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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003 Commission File number: 000-22054
COMMUNITY BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
South Carolina 57-0966962
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
791 Broughton St., Orangeburg, South Carolina 29115
(Address of Principal Executive Office, Zip Code)
(803) 535-1060
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 4,310,646 shares of common
stock outstanding as of August 1, 2003.
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10-Q TABLE OF CONTENTS
Part I-Financial Statements
Page
Item 1 Financial Statements .............................................. 3
Item 2 Management's Discussion and Analysis of Financial Condition and ... 10
Results of Operations
Item 3 Quantitative and Qualitative Disclosure About Market Risk ......... 22
Item 4 Controls and Procedures ........................................... 22
Part II-Other Information
Item 4 Submission of Matters to a Vote of the Security Holders ........... 23
Item 6 Exhibits and Reports on Form 8-K .................................. 24
2
Part I. Item 1. Financial Statements
COMMUNITY BANKSHARES, INC. - CONSOLIDATED BALANCE SHEETS
$ amounts in thousands
UNAUDITED
June 30, December 31,
ASSETS 2003 2002
---- ----
Cash and due from other financial institutions:
Non-interest bearing ........................................................... $ 15,336 $ 14,738
Federal funds sold ............................................................. 32,024 23,831
--------- ---------
Total cash and cash equivalents ............................................ 47,360 38,569
Interest bearing deposits in other banks ............................................. 1,261 511
Securities available for sale, at fair value ......................................... 52,791 53,066
Loans held for resale ................................................................ 26,657 24,664
Loans receivable ..................................................................... 318,217 306,484
Less, allowance for loan losses ................................................ (3,922) (3,573)
--------- ---------
Net loans .................................................................. 314,295 302,911
Accrued interest receivable ......................................................... 2,014 2,131
Premises and equipment ............................................................... 6,780 6,376
Net deferred tax asset ............................................................... 424 584
Intangible assets .................................................................... 7,773 7,896
Other assets ......................................................................... 691 612
--------- ---------
Total assets ............................................................... $ 460,046 $ 437,320
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ........................................................... $ 54,974 $ 47,128
Interest bearing ............................................................... 300,838 289,934
--------- ---------
Total deposits ............................................................. 355,812 337,062
Federal funds purchased and securities
sold under agreements to repurchase ............................................ 13,344 16,302
Federal Home Loan Bank advances ...................................................... 20,210 20,210
Lines of credit payable .............................................................. 22,833 18,249
Other liabilities .................................................................... 1,755 1,780
--------- ---------
Total liabilities .......................................................... 413,954 393,603
--------- ---------
Shareholders' equity:
Common stock ................................................................... 29,159 29,090
No par, authorized shares 12,000,000, issued and
outstanding 4,310,646 in 2003 and 4,304,384 in 2002
Retained earnings .............................................................. 16,520 14,529
Accumulated other comprehensive income ......................................... 413 98
--------- ---------
Total shareholders' equity ................................................. 46,092 43,717
--------- ---------
Total liabilities and shareholders' equity ................................. $ 460,046 $ 437,320
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
3
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
for the six months ended June 30, 2003 and 2002 (Unaudited)
(Amounts in thousands, except share data)
Accumulated
Other Total
Common Common Retained Comprehensive Shareholders'
Shares Stock Earnings Income(Loss) Equity
------ ----- -------- ------------ ------
Balances at Dec. 31, 2001 .......................... 3,299,674 $ 17,208 $ 10,346 $ (7) $ 27,547
Comprehensive income:
Net income .................................... 2,336 2,336
Other comprehensive income net of tax:
Unrealized gain on securities ............. 172 172
Shares issued under stock options .................. 4,710 40 40
Expenses related to merger ......................... (98) (98)
Dividends paid ..................................... - - (529) - (529)
---------- ---------- ---------- ---------- ----------
Balances at June 30, 2002 .......................... 3,304,384 $ 17,150 $ 12,153 $ 165 $ 29,468
========== ========== ========== ========== ==========
Balances at Dec. 31, 2002 .......................... 4,304,384 $ 29,090 $ 14,529 $ 98 $ 43,717
Comprehensive income:
Net income .................................... 2,766 2,766
Other comprehensive income net of tax:
Unrealized gain on securities ............. 315 315
Shares issued under stock options .................. 6,262 69 69
Dividends paid ..................................... - - (775) - (775)
---------- ---------- ---------- ---------- ----------
Balances at June 30, 2003 .......................... 4,310,646 $ 29,159 $ 16,520 $ 413 $ 46,092
========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
4
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF INCOME
Six months ended June 30, Three months ended June 30,
2003 2002 2003 2002
(In thousands, except per share data) UNAUDITED UNAUDITED UNAUDITED UNAUDITED
--------- --------- --------- ---------
Interest and dividend income:
Loans, including fees ....................................... $ 11,091 $ 8,942 $ 5,816 $ 4,618
Deposits with other financial institutions .................. 9 10 5 4
Debt securities ............................................. 845 858 352 483
Dividends ................................................... 40 63 20 32
Federal funds sold .......................................... 149 167 92 80
-------- -------- -------- --------
Total interest and dividend income ..................... 12,134 10,040 6,285 5,217
-------- -------- -------- --------
Interest expense:
Deposits:
Certificates of deposit of $100,000 or more ............... 839 914 412 446
Other ..................................................... 2,198 2,206 1,079 1,054
-------- -------- -------- --------
