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 March 31, 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
May 1, 1999: 2,159,830
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet -
March 31, 1999 and December 31, 1998 2
Consolidated Statements of Operations
and Comprehensive Income for Three
Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 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 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
MARCH 31, 1999 AND DECEMBER 31, 1998
(Dollars in thousands)
(Unaudited)
Assets 1999 1998
---------- ----------
<S> <C> <C>
Cash and due from banks $ 25,627 $ 26,796
Interest-bearing deposits in banks 443 428
Federal funds sold 18,675 22,890
Securities available-for-sale 47,080 42,525
Securities held-to-maturity (fair value
$32,071 and $32,174) 30,883 30,915
Loans held for sale 1,250 699
Loans 328,190 313,438
Less allowance for loan losses 4,970 4,863
---------- ----------
Loans, net 323,220 308,575
---------- ----------
Premises and equipment 13,859 13,463
Other assets 13,874 14,302
---------- ----------
Total assets $ 474,911 $ 460,593
========== ==========
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand $ 60,855 $ 65,266
Interest-bearing demand 105,080 94,458
Savings 21,611 19,731
Time, $100,000 and over 57,800 67,003
Other time 175,470 158,824
---------- ----------
Total deposits 420,816 405,282
Other borrowings 6,170 5,808
Other liabilities 6,407 8,958
---------- ----------
Total liabilities 433,393 420,048
---------- ----------
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; 2,159,830
Shares issued and outstanding 2,170 2,170
Capital surplus 6,036 6,036
Retained earnings 19,103 17,858
Accumulated other comprehensive income,
net of tax (45) 227
---------- ----------
Total stockholders' equity 27,264 26,291
---------- ----------
Total liabilities and stockholders' equity $ 474,911 $ 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 MARCH 31, 1998 AND 1997
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Interest income
Loans $ 8,136 $ 6,684
Taxable securities 553 755
Nontaxable securities 484 390
Deposits in banks 5 11
Federal funds sold 262 122
----------- -----------
Total interest income 9,440 7,962
----------- -----------
Interest expense on deposits
Deposits 4,124 3,692
Other borrowings 79 8
----------- -----------
Total interest expense 4,203 3,700
----------- -----------
Net interest income 5,237 4,262
Provision for loan losses 270 190
----------- -----------
Net interest income after
Provision for loan losses 4,967 4,072
----------- -----------
Other income
Service charges on deposit accounts 661 602
Other service charges and fees 141 83
Gains on sale of loans 57 61
Trust Department fees 46 27
Net realized gains on sales of securities 0 9
Nonbank subsidiary non-interest income 1,434 1,659
Other operating income 178 159
----------- -----------
Total other income 2,517 2,600
----------- -----------
Other expenses
Salaries and employee benefits 2,952 2,350
Occupancy expense 323 303
Equipment expense 606 445
Other operating expenses 1,804 1,509
----------- -----------
Total other expenses 5,685 4,607
----------- -----------
Income before income taxes 1,799 2,065
Income tax expense 467 646
----------- -----------
Net income $ 1,332 $ 1,419
----------- -----------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available-for-sale arising during
the period (272) 39
Less: reclassification adjustment
for gains included in net
income 0 9
----------- -----------
Total other comprehensive income (272) 30
----------- -----------
Comprehensive income $ 1,060 $ 1,449
=========== ===========
Basic earnings per common share $ 0.61 $ 0.65
----------- -----------
Diluted earnings per common share 0.61 0.65
----------- -----------
Cash dividends per share of common stock $ 0.0395 $ 0.0367
----------- -----------
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Dollars in thousands)
(Unaudited)
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,332 $ 1,419
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 549 443
Provision for loan losses 270 190
Provision for other real estate - 10
Deferred income taxes (125) (107)
Increase in loans held for sale (551) (1,201)
Net realized losses on securities
available-for-sale - (9)
Net losses on sale of other real estate - -
Increase in interest receivable (604) (292)
Increase (decrease) in interest payable (893) 427
Increase in taxes payable 592 753
(Increase) decrease in accounts
receivable of nonbank subsidiary 251 (905)
(Increase) decrease in work in
process of nonbank subsidiary 293 128
Decrease in accruals and
payables of nonbank subsidiary (1,461) (1,215)
Other operating activities (40) (1,012)
---------- ----------
Net cash provided by
(used in) operating activities (387) (1,371)
---------- ----------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (9,313) (3,677)
Proceeds from sales of securities
available-for-sale - 1,875
Proceeds from maturities of securities
available-for-sale 4,305 9,683
Purchases of securities held-to-maturity (448) (1,265)
Proceeds from maturities of securities
held-to-maturity 480 165
Net (increase) decrease in Federal funds sold 4,215 (1,535)
Net increase in interest-bearing
deposits in banks (15) (19)
Net increase in loans (14,966) (24,714)
Purchase of premises and equipment (871) (1,175)
Net cash acquired in branch acquisition - 171
