UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Mark One
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
// TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE EXCHANGE ACT
For the transition period from _______ to _______
Commission File Number: 33-81890
Community Bankshares, Inc.
__________________________________
(Exact name of registrant as specified in its charter)
Georgia 58-1415887
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
448 North Main Street,
Cornelia, Georgia 30531
(Address of principal executive offices)
(Zip Code)
(706) 778-2265
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant has (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
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of
November 1, 1998: 2,169,830
<PAGE>
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997 2
Consolidated Statements of Operations
and Comprehensive Income for Three
Months Ended September 30, 1998 and 1997
and Nine Months Ended September 30, 1998
and 1997 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K 7
Signatures 8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Dollars in thousands)
(Unaudited)
Assets 1998 1997
<S> <C> <C>
Cash and due from banks $ 25,064 $ 23,957
Interest-bearing deposits in banks 946 769
Federal funds sold 7,110 5,960
Securities available-for-sale 44,038 53,282
Securities held-to-maturity (fair value
$31,609 and $29,558) 30,218 28,719
Loans held for sale 2,955 2,561
Loans 298,310 242,660
Less allowance for loan losses 4,548 4,024
Loans, net 293,762 238,636
Premises and equipment 13,748 12,115
Other assets 14,371 11,080
Total assets $ 432,212 $ 377,079
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand $ 55,987 $ 50,768
Interest-bearing demand 84,450 72,854
Savings 19,736 16,276
Time, $100,000 and over 64,920 55,849
Other time 153,291 139,798
Total deposits 378,384 335,545
Other borrowings 5,347 462
Other liabilities 9,050 7,331
Total liabilities 392,781 343,338
Commitments and contingent liabilities
Redeemable common stock held by ESOP, 362,241
and 344,531 shares outstanding, at fair
value 11,168 10,622
Stockholders' equity
Common stock, par value $1; 5,000,000
shares authorized; 2,169,830
shares issued and outstanding 2,170 2,170
Capital surplus 6,036 6,036
Retained earnings 19,736 14,783
Accumulated other comprehensive income,
net of tax 321 130
Total stockholders' equity 28,263 23,119
Total liabilities and stockholders' equity $ 432,212 $ 377,079
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHESIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $ 7,785 $ 6,475 $ 21,818 $ 17,537
Taxable securities 631 717 2,041 2,279
Nontaxable securities 448 336 1,256 947
Deposits in banks 14 61 32 78
Federal funds sold 98 156 317 521
Total interest income 8,976 7,745 25,464 21,362
Interest expense on deposits
Deposits 4,101 3,308 11,704 9,652
Other borrowings 15 10 32 32
Total interest expense 4,116 3,318 11,736 9,684
Net interest income 4,860 4,427 13,728 11,678
Provision for loan losses 224 247 764 636
Net interest income
after provision
for loan losses 4,636 4,180 12,964 11,042
Other income
Service charges on deposit
accounts 643 497 1,859 1,465
Other service charges and fees 130 191 386 477
Gains on sale of loans 157 261 372 539
Trust Department fees 29 20 83 65
Net realized gains on sales of
securities 30 15 41 9
Nonbank subsidiary
non-interest income 3,536 1,170 7,175 6,120
Other operating income 131 7 376 302
Total other income 4,656 2,161 10,292 8,977
Other expenses
Salaries and employee benefits 2,662 2,350 7,562 7,317
Occupancy expense 355 264 969 765
Equipment expense 492 306 1,396 911
Other operating expenses 1,684 1,253 4,753 4,168
Total other expenses 5,193 4,173 14,680 13,161
Income before income
taxes 4,099 2,168 8,576 6,858
Income tax expense 1,399 689 2,838 2,210
Net income $ 2,700 $ 1,479 $ 5,738 $ 4,648
Other comprehensive income
(loss),net of tax:
Unrealized gains (losses) on
securities available-for-
sale arising during
the period 209 140 191 141
Less: reclassification
adjustment for
gains included
in net income 18 9 25 5
Total other comprehensive
income 227 149 216 146
Comprehensive income $ 2,927 $ 1,628 $ 5,954 $ 4,794
Basic earnings per common share $ 1.24 $ 0.71 $ 2.64 $ 2.29
Diluted earnings per common share 1.23 0.68 2.61 2.26
Cash dividends per share of
common stock $ 0.037 $ 0.034 $ 0.110 $ 0.102
<FN>
See Notes to Consolidated
Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands)
(Unaudited)
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,738 $ 4,648
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,441 772
Provision for loan losses 764 636
Provision for other real estate 10 50
Deferred income taxes (221) (147)
Increase in loans held for sale (394 171
Net realized (gains) losses on securities
available-for-sale (41) (9)