Total deposits ......................................... 3,037 3,120 1,491 1,500
Federal funds purchased and securities
sold under agreements to repurchase ....................... 75 44 37 22
Warehouse lines of credit ................................... 296 150 153 64
FHLB advances ............................................... 553 556 279 278
-------- -------- -------- --------
Total interest expense ................................. 3,961 3,870 1,960 1,864
-------- -------- -------- --------
Net interest income .............................................. 8,173 6,170 4,325 3,353
Provision for loan losses ........................................ 543 358 279 189
-------- -------- -------- --------
Net interest income after provision for loan losses .............. 7,630 5,812 4,046 3,164
-------- -------- -------- --------
Non-interest income:
Service charges on deposit accounts ......................... 1,621 1,082 838 538
Securities gains (losses) ................................... (252) 104 (298) 62
Mortgage banking income ..................................... 2,825 1,672 1,314 716
Other ....................................................... 437 303 222 158
-------- -------- -------- --------
Total non-interest income .............................. 4,631 3,161 2,076 1,474
-------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits .............................. 5,031 3,383 2,680 1,728
Premises and equipment ...................................... 806 605 403 308
Other ....................................................... 2,116 1,335 1,135 709
-------- -------- -------- --------
Total non-interest expense ............................. 7,953 5,323 4,218 2,745
-------- -------- -------- --------
Income before income taxes ....................................... 4,308 3,650 1,904 1,893
Income tax expense ............................................... 1,542 1,314 719 682
-------- -------- -------- --------
Net income ....................................................... $ 2,766 $ 2,336 $ 1,185 $ 1,211
======== ======== ======== ========
5
Six months ended June 30, Three months ended June 30,
2003 2002 2003 2002
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
--------- --------- --------- ---------
Basic earnings per common share:
Weighted average shares outstanding ........... 4,306,742 3,299,834 4,308,263 3,299,754
Net income per common share ................... $ 0.64 $ 0.71 $ 0.28 $ 0.37
Diluted earnings per common share:
Weighted average shares outstanding ........... 4,420,316 3,404,733 4,421,836 3,382,921
Net income per common share ................... $ 0.63 $ 0.69 $ 0.27 $ 0.36
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
6
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
(Dollar amounts in thousands) 2003 2002
UNAUDITED UNAUDITED
--------- ---------
Cash flows from operating activities:
Net income ................................................................................... $ 2,766 $ 2,336
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization ....................................................... 465 160
Net amortization (accretion) of investment securities ............................... 133 (1)
Provision for loan losses ........................................................... 543 358
Net realized (losses) on sale of securities available for sale ...................... (72) (104)
Proceeds from sales of real estate loans held for sale .............................. 155,668 74,766
Originations of real estate loans held for sale ..................................... (157,661) (74,361)
Deferred income taxes ............................................................... 160 -
Changes in operating assets and liabilities:
Accrued interest receivable ......................................................... 117 (87)
Other assets ........................................................................ (79) 458
Other liabilities ................................................................... (25) (77)
--------- ---------
Net cash provided by operating activities ........................................... 2,015 3,448
--------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits in banks ....................... (750) 1,567
Purchases of investment securities available-for-sale ............................... (43,825) (30,591)
Proceeds from maturities of investment securities available-for-sale ................ 42,286 15,096
Proceeds from sales of investment securities available-for-sale ..................... 2,068 18,529
Loan originations and principal collections, net .................................... (11,927) (15,683)
Proceeds from sale of other real estate owned ....................................... - 267
Purchases of premises and equipment ................................................. (746) (444)
--------- ---------
Net cash (used) in investing activities ............................................. (12,894) (11,259)
--------- ---------
Cash flows from financing activities:
Net increase in deposits ............................................................ 18,750 5,375
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase ............................. (2,958) 549
Net increase (decrease) under line of credit arrangement ............................ 4,584 (502)
Proceeds from issuance of common stock .............................................. 69 40
Costs incurred in business combination .............................................. - (98)
Dividends paid ...................................................................... (775) (529)
--------- ---------
Net cash provided by financing activities ........................................... 19,670 4,835
--------- ---------
Net increase (decrease) in cash and cash equivalents ......................................... 8,791 (2,976)
Cash and cash equivalents - beginning of period .............................................. 38,569 25,649
--------- ---------
Cash and cash equivalents - end of period .................................................... $ 47,360 $ 22,673
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
7
Six months ended June 30,
(Dollar amounts in thousands) 2003 2002
UNAUDITED UNAUDITED
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest ............................................................... $3,898 $3,933
------ ------
Cash payments for income tax ............................................................. $1,470 $1,379
====== ======
NON-CASH INVESTING ACTIVITIES
Transfer of loans receivable to other real estate owned .................................. $ 131 $ -
====== ======
8
Summary of Significant Accounting Principles
A summary of significant accounting policies and the audited financial
statements for 2002 are included in Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of Community
Bankshares, Inc. (CBI), the parent company, and Orangeburg National Bank, Sumter
National Bank, Florence National Bank, Community Resource Mortgage Inc., and the
Bank of Ridgeway, its wholly owned subsidiaries. All significant intercompany
items have been eliminated in the consolidated statements.
