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, 2001 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:
3,204,220 shares of common stock outstanding as of August 1, 2001.
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 ............................................. 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk .... 18
Part II-Other Information
Item 4 Submission of Matters to a Vote of Security Holders ............... 19
Item 6 Exhibits and Reports on Form 8-K .................................. 20
2
Part I. Item 1. Financial Statements
COMMUNITY BANKSHARES, INC. - CONSOLIDATED BALANCE SHEETS
$ amounts in thousands UNAUDITED
June 30, December 31,
ASSETS 2001 2000
---- ----
Cash and due from other financial institutions:
Non-interest bearing .................................................................. $ 12,272 $ 10,209
Federal funds sold .................................................................... 23,727 8,130
--------- ---------
Total cash and cash equivalents ................................................... 35,999 18,339
Interest bearing deposits in other banks ................................................... 4,477 594
Investment securities:
Securities held to maturity ........................................................... 4,148 12,371
Securities available for sale ......................................................... 27,353 41,195
Loans held for resale ...................................................................... 406 343
Loans ...................................................................................... 208,094 195,077
Less, allowance for loan losses ....................................................... (2,635) (2,424)
--------- ---------
Net loans ......................................................................... 205,459 192,653
Premises and equipment ..................................................................... 4,349 4,411
Accrued interest receivable ............................................................... 1,775 2,330
Deferred income taxes ...................................................................... 690 795
Other assets ............................................................................... 566 292
--------- ---------
Total assets ...................................................................... $ 285,222 $ 273,323
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing .................................................................. $ 33,781 $ 31,219
Interest bearing ...................................................................... 198,718 187,592
--------- ---------
Total deposits .................................................................... 232,499 218,811
Federal funds purchased and securities
sold under agreements to repurchase ................................................... 8,579 9,352
Federal Home Loan Bank advances ............................................................ 17,850 20,350
Other liabilities .......................................................................... 1,544 1,671
--------- ---------
Total liabilities ................................................................. 260,472 250,184
--------- ---------
Shareholders' equity:
Common stock
No par, authorized shares 12,000,000, issued and
outstanding 3,204,220 in 2001 and 3,199,180 in 2000 ............................... 15,967 15,928
Retained earnings ..................................................................... 8,726 7,342
Accumulated other comprehensive income (loss) ......................................... 57 (131)
--------- ---------
Total shareholders' equity ........................................................ 24,750 23,139
--------- ---------
Total liabilities and shareholders' equity ........................................ $ 285,222 $ 273,323
========= =========
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, 2001 and 2000 (Unaudited)
($ amounts in thousands)
Common Stock Accumulated
------------ Other Total
Retained Comprehensive Shareholders'
Shares Amount Earnings Income (Loss) Equity
------ ------ -------- ------------- ------
Balances at Dec. 31, 1999 ............................... 3,191,462 $ 14,207 $ 6,549 $ (511) $ 20,245
Comprehensive income:
Net income ......................................... 1,477 1,477
Other comprehensive income (loss) net of tax:
Unrealized gain (loss) on securities ............... (134) (134)
Cash-in-lieu of shares in connection
with Jan. 31, 2000 stock div ....................... (137)
Market value of shares issued in
five percent stock dividend ........................ - 1,709 (1,709) -
Shares issued under option agreement .................... 2,520 19 19
Costs of stock dividend ................................. (10) (10)
Dividends paid .......................................... - - (319) - (319)
---------- ---------- ---------- ---------- ----------
Balances at June 30 , 2000 .............................. 3,193,845 $ 15,925 $ 5,998 $ (645) $ 21,278
========== ========== ========== ========== ==========
Balances at Dec. 31, 2000 ............................... 3,199,180 $ 15,928 $ 7,342 $ (131) $ 23,139
Comprehensive income:
Net income ......................................... 1,831 1,831
Other comprehensive income (loss) net of tax:
Unrealized gain (loss) on securities ............... 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
========== ========== ========== ========== ==========
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,
2001 2000 2001 2000
$ amounts in thousands UNAUDITED UNAUDITED UNAUDITED UNAUDITED
--------- --------- --------- ---------
Interest and dividend income:
Interest and fees on loans ......................................... $ 9,116 $ 7,763 $ 4,525 $ 4,033
Deposits with other financial institutions ..................... 106 28 78 24
Investment securities:
Interest - U. S. Treasury and
U. S. Government Agencies .................................. 1,194 1,432 469 726
Dividends .................................................... 69 60 33 31
------- ------- ------- -------
Total investment securities ............................... 1,263 1,492 502 757
Federal funds sold and securities
purchased under agreements to resell ......................... 454 188 284 74
------- ------- ------- -------
Total interest and dividend income ........................ 10,939 9,471 5,389 4,888
------- ------- ------- -------