Net (gains) losses on sale of other real
estate (3) 42
Increase in interest receivable (740) (463)
Increase in interest payable 651 508
Increase (decrease) in taxes payable 1,112 (438)
Increase (decrease) in accounts
receivable of nonbank subsidiary (1,136) 915
Increase (decrease) in work in
process of nonbank subsidiary (804) 1,277
Increase (decrease) in accruals and
payables of nonbank subsidiary 270 (1,684)
Other operating activities (1,164) (352)
Net cash provided by
operating activities 5,483 5,926
INVESTING ACTIVITIES
Purchases of securities available-for-sale (12,936) (16,355)
Proceeds from sales of securities
available-for-sale 6,161 7,202
Proceeds from maturities of securities
available-for-sale 16,378 6,297
Purchases of securities held-to-maturity (2,329) (7,463)
Proceeds from maturities of securities
held-to-maturity 830 831
Net increase in Federal funds sold (1,150) (1,460)
Net increase in interest-bearing
deposits in banks (177) (509)
Net increase in loans (56,017) (23,613)
Purchase of premises and equipment (2,862) (2,591)
Net cash acquired in branch acquisition 171 -
Proceeds from sales of other real estate 70 341
Net cash used in
investing activities (51,861) (37,320)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 42,839 28,433
Increase in other borrowings 5,000 -
Repayment of other borrowings (115) (115)
Proceeds from issuance of Common
Stock - 143
Dividends paid (239) (212)
Net cash provided by
financing activities 47,485 28,249
Net increase (decrease) in cash and
due from banks $ (1,107) $ (3,145)
Cash and due from banks at beginning of the Year 23,957 19,480
Cash and due from banks at end of the Year $ 25,064 $ 16,335
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 11,085 $ 9,176
Income taxes $ 1,947 $ 2,795
NONCASH TRANSACTIONS
Unrealized (gains) losses on
securities available-for sale $ (318) $ (235)
Principal balances on loans and premises
and equipment transferred to other
real estate $ 127 $ 220
BRANCH ACQUISITION
Net cash acquired $ 171 $ -
Loans $ 2,981 -
Premises and equipment 10 -
Other assets 14 -
Core deposit intangible 759 -
Deposits (5,838) -
Other liabilities (25) -
Net liabilities assumed, net of
cash and due from banks of $171 $ (2,099) $ -
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
<PAGE>
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial information included herein is
unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in
opinion of management, necessary for a fair statement of results
for the interim periods.
The results of operations for the nine month period ending
September 30, 1998 are not necessarily indicative of the results
to be expected for the full year.
NOTE 2. CURRENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued, and
the Company has adopted, Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". This
statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that
are secured borrowings. The adoption of this statement did not
have a material effect on the company's financial statements.
The FASB has issued, and the Company has adopted, SFAS No. 128,
"Earnings Per Share". SFAS No. 128 supersedes Accounting
Principals Board Opinion No. 15 "Earnings Per Share" and specifies
the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly held common
stock or potential issuable common stock. SFAS No. 128 replaced
the presentation of primary EPS with a presentation of basic EPS
and fully diluted EPS with diluted EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator for the
basic EPS computation to the numerator and denominator of the
diluted EPS computation. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after
December 15, 1997. The adoption of this statement did not have a
material effect on the Company's financial statements.
The FASB has issued, and the Company has adopted, SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes
standards for reporting and display of comprehensive income and
its components in the financial statements. SFAS No. 130 requires
all items that are required to be recognized under accounting
standards as components of comprehensive income to be reported in
a financial statement that is displayed in equal prominence with
the other financial statements. The term "comprehensive income"
is used in the SFAS to describe the total of all components of
comprehensive income including net income. "Other comprehensive
income" refers to revenues, expenses, gains and losses that are
included in comprehensive income but excluded from earnings under
current accounting standards. Currently, "other comprehensive
income" for the Company consists of items previously recorded
directly in equity under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". SFAS No. 130 is
effective for fiscal years and interim periods beginning after
December 15, 1997.
