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 quarter period ended June 30, 1999
// 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
August 1, 1999: 2,172,830
<PAGE>
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations
and Comprehensive Income for Three
Months Ended June 30, 1999 and 1998
and Six Months Ended June 30, 1999
and 1998 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 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 4. Submission of Matters to a Vote of Security Holders
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
JUNE 30, 1999 AND DECEMBER 31, 1998
(Dollars in thousands)
(Unaudited)
Assets 1999 1998
---------- ----------
<S> <C> <C>
Cash and due from banks $ 25,826 $ 26,796
Interest-bearing deposits in banks 457 428
Federal funds sold 12,160 22,890
Securities available-for-sale 47,342 42,525
Securities held-to-maturity (fair value
$31,233 and $32,174) 30,875 30,915
Loans held for sale 1,157 699
Loans 349,703 313,438
Less allowance for loan losses 5,320 4,863
---------- ----------
Loans, net 344,383 308,575
---------- ----------
Premises and equipment 13,603 13,463
Other assets 14,860 14,302
---------- ----------
Total assets $ 490,663 $ 460,593
========= ==========
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand $ 73,310 $ 65,266
Interest-bearing demand 106,457 94,458
Savings 21,744 19,731
Time, $100,000 and over 73,119 67,003
Other time 160,722 158,824
---------- ----------
Total deposits 435,352 405,282
Other borrowings 6,131 5,808
Other liabilities 6,930 8,958
---------- ----------
Total liabilities 448,413 420,048
---------- ----------
Commitments and contingent liabilities
Redeemable common stock held by ESOP, 363,616
Shares outstanding, at fair value 14,254 14,254
-------- --------
Stockholders' equity
Common stock, par value $1; 5,000,000
Shares authorized; 2,172,830
Shares issued and outstanding 2,173 2,170
Capital surplus 6,063 6,036
Retained earnings 20,414 17,858
Accumulated other comprehensive income,
Net of tax (654) 227
---------- ----------
Total stockholders' equity 27,996 26,291
---------- ----------
Total liabilities and stockholders' equity $ 490,663 $ 460,593
========== ==========
<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 JUNE 30, 1999 AND 1998 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
----------------- --------- --------
<S> <C> <C> <C> <C>
Interest income
Loans $ 8,642 $ 7,349 $ 16,778 $14,033
Taxable securities 603 655 1,156 1,410
Nontaxable securities 494 418 978 808
Deposits in banks 5 7 11 18
Federal funds sold 176 97 437 219
-------- -------- -------- -------
Total interest income 9,920 8,526 19,360 16,488
-------- -------- -------- -------
Interest expense on deposits
Deposits 4,188 3,911 8,312 7,603
Other borrowings 82 9 161 17
-------- -------- --------- --------
Total interest expense 4,270 3,920 8,473 7,620
-------- -------- --------- --------
Net interest income 5,650 4,606 10,887 8,868
Provision for loan losses 388 350 657 540
-------- -------- --------- --------
Net interest income
after provision
for loan losses 5,262 4,256 10,230 8,328
-------- -------- --------- --------
Other income
Service charges on deposit 700 614 1,361 1,216
accounts
Other service charges and fees 124 173 264 256
Gains on sale of loans 99 154 156 215
Trust Department fees 22 27 68 54
Net realized gains on sales
of securities - 2 - 11
Nonbank subsidiary
non-interest income 1,564 1,980 2,999 3,639
Other operating income 201 86 379 245
-------- -------- --------- --------
Total other income 2,710 3,036 5,227 5,636
-------- -------- --------- --------
Other expenses
Salaries and employee benefits 3,246 2,550 6,199 4,900
Occupancy expense 346 311 669 614
Equipment expense 655 459 1,262 904
Other operating expenses 1,801 1,560 3,555 3,069
-------- -------- --------- --------
Total other expenses 6,048 4,880 11,685 9,487
-------- -------- --------- --------
Income before income
taxes 1,924 2,412 3,772 4,477
Income tax expense 528 793 1,044 1,439
-------- -------- --------- --------
Net income $ 1,396 $ 1,619 $ 2,728 $ 3,038
-------- -------- --------- --------
Other comprehensive income (loss):
Unrealized gains (losses) on
securities Available-for-sale
arising during the period (609) 70 (881) (32)
Less: reclassification
adjustment
for gains
included in net
