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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003 Commission File number: 000-22054
COMMUNITY BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
South Carolina 57-0966962
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
791 Broughton St., Orangeburg, South Carolina 29115
(Address of Principal Executive Office, Zip Code)
(803) 535-1060
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the number of sharesoutstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 4,306,984 shares of common
stock outstanding as of May 1, 2003.
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10-Q TABLE OF CONTENTS
Part I-Financial Statements Page
Item 1 Financial Statements ............................................. 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................... 9
Item 3 Quantitative and Qualitative Disclosure About Market Risk ........ 17
Item 4 Controls and Procedures .......................................... 18
Part II-Other Information
Item 6 Exhibits and Reports on Form 8-K ................................. 18
2
Part I. Item 1. Financial Statements
COMMUNITY BANKSHARES, INC. - CONSOLIDATED BALANCE SHEETS
$ amounts in thousands
UNAUDITED
March 31, December 31,
ASSETS 2003 2002
---- ----
Cash and due from other financial institutions:
Non-interest bearing ........................................................... $ 16,599 $ 14,738
Federal funds sold ............................................................. 32,428 23,831
--------- ---------
Total cash and cash equivalents ............................................ 49,027 38,569
Interest bearing deposits in other banks ............................................. 883 511
Securities available for sale, at fair value ......................................... 46,380 53,066
Loans held for resale ................................................................ 23,191 24,664
Loans receivable ..................................................................... 313,711 306,484
Less, allowance for loan losses ................................................ (3,767) (3,573)
--------- ---------
Net loans .................................................................. 309,944 302,911
Accrued interest receivable ......................................................... 2,156 2,131
Premises and equipment ............................................................... 6,426 6,376
Net deferred tax asset ............................................................... 571 584
Intangible assets .................................................................... 7,835 7,896
Other assets ......................................................................... 826 612
--------- ---------
Total assets ............................................................... $ 447,239 $ 437,320
========= =========
LIABLITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ........................................................... $ 50,524 $ 47,128
Interest bearing ............................................................... 296,146 289,934
--------- ---------
Total deposits ............................................................. 346,670 337,062
Federal funds purchased and securities
sold under agreements to repurchase ............................................ 14,500 16,302
Federal Home Loan Bank advances ...................................................... 20,210 20,210
Lines of credit payable .............................................................. 18,729 18,249
Other liabilities .................................................................... 2,178 1,780
--------- ---------
Total liabilities .......................................................... 402,287 393,603
--------- ---------
Shareholders' equity:
Common stock ................................................................... 29,107 29,090
No par, authorized shares 12,000,000, issued and
outstanding 4,305,984 in 2003 and 3,299,674 in 2002
Retained earnings .............................................................. 15,723 14,529
Accumulated other comprehensive income ......................................... 122 98
--------- ---------
Total shareholders' equity ................................................. 44,952 43,717
--------- ---------
Total liabilities and shareholders' equity ................................. $ 447,239 $ 437,320
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
3
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
for the three months ended March 31, 2003 and 2002 (Unaudited)
(Amounts in thousands, except share data)
Accumulated Other Total
Common Common Retained Comprehensive Shareholders'
Shares Stock Earnings Income (Loss) Equity
------ ----- -------- ------------- ------
Balances at Dec. 31, 2001 ............................... 3,299,674 $ 17,208 $ 10,346 $ (7) $ 27,547
Comprehensive income:
Net income ......................................... 1,125 1,125
Other comprehensive income (loss) net of tax:
Unrealized gain (loss) on securities ........... (163) (163)
Dividends paid .......................................... - - (264) - (264)
---------- ---------- ---------- ---------- ----------
Balances at Mar. 31, 2002 ............................... 3,299,674 $ 17,208 $ 11,207 $ (170) $ 28,245
========== ========== ========== ========== ==========
Balances at Dec. 31, 2002 ............................... 4,304,384 $ 29,090 $ 14,529 $ 98 $ 43,717
Comprehensive income:
Net income ......................................... 1,581 1,581
Other comprehensive income (loss) net of tax:
Unrealized gain (loss) on securities ........... 24 24
Stock issued under option ............................... 1,600 17 17
Dividends paid .......................................... - - (387) - (387)
---------- ---------- ---------- ---------- ----------
Balances at Mar. 31, 2003 ............................... 4,305,984 $ 29,107 $ 15,723 $ 122 $ 44,952
========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
4
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31,
2003 2002
In thousands, except shares and per share data UNAUDITED UNAUDITED
--------- ---------
Interest and dividend income:
Loans, including fees ................................................................. $ 5,275 $ 4,324
Deposits with other financial institutions ............................................ 4 6
Debt securities ....................................................................... 493 375
Dividends ............................................................................. 20 31
Federal funds sold .................................................................... 57 87
---------- ----------
Total interest and dividend income ............................................... 5,849 4,823
---------- ----------
Interest expense:
Deposits:
Certificates of deposit of $100,000 or more ......................................... 427 468