NOTE 3 EARNINGS PER COMMON SHARE
The following is a reconciliation of net income (the numerator)
and weighted-average shares outstanding (the denominator) used in
determining basic and diluted earnings per common share (EPS).
<TABLE>
<CAPTION>
Three Months Ended September 30,1998
( Dollars in Thousands, except per share amounts)
Net Weighted-
Income Average Shares Per
(Numerator) (Denominator) Share
Amount
<S> <C> <C> <C>
Basic EPS 2,700 2,170 1.24
Effect of Dilutive
Securities Stock
options 0 26
-------- -------- --------
Diluted EPS 2,700 2,196 1.23
======== ======== ========
Three Months Ended September 30, 1997
(Dollars in Thousands, except per share amounts)
Net Weighted-
Income Average Shares Per
(Numerator) (Denominator) Share
Amount
Basic EPS 1,479 2,076 0.71
Effect of Dilutive
Securities Stock
options 0 91
-------- -------- --------
Diluted EPS 1,479 2,167 0.68
======== ======== ========
Nine Months Ended September 30, 1998
(Dollars in Thousands, except per share amounts)
Net Weighted-
Income Average Shares Per
(Numerator) (Denominator) Share
Amount
Basic EPS 5,738 2,170 2.64
Effect of Dilutive
Securities Stock
options 0 26
-------- -------- --------
Diluted EPS 5,738 2,196 2.61
======== ======== ========
Nine Months Ended September 30, 1997
(Dollars in Thousands, except per share amounts)
Net Weighted-
Income Average Shares Per
(Numerator) (Denominator) Share
Amount
Basic EPS 4,648 2,033 2.29
Effect of Dilutive
Securities Stock
options 0 24
-------- -------- --------
Diluted EPS 4,648 2,057 2.26
======== ======== ========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
- ----------------------------------------------
The following appears in accordance with the Securities Litigation
Reform Act. These financial statements and financial review
include forward looking statements that involve inherent risks and
uncertainties. A number of important factors could cause actual
results to differ materially from those in the forward looking
statements. Those factors include fluctuations in interest rates,
inflation, government regulations, economic conditions, Year 2000
issues and competition in the geographic business areas in which
the Company conducts its operations.
Management Discussion and Analysis
- ----------------------------------------------
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
position and operating results during the periods included in the
accompanying consolidated financial statements.
Financial Condition
As of September 30, 1998, the Company continues to experience
growth in total assets, total loans and total deposits as compared
to December 31, 1997. Total assets, loans, and deposits increased
by 14.62%, 22.85% and 12.77% respectively. The growth in deposits
and loans is higher than prior year, but consistent with
management's expectations. The growth in assets is attributable
to growth in deposits and retention of earnings. Management
expects the growth to continue in the future.
Liquidity
As of September 30, 1998, the Liquidity Ratio was 23.26% which is
within the Company's target range of 20 - 25%. The Banks have
available lines of credit to meet unexpected liquidity needs.
Liquidity is measured by the ratio of net cash, short term and
marketable securities to net deposits and short term Liabilities.
Interest Rate Risk
The Company's overall interest rate risk was less than 6% of net
interest income subjected to rising and falling rates of 200 basis
points.
Capital
Banking regulations require the Company to maintain capital levels
in relation to Company assets. At September 30, 1998, the
Company's capital ratios were considered satisfactory based on
regulatory minimum capital requirements. The minimum capital
requirements and the actual capital ratios for the Company at
September 30, 1998 were as follows:
<TABLE>
Actual Regulatory
Minimum
<S> <C> <C>
Leverage 8.46% 4.00%
Risked Based
Capital ratios:
Core Capital 11.22% 4.00%
Total Capital 12.47% 8.00%
</TABLE>
Results of Operation
Net interest income for the nine month period ended September 30,
1998 is up 17.55% over the same period for 1997, from $11,678,000
to $13,728,000, and is up 9.78% for the three month period ending
September 30, 1998 from $4,427,000 to $4,860,000 for 1998.
Interest income was up by 19.20% for the nine month period ending
September 30, 1998 from $21,362,000 to $25,464,000 and up 15.89%
for the three month period ending September 30, 1998 from
$7,745,000 to $8,976,000. Interest expense was up 21.19% or
$2,052,000 for the nine month period ended September 30, 1998,
over the same period in 1997 and up 24.05% or $798,000 for the
three month period ending September 30, 1998, as compared to 1997.