Interest expense:
Deposits:
Certificates of deposit of $100,000 or more .................. 1,310 1,073 662 565
Other ........................................................ 3,528 2,831 1,714 1,451
------- ------- ------- -------
Total deposits ............................................ 4,838 3,904 2,376 2,016
Federal funds purchased and securities
sold under agreements to repurchase .......................... 149 64 66 40
Federal Home Loan Bank advances ................................ 596 526 295 273
------- ------- ------- -------
Total interest expense .................................... 5,583 4,494 2,737 2,329
------- ------- ------- -------
Net interest income ................................................ 5,356 4,977 2,652 2,559
Provision for loan losses .......................................... 277 338 135 158
------- ------- ------- -------
Net interest income after provision for loan losses ................ 5,079 4,639 2,517 2,401
------- ------- ------- -------
Non-interest income:
Service charges on deposit accounts ............................ 928 696 516 349
Other .......................................................... 315 189 176 99
------- ------- ------- -------
Total non-interest income ................................. 1,243 885 692 448
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits ..................................... 2,102 1,892 1,062 952
Premises and equipment ......................................... 471 456 236 232
Other .......................................................... 916 879 479 443
------- ------- ------- -------
Total non-interest expense ................................ 3,489 3,227 1,777 1,627
------- ------- ------- -------
Net income before taxes ............................................ 2,833 2,297 1,432 1,222
Provision for income taxes ......................................... 1,002 820 502 439
------- ------- ------- -------
Net income ......................................................... $ 1,831 $ 1,477 $ 930 $ 783
======= ======= ======= =======
Basic earnings per common share:
Weighted average shares outstanding ............ 3,200,174 3,194,685 3,199,677 3,193,005
Net income per common share .................... $ 0.57 $ 0.46 $ 0.29 $ 0.25
Diluted earnings per common share:
Weighted average shares outstanding ............ 3,217,819 3,216,207 3,217,443 3,214,555
Net income per common share .................... $ 0.57 $ 0.46 $ 0.29 $ 0.24
5
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
2001 2000
---- ----
(dollar amounts in thousands)
UNAUDITED UNAUDITED
Cash flows from operating activities:
Net income ................................................................................. $ 1,831 $ 1,477
Adjustments to reconcile net income
to net cash (provided) by operating activities
Depreciation ....................................................................... 218 240
Provision for loan losses .......................................................... 277 338
Accretion of discounts and
amortization of premiums -
investment securities - net ...................................................... (13) (5)
Proceeds from sale of real estate loans held for sale .............................. (6,352) (2,337)
Origination of real estate loans held for sale ..................................... 6,289 2,606
Changes in assets and liabilities:
(Increase) decrease in interest receivable ......................................... 555 198
(Increase) decrease in other assets ................................................ 98 (828)
Increase (decrease) in other liabilities ........................................... (127) (24)
-------- --------
Net cash provided (used) by operating activities ........................................... 2,776 1,665
-------- --------
Cash flows from investing activities:
Proceeds from maturities and sales of
investment securities - held to maturity ......................................... 8,875 1,500
Purchases of investment securities - held to maturity .............................. (652) (500)
Proceeds from maturities and sales of
investment securities - available for sale ....................................... 43,716 2,822
Purchases of investment securities - available for sale ............................ (29,673) (8,126)
Net (increase) decrease in interest bearing deposits ............................... (3,883) (554)
Net increase in loans to customers ................................................. (13,083) (28,233)
Increase in other real estate owned ................................................ (267) -
Purchase of premises and equipment ................................................. (156) (67)
-------- --------
Net cash provided (used) by investing activities ................................. 4,877 (33,158)
-------- --------
Cash flows from financing activities:
Net increase in demand, savings, & time deposits ................................... 13,688 17,709
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase ................................... (773) 1,761
Sale of common stock ............................................................... 39 9
Increase (repayment) of FHLB advances .............................................. (2,500) 4,700
Dividends .......................................................................... (447) (319)
-------- --------
Net cash provided by financing activities ........................................ 10,007 23,860
-------- --------
Net increase (decrease) in cash and cash equivalents ...................................... 17,660 (7,633)
Cash and cash equivalents -beginning of period ............................................. 18,339 20,315
-------- --------
Cash and cash equivalents -end of period ................................................... $ 35,999 $ 12,682
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
6
Notes to Unaudited Consolidated Financial Statements
Summary of Significant Accounting Principles
A summary of significant accounting policies and the audited financial
statements for 2000 are included in Corporation's Annual Report on Form 10-K for
the year ended December 31, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of Community
Bankshares, Inc. (CBI), the parent company, and Orangeburg National Bank, Sumter
National Bank and Florence National Bank, 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 2000 Annual Report on Form 10-K.
