UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

Community Bankshares, Inc.

PART I - FINANCIAL INFORMATION

ITEM 1.            FINANCIAL STATEMENTS

COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
  (Dollars in thousands)

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COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHESIVE INCOME
THREE MONTHS ENDED JUNE 30, 2002 AND 2001 AND
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in thousands, except per share amounts)
(Unaudited)

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COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in thousands)
(Unaudited)

See Notes to Consolidated Financial Statements

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COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.          BASIS OF PRESENTATION

The consolidated financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in our opinion, necessary for a fair statement of results for the interim periods.

The results of operations for the three and six month periods ending June 30, 2002 are not necessarily indicative of the results to be expected for the full year.

NOTE 2.         RECENT DEVELOPMENTS

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141 (SFAS No. 141), “Business Combinations” and Statement No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets”.  SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001.  SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill.  SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142.  The impact of this change has resulted in a reduction of amortization expense of $2,000 per quarter.  Goodwill was evaluated prior to June 30, 2002 and it was determined no write-down because of impairment was warranted.  SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.  SFAS No. 141 was effective July 1, 2001 while the provisions of SFAS No. 142 were adopted effective January 1, 2002. 

NOTE 3.          EARNINGS PER COMMON SHARE

The following is a reconciliation of net income (the numerator) and weighted-average shares outstanding (the denominator) used in determining basic and diluted earnings per common share (EPS).

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NOTE 4          SEGMENT INFORMATION

Selected segment information by industry segment for the three and six month periods ended June 30, 2002 and 2001 is as follows:

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COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES

Item 2. 

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

The following appears in accordance with the Securities Litigation Reform Act.  These financial statements and discussion and analysis include forward looking statements that involve inherent risks and uncertainties.  A number of important factors could cause actual results to differ materially from those in the forward looking statements.  Those factors include fluctuations in interest rates, inflation, government regulations, economic conditions, and competition in the geographic business areas in which we conduct operations.

The terrorist attacks that occurred in New York City and Washington D.C. on September 11, 2001, and the United States’ subsequent response to these events have resulted in a general economic slowdown that may adversely effect our banking business.  Economic slowdowns or recessions in our primary market areas may be accompanied by reduced demand for credit, decreasing interest margins and declining real estate values, which may in turn result in a decrease in net earnings and an increased possibility of potential loan losses in the event of default.  Any sustained period of decreased economic activity, increased delinquencies, foreclosures or losses could limit our growth and negatively affect our results of operations.  We cannot predict the extent, duration of these events or effect upon our business and operations.  We will, however, closely monitor the effect of these events upon our business, and make adjustments to our business strategy as deemed necessary.

Management’s Discussion and Analysis

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements.

Financial Condition

As of June 30, 2002, we continue to experience moderate growth in total assets, total loans and total deposits as compared to December 31, 2001.  Total assets, loans, and deposits increased by 5.06%, 1.73% and 3.40% respectively.  The growth in all areas except for loans is slightly less than the same period last year but consistent with management’s expectations. The growth in assets is attributable to growth in deposits and retention of earnings.  Management expects the growth to continue in the future.

Liquidity

As of June 30, 2002, the liquidity ratio was 21.79% which is within our target range of 20 - - 25%.  The banks have available lines of credit to meet unexpected liquidity needs.  Liquidity is measured by the ratio of net cash, short term and marketable securities to net deposits and short term liabilities.

Interest Rate Risk

Our overall interest rate risk was less than 3% of net interest income subjected to rising and falling rates of 200 basis points.  We have positioned ourselves to minimize the affect of changes in rates in either direction.

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Capital

Banking regulation requires the Company and the Banks to maintain capital levels in relation to our assets.  At June 30, 2002, the Company’s and banks' capital ratios were considered well capitalized based on regulatory minimum capital requirements.  The minimum capital requirements and the actual capital ratios for the Company at June 30, 2002 were as follows:

Results of Operation

Net interest income for the six month period ended June 30, 2002 is up 4.26% over the same period for 2001, from $12,588,000 to $13,124,000 and is up 6.76% for the three month period ending June 30, 2002 from $6,317,000 to $6,744,000 for 2002.  Interest income was down by 12.68% for the six month period ending June 30, 2002 from $24,879,000 to $21,725,000 and down 12.27% for the three month period ending June 30, 2002 from $12,422,000 to $10,898,000. The decrease in interest income is the net effect of a decrease in the average prime rate of over 3% from the level of the same period one year ago and an increase in earning assets of $50,882,000 from June 2001 to June 2002.  This represents a 9.24% increase in earning assets and includes a 23.66% increase in investments of $23,751,000 and a 5.86% increase in total loans amounting to $25,665,000 for the 12 month period.  Interest expense was down 30.02% or $3,690,000 for the six month period ended June 30, 2002, over the same period in 2001 and down 31.95% or $1,951,000 for the three month period ending June 30, 2002, as compared to 2001.  These decreases were related directly to the lower rate environment.  The Company’s net interest margin was 4.43% for the six month period ended June 30,2002 compared to 4.74% for the same period in 2001.  Management anticipates a stable net interest margin over the next twelve months.   Any increase in rates would have a slight positive effect on our net interest margin.

The loan loss reserve is evaluated monthly and adjusted to reflect the risk in the portfolio in the following manner.  We use two different methods of measuring risk in the portfolio: (1) Risk in our watch list of loans and past due ratios and (2) Percentage of classified loans.  We then compare results to reserve balances to assure  all identified risk are covered.

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The following table furnishes information on the loan loss reserve for the current six month reporting period and the same period for 2001.