The increase in interest income is due to an increase of 21.71% or
$68,415,000 in earning assets from September 30, 1997 to September
30, 1998. Investment securities decreased by $1,548,000 or 2.04%
during the period primarily to meet the loan demand. Total loans
increased during the last year by $72,429,000 or 31.65%. The
increase in interest income, interest expense, and net interest
income were consistent with the budget projections made by
management and are on target to be consistent with annual
projections. Included in the above are $7,339,000 and $18,225,000
in loans and deposits, respectively, which were assumed through
the purchase of two bank branches during the past twelve month
period.
The provision for loan losses was $764,000 for the first nine
months of 1998. This provision will fluctuate based on Small
Business Administration (SBA) loans closed, as the Company has a
policy of reserving 5% of the un-guaranteed portion of any SBA
loans. The Company currently has reserves totaling $946,712 for
its un-guaranteed portion of SBA loans.
The following table furnishes information on the Loan Loss Reserve
for the current nine month reporting period and the same period
for 1997.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Beginning Balance $ 4,024 $ 3,592
Less Charge Offs:
Real Estate Loans (7) (35)
Commercial Loans (75) (94)
Consumer Loans (277) (111)
Credit Cards (8) (4)
Plus Recoveries
Real Estate Loans 18 27
Commercial Loans 20 9
Consumer Loans 89 36
Credit Cards 0 0
Plus Provision 764 636
-------- --------
Ending Balance $ 4,548 $ 4,056
======== ========
The loan loss reserve for the company is evaluated monthly and
adjusted to reflect the risk in the portfolio in the following
manner. We use four different methods of measuring risk in the
portfolio: (a) Risk in our watch list of loans and past due
ratios; (b) Historical charge offs; ( c) Peer group comparisons;
and (d) Percentage of classified loans. We then compare results
to reserve balances to assure any and all identified risk are
covered.
The Provision for Loan Losses for the nine month period ended
September 30, 1998 represented 208% of charge offs for the same
period, while the provision for the first nine months of 1997
represented 261% of the charge offs recorded in that period. The
reserve at the end of September 30, 1998 represented 374% of non
accrual loans while the reserve at September 30, 1997 represented
715% of non accrual loans. Non accrual loans have increased from
$567,000 at September 30, 1997 to $1,215,000 as of September 30,
1998, due mainly to the addition of two large SBA loans.
Management does not anticipate any loss on these loans. The Company
is well within its policy limit of maintaining a loan loss reserve
of at least 200% of non-performing assets. The Loan Loss Reserve
balance to total loan ratio at September 30, 1998 was 1.51% as
compared to 1.77% at September 30, 1997. The decrease in this
ratio is due to the strong loan demand experienced in all the
Company's market areas. Management considered the Loan Loss
Reserve to be adequate to absorb any losses that may be incurred.
The following table is a summary of Non Accrual, Past due and
Restructured Debt
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
Non-accrual Past Due Restructured
Loans 90 days Debt
still
accruing
<S> <C> <C> <C>
Real Estate Loans 30 55 0
Commercial Loans 509 127 683
Consumer Loans 676 264 0
----- ----- -----
Total 1,215 446 683
===== ===== =====
</TABLE>
September 30, 1997
<TABLE>
<CAPTION>
Non-accrual Past Due Restructured
Loans 90 days Debt
still
accruing
<S> <C> <C> <C>
Real Estate Loans 10 16 0
Commercial Loans 240 387 604
Consumer Loans 317 276 0
------ ------ -----
Total 567 679 604
====== ====== =====
</TABLE>
Loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been included in the
table above do not represent or result from trends or uncertainties
which management reasonably expects will materially impact future
operating results, liquidity or capital resources. These
classified loans do not represent material credits about which
management is aware of any information which causes management to
have serious doubts as to the ability of such borrows to comply
with the loan payment terms.
The bank places loans on non-accrual at such a time it is apparent
that the collection of all principal and interest is questionable
and the loan is either past due 90 days or bankruptcy has been
filed.
