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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, 2002 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 [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 4,304,384 shares of common
stock outstanding as of August 1, 2002.
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 Results of Operations ........... 11
Item 3 Quantitative and Qualitative Disclosures
About Market Risk ....................................... 21
Part II-Other Information
Item 4 Submission of Matters to a Vote of Security Holders ...... 22
Item 6 Exhibits and Reports on Form 8-K ......................... 23
2
Part I. Item 1. Financial Statements
COMMUNITY BANKSHARES, INC. - CONSOLIDATED BALANCE SHEETS
($ amounts in thousands) UNAUDITED
June 30, December 31,
ASSETS 2002 2001
---- ----
Cash and due from other financial institutions:
Non-interest bearing ............................................................ $ 12,470 $ 14,586
Federal funds sold .............................................................. 10,203 11,063
--------- ---------
Total cash and cash equivalents ............................................. 22,673 25,649
Interest bearing deposits in other banks ............................................. 809 2,376
Investment securities:
Securities held to maturity ..................................................... 500 500
Securities available for sale ................................................... 40,450 43,207
Loans held for resale ................................................................ 9,860 10,265
Loans ................................................................................ 244,993 229,905
Less, allowance for loan losses ................................................. (2,860) (2,830)
--------- ---------
Net loans ................................................................... 242,133 227,075
Premises and equipment ............................................................... 5,461 5,177
Accrued interest receivable ......................................................... 1,849 1,762
Deferred income taxes ................................................................ 767 870
Goodwill ............................................................................. 921 921
Other assets ......................................................................... 460 815
--------- ---------
Total assets ................................................................ $ 325,883 $ 318,617
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ............................................................ $ 35,261 $ 35,882
Interest bearing ................................................................ 225,547 219,551
--------- ---------
Total deposits .............................................................. 260,808 255,433
Federal funds purchased and securities
sold under agreements to repurchase ............................................. 4,720 4,171
Federal Home Loan Bank advances ...................................................... 20,280 20,280
Lines of credit payable .............................................................. 8,526 9,028
Other liabilities .................................................................... 2,081 2,158
--------- ---------
Total liabilities ........................................................... 296,415 291,070
--------- ---------
Shareholders' equity:
Common stock
No par, authorized shares 12,000,000, issued and
outstanding 3,304,384 in 2002 and 3,299,674 in 2001 ......................... 17,150 17,208
Retained earnings ............................................................... 12,153 10,346
Accumulated other comprehensive income (loss) ................................... 165 (7)
--------- ---------
Total shareholders' equity .................................................. 29,468 27,547
--------- ---------
Total liabilities and shareholders' equity .................................. $ 325,883 $ 318,617
========= =========
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, 2002 and 2001 (Unaudited)
($ amounts in thousands)
Accumulated
Other Total
Number of Retained Comprehensive Shareholders'
Shares Amount Earnings Income (Loss) Equity
------ ------ -------- ------------ ------
Balances at Dec. 31, 2000 .......................... 3,199,180 $ 15,928 $ 7,342 $ (131) $ 23,139
Comprehensive income:
Net income ....................................... 1,831 1,831
Change in unrealized gain (loss) on
securities available for sale, net
of tax effect ............................... 188 188
Shares issued under option agreement ............... 5,040 39 39
Dividends paid ..................................... - - (447) - (447)
---------- ---------- ---------- ---------- ----------
Balances at June 30, 2001 .......................... 3,204,220 $ 15,967 $ 8,726 $ 57 $ 24,750
========== ========== ========== ========== ==========
Balances at Dec. 31, 2001 .......................... 3,299,674 $ 17,208 $ 10,346 $ (7) $ 27,547
Comprehensive income:
Net income ....................................... 2,336 2,336
Change in unrealized gain (loss) on
securities available for sale, net
of tax effect ............................... 172 172
Shares issued under option agreement ............... 4,710 40 40
Expense associated with pending merger ............. (98) (98)
Dividends paid ..................................... - - (529) - (529)
---------- ---------- ---------- ---------- ----------
Balances at June 30, 2002 .......................... 3,304,384 $ 17,150 $ 12,153 $ 165 $ 29,468
========== ========== ========== ========== ==========
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,
2002 2001 2002 2001
(In thousands, except per share data) UNAUDITED UNAUDITED UNAUDITED UNAUDITED
--------- --------- --------- ---------
Interest and dividend income:
Loans, including fees ......................................... $ 8,666 $ 9,116 $ 4,342 $ 4,525
Deposits with other financial institutions .................... 10 106 4 78
Debt securities ............................................... 858 1,194 483 469
Dividends ..................................................... 63 69 32 33
Federal funds sold ............................................ 167 454 80 284
------- ------- ------- -------
Total interest and dividend income ....................... 9,764 10,939 4,941 5,389
