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UNITED STATES 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 Commission File No.
September 30, 2004 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 No.)
incorporation or organization)
791 Broughton Street
Orangeburg, South Carolina 29115
- --------------------------------------------------------------------------------
(Address of principal executive offices, 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 Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: common stock, no par
or stated value, 4,385,744 shares outstanding on November 3, 2004.
COMMUNITY BANKSHARES, INC.
FORM 10-Q
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet .................................... 3
Consolidated Statement of Income............................... 4
Consolidated Statement of Changes in Shareholders' Equity ..... 5
Consolidated Statement of Cash Flows .......................... 6
Notes to Unaudited Consolidated Financial Statements .......... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 17
Item 4. Controls and Procedures ....................................... 18
PART II - OTHER INFORMATION
Item 6. Exhibits ...................................................... 18
SIGNATURES ................................................................. 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
2004 2003
---- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................. $ 12,609 $ 16,554
Federal funds sold ...................................................................... 14,921 25,321
--------- ---------
Total cash and cash equivalents .................................................. 27,530 41,875
Interest bearing deposits with other banks .............................................. 874 1,124
Securities available-for-sale ........................................................... 48,361 64,864
Securities held-to-maturity (estimated fair value $1,959 for 2004
and $2,155 for 2003) ............................................................... 2,000 2,000
Other investments ....................................................................... 2,040 2,038
Loans held for sale ..................................................................... 11,287 8,411
Loans receivable ........................................................................ 382,958 332,106
Less, allowance for loan losses ..................................................... (5,769) (4,206)
--------- ---------
Net loans ........................................................................ 377,189 327,900
Premises and equipment - net ............................................................ 7,397 6,915
Accrued interest receivable ............................................................. 2,214 2,186
Net deferred income tax assets .......................................................... 793 805
Intangible assets ....................................................................... 7,466 7,650
Prepaid expenses and other assets ....................................................... 1,262 812
--------- ---------
Total assets ..................................................................... $ 488,413 $ 466,580
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................. $ 60,660 $ 59,337
Interest bearing .................................................................... 332,907 319,367
--------- ---------
Total deposits ................................................................... 393,567 378,704
Short-term borrowings ................................................................... 12,295 17,960
Long-term debt .......................................................................... 30,576 20,140
Accrued interest payable ................................................................ 742 585
Accrued expenses and other liabilities .................................................. 717 1,121
--------- ---------
Total liabilities ................................................................ 437,897 418,510
--------- ---------
Shareholders' equity
Common stock - no par value; 12,000,000 shares authorized; issued and
outstanding - 4,364,362 for 2004 and 4,331,460 for 2003 ............................. 29,786 29,402
Retained earnings ....................................................................... 20,650 18,610
Accumulated other comprehensive income (loss) ........................................... 80 58
--------- ---------
Total shareholders' equity ....................................................... 50,516 48,070
--------- ---------
Total liabilities and shareholders' equity ....................................... $ 488,413 $ 466,580
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY BANKSHARES, INC.
Consolidated Statement of Income
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest and dividend income
Loans, including fees .................................... $ 5,756 $ 5,698 $ 16,536 $ 16,789
Interest bearing deposits with other banks ............... 4 5 12 14
Debt securities .......................................... 434 365 1,339 1,210
Dividends ................................................ 19 18 57 58
Federal funds sold ....................................... 40 69 145 218
-------- -------- -------- --------
Total interest and dividend income ................... 6,253 6,155 18,089 18,289
-------- -------- -------- --------
Interest expense
Time deposits $100M and over ............................. 360 382 996 1,221
Other deposits ........................................... 958 993 2,772 3,191
-------- -------- -------- --------
Total deposits ....................................... 1,318 1,375 3,768 4,412
Short-term borrowings .................................... 76 28 245 103
Long-term debt ........................................... 363 491 1,046 1,340
-------- -------- -------- --------
Total interest expense ............................... 1,757 1,894 5,059 5,855
-------- -------- -------- --------
Net interest income ........................................... 4,496 4,261 13,030 12,434
Provision for loan losses ..................................... 1,648 232 2,139 775
-------- -------- -------- --------
Net interest income after provision ........................... 2,848 4,029 10,891 11,659
-------- -------- -------- --------
Noninterest income
Service charges on deposit accounts ...................... 841 893 2,508 2,514
Securities gains (losses) ................................ 10 - 5 (252)
Mortgage brokerage income ................................ 835 1,428 2,487 4,253
Other .................................................... 163 202 626 639
-------- -------- -------- --------
Total noninterest income ............................. 1,849 2,523 5,626 7,154
-------- -------- -------- --------
Noninterest expenses
Salaries and employee benefits ........................... 2,123 2,461 6,459 7,492
Premises and equipment ................................... 508 464 1,471 1,270
Other .................................................... 1,195 1,184 3,403 3,300
-------- -------- -------- --------
Total noninterest expenses ........................... 3,826 4,109 11,333 12,062
-------- -------- -------- --------
Income before income taxes .................................... 871 2,443 5,184 6,751
Income tax expense ............................................ 306 871 1,839 2,413
-------- -------- -------- --------
Net income .................................................... $ 565 $ 1,572 $ 3,345 $ 4,338
======== ======== ======== ========
Per share
Net income ............................................... $ 0.13 $ 0.36 $ 0.77 $ 1.01
Net income, assuming dilution ............................ 0.12 0.35 0.74 0.98
Cash dividends declared .................................. 0.10 0.09 0.30 0.27
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY BANKSHARES, INC.