income - 2 - 11
-------- -------- --------- --------
Total other comprehensive
income (609) 72 (881) (21)
-------- -------- --------- --------
Comprehensive income $ 787 $ 1,691 $ 1,847 $ 3,107
======== ======== ========= ========
Basic earnings per common share $ 0.64 $ 0.75 $ 1.26 $ 1.40
-------- -------- --------- --------
Diluted earnings per common share 0.63 0.74 1.24 1.38
-------- -------- -------- ---------
Cash dividends per share of
common stock $ .039 $ 0.037 $ .079 $ 0.073
-------- -------- --------- --------
<FN>
See Notes to Consolidated
Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands)
(Unaudited)
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,728 $ 3,038
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,131 928
Provision for loan losses 657 540
Provision for other real estate - 10
Deferred income taxes (319) (141)
Increase in loans held for sale (458) (190)
Net realized (gains) losses on
securities available-for-sale - (11)
Net (gains) losses on sale of other real
estate (39) -
Increase in interest receivable (428) (552)
Increase (decrease) in interest payable (983) 273
Increase in taxes payable 287 573
Increase (decrease) in accounts
receivable of nonbank subsidiary 245 (1,617)
Increase (decrease) in work in
process of nonbank subsidiary (18) (24)
Increase (decrease) in accruals and
payables of nonbank subsidiary (1,148) (860)
Other operating activities 39 (1,384)
---------- ----------
Net cash provided by
operating activities 1,694 585
---------- ----------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (16,488) (5,867)
Proceeds from sales of securities
available-for-sale - 1,875
Proceeds from maturities of securities
available-for-sale 10,203 12,939
Purchases of securities held-to-maturity (448) (2,209)
Proceeds from maturities of securities
held-to-maturity 488 830
Net decrease in Federal funds sold 10,730 180
Net increase in interest-bearing
deposits in banks (29) (60)
Net increase in loans (36,532) (45,374)
Purchase of premises and equipment (1,115) (2,285)
Net cash acquired in branch acquisition - 171
Proceeds from sales of other real estate 276 16
---------- ----------
Net cash used in
investing activities (32,915) (39,786)
---------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 30,069 37,181
Increase in other borrowings 400 -
Repayment of other borrowings (77) (76)
Proceeds from issuance of Common
Stock 30 -
Dividends paid (171) (159)
---------- ----------
Net cash provided by
financing activities 30,251 36,946
Net increase (decrease) in cash and
due from banks $ (970) $ (2,255)
Cash and due from banks at beginning of the
Period 26,796 23,957
---------- ----------
Cash and due from banks at end of the Period $ 25,826 $ 21,702
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 9,456 $ 7,347
Income taxes $ 1,076 $ 1,007
NONCASH TRANSACTIONS
Unrealized (gains) losses on
securities available-for sale $ 1,468 $ 32
Principal balances on loans and premises
and equipment transferred to other
real estate $ 67 $
29
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 six month period ending June 30, 1999 are
not necessarily indicative of the results to be expected for the full year.
NOTE 2. CURRENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". This statement is required
to be adopted for fiscal years beginning after June 15, 1999. However, the
statement permits early adoption as of the beginning of any fiscal quarter
after its issuance. The Company expects to adopt this statement effective
January 1, 2000. SFAS No. 133 requires the Company to recognize all
derivatives as either assets or liabilities in the consolidated balance
sheet at fair value. For derivatives that are not designated as hedges, the
gain or loss must be recognized in earnings in the period of change. For
derivatives that are designed as hedges, changes in the fair value of the
hedged assets, liabilities, or firm commitments must be recognized in
earnings or recognized in other comprehensive income until the hedged item
is recognized in earnings, depending on the nature of the hedge. The
ineffective portion of a derivative's change in fair value must be
recognized in earnings immediately. Management has not yet determined what
effect the adoption of SFAS No. 133 will have on the Company's earnings or
financial position.
