------
U.S. Treasury securities $ 2,765,918 $ 32,802 $ - - $ 2,798,720
U.S. Agency securities 16,756,102 102,010 (8,414) 16,849,698
FRB stock 191,100 - - - - 191,100
Municipal securities 2,276,412 25,954 (2,525) 2,299,841
Mortgage pools 1,377,225 2,516 (5,438) 1,374,303
Other securities 773,986 668 - - 774,654
---------- ------- ------- ----------
Total securities $24,140,743 $163,950 $(16,377) $24,288,316
========== ======= ======= ==========
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 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 at December 31, 1998, 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 $ 6,372,557 $ 6,416,304
Due after one through five years 14,218,891 14,299,074
Due after five through ten years 3,358,195 3,381,838
FRB stock (no maturity) 191,100 191,100
---------- ----------
Total securities $24,140,743 $24,288,316
========== ==========
Proceeds form sales of securities during 1998 and 1997 were $504,687 and
$2,051,632, respectively. Gains of $1,360 (1998) and losses of $4,618 (1997)
were realized on those sales.
As of December 31, 1998 and 1997, securities with an aggregate par value
of $3,500,000 and $2,166,109, 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, 1998 follow:
Gross
Amortized Unrealized Estimated
Description Costs Gains Losses Market Values
---------- ------- ------ -------------
Mortgage-backed securities $ 1,000,584 $12,660 $ (212) $ 1,013,032
Mortgage pools 1,384,578 19,012 - - 1,403,590
---------- ------ ----- -----------
Total securities $ 2,385,162 $31,672 $ (212) $ 2,416,622
========== ====== ===== ===========
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 1,491,04 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 at December 31, 1998, 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
Costs Market Values
----- -------------
Due in one year or less $ 571,342 $ 573,834
Due after one year through five years 1,809,267 1,838,342
Due after ten years 4,553 4,446
--------- ----------
Total securities $2,385,162 $ 2,416,622
========= ==========
At December 31, 1998 and 1997, securities with an aggregate par value of
zero and $250,000, respectively, were pledged to secure public deposits.
Note 6 - Loans
The composition of net loans by major loan category, as of December 31,
1998 and 1997, follows:
December 31,
--------------------------
1998 1997
---- ----
Commercial, financial, agricultural $29,132,567 $28,215,330
Real estate - construction 7,699,492 6,571,616
Real estate - mortgage 20,830,973 21,088,303
Installment 15,404,781 14,016,280
Lease financing 159,642 335,868
---------- ----------
Loans, gross $73,227,455 $70,227,397
Deduct:
Allowance for loan losses (1,106,830) (1,033,393)
---------- ----------
Loans, net $72,120,625 $69,194,004
========== ==========
The Company had no loans which it considered to be impaired other than
the loans on which the accrual of interest had been discontinued. The total
recorded investment in impaired loans was zero and $95,501 at December 31, 1998
and 1997, respectively. These loans had related allowances for loan losses of
approximately zero and $34,600 at December 31, 1998 and 1997, respectively.
The average recorded investment in impaired loans for 1998 and 1997 was $98,406
and $148,053, respectively. There was no significant amount of interest income
recognized on impaired loans in 1998 or 1997.
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, 1998 and 1997 follows:
Years ended December 31,
--------------------------
1998 1997
---- ----
Balance, beginning of year $1,033,393 $ 619,133
Add: Provision for loan losses 258,257 485,000
Add: Recoveries of previously charged
off amounts 14,897 12,370
--------- ---------
Total $1,306,547 $1,116,503
Deduct: Amount charged-off (199,717) (83,110)
--------- ---------
Balance, end of year $1,106,830 $1,033,393
========= =========
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, 1998 and
1997 follow:
December 31,
--------------------------
1998 1997
---- ----
Land $ 464,100 $ 350,000
Leasehold improvement 118,090 68,938
Building 1,537,333 1,337,332
Furniture and equipment 408,632 276,423
--------- ---------
Property and equipment, gross $2,528,155 $2,032,693
Deduct:
Accumulated depreciation (313,548) (226,634)
--------- ---------
Property and equipment, net $2,214,607 $1,806,059
========= =========
Depreciation expenses for the years ended December 31, 1998 and 1997
amounted to $97,239 and $58,582, 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
On December 23, 1998, the Company settled a proposed derivative action
involving the Company and eight of its directors. All claims made by all
parties have been dismissed pursuant to the settlement. Pursuant to the terms
of the settlement agreement on February 18, 1999, six directors agreed to
purchase substantially all of the common stock of the Company owned by two
other directors and their related interests. In addition, the Company and
certain directors agreed to purchase from the above two directors all the
Company's warrants and stock options owned by the above two directors. Please
refer to Note 22 for additional details.