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Common Stock Accumulated
------------ Other
Number of Retained Comprehensive
Shares Amount Earnings Income (Loss) Total
------ ------ -------- ------------- -----
(Dollars in thousands, except per share)
Balance, January 1, 2003 .................................. 4,304,384 $ 29,090 $ 14,529 $ 98 $ 43,717
---------
Comprehensive income:
Net income ............................................ - - 4,338 - 4,338
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $136 ...... - - - (242) (242)
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $90 ...... - - - 162 162
---------
Total other comprehensive income .................. - - - - (80)
---------
Total comprehensive income ...................... - - - - 4,258
---------
Exercise of employee stock options ........................ 14,009 160 - - 160
Cash dividends declared, $.27 per share ................... - - (1,163) - (1,163)
--------- --------- --------- --------- ---------
Balance, September 30, 2003 ............................... 4,318,393 $ 29,250 $ 17,704 $ 18 $ 46,972
========= ========= ========= ========= =========
Balance, January 1, 2004 .................................. 4,331,460 $ 29,402 $ 18,610 $ 58 $ 48,070
---------
Comprehensive income:
Net income ............................................ - - 3,345 - 3,345
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $14 ....... - - - 25 25
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $2 ....... - - - (3) (3)
---------
Total other comprehensive income (loss) ........... - - - - 22
---------
Total comprehensive income ...................... - - - - 3,367
---------
Exercise of employee stock options ........................ 32,902 384 - - 384
Cash dividends declared, $.30 per share ................... - - (1,305) - (1,305)
--------- --------- --------- --------- ---------
Balance, September 30, 2004 ............................... 4,364,362 $ 29,786 $ 20,650 $ 80 $ 50,516
========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY BANKSHARES, INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2004 2003
---- ----
(Dollars in thousands)
Operating activities
Net income .................................................................................. $ 3,345 $ 4,338
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization ........................................................ 676 550
Amortization of intangibles .......................................................... 184 184
Net amortization of securities ....................................................... 134 620
Provision for loan losses ............................................................ 2,139 775
Net realized losses or (gains) on sales of securities ................................ (5) (73)
Net realized losses on other dispositions of securities available-for-sale ........... - 325
Net loss realized on disposition of equipment ........................................ - 5
Net gain realized on sale of other real estate ....................................... (9) (9)
Proceeds of sales of loans held for sale ............................................. 137,427 250,564
Originations of loans held for sale .................................................. (140,303) (247,883)
(Increase) decrease in accrued interest receivable ................................... (28) 74
(Increase) in other assets ........................................................... (490) (387)
Increase in accrued interest payable ................................................. 157 7
(Decrease) increase in other liabilities ............................................. (404) 867
--------- ---------
Net cash provided by operating activities ........................................ 2,823 9,957
--------- ---------
Investing activities
Net decrease (increase) in interest bearing deposits with other banks ....................... 250 (860)
Purchases of available-for-sale securities .................................................. (24,671) (54,973)
Maturities, calls and paydowns of available-for-sale securities ............................. 29,466 49,817
Proceeds of sales of available-for-sale securities .......................................... 11,613 2,895
Purchases of other investments .............................................................. (2) -
Net increase in loans made to customers ..................................................... (51,515) (18,179)
Purchases of premises and equipment ......................................................... (1,158) (1,288)
Proceeds from sales of other real estate .................................................... 136 123
--------- ---------
Net cash used by investing activities ............................................ (35,881) (22,465)
--------- ---------
Financing activities
Net increase in deposits .................................................................... 14,863 18,471
Net (decrease) increase in short-term borrowings ............................................ (5,665) 636
Proceeds from issuing long-term debt ........................................................ 10,506 -
Repayments of long-term debt ................................................................ (70) (70)
Exercise of employee stock options .......................................................... 384 160
Cash dividends paid ......................................................................... (1,305) (1,163)
--------- ---------
Net cash provided by financing activities ........................................ 18,713 18,034
--------- ---------
(Decrease) increase in cash and cash equivalents ................................................. (14,345) 5,526
Cash and cash equivalents, beginning of period ................................................... 41,875 38,569
--------- ---------
Cash and cash equivalents, end of period ......................................................... $ 27,530 $ 44,095
========= =========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest .................................................................. $ 4,902 $ 5,848
========= =========
Cash payments for income taxes .............................................................. $ 2,438 $ 2,120
========= =========
Supplemental Disclosures of Non-cash Investing Activities
Transfers of loans receivable to other real estate .......................................... $ 87 $ 353
========= =========
See accompanying notes to unaudited consolidated financial statements.
6
COMMUNITY BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements
Accounting Principles - A summary of significant accounting policies is included
in Community Bankshares, Inc.'s (the "Company" or "CBI") Annual Report for the
year ended December 31, 2003 on Form 10-K filed with the Securities and Exchange
Commission. Certain amounts in the 2003 financial statements have been
reclassified to conform to the current period presentation. Such
reclassifications had no effect on previously reported shareholders' equity or
net income.
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 2003 Annual Report on Form 10-K.
Nonperforming Loans - As of September 30, 2004, there were $2,826,000 in
nonaccrual loans and $557,000 in loans 90 or more days past due and still
accruing interest.