Other ............................................................................... 1,119 1,152
---------- ----------
Total deposits ................................................................... 1,546 1,620
Federal funds purchased and securities
sold under agreements to repurchase ................................................. 38 22
Other borrowed funds .................................................................. 417 364
---------- ----------
Total interest expense ........................................................... 2,001 2,006
---------- ----------
Net interest income ........................................................................ 3,848 2,817
Provision for loan losses .................................................................. 264 169
---------- ----------
Net interest income after provision for loan losses ........................................ 3,584 2,648
---------- ----------
Non-interest income:
Service charges on deposit accounts ................................................... 783 544
Gains on sales of securities .......................................................... 46 42
Mortgage banking income ............................................................... 1,511 956
Other ................................................................................. 215 145
---------- ----------
Total non-interest income ........................................................ 2,555 1,687
---------- ----------
Non-interest expense:
Salaries and employee benefits ........................................................ 2,351 1,655
Premises and equipment ................................................................ 403 297
Other ................................................................................. 981 626
---------- ----------
Total non-interest expense ....................................................... 3,735 2,578
---------- ----------
Income before income taxes ................................................................. 2,404 1,757
Income tax expense ......................................................................... 823 632
---------- ----------
Net income ................................................................................. $ 1,581 $ 1,125
========== ==========
Basic earnings per common share:
Weighted average shares outstanding ................................................... 4,305,237 3,299,674
Net income per common share ........................................................... $ 0.37 $ 0.34
Diluted earnings per common share:
Weighted average shares outstanding ................................................... 4,420,033 3,361,108
Net income per common share ........................................................... $ 0.36 $ 0.33
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
5
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
(Dollar amounts in thousands) 2003 2002
UNAUDITED UNAUDITED
--------- ---------
Cash flows from operating activities:
Net income ............................................................................. $ 1,581 $ 1,125
Adjustments to reconcile net income
to net cash (provided) used by operating activities
Depreciation and amortization ................................................... 232 169
Net amortization (accretion) of securities ...................................... 46 41
Provision for loan losses ....................................................... 264 169
Net realized gains on sale of securities ........................................ (46) (42)
Proceeds from sales of loans held for sale ...................................... 71,867 45,029
Originations of real estate loans held for sale ................................. (70,394) (43,752)
Deferred income taxes ........................................................... 13 -
Changes in operating assets and liabilities:
Accrued interest receivable ..................................................... (25) (179)
Other assets .................................................................... (214) (181)
Other liabilities ............................................................... 398 241
-------- --------
Net cash provided by operating activities .................................... 3,722 2,620
-------- --------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits ............................ (372) 1,388
Purchases of securities available for sale ...................................... (19,847) (15,577)
Maturities of securities available-for-sale ..................................... 24,810 12,611
Sales of securities available-for-sale .......................................... 1,747 5,648
Loan originations and principal collections, net ................................ (7,297) (10,758)
Purchases of premises and equipment ............................................. (221) (344)
-------- --------
Net cash (used) in investing activities ......................................... (1,180) (7,032)
-------- --------
Cash flows from financing activities:
Net increase in deposits ........................................................ 9,608 12,279
Net increase (decrease) in short-term borrowing ................................. (1,802) 248
Net increase (decrease) under line of credit .................................... 480 (358)
Proceeds from issuance of common stock .......................................... 17 -
Dividend payments ............................................................... (387) (264)
-------- --------
Net cash provided by financing activities .................................... 7,916 11,905
-------- --------
Net increase in cash and cash equivalents .............................................. 10,458 7,493
Cash and cash equivalents - beginning of period ........................................ 38,569 25,649
-------- --------
Cash and cash equivalents - end of period .............................................. $ 49,027 $ 33,142
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
6
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three months ended March 31,
2003 2002
---- ----
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash payments for interest ......................................................... $1,907 3,711
====== =====
Cash payments for income tax ....................................................... $ 517 580
====== =====
NON-CASH INVESTING ACTIVITIES
Transfers of loans receivable to other real estate ................................. $ 131 0
====== =====
7
Summary of Significant Accounting Principles
A summary of significant accounting policies and the audited financial
statements for 2002 are included in Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of Community
Bankshares, Inc. (CBI), the parent company, and Orangeburg National Bank, Sumter
National Bank, Florence National Bank, Community Resource Mortgage Inc., and the
Bank of Ridgeway, its wholly owned subsidiaries. All significant intercompany
items have been eliminated in the consolidated statements.