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, 1998 and 1997:
December 31,
----------------------------
1998 1997
---- ----
Non-interest bearing deposits $ 7,959,459 $ 5,910,213
Interest bearing deposits:
NOW accounts 8,219,478 6,241,531
Money market accounts 9,016,364 7,699,956
Savings 3,785,727 2,689,560
Time, less than $100,000 38,753,556 38,105,637
Time, $100,000 and over 23,571,952 21,132,667
---------- ----------
Total deposits $91,306,536 $81,779,564
========== ==========
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, 1,446,984 shares of which
were issued and outstanding at December 31, 1998. The holders of common stock
have no preemptive rights with respects to the issuance of any shares by the
Company.
At December 31, 1998 and 1997, there were 235,036 and 382,664 stock
warrants, respectively, outstanding. During 1998 and 1997, 147,628 and 2,450
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, 1998 and 1997, there were 201,496 and 169,696 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, 1998 and
1997 follows:
December 31,
----------------------------
1998 1997
---- ----
Interest on NOW accounts $ 260,675 $ 170,656
Interest on money market accounts 264,017 271,844
Interest on savings accounts 98,985 75,384
Interest on CDs under $100,000 2,276,718 2,081,309
Interest on CDs $100,000 and over 1,328,642 1,059,156
Interest, other borrowings 18,150 14,586
--------- ---------
Total interest on deposits and borrowings $4,247,187 $3,672,935
========= =========
Note 13 - Other Operating Expenses
A summary of other operating expenses for the years ended December 31,
1998 and 1997 follows:
December 31,
---------------------------
1998 1997
---- ----
Advertising and public relations $ 81,450 $ 75,199
Depreciation and amortizaton 104,385 67,249
Utilities and telephone 87,343 65,069
Repairs and maintenance 84,590 61,352
Taxes and licenses 66,630 38,117
Regulatory assessments 48,493 45,724
All other operating expenses 156,852 176,542
--------- ---------
Total other operating expenses $ 629,743 $ 529,252
========= =========
Note 14 - Income Taxes
As of December 31, 1998 and 1997, the Company's provision for income
taxes consisted of the following:
December 31,
-------------------------
1998 1997
---- ----
Current $721,424 $447,284
Deferred 29,577 134,638
Reversal of valuation allowance (47,969) - -
Loss carryforward, (benefit) (17,317) 13,940
------- -------
Federal income tax expense $685,715 $595,862
======= =======
Deferred income taxes for the years ended December 31, 1998 and 1997
consist of the following:
1998 1997
---- ----
Provision for loan losses $ 24,969 $137,448
Other 4,608 (2,810)
------- -------
Total $ 29,577 $134,638
======= =======
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,
1998:
1998
----
Income taxes at statutory rate $ 565,124
State tax, net of Federal benefits 34,106
Change in valuation allowance 23,001
Tax-free income 24,960
Other 38,524
---------
Total $ 685,715
=========
The tax effects of the temporary differences that comprise the net
deferred tax assets at December 31, 1998 is presented below:
1998
----
Deferred tax assets:
Allowance for loan losses $ 348,517
Community Mortgage 13,283
Unrealized gain, securities (47,133)
Deferred asset, depreciation 6,019
Valuation reserve (330,239)
---------
Net deferred tax asset $ (9,553)
=========
There was a net change in the valuation allowance during 1998. 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, 1998.
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 1998 and
1997, the Company made contributions totaling $31,174 and $29,000 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 either 1998 or 1997.
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
------------------------
1998 1997
---- ----
Options granted in past years 188,296 126,296
Options granted this year 36,000 62,000
Options exercised in previous years (17,400) (7,080)
Options exercised this year (2,200) (10,320)
Options forfeited in previous years (1,200) (1,200)
Options forfeited this year (2,000) - -
------- -------
Balance, end of year 201,496 169,696
======= =======
Options available for grant 175,704 211,704
======= =======
The options entitle their holders to purchase one share of the Company's
common stock for an amount between $9.00 to $16.00 each, at a weighted average
price of $11.88.