Changes in Comprehensive Income Components
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Disclosure as
required by the Statement is as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ................... $(977,000) $ 332,000 $(645,000)
--------- --------- ---------
Other comprehensive income, June 30, 2000 ................................. $(977,000) $ 332,000 $(645,000)
========= ========= =========
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ................... $ 87,000 $ (30,000) $ 57,000
--------- --------- ---------
Other comprehensive income, June 30, 2001 ................................. $ 87,000 $ (30,000) $ 57,000
========= ========= =========
7
COMMUNITY BANKSHARES, INC. - AVERAGE BALANCE SHEETS, YIELDS, AND RATES
Six months ended June 30, 2001 2000
(Dollar amounts in thousands) Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense Rates Balance Expense Rates
------- -------- ------ ------- -------- -----
Interest bearing deposits ........................ $ 4,427 $ 106 4.79% $ 985 $ 28 5.69%
Investment securities taxable .................... 39,370 1,250 6.35% 46,367 1,476 6.37%
Investment securities--tax exempt ................ 730 13 5.40% 806 16 6.02%
Federal funds sold ............................... 18,900 454 4.80% 6,062 188 6.20%
Loans receivable ................................. 201,885 9,116 9.03% 170,429 7,763 9.11%
-------- ------- -------- ------
Total interest earning assets .................... 265,312 10,939 8.25% 224,649 9,471 8.43%
Cash and due from banks .......................... 9,019 8,298
Allowance for loan losses ........................ (2,547) (2,084)
Premises and equipment ........................... 4,401 4,560
Other assets ..................................... 3,159 3,085
-------- --------
Total assets ..................................... $279,344 $238,508
======== ========
Liabilities and Shareholders' Equity
Interest bearing deposits
Savings ..................................... $ 36,526 $ 651 3.56% $ 31,364 $ 610 3.89%
Interest bearing trans.accounts ............. 23,063 123 1.07% 20,050 147 1.47%
Time deposits ............................... 135,934 4,064 5.98% 116,441 3,147 5.41%
-------- ------- -------- ------
Total interest bearing deposits .................. 195,523 4,838 4.95% 167,855 3,904 4.65%
Short term borrowing ............................. 7,391 149 4.03% 3,134 64 4.08%
FHLB advances .................................... 20,295 596 5.87% 18,311 526 5.75%
-------- ------- -------- ------
Total interest bearing liabilities ............... 223,209 5,583 5.00% 189,300 4,494 4.75%
Noninterest bearing demand deposits .............. 30,332 27,353
Other liabilities ................................ 1,750 1,222
Shareholders' equity ............................. 24,053 20,633
-------- --------
Total liabilities and equity ..................... $279,344 $238,508
======== ========
Interest rate spread 3.24% 3.68%
Net interest income and net yield on $5,356 4.04% $4,977 4.43%
earning assets
8
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 Corporation cautions readers that forward
looking statements, including without limitation, those relating to the
Corporation's future business prospects, 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, 2001 COMPARED TO JUNE
30, 2000
Net Income
For the first half of 2001 CBI earned a consolidated profit of
$1,831,000 compared to $1,477,000 for the first half of 2000, an increase of 24%
or $354,000. Basic and diluted earnings per share were $.57 in the 2001 period
compared to $.46 for the 2000 period.