Earnings Per Share - Basic earnings per share is computed by dividing net income
applicable to common shares by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing applicable net
income by the weighted average number of shares outstanding and any dilutive
potential common shares and dilutive stock options. It is assumed that all
dilutive stock options are exercised at the beginning of each period and that
the proceeds are used to purchase shares of the Company's common stock at the
average market price during the period. Net income per share and net income per
share, assuming dilution, were computed as follows:
(Unaudited)
Period Ended September 30,
Three Months Nine Months
------------ -----------
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ............................... $ 565 $ 1,572 $ 3,345 $ 4,338
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 4,363,582 4,315,482 4,348,798 4,309,673
========== ========== ========== ==========
Net income per share, basic ...................... $ .13 $ .36 $ .77 $ 1.01
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ............................... $ 565 $ 1,572 $ 3,345 $ 4,338
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 4,363,582 4,315,482 4,348,798 4,309,673
Effect of dilutive stock options ..................... 298,929 113,966 185,142 113,966
---------- ---------- ---------- ----------
Total shares ............................ 4,662,511 4,429,448 4,533,940 4,423,639
========== ========== ========== ==========
Net income per share, assuming dilution .......... $ .12 $ .35 $ .74 $ .98
========== ========== ========== ==========
Stock-Based Compensation - The Company has elected to continue using the
methodology of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," to account for compensation expenses
related to stock-based compensation. Options issued under the Company's plans
have no intrinsic value at the grant date and no compensation cost is recognized
for them in accordance with APB No. 25. Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"
as amended by SFAS 148, requires entities to provide proforma disclosures of net
7
income, and earnings per share, as if the fair value based method of accounting
promulgated by that standard had been applied. While the Company has adopted the
disclosure provisions of SFAS No. 123, as amended, there are no current
intentions to adopt the fair value recognition provisions of that Statement. Had
compensation cost of the Company's stock options been determined based on the
fair value as of the grant date for awards under the plans consistent with the
method prescribed by SFAS No. 123, the Company's net income and earnings per
share would have been adjusted to the pro forma amounts indicated below:
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income, as reported ...................................... $ 565 $ 1,572 $ 3,345 $ 4,338
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of any related tax effects .......................... 214 - 642 -
------- --------- --------- ---------
Pro forma net income ......................................... $ 351 $ 1,572 $ 2,703 $ 4,338
======= ========= ========= =========
Net income per share, basic
As reported ............................................. $ 0.13 $ 0.36 $ 0.77 $ 1.01
Pro forma ............................................... 0.08 0.36 0.62 1.01
Net income per share, assuming dilution
As reported ............................................. $ 0.12 $ 0.35 $ 0.74 $ 0.98
Pro forma ............................................... 0.08 0.35 0.60 0.98
Variable Interest Entity - On March 8, 2004, CBI sponsored the creation of a
Variable Interest Entity ("VIE"), SCB Capital Trust I (the "Trust"), and is the
sole owner of the common securities issued by the Trust. On March 10, 2004, the
Trust issued $10,000,000 in floating rate capital securities. The proceeds of
this issuance, and the amount of CBI's capital investment, were used to acquire
$10,310,000 principal amount of CBI's floating rate junior subordinated
deferrable interest debt securities ("Debentures") due April 7, 2034, which
securities, and the accrued interest thereon, now constitute the Trust's sole
assets. The interest rate associated with the debt securities, and the
distribution rate on the common securities of the Trust, was established
initially at 3.91% and is adjustable quarterly at 3 month LIBOR plus 280 basis
points. The index rate (LIBOR) may not be lower than 1.11%. CBI may defer
interest payments on the Debentures for up to twenty consecutive quarters, but
not beyond the stated maturity date of the Debentures. In the event that such
interest payments are deferred by CBI, the Trust may defer distributions on the
common securities. In such an event, CBI would be restricted in its ability to
pay dividends on its common stock and to perform under other obligations that
are not senior to the junior subordinated Debentures.
The Debentures are redeemable at par at the option of CBI, in whole or
in part, on any interest payment date on or after April 7, 2009. Prior to that
date, the Debentures are redeemable at 105% of par upon the occurrence of
certain events that would have a negative effect on the Trust or that would
cause it to be required to be registered as an investment company under the
Investment Company Act of 1940 or that would cause trust preferred securities
not to be eligible to be treated as Tier 1 capital by the Federal Reserve Board.
Upon repayment or redemption of the Debentures, the Trust will use the proceeds
of the transaction to redeem an equivalent amount of trust preferred securities
and trust common securities. The Trust's obligations under the trust preferred
securities are unconditionally guaranteed by CBI.
FASB Interpretation 46 (FIN 46), "Consolidation of Variable Interest
Entities," was issued by the Financial Accounting Standards Board (FASB) in
January 2003. FIN 46 requires the primary beneficiary of a variable interest
entity's activities to consolidate the VIE. FIN 46 defines a VIE as an entity in
which the equity investors do not have substantive voting rights and there is
not sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. The primary beneficiary is the party
that absorbs a majority of the expected losses and/or receives a majority of the
expected residual returns of the VIE's activities. In December 2003, the FASB
issued FIN 46(R), which supersedes and amends certain provisions of FIN 46. FIN
46(R) retains many of the concepts and provisions of FIN 46, provides additional
guidance related to the application of FIN 46, provides for certain additional
scope exceptions, and incorporates several FASB Staff Positions issued related
8
to the application of FIN 46. The provisions of FIN 46 are immediately
applicable to VIEs created, or interests in VIEs obtained, after January 31,
2003 and the provisions of FIN 46(R) are required to be applied to such
entities, except for special purpose entities, by the end of the first reporting
period ending after March 15, 2004 (March 31, 2004 for CBI).