------- ------- ------- -------
Interest expense:
Deposits:
Certificates of deposit of $100,000 or more ................. 914 1,310 446 662
Other ....................................................... 2,206 3,528 1,054 1,714
------- ------- ------- -------
Total deposits ........................................... 3,120 4,838 1,500 2,376
Federal funds purchased and securities
sold under agreements to repurchase ......................... 44 149 22 66
Other borrowed funds .......................................... 706 596 342 295
------- ------- ------- -------
Total interest expense ................................... 3,870 5,583 1,864 2,737
------- ------- ------- -------
Net interest income ................................................ 5,894 5,356 3,077 2,652
Provision for loan losses .......................................... 358 277 189 135
------- ------- ------- -------
Net interest income after provision for loan losses ................ 5,536 5,079 2,888 2,517
------- ------- ------- -------
Non-interest income:
Service charges on deposit accounts ........................... 1,082 928 538 516
Gains on sales of securities .................................. 104 - 62 -
Mortgage banking income ....................................... 1,948 - 992 -
Other ......................................................... 303 315 158 176
------- ------- ------- -------
Total non-interest income ................................ 3,437 1,243 1,750 692
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits ................................ 3,383 2,102 1,728 1,062
Premises and equipment ........................................ 605 471 308 236
Other ......................................................... 1,335 916 709 479
------- ------- ------- -------
Total non-interest expense ............................... 5,323 3,489 2,745 1,777
------- ------- ------- -------
Income before income taxes ......................................... 3,650 2,833 1,893 1,432
Income tax expense ................................................. 1,314 1,002 682 502
------- ------- ------- -------
Net income ......................................................... $ 2,336 $ 1,831 $ 1,211 $ 930
======= ======= ======= =======
5
Six months ended June 30, Three months ended June 30,
2002 2001 2002 2001
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
--------- --------- --------- ---------
Basic earnings per common share:
Weighted average shares outstanding ........... 3,299,834 3,199,180 3,299,754 3,199,180
Net income per common share ................... $ 0.71 $ 0.57 $ 0.37 $ 0.29
Diluted earnings per common share:
Weighted average shares outstanding ........... 3,404,733 3,217,067 3,382,921 3,217,067
Net income per common share ................... $ 0.69 $ 0.57 $ 0.36 $ 0.29
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,
2002 2001
---- ----
(In thousands)
Cash flows from operating activities:
Net income ..................................................................................... $ 2,336 $ 1,831
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation .......................................................................... 160 218
Provision for loan losses ............................................................. 358 277
Accretion of discounts and amortization of premiums -
investment securities - net ......................................................... (1) (13)
Net realized (gains) on sale of securities ............................................ (104) -
Proceeds from sale of real estate loans held for sale ................................. 74,766 6,289
Origination of real estate loans held for sale ........................................ (74,361) (6,352)
Changes in assets and liabilities:
(Increase) decrease in interest receivable ............................................ (87) 555
Decrease in other assets .............................................................. 458 98
Decrease in other liabilities ......................................................... (77) (127)
-------- --------
Net cash provided by operating activities ...................................................... 3,448 2,776
-------- --------
Cash flows from investing activities:
Proceeds from maturities of
investment securities - held to maturity ............................................ - 8,875
Purchases of investment securities - held to maturity ................................. - (652)
Purchases of investment securities - available for sale ............................... (30,591) (29,673)
Proceeds from maturities of available for sale securities ............................. 15,096 43,716
Proceeds from sales of available for sale securities .................................. 18,529 -
Net (increase) decrease in interest bearing deposits .................................. 1,567 (3,883)
Net increase in loans to customers .................................................... (15,683) (13,350)
Proceeds from sale of other real estate owned ......................................... 267 -
Purchase of premises and equipment .................................................... (444) (156)
-------- --------
Net cash provided (used) by investing activities .................................... (11,259) 4,877
-------- --------
Cash flows from financing activities:
Net increase in demand, savings, & time deposits ...................................... 5,375 13,688
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase ...................................... 549 (773)
Net principal reduction under lines of credit agreements .............................. (502) -
Repayment of FHLB advances ............................................................ - (2,500)
Sale of common stock .................................................................. 40 39
Merger expenses ....................................................................... (98) -
Dividends ............................................................................. (529) (447)
-------- --------
Net cash provided by financing activities ........................................... 4,835 10,007
-------- --------
7
Six months ended June 30,
2002 2001
---- ----
(In thousands)
Net increase (decrease) in cash and due from other
financial institutions ..................................................... (2,976) 17,660
Cash and due from other financial institutions -