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 June 30, 1999
(Dollars and shares in Thousands,
except per share amounts)
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ------------- -------
<S> <C> <C> <C>
Basic EPS $1,396 2,172 $ 0.64
Effect of Dilutive
Securities
Stock options 0 27
------ ------ ------
Diluted EPS $1,396 2,199 $ 0.63
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
(Dollars and shares in Thousands,
except per share amounts)
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ------------- -------
<S> <C> <C> <C>
Basic EPS $1,619 2,170 $ 0.75
Effect of Dilutive
Securities
Stock options 0 26
------ ------ ------
Diluted EPS $1,619 2,196 $ 0.74
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
(Dollars and shares in Thousands,
except per share amounts)
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ------------- -------
<S> <C> <C> <C>
Basic EPS $2,728 2,171 $ 1.26
Effect of Dilutive
Securities
Stock options 0 27
------ ------ ------
Diluted EPS $2,728 2,198 $ 1.24
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
(Dollars and shares in Thousands,
except per share amounts)
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ------------- -------
<S> <C> <C> <C>
Basic EPS $3,038 2,170 $ 1.40
Effect of Dilutive
Securities
Stock options 0 26
------ ------ ------
Diluted EPS $3,038 2,196 $ 1.38
====== ====== ======
</TABLE>
NOTE 4 SEGMENT INFORMATION
Selected segment information by industry segment for the
reporting periods is as follows:
<TABLE>
<CAPTION>
Reportable Segments
(Dollars in thousands)
---------------------------------------
All
For the three month period Banking Financial Other Total
ended June 30, 1998 Supermarkets
---------------------------- --------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenue from external $ 9,584 $ 2,013 $ 36 $ 11,633
customers
Intersegment revenues (90) 113 366 389
(expenses)
Segment profit (loss) $ 1,099 $ 740 $ (223) $ 1,616
</TABLE>
<TABLE>
<CAPTION>
Reportable Segments
(Dollars in thousands)
---------------------------------------
All
For the six month period Banking Financial Other Total
ended June 30, 1999 Supermarkets
---------------------------- --------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenue from external $ 21,828 $ 3,062 $ 85 $ 24,975
customers
Intersegment revenues (244) 307 789 852
Segment profit $ 2,489 $ 817 $ (531) $ 2,775
</TABLE>
<TABLE>
<CAPTION>
Reportable Segments
(Dollars in thousands)
---------------------------------------
All
For the six month period Banking Financial Other Total
ended June 30, 1998 Supermarkets
---------------------------- --------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenue from external $ 18,526 $ 3,659 $ 58 $ 22,243
customers
Intersegment revenues (172) 225 730 783
Segment profit $ 2,096 $ 1,292 $ (357) $ 3,031
</TABLE>
<TABLE>
<CAPTION>
For the three For the six
months months
Ended June, 30 Ended June, 30
------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net Income:
Total profit for
reportable segments $ 1,677 $1,839 $3,306 $3,388
Non-reportable segment loss (284) (223) (531) (357)
Elimination of
intersegment (gains) losses 3 3 (47) 7
--------- --------- -------- --------
Total consolidated
other income $ 1,396 $1,619 $2,728 $3,038
========= ========= ======== ========
</TABLE>
<PAGE>
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 June 30, 1999, the Company continues to experience growth in total
assets, total loans and total deposits as compared to December 31, 1998.
Total assets, loans, and deposits increased by 6.53%, 11.69% and 7.42%
respectively. The growth in all areas is slightly less than the same period
last 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 June 30, 1999, the Liquidity Ratio was 23.20% which is within the
Company's target range of 20 - 25%. 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 1% of net interest
income subjected to rising and falling rates of 200 basis points.
Capital
Banking regulation requires the Company to maintain capital levels in
relation to Company assets. At June 30, 1999, 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 June 30, 1999 were as follows:
<TABLE>
Actual Regulatory
Minimum
<S> <C> <C>
Leverage 8.37% 4.00%
Risked Based
Capital ratios:
Core Capital 10.55% 4.00%
Total Capital 11.81% 8.00%
</TABLE>
Results of Operation
Net interest income for the six month period ended June 30, 1999 is up
22.77% over the same period for 1998, from $8,868,000 to $10,887,000, and is
up 22.67% for the three month period ending June 30, 1999 from $4,606,000 to
$5,650,000 for 1999. Interest income was up by 17.42% for the six month
period ending June 30, 1999 from $16,488,000 to $19,360,000 and up 16.35%
for the three month period ending June 30, 1999 from $8,526,000 to
$9,920,000. Interest expense was up 11.19% or $853,000 for the six month
period ended June 30, 1999, over the same period in 1998 and up 8.93% or
$350,000 for the three month period ending June 30, 1999, as compared to
1998. The increase in interest income is due to an increase of 18.85% or
$70,042,000 in earning assets from June 30, 1998 to June 30, 1999.