For the first half of 2001 Orangeburg National Bank reported a profit
of $1,222,000 compared to $1,104,000 for the first half of 2000, an increase of
10.7% or $118,000.
For the first half of 2001 Sumter National Bank reported a profit of
$552,000 compared to $393,000 for the first half of 2000, an increase of 40.5%
or $159,000. The Sumter bank began operation in June 1996.
For the first half of 2001 Florence National Bank reported a profit of
$86,000 compared to net loss of $12,000 for the first half of 2000, an
improvement of $98,000. The Florence bank began operation in July 1998.
As noted above, consolidated net income for the six months ended June
30, 2001, increased from the prior year by 24% or $354,000. The major components
of this increase are discussed below. Net interest income before provision for
loan losses for the six months ended June 30, 2001 increased to $5,356,000
compared to $4,977,000 for the same period in 2000, an increase of 7.6% or
$379,000. For the same period the provision for loan losses was $277,000
compared to $338,000 for the 2000 period, a decrease of 18% or $61,000.
Non-interest income for the 2001 period increased to $1,243,000 from $885,000
for the 2000 period, a 40.5% or $358,000 increase. Non-interest expense
increased to $3,489,000 from $3,227,000, an 8.1% or $262,000 increase.
9
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, 2001 and
2000 yield the results in the table shown below.
Period ended June 30,
2001 2000
---- ----
(dollars in thousands)
Average assets $279,344 $238,508
ROA 1.31% 1.24%
Average equity $24,053 $20,633
ROE 15.22% 14.32%
Net income $1,831 $1,477
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 2001 net interest income after provision for loan losses increased
to $5,079,000 from $4,639,000, a 9.5% or $440,000 increase over the first six
months of 2000. This improvement was mostly the result of a $40 million increase
in the average volume of earning assets. The average yield on earning assets
decreased to 8.25% for the 2001 period from 8.43% for the 2000 period. This
decline in yield was the result of market interest rate declines. During the
first half of 2001 the prime lending rate declined from 9.5% to 6.75%, during
the first half of 2000 the prime lending rate increased from 8.75% to 9.5%.
For the first six months of 2001 the cost of funds averaged 5.00%,
increased from 4.75% for the first six months of 2000. The effect of these
changes was a net interest spread (yield on earning assets less cost of interest
bearing liabilities) of 3.24% for the first six months of 2001, decreased from
3.68% during the first six months of 2000. CBI's net interest margin (net
interest income divided by total earning assets) was 4.04% for the first six
months of 2001 compared to 4.43% for the first six months of 2000.
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, 2001 and 2000. A discussion of
that table follows.
Total interest income for the first six months of 2001 was $10,939,000
compared with $9,471,000 for the same period in 2000, a 15.5% or $1,468,000
increase. The yield on average earning assets for the 2001 period was 8.25%,
decreased from 8.43% for the 2000 period. Total average interest earning assets
for the 2001 period were $265,312,000 compared to $224,649,000 for the 2000
period, an increase of 18.1% or $40,663,000.
10
The loan portfolio earned $9,116,000 for the first six months of 2001
compared to $7,763,000 for the same period of 2000, a 17.4% or $1,353,000
increase. The yield decreased to 9.03% for the 2001 period from 9.11% for the
2000 period. The average size of the loan portfolio was $201,885,000 for the
2001 period compared to $170,429,000 for the 2000 period, an increase of 18.5%
or $31,456,000 primarily as the result of continuing strong loan demand.
The taxable investment portfolio earned $1,250,000 for the first six
months in 2001 compared to $1,476,000 for the same period in 2000, a 15.3% or
$226,000 decrease. The yield decreased to 6.35% in the 2001 period from 6.37% in
the 2000 period. The average size of the portfolio was $39,370,000 in the 2001
period compared to $46,367,000 in the 2000 period, a decrease of 15.1% or
$6,997,000. As market interest rates declined during the first half of 2001 the
Corporation had numerous securities called prior to maturity.
The tax-exempt investment portfolio earned $13,000 for the first six
months in 2001 compared to $16,000 for the same period in 2000, an 18.8% or
$3,000 decrease. The yield (on a taxable equivalent basis) on the portfolio was
5.4%, a decrease from 6.02%. The average size of the portfolio was $730,000 for
the 2001 period compared to $806,000 in the 2000 period, a decrease of 9.4% or
$76,000.