Management Opinion
The interim financial statements in this report are unaudited. In the
opinion of management, all the adjustments necessary to present a fair statement
of the results for the interim period have been made. Such adjustments are of a
normal and recurring nature.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for an entire year. These interim
financial statements should be read in conjunction with the annual financial
statements and notes thereto contained in the 2002 Annual Report on Form 10-K.
Changes in Comprehensive Income Components
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," effective for
fiscal years beginning after December 15, 1997. This Statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Disclosure as required by
the Statement is as follows:
Six months ended June 30,
2003 2002
---- ----
(Dollars in thousands)
Unrealized holding gains on
available for sale securities .................... $ 729 $ 373
Less: Reclassification adjustment for
(losses) realized in income ...................... (252) (104)
----- -----
Net unrealized gains ............................... 477 269
Tax effect ......................................... (162) (97)
----- -----
Net-of-tax amount .................................. $ 315 $ 172
===== =====
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as `forward looking statements'
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. The words "estimate," "project," "intend,",
"expect," "believe," "anticipate," "plan," and similar expressions identify
forward-looking statements. The Corporation (CBI) cautions readers that forward
looking statements, including without limitation, those relating to the CBI's
future business prospects, ability to successfully integrate recent
acquisitions, revenues, adequacy of the allowance for loan losses, working
capital, liquidity, capital needs, interest costs, and income, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward looking statements, due to
several important factors herein identified, among others, and other risks and
factors identified from time to time in the CBI's reports filed with the
Securities and Exchange Commission.
Critical Accounting Policies
CBI has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of CBI's financial statements. The significant
accounting policies of CBI are described in detail in the notes to CBI's audited
consolidated financial statements included in CBI's Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and estimates
by management, which have a material impact on the carrying value of certain
assets and liabilities. Management considers such accounting policies to be
critical accounting policies. The judgments and estimates used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ from these judgments
and estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of operations of CBI.
CBI is a holding company for community banks and a mortgage company
and, as a financial institution, believes the allowance for loan losses is a
critical accounting policy that requires the most significant judgments and
estimates used in preparation of its consolidated financial statements. Refer to
the sections "Allowance for Loan Losses" and "Provision for Loan Losses" in the
Annual Report on Form 10-K for 2002 for a detailed description of CBI's
estimation process and methodology related to the allowance for loan losses.
10
RESULTS OF OPERATIONS: SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO JUNE 30, 2002
(all comparisons in this section are period to period, unless specified
otherwise)
COMMUNITY BANKSHARES, INC. - AVERAGE BALANCE SHEETS, YIELDS, AND RATES
Six months ended June 30, 2003 2002
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense Rates Balance Expense Rates
------- ------- ----- ------- ------- -----
Interest bearing deposits in banks ........................ $ 625 $ 9 2.88% $ 1,311 $ 10 1.53%
Investment securities taxable ............................. 42,526 709 3.33% 40,229 916 4.55%
Investment securities--tax exempt ......................... 9,317 176 3.78% 269 5 3.72%
Federal funds sold ........................................ 26,001 149 1.15% 19,884 167 1.68%
Loans receivable .......................................... 336,889 11,091 6.58% 247,983 8,942 7.21%
-------- ------ -------- -------
Total interest earning assets ........................... 415,358 12,134 5.84% 309,676 10,040 6.48%
Cash and due from banks ................................... 14,098 11,952
Allowance for loan losses ................................. (3,706) (2,947)
Premises and equipment .................................... 6,742 5,539
Goodwill .................................................. 7,834 921
Other assets .............................................. 3,224 3,022
-------- --------
Total assets ............................................ $443,550 $328,163
======== ========
Liabilities and Shareholders' Equity
Interest bearing deposits
Savings ................................................... $ 67,394 $ 416 1.23% $ 46,577 $ 403 1.73%
Interest bearing transaction accounts ..................... 42,252 105 0.50% 42,158 171 0.81%
Time deposits ............................................. 185,852 2,515 2.71% 142,278 2,546 3.58%
-------- ------- -------- -------
Total interest bearing deposits ......................... 295,498 3,036 2.05% 231,013 3,120 2.70%
Short term borrowing ...................................... 13,873 75 1.08% 4,603 44 1.91%
Warehouse lines payable ................................... 17,725 296 3.34% 7,232 150 4.15%
Other borrowings .......................................... 20,298 554 5.46% 20,280 556 5.48%
-------- ------- -------- -------
Total interest bearing liabilities ...................... 347,394 3,961 2.28% 263,128 3,870 2.94%
Noninterest bearing demand deposits ....................... 49,071 34,344
Other liabilities ......................................... 1,837 2,025
Shareholders' equity ...................................... 45,248 28,666
-------- --------
Total liabilities & shareholders' equity ................ $443,550 $328,163
======== ========
Interest rate spread ...................................... 3.56% 3.54%
Net interest income and net yield on
earning assets ............................................ $ 8,173 3.93% $ 6,170 3.98%
Notes:
Yields and rates are annualized.