Other income increased by 14.65% or $1,315,000 during the nine
month period ended September 30, 1998 as compared to the same
period for 1997 and the three month period ending September 30,
1998 showed a 115.46% or $2,495,000 increase over the same three
month period of 1997. Although the Company has had fewer
installations of supermarket bank units during 1998 as compared to
1997, the income for the nine month and three month periods
increased due to compensation received as a result of the
termination of the Company's Master Consulting Agreement with
Nationsbanc Services, Inc. ("Nationsbanc") on August 14, 1998.
Under the terms of the Agreement, Nationsbanc's on going obligation
under the Master Consulting Agreement are limited to paying monthly
consulting fees with respect to the seventy-nine supermarket
locations it will continue to operate in Winn-Dixie stores.
Service charges on deposit accounts increased by $394,000 or 26.89%
for the nine month period ended September 30, 1998, and $146,000 or
29.38% for the three month period ended September 30, 1998, as
compared to the same periods in 1997. The major increase was the
increase in non-sufficient funds (NSF) charges of $371,000 and
$133,000 for the nine month period and the three month period ended
September 30, 1998, respectively, compared to the same period in
1997. NSF charges increased primarily as a result of the Company's
continued growth in accounts in the totally free checking program.
The gains on sale of loans decreased by $167,000 or 30.98% during
the nine month period ended September 30, 1998 as compared to the
same period for 1997. This decrease is due to a smaller number of
SBA loan originations during 1998 compared to 1997. Trust
department income for the first three quarters of 1998 increased to
$83,000 compared to $65,000 for the same period of 1997.
Other operating expenses increased by 11.54% or $1,519,000 for the
nine month period ended September 30, 1998, and 24.44% or
$1,020,000 for the three month period ending September 30, 1998 as
compared to the same period in 1997. Salaries and benefits
increased by $245,000 or 3.35% during the nine month period ended
September 30, 1998 compared to the same period in 1997. Although
full time equivalent employees increased from 234 at the end of
September 1997 to 283 at the end of September 1998, the amount
being accrued for incentive compensation decreased, because or less
supermarket banking unit installations during 1998 compared to
1997, resulting in an overall small net increase in salaries and
benefits. Salaries and benefits increased by 13.28% or $312,000
for the three month period ended September 1998, due to the
incentive compensation related to the additional non-bank
subsidiary income received during the quarter. Equipment and
occupancy expenses were up by 41.11% or $689,000 for the nine month
period ended September 30, 1998, and 48.60% or $277,000 for the
three month period ending September 30, 1998, as compared to the
same period in 1997. The increase in full time equivalent employees
as well as equipment and occupancy expenses was influenced by the
addition of four brick and mortar facilities and one supermarket
banking center during the past twelve months, as well as, the
ongoing maintenance of existing facilities. In addition, the
increase in the equipment and occupancy expense has increased even
more in the past quarter due to the installation of a new data
processing system. Management anticipates equipment and occupancy
expenses to continue to increase during the forth quarter of 1998
and the first quarter of 1999 as the installation of the new data
processing system is completed.
Net income for the nine month period ended September 30, 1998, was
$5,738,000 or an increase of 23.45% and for the three month period
ended September 30, 1998, was $2,700,000 or an increase of 82.56%
over the same periods for 1997. The net income was more than
budgeted numbers for both periods for the reasons previously
discussed and is above management's expectations.
The company is not aware of any other known trends, events or
uncertainties, other than the effect of events as described above,
that will have or that are reasonably likely to have a material
effect on its liquidity, capital resources or operations. The
Company is also not aware of any current recommendations by the
regulatory authorities which, if they were implemented, would have
such an effect.
YEAR 2000 COMPLIANCE
The Company utilizes and depends upon data processing systems and
software to conduct its business. The "year 2000 issue" arises
from the widespread use of computer programs that rely on two-digit
codes to perform computations or decision-making functions. Many
of these programs may fail due to an 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 Bank is
evaluating its computer systems to determine which modifications
and expenditures will be necessary to make its systems compatible
with year 2000 requirements.
The Year 2000 - Impact and Readiness
Community Bankshares, Inc. performed an organizational wide
assessment to ascertain the impact of Year 2000 issues on
information technology systems and non-technology systems. In l997,
a Year 2000 Task Force Committee was appointed with the Chief
Financial Officer directing the program, including remediation
efforts .The Company has viewed Year 2000 readiness as not only an
information or technology problem, but as a corporate wide
challenge and placed the issue at the forefront of all strategic
planning.