Since CBI is not the primary beneficiary of the VIE as defined by FIN
46 and FIN 46(R), the activities of this VIE have not been consolidated into the
consolidated financial statements of CBI. CBI's investment in the VIE is carried
in the consolidated balance sheet in other assets and the Debentures are
included in long-term debt.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS
Statements included in this report 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. Forward-looking statements include statements
other than statements of historical facts concerning plans, objectives, goals,
strategies, future events or performance and underlying assumptions. Such
forward-looking statements may be identified, without limitation, by the use of
the words "anticipates," "believes," "estimates," "expects," "intends," "plans,"
"predicts," "projects," and similar expressions. The Company's expectations,
beliefs, estimates and projections are expressed in good faith and are believed
by the Company to have a reasonable basis, including without limitation,
management's examination of historical operating trends, data contained in the
Company's records and other data available from third parties, but there can be
no assurance that management's expectations, beliefs, estimates or projections
will result or be achieved or accomplished. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's recent and continuing expansion, its future business prospects,
revenues, working capital, liquidity, capital needs, interest costs, income, and
adequacy of the allowance for loan losses, are subject to 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 Company's reports filed with the Securities and Exchange
Commission. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
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 2003 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 four 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 2003 for a detailed description of CBI's
estimation process and methodology related to the allowance for loan losses.
9
RESULTS OF OPERATIONS
Earnings Performance
Operating results for both the third quarter and the first nine-months
of 2004 were adversely affected by additional provision for loan losses
resulting from the identification of certain problem loans at one of the banking
subsidiaries and by a marked decrease in mortgage loan origination activity.
The problem loans were originated by a former lending officer and
totaled $5,121,000 as of September 30, 2004. Based on currently available
information, management determined at the end of the 2004 third quarter that the
amount of the allowance for loan losses should include an allocation of
$1,300,000 for those loans. That allocation was effected by charging the
provision for loan losses. Of these loans, $1,024,000 to one borrower is
currently in workout status, with management and the borrower cooperating to
achieve the orderly repayment of the debt. Management has engaged legal counsel
and is vigorously pursuing collection of the remaining loans. As collection
efforts progress and additional information becomes available, further
provisions for loan losses may be required. Management anticipates any further
required provision expense will be recognized in the near future. For additional
information, refer to the section "Provision and Allowance for Loan Losses,
Non-performing and Potential Problem Loans" contained elsewhere in this
discussion.
Because of recent increases in residential mortgage interest rates,
mortgage origination and refinancing activity decreased significantly from the
unprecedented industry-wide levels experienced in the previous year. As a
result, income from mortgage brokerage activities decreased by $593,000, or
41.5%, for the third quarter of 2004 and by $1,766,000, or 41.5%, for the first
nine months of 2004, each compared with the same period of 2003. These effects
were partially offset by decreases in interest expense on borrowings, commission
based salaries and employee benefits, and other expenses related to the
origination of residential mortgage loans.
Three Months Ended September 30, 2004 and 2003
For the quarter ended September 30, 2004, CBI earned consolidated net
income of $565,000, compared with $1,572,000 for the comparable period of 2003,
a decrease of $1,007,000, or 64.1%. Basic earnings per share was $.13 in the
2004 quarter compared with $.36 for the 2003 quarter. Diluted earnings per share
was $.12 for the 2004 quarter compared with $.35 for the 2003 quarter. The
changes in the items comprising net income resulted from essentially the same
factors discussed below regarding the results of operations for the nine months
ended September 30, 2004.
Summary Income Statement
------------------------
(Dollars in thousands)
For the Three Months Ended September 30, 2004 2003 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .................................... $ 6,253 $ 6,155 $ 98 1.6%
Interest expense ................................... 1,757 1,894 (137) -7.2%
------- ------- ------
Net interest income ................................ 4,496 4,261 235 5.5%
Provision for loan losses .......................... 1,648 232 1,416 610.3%
Noninterest income ................................. 1,849 2,523 (674) -26.7%
Noninterest expenses ............................... 3,826 4,109 (283) -6.9%
Income tax expense ................................. 306 871 (565) -64.9%
------- ------- ------
Net income ......................................... $ 565 $ 1,572 $(1,007) -64.1%
======= ======= ======
Nine Months Ended September 30, 2004 and 2003
CBI's consolidated net income for the nine months ended September 30,
2004 was $3,345,000, down 22.9% from $4,338,000 for the comparable 2003 period.
Basic earnings per share for the 2004 period was $.77, down from $1.01 per share
in 2003. Diluted earnings per share was $.74 for the 2004 period, down from $.98
for 2003.
10
Summary Income Statement
------------------------
(Dollars in thousands)
For the Nine Months Ended September 30, 2004 2003 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .................................... $18,089 $18,289 $ (200) -1.1%
Interest expense ................................... 5,059 5,855 (796) -13.6%
------- ------- ------
Net interest income ................................ 13,030 12,434 596 4.8%
Provision for loan losses .......................... 2,139 775 1,364 176.0%
Noninterest income ................................. 5,626 7,154 (1,528) -21.4%
Noninterest expenses ............................... 11,333 12,062 (729) -6.0%
Income tax expense ................................. 1,839 2,413 (574) -23.8%
------- ------- ------
Net income ......................................... $ 3,345 $ 4,338 $ (993) -22.9%
======= ======= ======
CBI increased net interest income by reallocating resources into loans
and investments and decreasing average amounts of short-term borrowings related
to mortgage brokerage activities. Also, rates paid on deposits and other funding
sources were lower in 2004 as compared with 2003.