11
Earnings Performance, Six months ended June 30, 2003 compared to June 30, 2002
The 2003 period was influenced by three major factors: interest rates
held stable at historically low levels, higher demand for mortgage loans
generated by continuing low interest rates, and the July 2002 acquisition of the
Bank of Ridgeway. The prime lending rate for the first half of 2003 was 4.25%,
compared to 4.75% for the same period in 2002. At the end of June the prime rate
declined further, to 4.0%. Low interest rates put continuing pressure on CBI's
net interest margin, which declined slightly to 3.93% from 3.98%. The margin was
somewhat protected by relatively high interest income at the mortgage company
and the acquisition of the Bank of Ridgeway with its large dollar volume of
relatively low cost deposits.
Immediately prior to its acquisition by CBI in July 2002 the Bank of
Ridgeway's investment portfolio had a fair market value $675,000 in excess of
its amortized cost. In connection with the acquisition CBI established a new
amortized cost basis for those investments that equaled their market value.
Because interest rates declined to historically low levels, many securities with
call provisions have been called prior to maturity. Furthermore, since the
Ridgeway investments were recorded at amounts in excess of their redemption
values the proceeds of the redemptions (at par) were significantly less than the
recorded amounts, resulting in a $322,000 write-down of the Ridgeway purchase
premium in the second quarter of 2003. Management expects that the future effect
of this amortization will be modest in view of the fact that almost all the
callable securities in the Bank of Ridgeway's portfolio have been called.
The substantial dollar and percentage changes that are discussed
throughout this report are due in large measure to the above factors.
CBI's net income was $2,766,000 or $.64 per basic share in 2003
compared to $2,336,000 or $.71 per basic share in 2002, an increase of $430,000
or 18.4%. Diluted earnings were $.63 per share, down from $.69. The decrease in
earnings per basic share and earnings per diluted share was the result of a
greater number of shares being outstanding in the 2003 period. Most of the
additional outstanding shares were issued in connection with the Ridgeway
acquisition.
The increase in net income resulted from the operations of the
subsidiaries, which are summarized in the following chart (dollars in
thousands):
Net Income
For the periods ended June 30, 2003 2002 $ change % change
---- ---- -------- --------
Orangeburg National Bank (ONB) ............................... $ 1,376 $ 1,410 ($ 34) -2.41%
Sumter National Bank (SNB) ................................... 681 630 51 8.10%
Florence National Bank (FNB) ................................. 266 155 111 71.61%
Community Resource Mortgage, Inc.(CRM) ....................... 377 207 170 82.13%
Bank of Ridgeway (RW) ........................................ 182 0 182 na
Holding company costs and eliminations, net .................. (116) (66) (50) -81.25%
======= ======= ======= ======
Consolidated totals for CBI .................................. $ 2,766 $ 2,336 $ 430 18.31%
======= ======= ======= ======
12
Net Income
As noted above, consolidated net income for 2003, increased from the
prior year by 18.4% or $430,000. The major components of this increase are shown
in the following table and discussed below.
Summary Income Statement for Six Month Periods ended June 30,
2003 2002 $ change % change
---- ---- -------- --------
(Dollar amounts in thousands)
Interest income ............... $ 12,134 $ 10,040 $ 2,094 20.86%
Interest expense .............. (3,961) (3,870) (91) 2.35%
-------- -------- --------
Net interest income ........... 8,173 6,170 2,003 32.46%
Provision for loan losses ..... (543) (358) (185) 51.68%
Noninterest income ............ 4,631 3,161 1,470 46.50%
Noninterest expense ........... (7,953) (5,323) (2,630) 49.41%
Income tax expense ............ (1,542) (1,314) (228) 17.35%
-------- -------- --------
Net income .................... $ 2,766 $ 2,336 $ 430 18.41%
======== ======== ========
Interest Income
Total average interest earning assets for 2003 increased $105,682,000
or 34.1% over 2002. The Bank of Ridgeway acquisition accounted for about $89
million or 84.7% of the increase. The acquisition also accounted for the
majority of the increases in the volumes of specific earning assets. Thus,
although the average yield on interest earning assets declined, interest income
rose based on increased volumes.