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 each of the calendar years 1998 and 1997, the CEO
was granted options to purchase 10,000 shares of the Company's common stock at
$10.00 per share. For the years ended December 31, 1998 and 1997, the Company
incurred costs of approximately $143,553 and $133,432 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 was renewed with an expiration date of
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, 1998 and 1997 amounted to $48,455 and
$51,658, respectively. During December, 1998, the Company purchased the
property for $314,100.
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 terminated in 1998. Lease expense for the years ended
December 31, 1998 and 1997 amounted to $17,535 and $21,291.
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, 1998 and 1997, loans outstanding to directors,
their related interest and executive officers aggregated $1,013,866 and
$2,097,432, 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 1998 and 1997
follows:
Insider Loan Transactions
-------------------------
1998 1997
---- ----
Balance, beginning of year $2,097,432 $1,438,919
New loans 158,229 1,965,055
Less: principal reductions (1,241,795) (1,306,542)
--------- ---------
Balance, end of year $1,013,866 $2,097,432
========= =========
Deposits by directors and their related interests, as of December 31,
1998 and 1997 approximated $1,831,003 and $1,629,722, respectively.
Directors/Organizers Stock Warrants: Please refer to Notes 1, 11, 15
and 22 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 - Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In cases
where quoted market prices are not available, fair values are based on
estimates using discounted cash flow methods. Those methods are significantly
affected by the assumptions used, including the discount rates and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. The use of
different methodologies may have a material effect on the estimated fair market
value accounts. Also, the fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1998. Such
amounts have not been revalued for purposes of these financial statements since
those dates and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
Cash and Due from Banks, Interest-Bearing Deposits with Banks and Federal
Funds Sold. The carrying amounts of cash and due from banks, interest-bearing
deposits with banks, and Federal funds sold approximate their fair value.
Available for Sale and Held to Maturity Securities. Fair values for
securities are based on quoted market prices.
Loans. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
For other loans, the fair values are estimated using discounted cash flow
methods, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired loans
are estimated using discounted cash flow methods or underlying collateral
values.
Deposits. The carrying amounts of demand deposits and savings deposits
approximate their fair values. Fair values for certificates of deposit are
estimated using discounted cash flow methods, using interest rates currently
being offered on certificates.
Off-Balance Sheet Instruments. Fair values of the Company's off-balance
sheet financial instruments are based on fees charged to enter into similar
agreements. However, commitments to extend credit and standby letters of
credit do not represent a significant value to the Company until such
commitments are funded. The Company has determined that these instruments do
not have a distinguishable fair value and no fair value has been assigned.
The estimated fair values of the Company's financial instruments were as
follows:
December 31, 1998
---------------------------
Carrying Fair
-------- ----
Financial assets:
Cash and due from banks $ 3,181,025 $ 3,181,025
Securities available for sale 24,288,316 24,288,316
Securities held to maturity 2,385,162 2,416,622
Loans 72,120,625 72,051,177
Financial liabilities:
Deposits 91,306,536 91,365,160
Note 18 - Segment Reporting
The Company's operations include two primary business segments, banking
and mortgage activities. The Company, through the Bank, provides traditional
banking services including a full range of commercial and consumer banking
services. Through Community Mortgage, the Company provides mortgage services
including the origination and sale of mortgage loans to various investors,
including other financial institutions.