The majority of the real estate loan charge-offs for 2002 related to one loan and does not represent a general decline in the real estate portfolio.  The provision for loan losses for the six month period ended June 30, 2002 represented 113% of charge-offs for the same period, while the provision for the first six months of 2001 represented 115% of the charge offs recorded in that period.  The reserve at June 30, 2002 represented 214% of non-accrual loans while the reserve at June 30, 2001 represented 193% of non-accrual loans.  Non-accrual loans have decreased from $3,355,000 at June 30, 2001 to $3,202,000 as of June 30, 2002.  Past due loans greater than 90 days and accruing interest have decreased from $3,154,000 in 2001 to $1,199,000 in 2002.  The level of non-accrual loans is indicative of the overall state of the economy.  Our net charged-off loans to total loan ratio was .18% for the six month period ended June 30, 2002 compared to .15% for the same period in 2001.  Management has reviewed the non-accrual loans individually and determined that the likelihood of any significant loss of principal is mitigated due to the value of the collateral securing these loans.  We are currently within our guideline of maintaining a loan loss reserve of 200% of non-performing assets.  The loan loss reserve balance to total loan ratio at June 30, 2002 was 1.48% as compared to 1.48% at June 30, 2001.  Management considered the loan loss reserve to be adequate to absorb any anticipated losses that may be incurred.

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The following table is a summary of Non Accrual, Past due and Restructured Debt

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included in the table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources.  These classified loans do not represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan payment terms.

The banks place loans on non-accrual at such a time it is apparent that the collection of principal and interest is questionable and the loan is either past due 90 days or bankruptcy has been filed.

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Other income decreased by 13.95% or $1,285,000 during the six month period ended June 30, 2002 as compared to the same period for 2001 and the three month period ending June 30, 2002 showed a 2.26% or $91,000 increase over the same three month period of 2001.  This decrease for the six month period is primarily due to the decrease in activity associated with an agreement between Financial Supermarkets, Inc. (FSI), a nonbank subsidiary, and the Canadian Imperial Bank of Commerce (“CIBC”) to establish banking pavilions in Florida.  Due to slowing economic conditions, management anticipates fewer sales of supermarket bank units and thus anticipates a decline in revenue during 2002 as compared to 2001.  Service charges on deposit accounts increased by $426,000 or 20.63% for the six month period ended June 30, 2002, and increased $230,000 or 20.99% for the three month period ended June 30, 2002, as compared to the same periods in 2001.  During the last two quarters of 2001, the banks started charging a daily overdraft fee on accounts that are overdrawn more than one day.  During the six and three month periods ended June 30, 2002, these fees totaled $318,000 and $169,000 respectively.  Non-sufficient funds (NSF) charges increased $69,000 and $38,000 for the six month period and the three month period ended June 30, 2002, respectively, compared to the same period in 2001.  NSF charges increased primarily as a result of our continued growth in accounts in the totally free checking program.

Other expenses decreased by 1.97% or $311,000 for the six month period ended June 30, 2002, but increased 0.67% or $51,000 for the three month period ending June 30, 2002 as compared to the same periods in 2001.  Salaries and benefits increased by $163,000 or 1.92% during the six month period ended June 30, 2002 compared to the same period in 2001.  Full time equivalent employees was 378 at the end of June 2001 and June 2002.  Other operating expenses reflected a reduction of 8.91% or $428,000 for the six month period ending June 30, 2002 when compared to the six month period ended June 30, 2001 and a 3.9%  decrease for the three month period ending June 30, 2002 compared to the same period in 2001.  In other operating expenses, travel expenses decreased 33.41% or $278,000 for the six month period ended June 30, 2002, and 30.81% or $114,000 for the three month period ended June 30, 2002.  These decreases are due to a slow down in non-bank subsidiary travel during the first half of 2002.  In addition, legal fees decreased by 51.15% or $89,000 for the six month period ended June 30, 2002 and 32.35% or $22,000.00 for the three month period ended June 30, 2002 when compared to the same periods in 2001.

We incurred income tax expenses of $768,000 which represents an effective rate of 29% for the three month period ended June 30, 2002 as compared to $649,000 which represents an effective tax rate of 28% for the same period in 2001.  In addition, we incurred income tax expenses of $1,253,000 which represents an effective rate of 28% for the six month period ended June 30, 2002 as compared to $1,551,000 which represents an effective tax rate of 30% for the same period in 2001.

Net income for the six month period ended June 30, 2002, was $3,229,000 or a decrease of 10.85% and for the three month period ended June 30, 2002, was $1,873,000 or an increase of 13.17% over the same periods for 2001.  Our income fluctuated due to the timing of supermarket bank installations.Management does not anticipate meeting its original budgeted projections and management cannot guarantee an overall increase in earnings in 2002 compared to 2001 due to the variation in the number of supermarket bank installations from year to year.

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We are not aware of any other known trends, events or uncertainties, other than the effect of events as described above, that will have or that are reasonably likely to have a material effect on its liquidity, capital resources or operations.  We are also not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have such an effect.

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PART II - OTHER INFORMATION

ITEM 4.          Submission of Matters to a Vote of Security Holders.

The Annual Meeting of the Shareholders of the Company was held on April 10, 2002.  Total shares outstanding amounted to 2,186,330.  A total of 1,759,535 (80.48%) were represented by shareholders in attendance or by proxy.  The following directors were re-elected to serve for a one-year term.  The results of the election were as follows:

ITEM 6.          Exhibits and Reports on Form 8-K

(a)       Exhibits

Exhibit 99 Certification Pursuant to 18 U.S.C. Section 1350

(b)       Reports on Form 8-K

None

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