beginning of period ........................................................ 25,649 18,339
-------- --------
Cash and due from other financial institutions -
end of period .............................................................. $ 22,673 $ 35,999
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
8
Notes to Unaudited Consolidated Financial Statements
Summary of Significant Accounting Principles
A summary of significant accounting policies and the audited financial
statements for 2001 are included in Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
Principles of Consolidation
The consolidated financial statements include the accounts of Community
Bankshares, Inc. (CBI or the Corporation), the parent company, and Orangeburg
National Bank, Sumter National Bank, Florence National Bank and Community
Resource Mortgage Inc., 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 2001 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 disclosure 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,
2002 2001
---- ----
(Dollars in thousands)
Unrealized holding gains (losses) on available for sale
securities .......................................................................... $ 354 $ 285
Less: Reclassification adjustment for gains (losses)
realized in income .................................................................. 104 -
----- -----
Net unrealized gains (losses) ............................................................ 261 285
Tax effect ............................................................................... (89) (97)
----- -----
Net-of-tax amount ........................................................................ $ 172 $ 188
===== =====
9
COMMUNITY BANKSHARES, INC. - AVERAGE BALANCE SHEETS, YIELDS, AND RATES
Six months ended June 30, 2002 2001
$ in thousands Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense Rates Balance Expense Rates
------- -------- ------ ------- -------- -----
Interest bearing deposits ............................ $ 1,311 $ 10 1.53% $ 4,427 $ 106 4.79%
Investment securities taxable ........................ 40,229 916 4.55% 39,370 1,250 6.35%
Investment securities--tax exempt* ................... 269 5 5.63% 730 13 5.40%
Federal funds sold ................................... 19,884 167 1.68% 18,900 454 4.80%
Loans receivable ..................................... 247,983 8,666 6.99% 201,885 9,116 9.03%
--------- -------- --------- --------
Total interest earning assets ...................... 309,676 9,764 6.31% 265,312 10,939 8.25%
Cash and due from banks .............................. 11,952 9,019
Allowance for loan losses ............................ (2,947) (2,547)
Premises and equipment ............................... 5,539 4,401
Goodwill ............................................. 921 -
Other assets ......................................... 3,022 3,159
--------- ---------
Total assets ....................................... $ 328,163 $ 279,344
========= =========
Liabilities and Shareholders' Equity
Interest bearing deposits
Savings .............................................. $ 46,577 $ 403 1.73% $ 36,526 $ 651 3.56%
Interest bearing transaction accounts ................ 42,158 171 0.81% 23,063 123 1.07%
Time deposits ........................................ 142,278 2,546 3.58% 135,934 4,064 5.98%
--------- -------- --------- --------
Total interest bearing deposits .................... 231,013 3,120 2.70% 195,523 4,838 4.95%
Short term borrowing ................................. 4,603 44 1.91% 7,391 149 4.03%
Other borrowings ..................................... 27,512 706 5.13% 20,295 596 5.87%
--------- -------- --------- --------
Total interest bearing liabilities ................. 263,128 3,870 2.94% 223,209 5,583 5.00%
Noninterest bearing demand deposits .................. 34,344 30,332
Other liabilities .................................... 2,025 1,750
Shareholders' equity ................................. 28,666 24,053
--------- ---------
Total liabilities and shareholders' equity ......... $ 328,163 $ 279,344
========= =========
Interest rate spread ................................. 3.37% 3.25%
Net interest income and net yield on
earning assets .................................. $ 5,894 3.81% $ 5,356 4.04%
========= ==== ========= ====
* Yields are quoted as fully taxable equivalents
10
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 cautions readers that forward
looking statements, including without limitation, those relating to the
Corporation's future business prospects, ability to successfully integrate
recent and proposed acquisitions, revenues, 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 Corporation's reports filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO JUNE
30, 2001
Net Income
For the first half of 2002 CBI earned a consolidated profit of
$2,336,000 compared to $1,831,000 for the first half of 2001, an increase of
27.6% or $505,000. Basic earnings per share were $.71 in the 2002 period
compared to $.57 for the 2001 period. Diluted earnings per share were $.69 in
the 2002 period compared to $.57 for the 2001 period.
For the first half of 2002 Orangeburg National Bank reported a profit
of $1,410,000 compared to $1,222,000 for the first half of 2001, an increase of
15.4% or $188,000.
For the first half of 2002 Sumter National Bank reported a profit of
$630,000 compared to $552,000 for the first half of 2001, an increase of 14.31%
or $78,000.
For the first half of 2002 Florence National Bank reported a profit of
$155,000 compared to $86,000 for the first half of 2001, an increase of 80.2% or
$69,000. The Florence bank began operation in July 1998.
For the first half of 2002 Community Resource Mortgage Inc. reported a
profit of $207,000. The company acquired the mortgage company in November 2001,
so there are no comparative numbers available.
As noted above, consolidated net income for the six months ended June
30, 2002, increased from the prior year by 27.6% or $505,000. The major
components of this increase are discussed below. Net interest income before
provision for loan losses for the six months ended June 30, 2002 increased to
$5,894,000 compared to $5,356,000 for the same period in 2001, an increase of
11
10% or $538,000. For the same period the provision for loan losses was $358,000
compared to $277,000 for the 2001 period, an increase of 29.2% or $81,000.