Management Opinion
The interim financial statements in this report are unaudited. In the
opinion of management, all the adjustments necessary to present a fair statement
of the results for the interim period have been made. Such adjustments are of a
normal and recurring nature.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for an entire year. These interim
financial statements should be read in conjunction with the annual financial
statements and notes thereto contained in the 2002 Annual Report on Form 10-K.
Changes in Comprehensive Income Components
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," effective for
fiscal years beginning after December 15, 1997. This Statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Disclosure as required by
the Statement is as follows:
Three months ended March 31,
2003 2002
---- ----
(Dollars in thousands)
Unrealized holding gains (losses) on available for sale
securities .......................................................................... $ (10) $(293)
Less: Reclassification adjustment for gains (losses)
realized in income .................................................................. 46 42
----- -----
Net unrealized gains (losses) ............................................................ 36 (251)
Tax effect ............................................................................... (12) 88
----- -----
Net-of-tax amount ........................................................................ $ 24 $(163)
===== =====
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 words "estimate," "project," "intend,",
"expect," "believe," "anticipate," "plan," and similar expressions identify
forward-looking statements. The Corporation (CBI) cautions readers that forward
looking statements, including without limitation, those relating to the CBI's
future business prospects, ability to successfully integrate recent
acquisitions, revenues, adequacy of the allowance for loan losses, working
capital, liquidity, capital needs, interest costs, and income, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward looking statements, due to
several important factors herein identified, among others, and other risks and
factors identified from time to time in the CBI's reports filed with the
Securities and Exchange Commission.
Critical Accounting Policies
CBI has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of the CBI's financial statements. The significant
accounting policies of CBI are described in detail in the notes to CBI's audited
consolidated financial statements included in CBI's Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and estimates
by management, which have a material impact on the carrying value of certain
assets and liabilities. Management considers such accounting policies to be
critical accounting policies. The judgments and estimates used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ from these judgments
and estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of operations of CBI.
CBI is a holding company for community banks and a mortgage company
and, as a financial institution, believes the allowance for loan losses is a
critical accounting policy that requires the most significant judgments and
estimates used in preparation of its consolidated financial statements. Refer to
the sections "Allowance for Loan Losses" and "Provision for Loan Losses" in the
Annual Report on Form 10-K for 2002 for a detailed description of CBI's
estimation process and methodology related to the allowance for loan losses.