Investment securities increased slightly by $3,805,000 or 5.11% during the
period primarily due to funds being used to fund loan growth. Total loans
increased during the last year by $60,229,000 or 20.72%. 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.
The provision for loan losses was $657,000 for the first six months of
1999. This provision will fluctuate based on Small Business Administration
(SBA) loans closed, as we have a policy of reserving 5% of the un-guaranteed
portion of any SBA loans. The Company currently has reserves totaling
$1,042,318 for its un-guaranteed portion of SBA loans.
The following table furnishes information on the Loan Loss Reserve for the
current six month reporting period and the same period for 1998.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Beginning Balance $ 4,863 $ 4,024
Less Charge Offs:
Real Estate Loans (23) (7)
Commercial Loans (169) (34)
Consumer Loans (186) (165)
Credit Cards 0 0
Plus Recoveries
Real Estate Loans 4 18
Commercial Loans 33 10
Consumer Loans 141 53
Credit Cards 0 0
Plus Provision 657 540
------- -------
Ending Balance $ 5,320 $ 4,439
======= =======
</TABLE>
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 six month period ended June 30, 1999
represented 174% of charge offs for the same period, while the provision for
the first six months of 1998 represented 262% of the charge offs recorded in
that period. The reserve at the end of June 30, 1999 represented 707% of non
accrual loans while the reserve at June 30, 1998 represented 383% of non
accrual loans. Non accrual loans have increased from $1,158,000 at June 30,
1998 to $1,284,000 as of June 30, 1999. Past due loans greater than 90 days
and accruing interest have increased significantly from $371,000 in 1998 to
$2,178,000 in 1999. The primary reason for this increase in past due loans
is an additional $1,100,000 secured by real estate. Management anticipates no
significant losses in these credits. The remaining increase is due to
slight deteriation in the installment porffolio. However, management does
not anticipate any losses in excess of its historical loss experience.
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 June 30, 1999 was 1.52% as compared to 1.53%
at June 30, 1998. 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>
<CAPTION>
June 30, 1999
Non-accrual Past Due Restructured
Loans 90 days Debt
still
accruing
<S> <C> <C> <C>
Real Estate Loans $ 0 $ 0 $ 0
Commercial Loans 665 1,256 752
Consumer Loans 619 922 0
------- ------- -------
Total $1,284 $2,178 $ 752
======= ======= =======
</TABLE>
June 30, 1998
<TABLE>
<CAPTION>
Non-accrual Past Due Restructured
Loans 90 days Debt
still
accruing
<S> <C> <C> <C>
Real Estate Loans $ 7 $ 44 $ 0
Commercial Loans 473 133 808
Consumer Loans 678 194 0
------- ------- -------
Total $1,158 $ 371 $ 808
======= ======= =======
</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 decreased by 7.26% or $409,000 during the six month period ended
June 30, 1999 as compared to the same period for 1998 and the three month
period ending June 30, 1999 showed a 10.73% or $326,000 decrease over the
same three month period of 1998. The majority of these decreases, $640,000
and $416,000, respectively, are due to fewer installations of supermarket
bank units in the first half of 1999 compared to 1998. Service charges on
deposit accounts increased by $145,000 or 11.92% for the six month period
ended June 30, 1999, and $86,000 or 14.00% for the three month period ended
June 30, 1999, as compared to the same periods in 1998. The major increase
was the increase in non-sufficient funds (NSF) charges of $150,000 and
$47,000 for the six month period and the three month period ended June 30,
1999, respectively, compared to the same period in 1998. 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 $59,000 or 27.44% during the six month period ended June 30, 1999 as
compared to the same period for 1998. This decrease is due to a smaller
number of SBA loan originations during the first half of 1999 compared to
1998. Trust department income for the first half of 1999 increased by 14,000
or 25.93% to $68,000 compared to $54,000 for the first half of 1998.
Other operating expenses increased by 23.17% or $2,198,000 for the six month
period ended June 30, 1999, and 23.93% or $1,168,000 for the three month
period ending June 30, 1999 as compared to the same periods in 1998.