Non-interest income for the 2002 period increased to $3,437,000 from $1,243,000
for the 2001 period, a 177% or $2,194,000 increase. Non-interest expense
increased to $5,323,000 from $3,489,000, a 52.6% or $1,834,000 increase. The
large percentage increases in noninterest income and expense are mostly
associated with the addition of the mortgage company to the corporate group.
Profitability
Profitability may be measured through the ROA (return on average
assets) and the ROE (return on average equity). Return on assets is the income
for the period divided by the average assets for the period, annualized. Return
on equity is the income for the period divided by the average equity for the
period, annualized. Operating results for the six months ended June 30, 2002 and
2001 yield the results in the table shown below.
Period ended June 30,
2002 2001
---- ----
(dollars in thousands)
Average assets $328,163 $279,344
ROA 1.42% 1.31%
Average equity $28,666 $24,053
ROE 16.30% 15.22%
Net income $2,336 $1,831
Net interest income
Net interest income, the major component of CBI's 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. During the first
six months of 2002 net interest income after provision for loan losses increased
to $5,536,000 from $5,079,00, a 9% or $457,000 increase over the first six
months of 2001. This improvement was mostly the result of a $44 million increase
in the average volume of earning assets. The average yield on earning assets
decreased to 6.31% for the 2002 period from 8.25% for the 2001 period. This
decline in yield was the result of market interest rate declines. When 2001
began the prime lending rate was 9.5%, by year end 2001 it was at 4.75% where it
has remained through the middle of 2002.
For the first six months of 2002 the cost of funds averaged 2.94%,
decreased from 5.00% for the first six months of 2001. The effect of these
changes was a net interest spread (yield on earning assets less cost of interest
bearing liabilities) of 3.37% for the first six months of 2002, increased from
3.25% during the first six months of 2001. CBI's net interest margin (net
interest income divided by total earning assets) was 3.81% for the first six
months of 2002 compared to 4.04% for the first six months of 2001.
Interest Income
Elsewhere in this report is a table comparing the average balances,
yields, and rates for the interest rate sensitive segments of the Corporation's
balance sheets for the six months ended June 30, 2002 and 2001. A discussion of
that table follows.
12
Total interest income for the first six months of 2002 was $9,764,000
compared with $10,939,000 for the same period in 2001, a 10.7% or $1,175,000
decrease. The yield on average earning assets for the 2002 period was 6.31%,
decreased from 8.25% for the 2001 period. Total average interest earning assets
for the 2002 period were $309,676,000 compared to $265,312,000 for the 2001
period, an increase of 16.7% or $44,364,000.
The loan portfolio earned $8,666,000 for the first six months of 2002
compared to $9,116,000 for the same period of 2001, a 4.9% or $450,000 decrease.
The yield decreased to 6.99% for the 2002 period from 9.03% for the 2001 period.
The average size of the loan portfolio was $247,983,000 for the 2002 period
compared to $201,885,000 for the 2001 period, an increase of 22.8% or
$46,098,000.
The taxable investment portfolio earned $916,000 for the first six
months in 2002 compared to $1,250,000 for the same period in 2001, a 26.7% or
$334,000 decrease. The yield decreased to 4.55% in the 2002 period from 6.35% in
the 2001 period. The average size of the portfolio was $40,229,000 in the 2002
period compared to $39,370,000 in the 2001 period, an increase of 2.2% or
$859,000.
The tax-exempt investment portfolio earned $5,000 for the first six
months in 2002 compared to $13,000 for the same period in 2001, a 61.5% or
$8,000 decrease. The yield (on a taxable equivalent basis) on the portfolio was
5.63%, an increase from 5.4%. The average size of the portfolio was $269,000 for
the 2002 period compared to $730,000 in the 2001 period, a decrease of 63.2% or
$461,000.
Interest bearing deposits in other banks contributed $10,000 for the
first six months of 2002 compared to $106,000 during the prior year, a decrease
of 90.6% or $96,000. The yield on these deposits decreased to 1.53% for the 2002
period from 4.79% in the 2001 period. CBI averaged $1,311,000 in interest
bearing balances in the first six months of 2002 compared to $4,427,000 the
first six months of the prior year, a decrease of 70.4% or $3,116,000.
Federal funds sold earned $167,000 the first six months of 2002
compared to $454,000 the prior year, a decrease of 63.2% or $287,000. Yields
decreased to 1.68% for the first six months in 2002 from 4.80% for the first six
months in 2001. For the first six months of 2002 CBI increased its average
volume in federal funds sold to $19,884,000 compared to $18,900,000 for the
first six months of 2001, a 5.2% or $984,000 increase.