Proceeds from sales of other real estate 22 16
---------- ----------
Net cash used in
investing activities (16,591) (20,475)
---------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 15,533 18,567
Increase in other borrowings 400 -
Repayment of other borrowings (38) (38)
Dividends paid (86) (79)
---------- ----------
Net cash provided by
financing activities 15,809 18,450
Net increase (decrease) in cash and
due from banks $ (1,169) $ (3,396)
Cash and due from banks at beginning of the Year 26,796 23,957
---------- ----------
Cash and due from banks at end of the Year $ 25,627 $ 20,561
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 5,096 $ 3,273
Income taxes $ - $ -
NONCASH TRANSACTIONS
Unrealized (gains) losses on
securities available-for sale $ 453 $ (38)
Principal balances on loans and premises
and equipment transferred to other
real estate $ 51 $ -
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 three month period ending March 31, 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 March 31, 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 1,332 2,170 0.61
Effect of Dilutive
Securities 0 26
Stock options ------- ------- -------
Diluted EPS 1,332 2,196 0.61
======= ======= =======
Three Months Ended March 31, 1998
(Dollars and shares in Thousands,
except per share amounts)
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- -------------- ---------
Basic EPS $ 1,419 $ 2,170 $ 0.65
Effect of Dilutive
Securities 0 26
Stock options ------ ------ ------
Diluted EPS $ 1,419 $ 2,196 $ 0.65
====== ====== ======
</TABLE>
NOTE 4 SEGMENT INFORMATION
Selected segment information by industry segment for the periods ended March
31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Reportable Segments
(Dollars in thousands)
----------------------------------------
All
For the Period Ended Banking Financial Other Total
March 31, 1999 Super-
markets
--------------------------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenue from external $ 10,648 $ 1,494 $ 42 $ 12,184
customers
Intersegment revenues (122) 153 395 426
(expenses)
Segment profit (loss) 1,170 460 (247) 1,383
Segment assets $ 487,626 $ 12,955 $ 2,925 $ 503,506
</TABLE>
<TABLE>
<CAPTION>
Reportable Segments
(Dollars in thousands)
----------------------------------------
All
For the Period Ended Banking Financial Other Total
March 31, 1998 Super-
markets
--------------------------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenue from external $ 8,941 $ 1,645 $ 21 $ 10,607
customers
Intersegment revenues (82) 112 363 393
Segment profit $ 998 $ 551 $ (134) $ 1,415
</TABLE>
<TABLE>
<CAPTION>
1999 1998
--------- ----------
Net Income
<S> <C> <C>
Total profit for reportable
segments $ 1,630 $ 1,549
Non-reportable segment loss (247) (134)
Elimination of intersegment (51) 4
(gains) losses
--------- ----------
Total consolidated other
income $ 1,332 $ 1,419
========= ==========
</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 March 31, 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 3.11%, 4.87% and 3.83%
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 March 31, 1999, the Liquidity Ratio was 25.13% which is within the
Companys target range of 25 - 30%. The banks have available lines of credit
to meet 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 5% of net interest
income subjected to rising and falling rates of 200 basis points. The
company has positioned itself to be protected against any perceivable change
in rates in either direction.
Capital
Banking regulation requires the Company to maintain capital levels in
relation to Company assets. At March 31, 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 March 31, 1999 were as follows:
<TABLE>
Actual Regulatory
Minimum
<S> <C> <C>
Leverage 8.34% 4.00%
Risked Based
Capital ratios:
Core Capital 10.90% 4.00%
Total Capital 12.15% 8.00%
</TABLE>
Results of Operation
Net interest income for the three month period ended March 31, 1999 increased
12.11% to $5,237,000 over $4,262,000 for the same period for 1998. Interest
income for the three month period was up by 18.56% from $7,962,000 to
$9,440,000. This increase in interest income is due to an increase in
earning assets of 20.27% or $71,892,000 at March 31, 1999, compared to March
31, 1998. For the first three months of 1999, earning assets increased by
$15,626,000 or 3.80%. The largest increase in earning assets since March 31,
1998 was the increase in loans of $58,361,000 or 21.53%. Investment
securities increased by $2,696,000 while Federal Funds sold increased by
$11,180,000. Interest expense on interest bearing deposits was up by
$432,000 or 11.70% for the first three months of 1999 over the same period
for 1998. This increase in interest expense is due to an increase in
interest bearing deposits of 19.52% or $58,795,000 at March 31, 1999,
compared to March 31, 1998. For the first three months of 1999, interest
bearing deposits increased by $19,945,000 or 5.87%. The increase in interest
income, interest expense, and net interest income were all consistent with
budget projections made by management and is on target to be consistent with
annual projections.
The provision for loan losses was $270,000 and $190,000 for the first three
months of 1999 and 1998, respectively. 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 $1,028,412 for its un-guaranteed portion of
SBA loans.