Year Ended Holding Community Elimin-
December 31, 1998 Co. Bank Mortgage ations Consolidated
- ----------------- ------- ---- --------- ------- ------------
Revenues from
unaffiliated
customers $ 745 $ 8,726,201 $370,786 $ - - $ 9,097,732
Revenues from
affiliates 118,357 - - - - (118,357) - -
--------- ----------- ------- ---------- -----------
Total revenues $ 119,102 $ 8,726,201 $370,786 $ (118,357) $ 9,097,732
========= =========== ======= ========== ===========
Income/(loss) from
operations, before
tax $ (254,873) $ 1,866,068 $ 50,984 $ - - $ 1,662,179
========= =========== ======= ========== ===========
Indentifiable
assets, December
31, 1998 $12,019,913 $103,176,616 $ 53,450 $(10,116,778) $105,133,201
========= =========== ======= =========== ===========
Depreciation and
Amortization $ 31,782 $ 68,973 $ 3,630 $ - - $ 104,385
========= =========== ======= =========== ===========
Note 19 - 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, 1998 and 1997, unfunded
commitments to extend credit were $13,753,424 and $11,977,150, 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, 1998 and 1997, commitments under letters of credit was
identical at $25,000. 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 20 - 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, 1998,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 1998, 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, 1998:
- -----------------------
Total capital-risk-based
(to risk-weighted assets):
Bank $ 9,450 12.8% $5,907 >= 8% $7,384 >= 10%
Consolidated 12,921 17.0% 6,088 >= 8% N/A >= N/A
Tier 1 capital-risk-based
(to risk-weighted assets):
Bank $ 8,527 11.6% $2,954 >= 4% $4,431 >= 6%
Consolidated 11,970 15.7% 3,044 >= 4% N/A >= N/A
Tier 1 capital-leverage
(to average assets):
Bank $ 8,527 8.7% $3,938 >= 4% $4,923 >= 5%
Consolidated 11,970 11.9% 4,016 >= 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, 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
Note 21 - 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 1999 is $1,180,353 plus 1999 net
earnings of the Bank. For the years ended December 31, 1998 and 1997, no
dividends were paid to shareholders.
Note 22 - Subsequent Event
Subsequent to December 31, 1998, and prior to the date of this report,
The six directors mentioned under Note 9, above, purchased substantially all of
the Company's common stock and a number of the Company's warrants owned/held by
two other directors and their related interests. Additionally, the Company
purchased 82,968 warrants and 20,000 options from the above two directors for
an aggregated price of $1,155,100. The warrants and options purchased by the
Company were cancelled.
Note 23 - 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 1998 1997
---- ----
Cash $ 1,450,663 $ 1,089,954
Investment in Community Mortgage 47,702 (2,765)
Investment in Bank 8,618,413 7,388,500
Property and equipment 1,883,642 1,594,663
Other assets 19,493 57,016
----------- -----------
Total Assets $ 12,019,913 $ 10,127,368
=========== ===========
Liabilities and Shareholders' Equity:
Accounts payable $ 49,979 $ 22,360
----------- -----------
Total Liabilities $ 49,979 $ 22,360
----------- -----------
Common stock $ 4,340,952 $ 3,891,468
Paid-in-capital 5,769,693 5,380,223
Retained earnings 1,767,794 791,381
Unrealized gain on securities 91,495 41,936
----------- -----------
Total Shareholders' equity $ 11,969,934 $ 10,105,008
----------- -----------
Total Liabilities and
Shareholders' equity $ 12,019,913 $ 10,127,368
=========== ===========
Parent Company Statements of Income
Years Ended December 31,
-------------------------
1998 1997
Revenues: ---- ----
Interest income $ 63,652 $ 106,896
Rental income 55,450 6,600
--------- ---------
Total revenues $ 119,102 $ 113,496
--------- ---------
Expenses:
Depreciation and amortization $ 31,782 $ 15,075
Professional fees 290,613 103,606
Other expenses 51,580 53,868
--------- ---------
Total expenses $ 373,975 $ 172,549
--------- ---------
(Loss) before taxes and equity in undistributed
earnings of subsidiaries $ (254,873) $ (59,053)
Tax (benefit) - - (24,655)
--------- ---------
(Loss) before equity in undistributed earnings
of subsidiaries $ (254,873) $ (34,398)
Equity in undistributed earnings of subsidiaries
1,231,286 662,520
--------- ---------
Net Income $ 976,413 $ 628,122
========= =========
Parent Company Statements of Cash Flows
Years Ended December 31,
------------------------
1998 1997
Cash flows from operating activities: ---- ----
Net income $ 976,413 $ 628,122
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries (1,231,286) (665,520)
Depreciation and amortization 31,782 15,075
(Increase) in receivables and other assets 31,327 (29,470)
Increase in payables 27,619 15,160
--------- ----------
Net cash provided by operating activities $ (164,145) $ (33,633)
--------- ----------
Cash flows from investing activities:
Purchase of property and equipment $ (314,100) $(1,599,806)
Investment in Bank - - (1,000,000)
Investment in Community Mortgage - - (2,500)
--------- ----------
Net cash used by financing activities $ (314,100) $(2,602,306)
--------- ----------
Cash flows from financing activities:
Proceeds from sale of stock $ - - $ - -
Exercise of warrants/options 838,954 106,455
--------- ----------
Net cash used by financing activities $ 838,954 $ 106,455
--------- ----------
Net (decrease) in cash and cash equivalents $ 360,709 $(2,529,484)
Cash and cash equivalents, beginning of the year 1,089,954 3,619,438
--------- ----------
Cash and cash equivalents, end of year $1,450,663 $ 1,089,954
========= ==========
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
The information relating to Items 9, 10, 11 and 12 of this
Report will be filed as an amendment to this Report on or before
April 30, 1999 or the Company will otherwise have filed a
definitive proxy statement involving the election of directors
pursuant to Regulation 14A, which definitive proxy statement will
contain such information.