Interest Expense
Total average interest bearing liabilities for 2003 increased
$84,266,000 or 32% over 2002. The Bank of Ridgeway contributed $65 million or
77.4% of the increase. The acquisition also accounted for the majority of the
increases in the volumes of specific interest bearing liabilities. Even though
the volumes increased, rates declined enough to produce a 0.66% decrease in the
average rate paid for interest bearing liabilities.
Net interest income
Net interest income is the amount by which interest and fees on
interest earning assets exceeds the interest paid on interest bearing deposits
and other interest bearing funds. For 2003 net interest income was up $2,003,000
or 32.5% over 2002, primarily as a result of the Bank of Ridgeway acquisition.
CBI's net interest margin was 3.93% for 2003 compared to 3.98% for
2002. The low interest rate environment has put pressure on the margins of the
individual banks. This pressure has been mitigated somewhat by the relatively
13
low cost deposits at the Bank of Ridgeway and increased interest income at the
mortgage company.
Provision for loan losses
The increase in the provision for loan losses was mostly due to the
Bank of Ridgeway acquisition after the second quarter of 2002 and the
establishment of a loan loss reserve by Community Resource Mortgage, also after
the second quarter of 2002.
Non-Interest Income
Non-interest income for 2003 increased $1,470,000 over 2002. Most of
the increase was due to mortgage banking income which increased $1,153,000, the
vast majority of which was generated by Community Resource Mortgage. Service
charges and other income from Bank of Ridgeway provided approximately $395,000
of the non-interest income.
Gains (losses) on sales of securities reflected a net loss of $252,000
in 2003. This is the result of a $322,000 pretax charge to income recognized in
connection with the write-down on called securities of the investment portfolio
for the Bank of Ridgeway, discussed above. In the first year of the merger with
the Bank of Ridgeway, CBI has expensed approximately 47% of the acquired
investment premiums in the Ridgeway portfolio, due mostly to the large number of
securities being called prior to maturity. Management does not expect future
amortization of the remaining premiums will have a significant impact on
earnings, because there are very few remaining securities subject to early call.
Non-Interest Expense
Approximately $1,157,000 or 44% of the $2,630,000 increase in
non-interest expense was accounted for by the Bank of Ridgeway acquisition. The
remaining increase was due to volume increases at Community Resource Mortgage,
which has a commission based compensation system based on loan volume, and
normal increases at the other banks.
Income Taxes
Income tax expense for 2003 increased $228,000 or 17.5% over 2002. The
average tax rate for 2003 was 35.8%, slightly decreased from 2002 when it was
36%.
Profitability
A common way to review earnings is through the ROA (return on average
assets) and the ROE (return on average equity). Based on operating results for
the six months ended June 30, 2003 and 2002, the following table is presented.
14
Period ended June 30,
2003 2002
---- ----
(dollars in thousands)
Average assets ................... $443,550 $328,163
ROA .............................. 1.25% 1.42%
Average equity ................... $45,248 $28,666
ROE .............................. 12.23% 16.30%
Net income ....................... $2,766 $2,336
The decline in ROA and ROE is primarily related to the increase in shareholders'
equity resulting from the Bank of Ridgeway acquisition in July.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002 (all
comparisons in this section are quarter to quarter, unless otherwise specified)
For the quarter ended June 30, 2003, CBI earned a consolidated profit
of $1,185,000, compared to $1,211,000 for the comparable period of 2002, a
decrease of 2.1% or $26,000. Basic earnings per share were $.28 in the 2003
quarter compared to $.37 for the 2002 quarter. The changes in the items
comprising net income, which are discussed below, resulted from essentially the
same factors discussed above regarding the results of operation for the six
months ended June 30, 2003.
Summary Income Statement for Quarters ended June 30,
2003 2002 $ change % change
---- ---- -------- -------
(Dollar amounts in thousands)
Interest income ................. 6,285 5,217 1,068 20.47%
Interest expense ................ (1,960) (1,864) (96) 5.15%
------ ------ ------
Net interest income ............. 4,325 3,353 972 28.99%
Provision for loan losses ....... (279) (189) (90) 47.62%
Noninterest income .............. 2,076 1,474 602 40.84%
Noninterest expense ............. (4,218) (2,745) (1,473) 53.66%
Income tax expense .............. (719) (682) (37) 5.43%
------ ------ ------
Net income ...................... 1,185 1,211 (26) -2.15%
====== ====== ======
Interest Income
Interest income increased by over $1 million, or 20%, in the 2003
quarter compared to the 2002 quarter. The largest part of this increase was the
interest income generated by the Bank of Ridgeway acquisition.