The organization has addressed technology risks affecting all areas
of operations including the identification of vendors and service
providers which are critical to the Company. The Company has
implemented a program of ongoing awareness to address corporate
banking customers and financial counterparties. In addition the
Company has addressed contingency planning and recovery through
a plan of prevention and contingency procedures.
Based on the complex nature of organizational operations, corporate
wide objectives have been:
1) Minimize disruptions of service to the institution and its
customers, 2) Ensure timely resumption of operations and 3) Limit
losses to earnings and capital.
Based on documented risk assessments, the readiness plan covers
all aspects of operations, which are defined as the current
operations, the conversion period and the " worse case scenario"
situation. The term mission critical has been assigned to
electronic systems, components, third parties, vendors and any non-
IT systems that have been identified as having an impact on bank
operations. The Company has identified back-up and alternate
processing vendors and locations.
The organization's remediation program was implemented during the
first quarter of 1997 and although the organization will not be
compliant as of December 31, 1998, conversion to a new data system
will be completed during the first quarter of l999. Compliant is
defined as follows: 1) To correctly process dated before and after
the year 2000, 2) To recognize the year 2000 as a leap year, 3) To
accept and display dates unambiguously and 4) To correctly process
logic dates that are used for " non-date functions "
In May of l998, a Year 2000 Readiness-Key Milestones Testing Plan
was adopted that defined the Company's testing strategy. This plan
will continue to be modified , if needed, to address any change in
the remediation plans so as to effectively address current testing
needs and issues. The testing phase of the Year 2000 program is
the most prominent and plans are in place to have testing results
reviewed by employees independent of in-house testing. As the
testing procedures are completed, the results will be presented to
the Board of Directors along with supporting documentation.
Costs to Address Year 2000 Issues
During the fourth quarter of 1998, management implemented part of
its contengency plan and made a decision to proceed with a
traditional software provider vs. the client based software as
originally planned. Although earnings have not been significantly
impacted as a result of this change, management has reviewed budget
items to identify any additional expenditures which might result
due to implementation of these contingency plans. In addition,
based on the critical nature of "worse case scenario" planning, a
list of " unknowns" is being identified to explore any remote
difficulties in achieving remediation goals. Overall, the Company
believes that since the majority of IT equipment and software is
relatively new and have been certified by the developers as being
Year 2000 compliant, the IT budget will be adequate for Year 2000
programs as they relate to the installation of the Company's
network. In addition, the Company currently estimates that costs
of assessing, testing, and remediation of Year 2000 issues
associated with the core processing system and other embedded
systems will total approximately $900,000.
Risks of Third-Party Year 2000 Issues
Prudent risk controls to manage the Year 2000 related risks posed
by customers have been implemented and the broad categories of
customers have been identified. They are: 1) Funds Takers, 2)
Funds Providers and 3) Capital Market/Asset Management
Counterparties. Based on our analysis of the previously described
groups, the Company is able to look at different assumptions of
risk, liquidity and contingency. A high level program of awareness
continues in this area with sub-committees of the Board of
Directors reviewing for financial risk. Lending officers have been
asked to identify any economic factors in the bank's trade or
assessment areas that would have an impact on customers as a result
of a potential Year 2000 problem.
Another area of review for Year 2000 potential liability has been
that of fiduciary services. Client assessment management through
the bank's trust department has been identified and will continued
to be monitored.
Contingency Plans
In order to fully recognize the risks presented to the Company, "
worse case scenarios" have been reasonably identified along with
estimated costs for recovery, personnel and other budget items.
Due to a significant change in the organization's remediation
plans, the IT program has been accelerated to insure all
renovations are completed and tested by March 31, 1999.
Throughout the pre-planning processes and plan implementation
periods, contingency planning and business resumption goals and
objectives have been of paramount importance. Objectives in this
area have been 1) Practices implemented to conduct on-going risk
assessments of IT systems and non-IT systems, 2) An effective
business resumption plan coordinated with service providers, 3)
Testing procedures for contingency programs at least annually and
4) Implementation of appropriate corrective actions when needed.
Based on any "unknown" and a " worse case scenario" , the
Company has conducted due diligence to determine the probability of
outsourcing data services in the event IT systems experience
failure and even using a manual entry system . The Company has plans
to create system backup files prior to procseeing on any critical
dates to facilitate the recovery of mission critical systems.
The Company believes any mission critical systems could be recovered.