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"), (vi) the Annual Report on Form 10-KSB for the year ended
December 31, 1996 (referred to as "1996 10-K"), or (vii) the
Current Report on Form 8-K dated February 18, 1999 (referred to as
"8-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 - Amended and Restated Bylaws (8-K).
*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. - 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.
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 1998.
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 30, 1999 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 30, 1999
- --------------------------------------------
BRENT F. ELLER
Secretary, Treasurer and Class I Director
/s/ Jack R. Ferguson March 30, 1999
- --------------------------------------------
JACK R. FERGUSON
Class II Director
/s/ Gilbert R. Miller March 30, 1999
- --------------------------------------------
GILBERT R. MILLER
Class I Director
/s/ Randy D. Miller March 30, 1999
- --------------------------------------------
RANDY D. MILLER
Class I Director
/s/ Dwight E. Pardue March 30, 1999
- --------------------------------------------
DWIGHT E. PARDUE
Class III Director
/s/ Robert F. Ricketts March 30, 1999
- --------------------------------------------
ROBERT F. RICKETTS, D.D.S.
Class II Director
/s/ Rebecca Ann Sebastian March 30, 1999
- --------------------------------------------
REBECCA ANN SEBASTIAN
Class I Director
/s/ R. Colin Shoemaker March 30, 1999
- --------------------------------------------
R. COLIN SHOEMAKER
Class III Director
/s/ Ronald S. Shoemaker March 30, 1999
- --------------------------------------------
RONALD S. SHOEMAKER
President and Class III Director
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
21.1 Subsidiaries of the Registrant.
23.1 Consent of Francis & Co.
27.1 Financial Data Schedule (for SEC use only)
Exhibit 21.1
Subsidiaries of the Registrant
Wilkes National Bank, a national banking association
Community Mortgage Corporation, a North Carolina corporatio
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference into the Form S-8
Registration Statement of Community Bancshares, Inc. (Registration
No. 333-46231) of our report dated March 10, 1999, appearing in
the Annual Report on Form 10-KSB of Community Bancshares, Inc. for
the year ended December 31, 1998.
/s/ Francis & Co., CPAs
Atlanta, Georgia
March 30, 199
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF COMMUNITY BANCSHARES, INC. FOR
THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<PERIOD-START> JAN-1-1998
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,181,025
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,288,316
<INVESTMENTS-CARRYING> 2,385,162
<INVESTMENTS-MARKET> 2,416,622
<LOANS> 73,227,455
<ALLOWANCE> 1,106,830
<TOTAL-ASSETS> 105,133,201
<DEPOSITS> 91,306,536
<SHORT-TERM> 700,000
<LIABILITIES-OTHER> 1,156,731
<LONG-TERM> 0
0
0
<COMMON> 4,340,952
<OTHER-SE> 7,628,982
<TOTAL-LIABILITIES-AND-EQUITY> 105,133,201
<INTEREST-LOAN> 7,121,587
<INTEREST-INVEST> 1,370,889
<INTEREST-OTHER> 75,344
<INTEREST-TOTAL> 8,567,820
<INTEREST-DEPOSIT> 4,229,037
<INTEREST-EXPENSE> 4,247,187
<INTEREST-INCOME-NET> 4,320,633
<LOAN-LOSSES> 258,257
<SECURITIES-GAINS> 1,360
<EXPENSE-OTHER> 2,930,160
<INCOME-PRETAX> 1,662,128
<INCOME-PRE-EXTRAORDINARY> 1,662,128
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 976,413
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.61
<YIELD-ACTUAL> 4.59
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 416,000
<ALLOWANCE-OPEN> 1,033,393
<CHARGE-OFFS> 199,717
<RECOVERIES> 14,897
<ALLOWANCE-CLOSE> 1,106,830
<ALLOWANCE-DOMESTIC> 1,083,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 23,830
</TABLE>