Interest expense
Interest expense increased only slightly in the 2003 quarter compared
to the 2002 quarter. Even though the acquisition of the Bank of Ridgeway added
significantly to interest bearing liabilities, the overall decline in market
interest rates offset most of that change.
15
Provision for loan losses
The increase in the provision for loan losses was due to the Bank of
Ridgeway acquisition after the second quarter of 2002 and the establishment of a
loan loss reserve by CRM, also after the second quarter of 2002.
Non-Interest Income
Non-interest income for the 2003 quarter increased $602,000 over the
2002 quarter. Most of the increase was due to mortgage banking income which
increased $598,000, the vast majority of which was generated by CRM.
Gains (losses) on sales of securities reflected a net loss of $298,000
in 2003. This is the result of the $322,000 pretax charge to income recognized
in connection with the write-down of called securities in the investment
portfolio for the Bank of Ridgeway, discussed above.
Non-Interest Expense
Approximately $574,000 or 39% of the $1,473,000 increase in
non-interest expense was accounted for by the Bank of Ridgeway acquisition. The
remaining increase was due to volume increases at Community Resource Mortgage,
which has a commission based compensation system, and normal increases at the
other banks.
Income Taxes
Income tax expense for the 2003 quarter increased $37,000 or 5.4% over
the 2002 quarter.
CHANGES IN FINANCIAL POSITION
Investment portfolio
The investment portfolio is comprised of available for sale securities.
CBI and its banks usually purchase short-term issues (ten years or less) of U. S
Treasury and U. S. Government agency securities for investment purposes. At June
30, 2003 the available for sale portfolio totaled $52,791,000 compared to
$53,066,000 at December 31, 2002, a decrease of 0.5% or $275,000. The following
chart summarizes the aggregate investment portfolios at June 30, 2003 and
December 31, 2002.
16
June 30, 2003
-------------
Amortized Fair
Available for sale Cost Value
---- -----
(Dollar amounts in thousands)
U.S. Government and federal agencies ............. $39,421 $39,648
State and local governments ...................... 8,106 8,828
Mortgage backed securities ....................... 2,610 2,619
Other equity securities .......................... 1,696 1,696
------- -------
Total ............................................ $51,833 $52,791
======= =======
December 31, 2002
-----------------
Amortized Fair
Available for sale Cost Value
---- -----
(Dollar amounts in thousands)
U.S. Government and federal agencies ............. $41,488 $41,531
State and local governments ...................... 9,514 9,625
Other equity securities .......................... 1,910 1,910
------- -------
Total ............................................ $52,912 $53,066
======= =======
Loan portfolio
The loan portfolio is primarily consumer, and small and medium size
business oriented. At June 30, 2003 the loan portfolio was $318,217,000 compared
to $306,484,000 at December 31, 2002, a 3.8% or $11,733,000 increase. This
increase was attributable to normal growth of the banks in a low interest rate
environment. The following chart summarizes the loan portfolio at June 30, 2003
and December 31, 2002.
June 30, 2003 Dec. 31, 2002
------------- -------------
(Dollar amounts in thousands)
Commercial ................................ $80,045 $78,210
Real estate ............................... 200,570 191,844
Loans to individuals ...................... 37,602 36,430
-------- --------
Total ..................................... $318,217 $306,484
======== ========
Loans held for sale
The above loan portfolio table does not include loans held for sale.
Loans held for sale are loans originated by CBI's banks or mortgage company for
sale to others and are held pending completion of the sale. The vast majority of
such loans are originated by Community Resource Mortgage and are one-to-four
family residential mortgage loans. At June 30, 2003 loans held for sale totaled
$26,657,000 compared to $24,664,000 at December 31, 2002, an 8.1% or $1,993,000
increase. The amount of loans held for sale is subject to significant
fluctuation depending on current conditions.
17
Past Due and Non-Performing Assets
CBI closely monitors past due loans and loans that are in non-accrual
status and other real estate owned. Below is a summary of past due and
non-performing assets at June 30, 2003 and December 31, 2002.
June 30, 2003 Dec. 31, 2002
------------- -------------
(Dollar amounts in thousands)
Past due 90 days + and still accruing loans ....... $ 548 $1,740
Non-accrual loans ................................. $2,300 $ 796
Impaired loans (included in nonaccrual) ........... $2,300 $ 796
Other real estate owned ........................... $ 236 $ 219
The amount of non-accruing loans at June 30, 2003 is mostly
attributable to one loan, in the approximate amount of $1.3 million. The loan
involves principals who are having a legal dispute with one another. Management
believes that CBI's collateral position is sufficient so that no loss is
expected.
Management considers the past due and non-accrual amounts at June 30,
2003 to be reasonable in relation to the size of the portfolio and manageable in
the normal course of business.
CBI had no restructured loans during any of the above listed periods.
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan
losses, which is a direct charge to expense. Losses on specific loans are
charged against the allowance in the period in which management determines that
such loans become uncollectible. Recoveries of previously charged-off loans are
credited to the allowance.
Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and loans to individuals. The combination of
a relatively short operating history and relatively high asset quality precludes
management from establishing a meaningful specific loan loss percentage for the
computation of the allowance for each category. Instead management assigns an
estimated percentage factor to each in the computation of the overall allowance.
These estimates are not, however, intended to restrict CBI's ability to respond
to losses. CBI charges losses from any segment of the portfolio to the
allowance, regardless of the allocation. In general terms, the real estate
portfolio is subject to the least risk, followed by the commercial loan
portfolio, followed by the loans to individuals portfolio. The banks' internal
and external loan review programs from time to time identify loans that are
subject to specific weaknesses and such loans are reviewed for a specific loan
loss allowance.
Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 2003 will be less than the 2002
levels as such loans progress through the collection, foreclosure, and
repossession process. Management believes that the allowance for loan losses, as
18
of June 30, 2003, is sufficient to absorb the inherent losses that remain in the
loan portfolio. Management will continue to closely monitor the levels of
non-performing and potential problem loans and address the weaknesses in these
credits to enhance the amount of ultimate collection or recovery of these
assets. Management considers the levels and trends in non-performing and past
due loans in determining how the provision for loan losses is adjusted.
The aggregate allowance for loan losses of the banks and the mortgage
company and the aggregate activity with respect to the allowance are summarized
in the following table.
Six months ended Year ended Six months ended
(Dollar amounts in thousands) June 30, 2003 Dec. 31, 2002 June 30, 2002
------------- ------------- -------------
Allowance at beginning of period ........................... $ 3,572 $ 3,274 $ 2,830
Provision expense .......................................... 543 1,033 358
Net charge offs ............................................ (193) (734) (328)
------- ------- -------
Allowance at end of period ................................. $ 3,922 $ 3,573 $ 2,860
======= ======= =======
Allowance / outstanding loans .............................. 1.23% 1.17% 1.17%
Intangible assets
CBI adopted FASB No. 142, Goodwill and Other Intangible Assets, as of
January 1, 2002. As of June 30, 2003 intangible assets totaled $7,773,000,
compared to $7,896,000 at December 31, 2002, a decrease of $123,000. The
decrease represented amortization of the core deposit intangible acquired in
conjunction with the Bank of Ridgeway acquisition.
Deposits
Deposits at June 30, 2003 were $18,750,000 or 5.6%, higher than at
December 31, 2002. This increase was the result of normal business growth for
the banks.
Time deposits greater than $100,000 at June 30, 2003 were $1,256,000 or
1.8% greater than December 31, 2002.
Liquidity
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in a timely and economical manner.
The most manageable sources of liquidity are composed of liabilities, with the
primary focus of liquidity management being the ability to attract deposits
within the Banks' service areas. Core deposits (total deposits less certificates
of deposit of $100,000 or more) provide a relatively stable funding base.
Certificates of deposit of $100,000 or more are generally more sensitive to
changes in rates, so they must be monitored carefully. Asset liquidity is
provided by several sources, including amounts due from banks, federal funds
sold, and investments available-for-sale.
As of June 30, 2003 the loan to deposit ratio was 89.4% compared to
90.9% at December 31, 2002 and 93.9% at June 30, 2002. The Ridgeway acquisition
in July 2002 provided a significant amount of additional liquidity to the
19
company as a whole, which has been used in meeting the overall demand for loans
since the acquisition.
In the opinion of management, CBI's current and projected liquidity
position are adequate.
Capital resources
As summarized in the table below, CBI maintains a strong capital
position.
Minimum required
for capital
June 30, 2003 Dec. 31, 2002 adequacy
------------- ------------- --------
Tier 1 capital to average total assets ............................... 8.67% 8.29% 4.00%
Tier 1 capital to risk weighted assets ............................... 11.85% 11.56% 4.00%
Total capital to risk weighted assets ................................ 13.00% 12.70% 8.00%
In the opinion of management, the Company's current and projected
capital positions are adequate. In each case the ratios exceed by a substantial
margin the regulatory requirement for being considered well capitalized.
Dividends
CBI declared and paid a quarterly cash dividend of nine cents per share
during the second quarter of 2003 bringing the total dividends paid for the year
to eighteen cents per share. The total amount of these dividends was $775,000.
Accounting and Reporting Changes
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative contracts embedded in other contracts and loan commitments that
relate to the origination of mortgage loans held for sale, and for hedging
activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 is
not expected to have a material effect on financial condition or operating
results of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or as an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is generally effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material effect on the
financial condition or operating results of the Company.
20
Off-Balance-Sheet Activities:
The Banks are parties to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Banks' exposure to credit loss is represented by the contractual
amount of these commitments. The Banks use the same credit policies in making
commitments as they do for on-balance-sheet instruments.