Interest bearing deposits in other banks contributed $106,000 for the
first six months of 2001 compared to $28,000 during the prior year, an increase
of 279% or $78,000. The yield on these deposits decreased to 4.79% for the 2001
period from 5.69% in the 2000 period. CBI averaged $4,427,000 in interest
bearing balances in the first six months of 2001 compared to $985,000 the first
six months of the prior year, an increase of 349% or $3,442,000. The increase in
these deposits was the result of declining market interest rates, which caused
numerous calls of investment securities prior to maturity. The funds resulting
from these calls were temporarily put into interest bearing deposits and federal
funds.
Federal funds sold earned $454,000 the first six months of 2001
compared to $188,000 the prior year, an increase of 142% or $266,000. Yields
decreased to 4.80% for the first six months in 2001 from 6.20% for the first six
months in 2000. For the first six months of 2001 CBI increased its average
volume in federal funds sold to $18,900,000 compared to $6,062,000 for the first
six months of 2000, a 212% or $12,838,000 increase.
Interest Expense
Interest expense for the first six months of 2001 was $5,583,000
compared to the prior year's $4,494,000, a 24.2% or $1,089,000 increase. The
volume of interest bearing liabilities was $223,209,000 for the first six months
in 2001 compared to $189,300,000 for the first six months of 2000, a 17.9% or
$33,909,000 increase. The average rate paid for interest-bearing liabilities
during the 2001 period was 5.00%, up from 4.75% for the 2000 period.
The cost of savings accounts was $651,000 in the first six months in
2001 compared to $610,000 in the first six months of 2000, a 6.7% or $41,000
increase. Average savings deposit balances were $36,526,000 for the first six
months in 2001 compared to $31,364,000 for the first six months of 2000, an
increase of 16.5% or $5,162,000. The average rate paid on these funds decreased
to 3.56% from 3.89%.
11
Interest bearing transaction accounts cost $123,000 for the first six
months in 2001 compared to the prior year's $147,000, a decrease of 16.3% or
$24,000. The volume of these deposits was $23,063,000 for the first six months
in 2001 compared to $20,050,000 for the first six months of 2000, a 15% or
$3,013,000 increase. The average rate paid on these funds for the first six
months in 2001 decreased to 1.07% from 1.47% for the first six months of 2000.
Time deposits cost $4,064,000 for the first six months of 2001 compared
to $3,147,000 for the first six months of the prior year, an increase of 29.1%
or $917,000. The volume was $135,934,000 for the first six months in 2001
compared to $116,441,000 for the first six months of 2000, a 16.7% or
$19,493,000 increase. The average rate paid on these funds increased to 5.98%
for the first six months in 2001 from 5.41% for the first six months in 2000.
This increase runs contrary to market interest rates nationally but reflects
increased competition for deposits in the Corporation's local markets.
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 $149,000 for the first six months in 2001
compared to $64,000 for the first six months of 2000, an increase of 133% or
$85,000. The volume of these funds was $7,391,000 in the first six months of
2001 compared to $3,134,000 in the first six months of 2000, an increase of 136%
or $4,257,000. The average rate paid on these funds decreased to 4.03% from
4.08%.
Borrowings from the Federal Home Loan Bank cost $596,000 for the first
six months in 2001 compared to $526,000 for the first six months in 2000, an
increase of 13.3% or $70,000. The advances averaged $20,295,000 during the 2001
period compared to $18,311,000 for the prior year period, a 10.8% or $1,984,000
increase. The average rate paid on these funds increased to 5.87% from 5.75%.
Non-Interest Income
Non-interest income for the first six months of 2001 grew to $1,243,000
compared to $885,000 in the first six months of 2000, a 40.5% or $358,000
increase. Much of this increase resulted from the introduction of a new service,
an automated overdraft courtesy line for customers.
Non-Interest Expense
For the first six months of 2001 non-interest expenses increased to
$3,489,000 from $3,227,000 for the first six months of 2000, an 8.1% or $262,000
increase. This increase is related to higher levels of business activity and
included the following components:
For the 2001 period, personnel costs were $2,102,000 compared to
$1,892,000 for the 2000 period, an increase of 11.1% or $210,000;
For the 2001 period, premises and equipment expenses were $471,000
compared to $456,000 for the 2000 period, an increase of 3.3% or $15,000; and
For the 2001 period, other costs were $916,000 compared to $879,000 for
the 2000 period, an increase of 4.2% or $37,000.