9
RESULTS OF OPERATIONS: QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED
MARCH 31, 2002 (all comparisons in this section are quarter to quarter, unless
specified otherwise)
COMMUNITY BANKSHARES, INC. - AVERAGE BALANCE SHEETS, YIELDS, AND RATES
Quarter ended March 31, 2003 2002
---- ----
($ in thousands) Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense Rates Balance Expense Rates
------- -------- ------ ------- -------- -----
Interest bearing deposits ................................ $ 576 $ 4 2.78% $ 1,735 $ 6 1.38%
Investment securities taxable ............................ 44,758 409 3.66% 36,688 403 4.39%
Investment securities--tax exempt ........................ 9,534 104 6.61% 341 3 5.33%
Federal funds sold ....................................... 20,441 57 1.12% 20,935 87 1.66%
Loans receivable ......................................... 332,526 5,275 6.35% 243,987 4,324 7.09%
-------- ------ -------- ------
Total interest earning assets ......................... 407,835 5,849 5.74% 303,686 4,823 6.35%
Cash and due from banks .................................. 14,313 12,326
Allowance for loan losses ................................ (3,607) (2,960)
Premises and equipment ................................... 6,615 5,541
Intangible assets ........................................ 7,864 921
Other assets ............................................. 3,386 3,130
-------- --------
Total assets .......................................... $436,406 $322,644
======== ========
Liabilities and Shareholders' Equity
Interest bearing deposits
Savings .................................................. $ 66,553 $ 214 1.29% $ 44,327 $ 189 1.71%
Interest bearing transaction accounts .................... 40,891 51 0.50% 41,530 83 0.80%
Time deposits ............................................ 184,417 1,281 2.78% 140,419 1,348 3.84%
-------- ------ -------- ------
Total interest bearing deposits ....................... 291,861 1,546 2.12% 226,276 1,620 2.86%
Short term borrowing ..................................... 14,475 38 1.05% 4,463 22 1.97%
Warehouse lines of credit ................................ 15,357 143 3.72% 7,801 86 4.41%
FHLB advances ............................................ 20,210 274 5.42% 20,280 278 5.48%
-------- ------ -------- ------
Total interest bearing liabilities .................... 341,903 2,001 2.34% 258,820 2,006 3.10%
Noninterest bearing demand deposits ...................... 47,939 33,569
Other liabilities ........................................ 1,956 2,028
Shareholders' equity ..................................... 44,608 28,227
-------- --------
Total liabilities and equity .......................... $436,406 $322,644
======== ========
Interest rate spread ..................................... 3.40% 3.25%
Net interest income and net yield on
earning assets ...................................... $3,848 3.77% $2,817 3.71%
Notes:
Yields and rates are annualized.
The yield on tax exempt securities is calculated on a tax equivalent basis using
a 34% income tax rate.
10
Earnings Performance, March 31, 2003 compared to March 31, 2002
The first quarter of 2003 was influenced by three major factors:
interest rates held stable at historically low levels, higher demand for
mortgage loans generated by continuing low interest rates, and the July 2002
acquisition of the Bank of Ridgeway. The prime lending rate for the first
quarter 2003 was 4.25%, compared to 4.75% for the same quarter in 2002. Low
interest rates put continuing pressure on the Banks' net interest margin,
nevertheless the Banks' margin improved to 3.77% from 3.71%. Most of this
increase was associated with the acquisition of the Bank of Ridgeway in July
with its relatively large dollar volume of relatively low cost deposits. Low
rates were also responsible for the unprecedented volume of mortgage loan
originations and refinances done by Community Resource Mortgage, Inc., and its
income was up over 82%, favorably impacting CBI's (CBI) noninterest income.
Three months of operation in 2003 for the Bank of Ridgeway also had a
significant impact on CBI's income statement. The substantial dollar and
percentage changes that are discussed throughout this document are due in large
measure to these factors.
CBI's net income was $1,581,000 or $.37 per basic share in 2003
compared to $1,125,000 or $.34 per basic share in 2002, an increase of $456,000
or 40.5%. Diluted earnings were $.36 per share, up from $.33.
This increase in net income resulted from the operations of the
subsidiaries, which are detailed in the following chart (dollars in thousands):
Net Income
For the quarter ended March 31, 2003 2002 $ change % change
---- ---- -------- --------
Orangeburg National Bank (ONB) ................................. $ 699 $ 671 $ 28 4.2%
Sumter National Bank (SNB) ..................................... 349 321 28 8.7%
Florence National Bank (FNB) ................................... 139 53 86 162.3%
Community Resource Mortgage, Inc.(CRM) ......................... 195 107 88 82.2%
Bank of Ridgeway (RW) .......................................... 239 0 239 na
------ ------ ------ -----
Totals ......................................................... $1,621 $1,152 $ 469 40.7%
====== ====== ====== =====
The totals reflected in the chart do not include the net costs of operation of
the holding company and accordingly are more than CBI's consolidated net income
for the period as shown on the Consolidated Statements of Income included in
this report.