Net Interest Income
Net interest income is the amount of interest income earned on interest
earning assets (loans, securities, interest bearing deposits in other banks, and
federal funds sold), less the interest expense incurred on interest bearing
liabilities (interest bearing deposits and other borrowings), and is the
principal source of CBI's earnings. Net interest income is affected by the level
of interest rates, volume and mix of interest earning assets and interest
bearing liabilities and the relative funding of these assets.
Net interest income increased by $235,000, or 5.5%, in the 2004 third
quarter compared with the same 2003 quarter. This occurred primarily as a result
of lower interest expenses. CBI had a reduced need for short-term funding during
the 2004 period resulting from lower demand for refinancing of residential
mortgage loans and the increased use of long-term debt that CBI obtained through
the issuance of trust-preferred securities during the first quarter of 2004.
Interest income for the 2004 three month period was slightly higher than in the
same prior year period primarily because loans, other than residential mortgage
loans held for sale, increased $28,186,000 during the 2004 third quarter.
During the 2004 nine month period, net interest income increased by
$596,000, or 4.8%, over the same period of 2003. This resulted primarily from a
decrease in interest expense of $796,000 in the 2004 period. Interest income
decreased by $200,000 during the 2004 period, as well.
Total average interest bearing liabilities for the 2004 nine months
increased $6,870,000 or 2.0% over 2003. Average short-term borrowings for the
2004 nine-month period fell $21,451,000, or 65.6%, below the average for the
same period of 2003, while long-term debt for the 2004 period increased by
$7,594,000, or 37.3%, due to the issuance of trust preferred securities during
the 2004 first quarter. Average savings and interest bearing transaction account
balances grew significantly in the 2004 nine month period, also, increasing
$21,710,000, or 19.4%. Average time deposits were slightly lower in the 2004
period. Management believes that the 45 basis point decrease in the average rate
paid for time deposits in the 2004 nine month period may have contributed to
depositors moving funds to shorter-term, more liquid deposit products, probably
in anticipation of increases in rates that depositors expect to be offered for
time deposits in the future.
Total average interest earning assets for the 2004 nine month period
increased $18,287,000 or 4.3% over the same 2003 period. Average loans
outstanding for the 2004 period, including loans held for sale, were
$18,962,000, or 5.5%, greater than in the 2003 period. As of September 30, 2004,
loans, other than loans held for sale, were $50,852,000, or 15.3%, more than the
amount of such loans as of December 31, 2003. Investment securities grew also,
averaging $8,108,000, or 15.5%, more than in the first nine months of 2003. The
average rates earned on these assets were 30 basis points lower in the 2004
period than in the 2003 period, however.
The following table provides details of the changes in the composition
of CBI's average balance sheet, its interest income and expense, and the
relationships between those items.
11
Average Balances, Yields and Rates
Nine Months Ended September 30,
-------------------------------
2004 2003
---- ----
Interest Interest
Average Income / Yields / Average Income / Yields /
Balances Expense Rates * Balances Expense Rates *
-------- ------- ------- -------- ------- -------
(Dollars in thousands)
Assets
Interest earning deposits ........................... $ 1,008 $ 12 1.59% $ 903 $ 14 2.07%
Investment securities - taxable ..................... 50,662 1,152 3.03% 43,105 1,023 3.16%
Investment securities - tax exempt .................. 9,619 244 3.38% 9,068 245 3.60%
Federal funds sold .................................. 17,866 145 1.08% 26,754 218 1.09%
Loans, including loans held for sale ................ 360,723 16,536 6.11% 341,761 16,789 6.55%
--------- ------- --------- -------
Total interest earning assets .............. 439,878 18,089 5.48% 421,591 18,289 5.78%
Cash and due from banks ............................. 15,536 13,621
Allowance for loan losses ........................... (4,283) (3,800)
Premises and equipment, net ......................... 7,166 6,863
Intangible assets ................................... 7,557 7,803
Other assets ........................................ 4,014 3,165
--------- ---------
Total assets ............................... $ 469,868 $ 449,243
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Savings ........................................ $ 78,882 $ 571 0.97% $ 68,791 $ 586 1.14%
Interest bearing transaction accounts .......... 54,813 165 0.40% 43,194 147 0.45%
Time deposits .................................. 185,557 3,033 2.18% 186,540 3,679 2.63%
--------- ------- --------- -------
Total interest bearing deposits ............ 319,252 3,769 1.57% 298,525 4,412 1.97%
Short-term borrowings ............................... 11,251 186 2.20% 32,702 603 2.46%
Long-term debt ...................................... 27,943 1,105 5.27% 20,349 840 5.50%
--------- ------- --------- -------
Total interest bearing liabilities ......... 358,446 5,060 1.88% 351,576 5,855 2.22%
Noninterest bearing demand deposits ................. 59,704 49,930
Other liabilities ................................... 1,772 1,955
Shareholders' equity ................................ 49,946 45,782
--------- ---------
Total liabilities and shareholders' equity . $ 469,868 $ 449,243
========= =========
Interest rate spread ................................ 3.60% 3.56%
Net interest income and net yield
on earning assets .............................. $13,029 3.95% $12,434 3.93%
* Yields and rates are annualized.