Interest Expense
Interest expense for the first six months of 2002 was $3,870,000
compared to the prior year's $5,583,000, a 30.7% or $1,713,000 decrease. The
volume of interest bearing liabilities was $263,128,000 for the first six months
in 2002 compared to $223,209,000 for the first six months of 2001, a 17.9% or
$39,919,000 increase. The average rate paid for interest-bearing liabilities
during the 2002 period was 2.94%, decreased from 5.00% for the 2001 period.
The cost of savings accounts was $403,000 in the first six months in
2002 compared to $651,000 in the first six months of 2001, a 38.1% or $248,000
decrease. Average savings deposit balances were $46,577,000 for the first six
months in 2002 compared to $36,526,000 for the first six months of 2001, an
increase of 27.5% or $10,051,000. The average rate paid on these funds decreased
to 1.73% from 3.56%.
13
Interest bearing transaction accounts cost $171,000 for the first six
months in 2002 compared to the prior year's $123,000, an increase of 39% or
$48,000. The volume of these deposits was $42,158,000 for the first six months
in 2002 compared to $23,063,000 for the first six months of 2001, an 82.8% or
$19,095,000 increase. The average rate paid on these funds for the first six
months in 2002 decreased to .81% from 1.07% for the first six months of 2001.
Most of the increase in volume was due to a local government checking account
balance of about $16 million that was moved from one of the banks on June 28,
2002.
Time deposits cost $2,546,000 for the first six months of 2002 compared
to $4,064,000 for the first six months of the prior year, a decrease of 37.4% or
$1,518,000. The volume was $142,278,000 for the first six months in 2002
compared to $135,934,000 for the first six months of 2001, a 4.7% or $6,344,000
increase. The average rate paid on these funds decreased to 3.58% for the first
six months in 2002 from 5.98% for the first six months in 2001.
Short-term borrowings consist of federal funds purchased and securities
sold under agreements to repurchase. This is a relatively small and volatile
part of the balance sheet. It cost $44,000 for the first six months in 2002
compared to $149,000 for the first six months of 2001, a decrease of 70.5% or
$105,000. The volume of these funds was $4,603,000 in the first six months of
2002 compared to $7,391,000 in the first six months of 2001, a decrease of 37.7%
or $2,788,000. The average rate paid on these funds decreased to 1.91% from
4.03%.
Other borrowings consist of advances from the Federal Home Loan Bank
and warehouse lines of credit for the mortgage company. They cost $706,000 for
the first six months in 2002 compared to $596,000 for the first six months in
2001, an increase of 18.5% or $110,000. The borrowings averaged $27,512,000
during the 2002 period compared to $20,295,000 for the prior year period, a
35.6% or $7,217,000 increase. The average rate paid on these funds decreased to
5.13% from 5.87%. Virtually all of this increase in volume is associated with
the warehouse lines of credit for the mortgage company.
Non-Interest Income
Non-interest income for the first six months of 2002 grew to $3,437,000
compared to $1,243,000 in the first six months of 2001, a 177% or $2,194,000
increase. Of this increase, approximately $1.9 million resulted from the
mortgage company operations.
Non-Interest Expense
For the first six months of 2002 non-interest expenses increased to
$5,323,000 from $3,489,000 for the first six months of 2001, a 52.6% or
$1,834,000 increase. Of this increase, approximately $1.3 million was related to
the mortgage company operations, which accounts for most of the inceases noted
below.
For the 2002 period, personnel costs were $3,383,000 compared to
$2,102,000 for the 2001 period, an increase of 60.9% or $1,281,000;
For the 2002 period, premises and equipment expenses were $605,000
compared to $471,000 for the 2001 period, an increase of 28.5% or $134,000; and
14
For the 2002 period, other costs were $1,335,000 compared to $916,000
for the 2001 period, an increase of 45.7% or $419,000.
Income Taxes
CBI provided $1,314,000 for federal and state income taxes during the
first six months of 2002 compared to $1,002,000 for the same period in 2001, a
31.1% or $312,000 increase. The average tax rate for the 2002 period was
approximately 36% and for the 2001 period it was approximately 35.4%.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001
Net Income
For the quarter ended June 30, 2002, CBI earned a consolidated profit
of $1,211,000, compared to $930,000 for the comparable period of 2001, an
increase of 30.2% or $281,000. Basic earnings per share were $.37 in the 2002
period, compared to $.29 for the 2001 period. The changes in the items
comprising net interest 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, 2002.
Net interest income
Net interest income before provision for loan losses for the quarter
ended June 30, 2002, increased to $3,077,000 compared to $2,652,000 for the same
period in 2001, an increase of 16% or $425,000. For the same period the
provision for loan losses was $189,000 compared to $135,000 for the 2001 period,
an increase of 40% or $54,000.
Interest Income
Total interest income for the second quarter 2002 was $4,941,000
compared with $5,389,000 for the same period in 2001, an 8.3% or $448,000
decrease.