At June 30, 2003, the following financial instruments were outstanding
whose contract amounts represent credit risk:
Contract
Amounts
-------
June 30, 2003
-------------
Commitments to grant loans ......................................... $19,979
Unfunded commitments under lines of credit ......................... 17,113
Standby letters of credit .......................................... 4,176
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include personal
residences, accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Banks to guarantee the performance of a customer to a third party. Those letters
of credit are primarily issued to support private borrowing arrangements. All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks generally hold collateral supporting those
commitments if deemed necessary. Since many of the standby letters of credit are
expected to expire without being drawn upon, the total letter of credit amounts
do not necessarily represent future cash requirements.
To reduce credit risk related to the use of credit-related financial
instruments, the Bank might deem it necessary to obtain collateral. The amount
and nature of the collateral obtained is based on the Banks' credit evaluation
of the customer. Collateral held varies but may include cash, securities,
accounts receivable, inventory, property, plant and equipment and real estate.
21
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. CBI's market risk arises principally from interest rate risk inherent
in its lending, deposit and borrowing activities. Management actively monitors
and manages its interest rate risk exposure. Although CBI manages other risks,
such as credit quality and liquidity risk in the normal course of business,
management considers interest rate risk to be its most significant market risk
and this risk could potentially have the largest material effect on CBI's
financial condition and results of operations. Other types of market risks such
as foreign currency exchange risk and commodity price risk do not arise in the
normal course of community banking activities.
CBI's Asset/Liability Committee uses a simulation model to assist in
achieving consistent growth in net interest income while managing interest rate
risk. According to the model as of June 30, 2003, CBI is positioned so that net
interest income would increase $441,000 and net income would increase $293,000
in the next twelve months if interest rates rose 100 basis points. Conversely,
net interest income would decline $441,000 and net income would decline $293,000
in the next twelve months if interest rates declined 100 basis points. In the
current interest rate environment, it is unlikely that there will be any large
rate decreases in the immediate future. Computation of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates and loan prepayment, and should not be
relied upon as indicative of actual results. Further, the computations do not
contemplate any actions CBI and its customers could undertake in response to
changes in interest rates.
As of June 30, 2003 there was no significant change in the interest
rate sensitivity analysis for the various changes in interest rates calculated
as of December 31, 2002. The foregoing disclosures related to the market risk of
CBI should be read in connection with Management's Discussion and Analysis of
Financial Position and Results of Operations included in the 2002 Annual Report
on Form 10-K.
Item 4. Controls and Procedures
(a) Based on their evaluation of the issuer's disclosure controls and procedures
(as defined in 17 C.F.R. Sections 240.13a-14(c) and 240.15d-14(c)) as of a date
within 90 days prior to the filing of this quarterly report, the issuer's chief
executive officer and chief financial officer concluded that the effectiveness
of such controls and procedures was adequate.
(b) There were no significant changes in the issuer's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
22
Part II--Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
CBI held an Annual Meeting of Shareholders on May 19, 2003.
The following persons were elected to the Board for terms of three years:
E. J Ayers, Jr., Alvis J. Bynum, J. Otto Warren, Jesse A. Nance, and J. V.
Nicholson. The following person was elected to the Board for a term of two
years: Thomas B. Edmunds. The following person was elected to the Board for a
term of one year: William A. Harwell.
The vote tally was as follows:
Total number Voting for Voting Abstaining Present at
of shares ---------- against or to ---------- meeting and
eligible to withhold not voting
vote authority -----------
---- ---------
Election of directors
E. J Ayers, Jr., 4,305,614 3,054,590 2,880 0 0
Alvis J. Bynum 4,305,614 3,056,690 780 0 0
J. Otto Warren 4,305,614 3,054,590 2,880 0 0
Jesse A. Nance 4,305,614 3,054,590 2,880 0 0
J. V. Nicholson 4,305,614 3,056,690 780 0 0
Thomas B. Edmunds 4,305,614 3,056,340 1,130 0 0
William A. Harwell 4,305,614 3,054,590 2,880 0 0
23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
b) Reports on Form 8-K. Form 8-K filed April 28, 2003, pursuant to Item 9 of
that Form with respect to the information provided pursuant to Item 12 of that
Form.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATED: August 13, 2003
COMMUNITY BANKSHARES, INC.
By: s/ E. J. Ayers, Jr.,
-------------------------------------------
E. J. Ayers, Jr.,
Chief Executive Officer
By: s/ William W. Traynham
------------------------------------------
William W. Traynham
President and Chief Financial Officer
(Principal Accounting Officer)
24
CERTIFICATIONS
I, E. J. Ayers, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community
Bankshares Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 13, 2003 s/E. J. Ayers, Jr.
-----------------------------------
E. J. Ayers, Jr.
Chairman and CEO
25
CERTIFICATIONS
I, William W. Traynham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community
Bankshares Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 13, 2003 s/William W. Traynham
-----------------------------------
William W. Traynham
President and CFO
26