Salaries and benefits increased by $1,299,000 or 26.51% during the six month
period ended June 30, 1999 compared to the same period in 1998. Full time
equivalent employees increased from 278 at the end of June 1998 to 303 at the
end of June 1999. Equipment and occupancy expenses were up by 27.21% or
$413,000 for the six month period ended June 30, 1999, and 30.00% or $231,000
for the three month period ending June 30, 1999, as compared to the same
period in 1998. The increase in full time equivalent employees as well as
equipment and occupancy expenses was influenced by the addition of two
supermarket banking center during the past twelve months as well as the
overall growth of the Company's banking operations. In addition, the
increase in the equipment and occupancy expense is a direct result of the
depreciation and operating expense associated with the Company's new data
processing system which was became fully operational during the first six
months of 1999.
Net income for the six month period ended June 30, 1999, was $2,728,000 or a
decrease of 10.20% and for the three month period ended June 30, 1999, was
$1,396,000 or a decrease of 13.77% over the same periods for 1998. The net
income was less than management's budget for both periods primarily due to
fewer sales of supermarket banking units than anticipated during the first
half of the year. Management anticipates the sale of supermarket banking
units to remain low during the last half of 1999 primarily due to limited
capital expansion in the banking industry due to Year 2000 concerns.
However, management expects sales associated with the first phase of an
agreement with the Canadian Imperial Bank of Commerce to start during the
last quarter of 1999. Overall management anticipates income to be less than
in 1998 and less than budgeted for 1999.
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 following 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.
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 Company's State of Readiness
The Company views year 2000 readiness as not only an information or
technology problem, but as a corporate-wide challenge and has placed the
issue at the forefront of all strategic planning. The Company's readiness
plan has been designed to cover all aspects of its operations, which include
the current operations, the conversionperiod and contingency
planning in the event of the failure of a mission critical system.
Based on the complex nature of the Company's operations,
corporate wide objectives have been to: 1) minimize disruptions of service to
the institution and its customers, 2) ensure timely resumption of operations,
and 3) limit losses to earnings andcapital.
The Company began evaluating its information technology ("IT") systems
and non-IT systems, which include microcontrollers and other embedded
computers, to ascertain the impact of year 2000 issues in June of 1997. In
l997, a Year 2000 Task Force Committee was organized and the Chief Financial
Officer of the Company was appointed to direct the Company's year 2000
remediation efforts. The Committee believes that it has identified and
remediated all major internal business and operational functions that
will be impacted by the date changes.
Remediation of the Company's IT and Non-IT Systems.
The Company's remediation program was implemented during the first quarter
of 1998. In general, the Company believes that because the majority of IT
equipment and software is relatively new, and has been certified by the
developers as being year 2000 compliant, such equipment and software require
only minor modification to become year 2000 compliant.
During the fourth quarter of 1998, management of the Company determined
that it would be necessary to proceed with its traditional software provider,
as opposed to the client-based software as originally planned. As planned,
modifications to the Company's IT equipment and software were complete on
March 8, 1999. With respect to the Company's non-IT systems, no remediations
were required.
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.
Year 2000 Testing.
The Company considers the testing phase of its year 2000 program to
be a significant phase of its year 2000 program. In May of l998, a
Year 2000 Readiness-Key Milestones Testing Plan was adopted that defined the
Company's year 2000 testing strategy (the "Plan"). The Plan will
continue to be modified to address any change in the remediation plans as
necessary. The Company anticipates that the results of testing will be
reviewed by employees independent of in-house testing. In addition, test
results will be presented to the Board of Directors of each Community Banking
Subsidiary for evaluation. The Company successfully completed its Year 2000
testing prior to June 30, 1999.
Assessment of Third Party Readiness.
To the extent possible, the Company has also evaluated the systems of its
major business partners, borrowers and suppliers of products and services.
The Company has sent out a letter and questionnaire to its major borrowers and
suppliers of products and services. The Company has received a majority of
responses from these parties and notes no significant year 2000 issues.
Costs to Address Year 2000 Issues
The Company does not anticipate that the related overall costs will be
material to the financial condition of the Company for any single year or
quarter. The Company estimates that costs of assessing, testing, and
remediation issues associated with the year 2000 will total approximately
$1,200,000. Total costs incurred to date with respect to year 2000
remediations are $1,000,000. The Company anticipates that it will incur
additional costs relating to the remaining modifications of $200,000. A
majority of these costs have been capitalized, with 62% incurred in
connection with the purchase of new software and 38% required as a result of
the replacement of hardware. It is anticipated that expenses relating to the
independent audit of the test results will be deducted from income.
The Company has not used any independent verification and validation
processes to assure the reliability of year 2000 cost estimates. None of the
Company's IT projects have been deferred due to year 2000 efforts.