12
Income Taxes
CBI provided $1,002,000 for federal and state income taxes during the
first six months of 2001 compared to $820,000 for the same period in 2000, a
22.2% or $182,000 increase. The average tax rate for the 2001 period was
approximately 35.4% and for the 2000 period it was approximately 35.7%.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2001 AND 2000
Net Income
For the quarter ended June 30, 2001, CBI earned a consolidated profit
of $930,000, compared to $783,000 for the comparable period of 2000, an increase
of 18.8% or $147,000. Basic earnings per share were $.29 in the 2001 period,
compared to $.25 for the 2000 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, 2001.
Net interest income
Net interest income before provision for loan losses for the quarter
ended June 30, 2001, increased to $2,652,000 compared to $2,559,000 for the same
period in 2000, an increase of 3.6% or $93,000. For the same period the
provision for loan losses was $135,000 compared to $158,000 for the 2000 period,
a decrease of 14.6% or $23,000.
Interest Income
Total interest income for the second quarter 2001 was $5,389,000
compared with $4,888,000 for the same period in 2000, a 10.2% or $501,000
increase.
The loan portfolio earned $4,525,000 for the second quarter 2001
compared to $4,033,000 for the same period of 2000, a 12.2% or $492,000
increase.
The investment portfolio earned $469,000 for the second quarter 2001
compared to $726,000 for the 2000 period, a 35.4% or $257,000 decrease.
Interest bearing deposits in other banks contributed $78,000 for the
second quarter 2001 compared to $24,000 during the prior year, an increase of
225% or $54,000.
Federal funds sold earned $284,000 the second quarter of 2001 compared
to $74,000 the prior year, an increase of 284% or $210,000.
Interest expense
Interest expense for the second quarter of 2001 was $2,737,000 compared
to the prior year's $2,329,000, a 17.5% or $408,000 increase.
13
Non-interest income and expense
Non-interest income for the 2001 period was $692,000 compared to
$448,000 for the 2000 period, a 54.5% or $244,000 increase. This increase was
mostly the result of the introduction of the new automated overdraft service.
Non-interest expense was $1,777,000 compared to $1,627,000, a 9.2% or $150,000
increase.
CHANGES IN FINANCIAL POSITION
Investment portfolio
The investment portfolio is comprised of held to maturity securities
and available for sale securities. CBI and its three 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, 2001, the held to
maturity portfolio totaled $4,148,000 compared to $12,371,000 at December 31,
2000, a decrease of 66.5% or $8,223,000. At June 30, 2001, the available for
sale portfolio totaled $27,353,000 compared to $41,195,000 at December 31, 2000,
a decrease of 33.6% or $13,842,000. Most of the decline in the banks' investment
portfolios was due to the call of many securities during the first half of 2001,
which resulted from the decline in bond market interest rates. The following
chart summarizes the investment portfolios at June 30, 2001, and December 31,
2000.
June 30, 2001
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and agencies ................................. $4,148 $4,152 $24,481 $24,561
Tax exempt securities ......................................... - - 804 811
Other equity securities ....................................... - - 1,981 1,981
------ ------ ------- -------
Total ......................................................... $4,148 $4,152 $27,266 $27,353
====== ====== ======= =======
Unrealized gain ............................................... $ 4 $ 87
======= =======
December 31, 2000
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and agencies ................................. $12,371 $12,217 $38,599 $38,404
Tax exempt securities ......................................... - - 814 810
Other equity securities ....................................... - - 1,981 1,981
------- ------- ------- -------
Total ......................................................... $12,371 $12,217 $41,394 $41,195
======= ======= ======= =======
Unrealized (loss) ............................................. $ (154) $ (199)
======= =======
14
Loan portfolio
The loan portfolio is primarily consumer and small business oriented.
At June 30, 2001 the loan portfolio was $208,094,000 compared to $195,077,000 at
December 31, 2000, a 6.7% or $13,017,000 increase. The following chart
summarizes the loan portfolio at June 30, 2001 and December 31, 2000.