12
Provision and Allowance for Loan Losses, Non-performing and Potential Problem
Loans
The provision for loan losses for the third quarter of 2004 was
$1,648,000, an increase of $1,416,000, or 610.3%, over the same period of 2003.
During the 2004 third quarter, net loan charge-offs were $164,000 and the
allowance for loan losses as a percentage of loans outstanding (excluding loans
held for sale) increased to 1.51% as compared with 1.21% at the end of the
second quarter of 2004. Total non-performing loans (non-accrual and accruing
loans past due 90 days and more) increased $1,976,000 during the third quarter
of 2004.
The provision for loan losses for the nine month 2004 period was
$2,139,000, an increase of $1,364,000 or 176.0% over the comparable period of
2003. Net charge-offs in the 2004 period were $576,000, compared with $318,000
in the 2003 period. The allowance for loan losses stood at 1.51% of loans
outstanding (excluding loans held for sale), compared with 1.27% at the end of
2003. The activity in the allowance for loan losses is summarized in the
following table:
Nine Months Ended Year Ended Nine Months Ended
September 30, 2004 December 31, 2003 September 30, 2003
------------------ ----------------- ------------------
(Dollars in thousands)
Allowance at beginning of period ......................... $ 4,206 $ 3,573 $ 3,573
Provision for loan losses ................................ 2,139 1,119 775
Net charge-offs .......................................... (576) (486) (318)
--------- --------- ---------
Allowance at end of period ............................... $ 5,769 $ 4,206 $ 4,030
========= ========= =========
Allowance as a percentage of loans outstanding ........... 1.51% 1.27% 1.24%
Loans at end of period ................................... $ 382,958 $ 332,106 $ 323,992
========= ========= =========
Non-performing loans totaled $3,383,000 as of the end of the 2004
period compared with $2,741,000 as of December 31, 2003, an increase of $642,000
or 23.4%. Of the amount of nonaccrual loans, $1,776,000 or 62.8% was
collateralized by commercial furniture and fixtures, inventories and accounts
receivable, $712,000 or 25.2% was secured by mortgages on real estate, and the
remainder is primarily secured by consumer automobiles and other personal
property. The coverage ratio (allowance for loan losses divided by
non-performing loans) was 1.71 as of the end of the 2004 third quarter and 1.53
at the end of 2003. Following is a summary of non-performing loans as of
September 30, 2004 and December 31, 2003. There were no restructured loans
during any of the periods listed below.
September 30, 2004 December 31, 2003
------------------ -----------------
(Dollars in thousands)
Non-performing loans
Nonaccrual loans ............................................................... $2,826 $2,595
Past due 90 days or more and still accruing .................................... 557 146
------ ------
Total ....................................................... $3,383 $2,741
====== ======
Non-performing loans as a percentage
of loans outstanding ........................................................... 0.88% 0.83%
Potential problem loans are defined as loans, not including nonaccrual
loans or loans that are 90 days past due and still accruing, where information
about the borrowers' credit problems causes management to have doubts about the
borrowers' ability to comply with the original repayment terms. At September 30,
2004, the Corporation had identified $6,800,000, or 1.8%, of the loan portfolio,
as potential problem loans. This is an increase of $3,563,000 over the amount as
of December 31, 2003. The amount of potential problem loans does not represent
management's estimate of potential losses since a significant portion of these
loans are secured by real estate and other forms of collateral.
13
Based on current levels of non-performing and other potential problem
loans, including an evaluation of any available collateral, management believes
that loan charge-offs in 2004 will substantially exceed the amount experienced
in 2003 as such loans progress through the collection, foreclosure, and
repossession process. Management will continue to closely monitor the levels of
non-performing and potential problem loans and address the weaknesses in those
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 and allowance for loan losses is
estimated and adjusted.
During the third quarter of 2004, management identified $5,121,000 of
problem loans in the portfolio of one of the banking subsidiaries. Of this
amount, $1,750,000 is included in nonaccrual loans and $3,371,000 is included in
potential problem loans as of September 30, 2004.
The loans classified as nonaccrual are collateralized by equipment,
inventory and accounts receivable of business entities involved in bankruptcy
proceedings. It is doubtful that the net realizable value of the collateral will
be sufficient to repay the loans.
Of the amount included in potential problem loans, $200,000 is
unsecured and $824,000 is collateralized by inventory, accounts receivables and
the proceeds of contracts. The remaining $2,347,000 is collateralized by
restricted securities of indeterminate value.
Noninterest Income
Non-interest income for the 2004 quarter decreased $674,000, or 26.7%
from the 2003 quarter. The majority of the decrease was attributable to mortgage
brokerage income which decreased $593,000, or 41.5%. Service charges on deposit
accounts were down by $52,000. CBI realized gains of $10,000 from sales of
available-for-sale securities in the 2004 three-month period. There were no
sales of securities in the 2003 quarter.
Non-interest income for the 2004 nine month period decreased
$1,528,000, or 21.4%, from the 2003 amount. Most of the decrease was
attributable to a $1,766,000 or 41.5% decrease in mortgage brokerage income. The
Company's mortgage brokerage activities in 2004 have been affected adversely by
increasing interest rates and decreasing demand for mortgage loans. CBI also
recorded securities gains of $5,000 in the 2004 nine month period compared with
losses of $252,000 in 2003.