Risks of the Year 2000
The Company believes that all significant remediations with respect to
the Company's systems are complete. However, no assurance can be given that
the Company will not be exposed to potential losses resulting from system
problems associated with the change in date. There can also be no assurance
that the Company's systems that have been designed to be year 2000 compliant
contain all of the necessary date code changes and that systems have been
correctly modified, or will be correctly modified in contemplation of the
year 2000.
In addition to year 2000 compliance in the Company's internal systems,
the impact of year 2000 non-compliance by outside parties with whom the
Company may transact business cannot be accurately gauged. The year 2000
issue may have a material impact on the financial condition of the Company if
borrowers of the Company become insolvent and are, therefore, unable to repay
loans as they become due as a result of the borrowers' year 2000
non-compliance.
Certain 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 the 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 of each Community Banking Subsidiary carefully monitoring year 2000
remediation efforts to minimize 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.
In addition, the Company is reliant upon the Federal Reserve Company of
Atlanta (the "Atlanta Reserve Bank") for electronic funds transfers. If the
Atlanta Reserve Bank does not successfully complete all modifications
required by the date change, and is forced to interrupt automated services to
the Company, the Company could experience difficulties with respect to making
electronic funds transfers. The Company believes that the Atlanta Reserve
Bank is aggressively pursuing a year 2000 compliance strategy, and that the
risk associated with year 2000 non-compliance by the Atlanta Reserve Bank is
insignificant. With the exception of the Atlanta Reserve Bank, the Company
is not aware of any other third party relationships whose year 2000
non-compliance could result in a material adverse effect on the Company's
results of operations, liquidity and financial condition due to the date
change.
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
The potential impact of business disruptions has placed contingency plan
validation and training at the forefront of Year 2000 planning during . The
company has established organizational planning guidelines that define the
business continuity planning strategy; conducted business impact analysis in
all banking centers; developed a business resumption contingency plan that
has directorate approval and established a schedule for plan validation. The
business resumption contingency plan is considered phase II of the company's
overall Plan of Prevention which emphasis disaster prevention.
Plan development has been centered around mission critical and mission
necessary systems. A process of " event planning" has been used to focus on
each core business process.
The major portion of plan validation has been completed, although August 30,
l999 is the target date for completion. The parent company's internal
auditor has reviewed contingency and validation plans. A report has been
given to the directorate on plan development, implementation and audit
findings. Documentation is maintained on all planning and validation
processes and placed in record retention.
Staff wide contingency training has been identified as a primary component of
the company's overall plan. Monthly contingency planning has been scheduled
in all banking centers during third and fourth quarters with the emphasis on
external forces that could create or compound Year 2000 related risks.
Contingency planning has encompassed liquidity and sources designated that
could be converted to cash quickly. Management is in the process of securing
additional lines through the Federal Home Loan Bank and Federal Reserve.
Other market funds providers have also been considered. Affiliate banks have
adopted specific liquidity polices that detail cash on hand, borrowings and
net incoming cash flows.
Customer awareness continues and has become intensified over the last 90 days.
Awareness programs include not only information concerning the company's Year
2000 readiness but emphasizes avoiding fraudulent Year 2000 schemes.
The companies continuing due diligence processes in the areas of contingency,
recovery and restoration, training, liquidity and customer awareness should
decrease the bank's vulnerabilities to those external forces outside the
company's control.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Shareholders of the Company was held on April 14,
1999. Total shares outstanding amounted to 2,169,830. A total of 1,901,789
shares (87.65%) were represented by shareholders in attendance or by proxy.
The following directors were re-elected to serve for a one-year term. The
results of the election were as follows:
<TABLE>
Shares Voted:
For Against Abstain
---------------------------------
<S> <C> <C> <C>
Steven C. Adams 1,901,789 0 0
Edwin B. Burr 1,901,789 0 0
Harry H. Purvis 1,901,789 0 0
H. Calvin Stovall 1,901,789 0 0
Dean C. Swanson 1,901,789 0 0
George D. Telford 1,901,789 0 0
J. Alton Wingate 1,901,789 0 0
Lois M. Wood-Schroyer 1,901,789 0 0
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on June 11, 1999
related to a press release associated with an agreement with
the Canadian Imperial Bank of Commerce.
<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: August 13, 1999 BY: /s/ Harry L. Stephens
Harry L. Stephens,
Executive Vice President and
Chief Financial Officer
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