The following table furnishes information on the Loan Loss Reserve for the
current three month reporting period and the same period for 1999.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Beginning Balance $ 4,863 $ 4,024
Less Charge Offs:
Real Estate Loans 23 0
Commercial Loans 85 19
Consumer Loans 113 72
Credit Cards 7 0
Plus Recoveries
Real Estate Loans 4 0
Commercial Loans 18 5
Consumer Loans 41 29
Credit Cards 2 0
Plus Provision 270 190
-------- --------
Ending Balance $ 4,970 $ 4,157
======== ========
</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 three month period ended March 31, 1999
represented 118% of charge offs for the same period, while the provision for
the first three months of 1998 represented 209% of the charge offs recorded
in that period. The reserve at the end of March 31, 1999 represented 292%
of non-accrual loans while the reserve at March 31, 1998 represented 536% of
non-accrual 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 March 31, 1999 was 1.51%
as compared to 1.53% at March 31, 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>
March 31, 1999
Non-accrual Past Due Restructured
Loans 90 days Debt
still
accruing
<S> <C> <C> <C>
Real Estate Loans $ 167 $ 409 $ 0
Commercial Loans 262 1,003 762
Consumer Loans 388 292 0
------ ------- ------
Total $ 817 $ 1,704 $ 762
====== ======= ======
</TABLE>
March 31, 1998
<TABLE>
<CAPTION>
Non-accrual Past Due Restructured
Loans 90 days Debt
still
accruing
<S> <C> <C> <C>
Real Estate Loans $ 8 $ 45 $ 0
Commercial Loans 326 194 590
Consumer Loans 441 125 0
------ ------ ------
Total $775 $ 364 $ 590
====== ====== ======
</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 3.19% or $83,000 during the three month period
ended March 31, 1999 as compared to the same period for 1998. Other income
decreased by $225,000 in the first quarter of 1999 compared to 1998, due to
fewer installations of supermarket bank units in the first quarter. Service
charges on deposit accounts increased by $59,000 or 9.80% as compared to the
same period for 1998. The major increase was the increase in non-sufficient
funds (NSF) charges of $50,000 and the increase in stop payment fees of
7,000. Both NSF charges and stop payment fees increased primarily as a
result of the Company's continued growth in accounts in the totally free
checking program. The increase of $58,000 in other service charges and fees
is a result of the overall growth in deposit customers the banks have
experienced during the three months ended March 31, 1999 compared to the same
period in 1988. The gains on sale of loans decreased by $4,000 or 6.56%
during the three month period ended March 31, 1999 as compared to the same
period for 1998. This decrease is due to a slightly smaller number of SBA
loan originations during the first quarter. Trust department income for the
first quarter 1999 increased to $46,000 compared to $27,000 for the first
quarter of 1998.
Other operating expenses increased by 22.34% or $1,029,000 for the first
three months of 1999 over the same period in 1998. Salaries and benefits
increased by $602,000 or 25.62% from the first quarter of 1998 to the first
quarter of 1999. This increase is primarily resulting from the increase in
full time equivalent employees from 260 at the end of March 1998 to 291 at
the end of March 1999. Equipment and occupancy expenses were up by $181,000
or 24.20% for the first quarter of 1999 over the first quarter of 1998. The
major increases were depreciation expense of 91,000 and maintenance contracts
of $55,000. The increase in full time equivalent employees as well as
equipment and occupancy expenses was primarily due to the addition of
two supermarket banking centers and one brick and mourtorduring the past
twelve months.
Net income for the three month period was $1,332,000 or a decrease of 6.13%
over the same period for 1998. The net income was less than budgeted
numbers. Management anticipates earnings to improve as compared to the
budgeted figures. However, Management cannot guarantee the overall increase
in earnings in 1999 compared to 1998 due to the variation in the number of
supermarket bank installations from year to year. 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 newdevelopments.
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 conversion period 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 and
capital.
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 will only require 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 estimates that its year 2000 testing
will be complete by May 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
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. The Company is in the process
of finalizing its contingency planning with respect to the year 2000 date
change and believes that should its own systems fail, it could convert to a
manual entry system for a period of approximately one month without
significant losses. The business resumption plan will be validated by
conducting live tests at various banking centers prior to June 31, 1999. The
Company is in the process of contracting with a business recovery service for
a "hot site" location for disaster recovery or processing due to a failure
event.
In addition, the Company's preliminary contingency plan also takes into
account the risk that the Atlanta Reserve Bank will not make the necessary
modifications that will enable it to handle electronic funds transfers and
check clearing operations. Management of the Company believes that so long
as the Company is able to obtain the necessary information from the Atlanta
Reserve Bank in some manner, such as by telephone or facsimile transmissions,
and manually post transactions, the resulting impact on the Company's
financial condition will not be material.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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: May 14, 1999 BY: /s/ Harry L. Stephens
Harry L. Stephens,
Executive Vice President and
Chief Financial Officer
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