Noninterest Expenses
Noninterest expenses decreased $283,000, or 6.9%, for the third quarter
of 2004 compared with the 2003 quarter. Salaries and employee benefits decreased
$338,000, or 13.7%, due to the reduced mortgage brokerage activity. Premises and
equipment expenses increased $44,000, or 9.5%, primarily due to the deployment
of new technologies, as described below.
During the first nine months of 2004, noninterest expenses decreased
$729,000, or 6.0%, as compared with the same 2003 period. Salaries and employee
benefits decreased $1,033,000, or 13.8%, primarily due to the mortgage brokerage
subsidiary's largely commission-based compensation system and the lower volume
of home mortgage originations and sales in 2004. For the first nine months of
2004, premises and equipment expenses were up $201,000, or 15.8%, as compared
with the 2003 period, due to depreciation and amortization expenses resulting
from the acquisition and implementation of hardware and software associated with
imaging technologies. Over time, the use of such technology is expected to
reduce certain operating expenses, including postage and research, improve
internal processes and access to information, enable the Company to take
advantage of opportunities presented by the effectiveness of Check 21
legislation, and enhance the Company's ability to provide customer service.
Management believes that noninterest expenses will continue to increase for the
remainder of 2004 and in 2005 as a result of legislative mandates, such as
Sarbanes-Oxley Section 404 which will be effective for the Company's 2005
audited financial statements, and the implementation of certain improvements in
internal processes that are presently contemplated.
Income Tax Expense
Income tax expense decreased $565,000 and $574,000 for the third
quarter and nine months ended September 30, 2004, respectively, due to lower
taxable income. The average income tax rates applied to year-to-date income
before income taxes during 2004 and 2003 were approximately 35.5% and 35.7%,
respectively.
14
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 CBI's market areas. Individual and commercial deposits are the primary
source of funds for credit activities, along with long-term borrowings from the
Federal Home Loan Bank of Atlanta and the proceeds of issuing $10,000,000 of
subordinated debentures. Cash and amounts due from banks and federal funds sold
are CBI's primary sources of asset liquidity. These funds provide a cushion
against short-term fluctuations in cash flow from both loans and deposits.
Securities available-for-sale are CBI's principal source of secondary asset
liquidity. However, the availability of this source is limited by pledging
commitments for public deposits and securities sold under agreements to
repurchase, and is influenced by market conditions.
Total deposits at September 30, 2004 were $393,567,000, an increase of
$14,863,000 or 3.9% over the amount at December 31, 2003. As of September 30,
2004, the loan to deposit ratio was 97.3%, compared with 87.7% at December 31,
2003 and 91.1% as of September 30, 2003.
Management believes CBI and its subsidiaries' liquidity sources are
adequate to meet their current and projected operating needs.
CAPITAL RESOURCES
CBI and its banking subsidiaries are subject to regulatory risk-based
capital adequacy standards. Under these standards, bank holding companies and
banks are required to maintain certain minimum ratios of capital to
risk-weighted assets and average total assets. Under the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), federal
bank regulatory authorities are required to implement prescribed "prompt
corrective actions" upon the deterioration of the capital position of a bank. If
the capital position of an affected institution were to fall below certain
levels, increasingly stringent regulatory corrective actions are mandated.
The September 30, 2004 risk based capital ratios for CBI and its
banking subsidiaries are presented in the following table, compared with the
"well capitalized" and minimum ratios under the regulatory definitions and
guidelines:
September 30, 2004
------------------
Tier 1 Total Capital Leverage
------ ------------- --------
Community Bankshares, Inc. .......................................... 14.46% 15.63% 11.44%
Orangeburg National Bank ............................................ 12.11% 13.36% 9.51%
Sumter National Bank ................................................ 9.62% 10.88% 8.50%
Florence National Bank .............................................. 10.66% 11.68% 9.63%
Bank of Ridgeway .................................................... 14.04% 14.95% 8.70%
Minimum "well capitalized" requirement .............................. 6.00% 10.00% 6.00%
Minimum requirement ................................................. 4.00% 8.00% 4.00%
As shown in the table above, each of the capital ratios exceed the
regulatory requirement for being considered "well capitalized." In the opinion
of management, the CBI and the banking subsidiaries' current and projected
capital positions are adequate.
OFF-BALANCE-SHEET ACTIVITIES
In the normal course of business, CBI engages in transactions that, in
accordance with generally accepted accounting principles, are not recorded in
the financial statements (generally commitments to extend credit) or are
recorded in amounts that differ from their notional amounts (generally
derivatives). These transactions involve elements of credit, interest rate and
liquidity risk of varying degrees. Such transactions are used by CBI for general
corporate purposes.
15
Variable Interest Entity
As discussed under "Results of Operations - Net Interest Income," and
in the notes to unaudited consolidated financial statements under "Variable
Interest Entities," as of September 30, 2004, CBI held an interest in, and
guarantees the liabilities of, a non-consolidated variable interest entity.
Commitments
CBI's banking and mortgage brokerage subsidiaries 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 varying degrees of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. Exposure to
credit loss is represented by the contractual, or notional, amounts of these
commitments. The same credit policies are used in making commitments as for
on-balance-sheet instruments.
The following table sets forth the contractual amounts of commitments
which represent credit risk:
September 30, 2004
------------------
(Dollars in
thousands)
Loan commitments ........................... $ 51,936
Standby letters of credit .................. 2,609
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 management 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 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. Generally, collateral supporting those commitments is
held 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.