Jun. 30, 2001 Dec. 31, 2000
------------- -------------
(dollars in thousands)
Real estate ........................... $120,418 $113,543
Commercial ............................ 56,863 52,264
Loans to individuals .................. 30,813 29,270
-------- --------
Total ................................. $208,094 $195,077
======== ========
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, 2001 and December 31, 2000.
Jun. 30, 2001 Dec. 31, 2000
------------- -------------
(dollars in thousands)
Past due 90 days + accruing loans ........ $145 $93
Non-accrual loans ........................ $489 $238
Impaired loans (included in nonaccrual) .. $489 $238
Other real estate owned .................. $267 $-
Management considers the past due and non-accrual amounts at June 30,
2001 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.
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
15
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 2001 will at least approximate the
2000 levels as such loans progress through the collection process. Management
believes that the allowance for loan losses, as of June 30, 2001 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 Year ended Six months ended
(Dollars in thousands) June 30, 2001 Dec. 31, 2000 June 30, 2000
------------- ------------- -------------
Allowance at beginning of period ........................... $ 2,424 $ 1,936 $ 1,936
Provision expense .......................................... 277 688 338
Net charge offs ............................................ (66) (200) (124)
------- ------- -------
Allowance at end of period ................................. $ 2,635 $ 2,424 $ 2,150
======= ======= =======
Allowance / outstanding loans .............................. 1.27% 1.24% 1.16%
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, 2001.
Deposits
Deposits were $232,499,000 at June 30, 2001 compared to $218,811,000 at
December 31, 2000, an increase of 6.3% or $13,688,000.
16
Time deposits greater than $100,000 were $48,890,000 at June 30, 2001
compared to $38,702,000 at December 31, 2000, an increase of 26.3% or
$10,188,000.
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.
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 $232 million in 2001. 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, 2001 CBI had
approximately $24.6 million and $11.35 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
$106.3 million and $36.6 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.
17
Capital resources
As summarized in the table below, CBI maintains a strong capital
position.
Minimum
required for
capital
June 30, 2001 Dec. 31, 2000 adequacy
------------- ------------- --------
Tier 1 capital to average total assets ............................... 8.67% 8.20% 4.00%
Tier 1 capital to risk weighted assets ............................... 11.89% 11.10% 4.00%
Total capital to risk weighted assets ................................ 13.07% 12.30% 6.00%
In the opinion of management, the Corporation's current and projected
capital positions are adequate.
Dividends
CBI declared and paid a quarterly cash dividend of seven cents per
share during the first and second quarters of 2001. The total cost of these
dividends was $447,000.
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 this risk 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. 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, 2001 the Corporation is
positioned so that net interest income would be expected to increase $303,000
and net income would be expected to increase $186,000 in the next twelve months
18
if interest rates rise 100 basis points. Conversely, net interest income would
be expected to decline $303,000 and net income would be expected to decline
$186,000 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.
As of June 30, 2001 there was no significant change from the interest
rate sensitivity analysis for the various changes in interest rates calculated
as of December 31, 2000. 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 2000
Annual Report on Form 10-K.
Part II--Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
CBI had an Annual Meeting of Shareholders on April 24, 2001
The following persons were elected to the Board for terms of three years:
Three year term: Anna O. Dantzler, Richard L. Havekost, William H. Nock, Samuel
F. Reid, and William W. Traynham.
An amendment to the 1997 Stock Option Plan was approved that increases the
number of shares reserved for issuance under the Plan and permits non-employee
directors to participate in the Plan.
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, 2001.
The vote tally was as follows:
Total number of Voting
shares against or to Present at
eligible to withhold Voting to meeting and
vote Voting for authority abstain not voting
---- ---------- --------- ------- ----------
Election of directors
Anna O. Dantzler ......................... 3,198,757 2,202,304 0 0 0
Richard L. Havekost ...................... 3,198,757 2,203,505 0 0 0
William H. Nock .......................... 3,198,757 2,203,925 6,550 0 0
Samuel F. Reid ........................... 3,198,757 2,202,770 0 0 0
William W. Traynham ...................... 3,198,757 2,203,925 0 0 0
Amendment to option plan ...................... 3,198,757 2,127,099 73,961 4,255 0
Ratification of J. W. Hunt .................... 3,198,757 2,202,004 0 3,311 0
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No.(from item 601 of S-B) Description
None.
b) Reports on Form 8-K. None.
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, 2001
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)
20