The loan portfolio earned $4,342,000 for the second quarter 2002
compared to $4,525,000 for the same period of 2001, a 4% or $183,000 decrease.
The investment portfolio earned $483,000 for the second quarter 2002
compared to $469,000 for the 2001 period, a 3% or $14,000 increase.
Interest bearing deposits in other banks contributed $4,000 for the
second quarter 2002 compared to $78,000 during the prior year, a decrease of
94.9% or $74,000.
Federal funds sold earned $80,000 the second quarter of 2002 compared
to $284,000 the prior year, a decrease of 71.8% or $204,000.
15
Interest expense
Interest expense for the second quarter of 2002 was $1,864,000 compared
to the prior year's $2,737,000, a 31.9% or $873,000 decrease.
Non-interest income and expense
Non-interest income for the 2002 period was $1,750,000 compared to
$692,000 for the 2001 period, a 153% or $1,058,000 increase. Non-interest
expense was $2,745,000 compared to $1,777,000, a 54.5% or $968,000 increase.
Both changes were mostly the result of mortgage company operations.
CHANGES IN FINANCIAL POSITION
Investment portfolio
The investment portfolio is comprised of held to maturity securities
and 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, 2002, the held to maturity
portfolio totaled $500,000, unchanged from December 31, 2001. At June 30, 2002,
the available for sale portfolio totaled $40,450,000 compared to $43,207,000 at
December 31, 2001, a decrease of 6.4% or $2,757,000. The following chart
summarizes the investment portfolios at June 30, 2002, and December 31, 2001.
June 30, 2002
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and agencies ......................... $ 500 $ 492 $38,017 $38,267
Tax exempt securities ................................. - - 194 201
Other equity securities ............................... - - 1,982 1,982
------- ------- ------- -------
Total ................................................. $ 500 $ 492 $40,193 $40,450
======= ======= ======= =======
Unrealized gain (loss) ................................ $ (8) $ 257
======= =======
December 31, 2001
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and agencies ........................... $ 500 $ 500 $40,437 $40,415
Tax exempt securities ................................... - - 802 811
Other equity securities ................................. - - 1,981 1,981
----- ------- ------- -------
Total ................................................... $ 500 $ 500 $43,220 $43,207
===== ======= ======= =======
Unrealized (loss) ....................................... $ - $ (13)
===== =======
16
Loan portfolio
The loan portfolio is primarily consumer and small business oriented.
At June 30, 2002 the loan portfolio was $244,993,000 compared to $229,905,000 at
December 31, 2001, a 6.6% or $15,088,000 increase. The following chart
summarizes the loan portfolio at June 30, 2002 and December 31, 2001.
Jun. 30, 2002 Dec. 31, 2001
------------- -------------
(dollars in thousands)
Real estate ......................... $153,261 $146,559
Commercial .......................... 64,753 56,515
Loans to individuals ................ 26,979 26,831
-------- --------
Total ............................... $244,993 $229,905
======== ========
Past Due and Non-Performing Assets and the Allowance for Loan Losses
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, 2002 and December 31, 2001.
Jun. 30, 2002 Dec. 31, 2001
------------- -------------
(dollars in thousands)
Past due 90 days + accruing loans .......... $266 $ 17
Non-accrual loans .......................... $824 $281
Impaired loans (included in nonaccrual) .... $824 $238
Other real estate owned .................... $ - $267
Management considers the past due and non-accrual amounts at June 30,
2002 to be reasonable in relation to the size of the portfolio and manageable in
the normal course of business. The increase in non-accrual assets is associated
with a small number of loans and is not indicative, in the opinion of
management, of any trend.
CBI had no restructured loans during any of the above listed periods.
Allowance for Loan Losses
The Corporation operates three independent community banks in central
South Carolina. Under the provisions of the National Bank Act each board of
directors is responsible for determining the adequacy of its Bank's loan loss
allowance. In addition, each Bank is supervised and regularly examined by the
Office of the Comptroller of the Currency of the U. S. Treasury Department. As a
normal part of a safety and soundness examination, the OCC examiners will assess
and comment on the adequacy of a national bank's allowance for loan losses. The
allowance presented in this discussion is on an aggregated basis.
17
The nature of community banking is such that the loan portfolios will
be predominantly comprised of small and medium size business and consumer loans.
As community banks, there is a natural geographic concentration of loans within
the Banks' respective cities or counties. Management at each Bank monitors the
loan concentrations and loan portfolio quality on an ongoing basis including,
but not limited to: quarterly analysis of loan concentrations, monthly reporting
of past dues, non-accruals, and watch loans, and quarterly reporting of loan
charge-offs and recoveries. These efforts focus on historical experience and are
bolstered by quarterly analysis of local and state economic conditions, which is
part of the Banks' assessment of the adequacy of their allowances for loan
losses.
Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and installment loans. However, management
does not believe it would be useful to maintain a separate allowance for each
category. Instead management assigns an estimated risk percentage factor to each
category in the computation of the overall allowance. In general terms, the real
estate loan portfolio is subject to the least risk, followed by the installment
loan portfolio, which in turn is followed by the commercial portfolio. The
Banks' internal and external loan review programs will from time to time
identify loans that are subject to specific weaknesses and such loans will be
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 2002 will at least approximate the
2001 levels as such loans progress through the collection process. Management
believes that the allowance for loan losses, as of June 30, 2002 is sufficient
to absorb the expected charge-offs and provide adequately for 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 historical loan loss rates
are adjusted.
The aggregate allowance for loan losses of the Banks and the aggregate
activity with respect to those allowances are summarized in the following table.
Six months ended Six months ended
June 30, 2002 Dec. 31, 2001 June 30, 2001
------------- ------------- -------------
(dollars in thousands)
Allowance at beginning of period .................................... $ 2,830 $ 2,424 $ 2,424
Provision expense ................................................... 358 678 277
Net charge offs ..................................................... (328) (272) (66)
------- ------- -------
Allowance at end of period .......................................... $ 2,860 $ 2,830 $ 2,635
======= ======= =======
Allowance as a percent of outstanding loans ......................... 1.17% 1.23% 1.27%
In reviewing the adequacy of the allowance for loan losses at the end
of each period, management of each bank considers historical loan loss
experience, current economic conditions, loans outstanding, trends in
non-performing and delinquent loans, and the quality of collateral securing
problem loans. After charging off all known losses, management of each bank
considers the allowance adequate to provide for estimated losses inherent in the
loan portfolio at June 30, 2002.
18
Goodwill
CBI has adopted FASB No. 142, Goodwill and Other Intangible Assets, as
of January 1, 2002. As of June 30, 2002 the balance in goodwill, our only
intangible asset, totaled $921,000, unchanged from December 31, 2001. The
Company will evaluate the goodwill for impairment later in 2002.
The balance in goodwill was acquired in connection with the purchase of
Community Resource Mortgage Inc., which was consummated in November 2001.
Deposits
Deposits were $260,808,000 at June 30, 2002 compared to $255,433,000 at
December 31, 2001, an increase of 2.1% or $5,375,000.
Time deposits greater than $100,000 were $61,677,000 at June 30, 2002
compared to $51,374,000 at December 31, 2001, an increase of 20% or $10,303,000.
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 Orangeburg National Bank, Sumter National Bank, and Florence National
Bank 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.
CBI and its banks maintain an available for sale and a held to maturity
investment portfolio. While all these investment securities are purchased with
the intent to be held to maturity, such securities are marketable and occasional
sales may occur prior to maturity as part of the process of asset/liability and
liquidity management. Such sales will generally be from the available for sale
portfolio. Management deliberately maintains a short-term maturity schedule for
its investments so that there is a continuing stream of maturing investments.
CBI intends to maintain a short-term investment portfolio in order to continue
to be able to supply liquidity to its loan portfolio and for customer
withdrawals.
CBI has substantially more liabilities (mostly deposits, which may be
withdrawn) which mature in the next 12 months than it has assets maturing in the
same period. However, based on its historical experience, and that of similar
financial institutions, CBI believes that it is unlikely that so many deposits
would be withdrawn, without being replaced by other deposits, that CBI would be
unable to meet its liquidity needs with the proceeds of maturing assets.
CBI through its banking subsidiaries also maintains federal funds lines
of credit with correspondent banks, and is able to borrow from the Federal Home
Loan Bank and from the Federal Reserve's discount window.
19
CBI through its banking subsidiaries has a demonstrated ability to
attract deposits from its markets. Deposits have grown from $30 million in 1989
to over $260 million in 2002. This base of deposits is the major source of
operating liquidity.
CBI's long term liquidity needs are expected to be primarily affected
by the maturing of long-term certificates of deposit. At June 30, 2002 CBI had
approximately $25.7 million and $11.5 million in certificates of deposit and
other interest bearing liabilities maturing in one to five years and over five
years, respectively. CBI's assets maturing or repricing in the same periods were
$138.1 million and $28.2 million, respectively. CBI expects to be able to manage
its current balance sheet structure without experiencing any material liquidity
problems.
In the opinion of management, CBI's current and projected liquidity
position is adequate.
Capital resources
As summarized in the table below, CBI maintains a strong capital
position.
Minimum required
for capital
Jun. 30, 2002 Dec. 31, 2001 adequacy
------------- ------------- --------
Tier 1 capital to average total assets ............................................ 8.50% 8.20% 4.00%
Tier 1 capital to risk weighted assets ............................................ 11.49% 11.10% 4.00%
Total capital to risk weighted assets ............................................. 12.63% 12.30% 6.00%
In the opinion of management, the Corporation's current and projected
capital positions meet all applicable requirements and are adequate.