Record retention policies have been amended to include all Year
2000 due diligence documents and any new acquisition, upgrades to
existing systems, or written agreements are reviewed prior to
execution for Year 2000 warrants or guarantees of readiness.
The foregoing are forward-looking statements reflecting
management's current assessment and estimates with respect to the
Company's Year 2000 compliance efforts and the impact of Year 2000
issues on the Company's business and operations. Various factors
could cause actual plans and results to differ materially from
those contemplated by such assessments, estimates and forward-
looking statements, many of which are beyond the control of the
Company. Some of these factors include, but are not limited to
representations by the Company's vendors and counterparties,
technological advances, economic considerations, and consumer
perceptions. The Company's Year 2000 compliance program is an
ongoing process involving continual evaluation and may be subject
to change in response to new developments.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.8 Termination of Master Consulting
Agreement
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMUNITY BANKSHARES, INC.
DATE: November 16, 1998 BY: /s/ Harry L. Stephens
Harry L. Stephens,
Executive Vice President and
Chief Financial Officer
<PAGE>
TERMINATION OF MASTER CONSULTING AGREEMENT
This Agreement is made and entered into as of August 14, 1998
by and between NATIONSBANC SERVICES, INC., a North Carolina
corporation ("NBSI") and FINANCIAL SUPERMARKETS, INC., a Georgia
corporation ("FSI").
WHEREAS, NBSI and FSI have entered into a Master Consulting
Agreement dated April 3, 1996 as amended by that certain Letter
Agreement dated March 4, 1997 (the "Master Consulting Agreement");
WHEREAS, NBSI and FSI desire to terminate the agreement and to
provide for future payments by NBSI to FSI.
NOW, THEREFORE, in consideration of the premises and other good
and valuable consideration, the receipt and sufficiency of all such
consideration being hereby acknowledged, NBSI and FSI agree as
follows:
1. The Master Consulting Agreement between NBSI and FSI, as
amended, is hereby terminated, and null and void effective on the
date of this Agreement.
2. Each of the parties to this Agreement hereby release the
other from all obligations, legal or equitable in nature, arising
from or out of the Master Consulting Agreement.
3. Notwithstanding anything contained in this Agreement to
the contrary, the parties hereby agree that NBSI will continue to
pay FSI a fee of ___________________________DOLLARS ($______) per
month times the number of Winn-Dixie stores which are listed on
Exhibit "A" (the "Stores" or singularly, the "Store") that
NationsBank, N.A. is obligated to pay Winn-Dixie lease payments on
with respect to such Store. If any of the Stores are closed and
NationsBank, N.A. and Winn-Dixie both elect to relocate a bank in-
store facility to a replacement store, the fee shall continue to be
due and payable with respect to such replacement store. This fee
shall continue for so long as NationsBank, N.A. is required to pay
lease payments to Winn-Dixie on any of the Stores. The $___ per
month per Store shall be reduced to $___ per month per Store for
the sixth through tenth year that NationsBank, N.A. operates an in-
store banking facility in each Store and will be further reduced to
$___ per month per Store for each year after the tenth year that
NationsBank, N.A. operates a banking facility in each Store. In the
event that NationsBank, N.A. is no longer paying lease payments to
Winn-Dixie for a Store, then in such event no payment shall be
payable to FSI pursuant to this Agreement for that Store.
4. This Agreement shall be governed by and construed in
accordance with the Laws of the State of North Carolina.
5. Each party represents that it has all requisite legal
power and authority and has taken all action necessary or
appropriate to enter into this Agreement and that its
representative executing this Agreement is duly empowered to do so.
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute this Agreement and affix their
respective seals hereto all as of the date first set forth above.
NATIONSBANC SERVICES, INC.,
a North Carolina corporation
/s/ James D. Dixon
By:------------------------------
Name: James D. Dixon
Title: President
ATTEST:
/s/ Mary-Ann Lucas
- ---------------------------------
Name: Mary-Ann Lucas (Corporate Seal)
TITLE: Assistant Secretary
FINANCIAL SUPERMARKETS, INC.,
a Georgia corporation
/s/ J. Alton Wingate
By:------------------------------
Name: J. Alton Wingate
Title: President & CEO
ATTEST:
/s/ Annette R. Fricks (Corporate Seal)
- ---------------------------------
Name: Annette R. Fricks
TITLE: Corporate Secretary
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