Derivative Financial Instruments
In April, 2003, the Financial Accounting Standards Board issued
Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." Among other requirements, this Statement provides that loan
commitment contracts entered into or modified after June 30, 2003 that relate to
the origination of mortgage loans that will be held for sale shall be accounted
for as derivative instruments by the issuer of the loan commitment. CBI issues
mortgage loan rate lock commitments to potential borrowers to facilitate its
origination of home mortgage loans that are intended to be sold. Between the
time that CBI issues its commitments and the time that the loans close and are
sold, CBI is subject to variability in the selling prices related to those
commitments due to changes in market rates of interest. However, CBI offsets
this variability through the use of so-called "forward sales contracts" to
investors in the secondary market. Under these arrangements, an investor agrees
to purchase the closed loans at a predetermined price. CBI generally enters into
such forward sales contracts at the same time that rate lock commitments are
issued. These derivative financial instruments are carried in the balance sheet
at estimated fair value and changes in the estimated fair values of these
derivatives are recorded in the statement of income in net gains or losses on
loans held for sale.
Derivative financial instruments are written in amounts referred to as
notional amounts. Notional amounts only provide the basis for calculating
payments between counterparties and do not represent amounts to be exchanged
between parties or a measure of financial risk. The following table includes the
notional principal amounts of rate lock commitments and forward sales contracts
as of September 30, 2004, and the estimated fair values of those financial
instruments included in other assets and liabilities in the balance sheet as of
that date.
16
September 30, 2004
------------------
Estimated
Fair Value
Notional Asset
Amount (Liability)
------ -----------
(Dollars in thousands)
Rate lock commitments to potential borrowers
to originate mortgage loans to be
held for sale .................................. $ 7,101 $ 36
Forward sales contracts with investors
of mortgage loans to be held for sale .......... 7,101 (36)
ACCOUNTING AND REPORTING CHANGES
Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"),
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity," requires financial instruments within its scope to be
classified as liabilities (or assets in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise effective at the beginning of the first interim period beginning
after June 15, 2003, except for certain mandatorily redeemable financial
instruments. For those mandatorily redeemable financial instruments, the
effective date of certain provisions of SFAS No. 150 has been deferred by FASB
Staff Position FAS 150-3. When fully implemented, the adoption of SFAS No. 150
is not expected to have a material on the Company's financial statements.
Effectiveness of the guidance issued in paragraphs 10-20 of Emerging
Issues Task Force ("EITF") Issue No 03-1, "The Meaning of Other-Than-Temporarily
Impairment and Its Application to Certain Investments" has been delayed by FASB
Staff Position EITF Issue 03-1-1 until the final issuance of proposed EITF Issue
03-1-a, "Implementation Guidance for the Application of Paragraph 16 of EITF
Issue No 03-1..." All disclosures required by EITF Issue No 03-1 for annual
financial statements continue to be effective for fiscal years ending after
December 15, 2003 for investments accounted for under FASB Statements No 115 and
124. For all other investments within the scope of this Issue, the disclosures
continue to be effective in annual financial statements for fiscal years ending
after June 15, 2004. Additional disclosures for cost method investments continue
to be effective for fiscal years ending after June 15, 2004. The adoption of
this EITF is not expected to materially affect the Company's financial
statements.
The American Institute of Certified Public Accountants' Accounting
Standards Executive Committee issued its Statement of Position ("SOP") 03-3,
"Accounting for Certain Loans or Debt Securities Acquired in a Transfer," which
is effective generally for loans acquired in fiscal years beginning after
December 15, 2004. Early application is encouraged. The SOP addresses accounting
for differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least
in part, to credit quality. It includes loans acquired in business combinations
and applies to all nongovernmental organizations, including not-for-profit
organizations. The SOP does not apply to loans originated by the entity. For
loans acquired in fiscal years prior to this SOP's effective date and within the
scope of Practice Bulletin 6, the SOP also amends the application of Practice
Bulletin 6 with regard to accounting for decreases in cash flows expected to be
collected. The adoption of this SOP as of January 1, 2005 is not expected to
have any material impact on the Company's financial statements.
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.
17
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 September 30, 2004, CBI is positioned so
that net interest income would increase $271,000 and net income would increase
$163,000 in the next twelve months if interest rates rose 100 basis points.
Conversely, net interest income would decline $371,000 and net income would
decline $227,000 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, its customers and the issuers
of its investment securities could undertake in response to changes in interest
rates.
As of September 30, 2004, there was no significant change from the
interest rate sensitivity analysis for the various changes in interest rates
calculated as of December 31, 2003. 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 2003
Annual Report on Form 10-K.
Item 4. Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that such controls and
procedures, as of the end of the period covered by this quarterly report, were
effective.
There has been no change in the issuer's internal control over
financial reporting during the most recent fiscal quarter that has materially
affected, or is likely to reasonable materially affect, the issuer's internal
control over financial reporting.
PART II--OTHER INFORMATION
Item 6. Exhibits
Exhibits 31-1. Rule 13a-14(a)/15d-14(a) Certification of principal
executive officer
31-2. Rule 13a-14(a)/15d-14(a) Certification of principal
accounting officer
32. Certifications Pursuant to 18 U.S.C. Section 1350
18
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: November 10, 2004
COMMUNITY BANKSHARES, INC.
s/E. J. Ayers, Jr.
By: -------------------------------------
E. J. Ayers, Jr.
Chief Executive Officer
s/William W. Traynham
By: -------------------------------------
William W. Traynham
President and Chief Financial Officer
(Principal Accounting Officer)
19