Dividends
CBI declared and paid a quarterly cash dividend of eight cents per
share during both the first and second quarters of 2002. The total cost of these
dividends was $529,000.
Subsequent events
In late November 2001 CBI entered into an agreement to acquire by
merger Ridgeway Bancshares Inc., the holding company for the Bank of Ridgeway.
The agreement provided for CBI to issue 1,000,000 shares of its stock and
$4,000,000 cash in exchange for 100% of the stock of Ridgeway. The transaction
required approval by two-thirds of the shareholders of both companies, as well
as various regulators. Shareholder meetings for both companies were held in
April 2002 and the shareholders of both companies approved the transaction. This
transaction was consummated on July 1, 2002. A Form 8-K was filed on July 15,
2002 to describe this transaction.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Corporation'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 the
Corporation 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 the risk that could potentially have the
largest material effect on the Corporation'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.
Achieving consistent growth in net interest income is the primary goal
of the Corporation's asset/liability function. The Corporation attempts to
control the mix and maturities of assets and liabilities to achieve consistent
growth in net interest income despite changes in market interest rates. The
Corporation seeks to accomplish this goal while maintaining adequate liquidity
and capital. Management believes that the Corporation's asset/liability mix is
sufficiently balanced so that the effect of interest rates moving in either
direction is not expected to be significant over time.
The Corporation's Asset/Liability Committee uses a simulation model to
assist in achieving consistent growth in net interest income while managing
interest rate risk. The model takes into account interest rate changes as well
as changes in the mix and volume of assets and liabilities. The model simulates
the Corporation's balance sheet and income statement under several different
rate scenarios. The model's inputs (such as interest rates and levels of loans
and deposits) are updated on a quarterly basis in order to obtain the most
accurate projection possible. The projection presents information over a
twelve-month period. It reports a base case in which interest rates remain flat
and reports variations that occur when rates increase and decrease 100 and 200
basis points. According to the model as of June 30, 2002 the Corporation is
positioned so that net interest income would be expected to increase $210,000
and net income would be expected to increase $129,000 in the next twelve months
if interest rates rise 100 basis points. Conversely, net interest income would
be expected to decline $210,000 and net income would be expected to decline
$129,000 in the next twelve months if interest rates decline 100 basis points.
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 the
Corporation could undertake in response to changes in interest rates. In
addition, market interest rates are at long term lows and the probability of a
rate decrease is relatively small.
As of June 30, 2002 there was no significant change from the interest
rate sensitivity analysis for the various changes in interest rates calculated
as of December 31, 2001. The foregoing disclosures related to the market risk of
the Corporation should be read in connection with Management's Discussion and
Analysis of Financial Position and Results of Operations included in the 2001
Annual Report on Form 10-K.
21
Part II--Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
CBI held a Special Shareholders Meeting on April 8, 2002 to approve the
agreement and plan of merger dated as of November 20, 2001 by and between
Ridgeway Bancshares Inc. and Community Bankshares Inc.
The vote tally was as follows:
Total number Voting
of shares against or to Present at
eligible to withhold meeting and
vote Voting for authority Abstaining not voting
---- ---------- --------- ---------- ----------
Merger with Ridgeway 3,299,281 2,550,233 47,360 0 0
Bancshares
CBI was required to obtain approval of two-thirds of its outstanding shares in
order to complete the transaction. Total shares voting in favor were 77.3%. The
shareholders of Ridgeway Bancshares Inc. also approved the transaction, and the
transaction was consummated on July 1, 2002.
CBI held an Annual Meeting of Shareholders on May 8, 2002.
The following persons were elected to the Board for terms of three years:
Martha Rose C. Carson, J. M. Guthrie, A. Wade Douroux, Phil P. Leventis, W.
Reynolds Williams, Michael A. Wolfe.
The other item approved was the ratification of J. W. Hunt and Co., Certified
Public Accountants, as outside auditors for CBI for the year ended December 31,
2002.
The vote tally was as follows:
Total number Voting
of shares against or to Present at
eligible to withhold meeting and
vote Voting for authority Abstaining not voting
---- ---------- --------- ---------- ----------
Election of directors
Martha Rose C. Carson 3,299,281 2,284,286 33,541 0 0
J. M. Guthrie 3,299,281 2,279,555 38,272 0 0
A. Wade Douroux 3,299,281 2,313,124 4,703 0 0
Phil P. Leventis 3,299,281 2,311,164 6,653 0 0
Wm. Reynolds Williams 3,299,281 2,314,064 3,763 0 0
Michael A. Wolfe 3,299,281 2,312,709 5,118 0 0
Ratification of J. W. Hunt 3,299,281 2,301,929 15,370 528 0
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No.(from item Description 601 of S-K) None.
b) Reports on Form 8-K. CBI filed a Form 8-K on July 15, 2002 to announce the
consummation of its merger with Ridgeway Bancshares Inc.
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, 2002
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)
23