Net Income
As noted above, consolidated net income for 2003, increased from the
prior year by 40.5% or $456,000. The major components of this increase are shown
below.
11
Summary Income Statement for Quarters ended March 31,
2003 2002 $ change % change
---- ---- -------- --------
(Dollar amounts in thousands)
Interest income ..................................... $ 5,849 $ 4,823 $ 1,026 21.3%
Interest expense .................................... 2,001 2,006 (5) -0.2%
------- ------- -------
Net interest income ................................. 3,848 2,817 1,031 36.6%
Provision for loan losses ........................... 264 169 95 56.2%
Noninterest income .................................. 2,555 1,687 868 51.5%
Noninterest expense ................................. 3,735 2,578 1,157 44.9%
Income tax expense .................................. 823 632 191 30.2%
------- ------- -------
Net income .......................................... 1,581 1,125 456 40.5%
======= ======= =======
Elsewhere in this report is a table comparing the average balances,
yields, and rates for the interest rate sensitive segments of CBI's balance
sheets for the quarters ended March 31, 2003 and 2002. A discussion of that
table and the above table follows.
Interest Income
Total average interest earning assets for 2003 increased $104,149,000
or 34.3% over 2002. The RW acquisition accounted for about $77 million or 75% of
the increase. The acquisition also accounted for the majority of the increases
in the volumes of specific earning assets. The acquisition provided almost the
entire increase in the tax exempt security portfolio. Thus, although the average
yield on interest earning assets declined, interest income rose.
Interest Expense
Total average interest bearing liabilities for 2003 also increased
$83,083,000 or 32.1% over 2002. RW contributed $64 million or 77% of the
increase. The acquisition also accounted for the majority of the increases in
the volumes of specific interest bearing liabilities. Even though the volumes
increased, rates declined enough to produce a slight decrease in increase
expense.
Net interest income
Net interest income is the amount by which interest and fees on
interest earning assets exceeds the interest paid on interest bearing deposits
and other interest bearing funds. For 2003 net interest income was up
significantly over 2002, as noted above mostly as a result of the RW
acquisition.
CBI's net interest margin was 3.77% for 2003 compared to 3.71% for
2002. Most of the improvement was attributable to the RW acquisition, as RW had
a large amount of relatively low cost deposits, but a portion of the improvement
was also due to aggressive interest rate management by the other banks.
12
Provision of loan losses
The increase in the provision for loan losses was due to the RW
acquisition after the first quarter of 2002 and the establishment of a loan loss
reserve by CRM, also after the first quarter of 2002.
Non-Interest Income
Non-interest income for 2003 increased $868,000 over 2002. Most of the
increase was due to mortgage banking income which increased $555,000, the vast
majority of which was generated by CRM. Approximately $200,000 of the increase
was provided by service charges and other income from RW.
Non-Interest Expense
Approximately $683,000 or 50% of the $1,157,000 increase in
non-interest expense was accounted for by the RW acquisition. The remaining
increase was due to volume increases at CRM, which has a commission based
compensation system, and normal increases at the other banks.
Income Taxes
Although income tax expense for 2003 increased $191,000 or 30.2% over
2002, the average tax rate for 2003 was 34.2% while in 2002 it was 36%. The
decline in the average tax rate is related to the acquisition of the Ridgeway
bank's substantial tax exempt investment portfolio.
Profitability
One of the best ways to review earnings is through the ROA (return on
average assets) and the ROE (return on average equity). Based on operating
results for the quarters ended March 31, 2003 and 2002, the following table is
presented.
Period ended March 31, 2003 2002
---- ----
(Dollar amounts in thousands)
Average assets ..................... $436,406 $322,644
ROA ................................ 1.45% 1.39%
Average equity ..................... $44,608 $28,227
ROE ................................ 14.18% 15.94%
Net income ......................... $1,581 $1,125
The decline in ROE is related to the increase in shareholders' equity resulting
from the RW acquisition in July 2002.
13
CHANGES IN FINANCIAL POSITION
Investment portfolio
The investment portfolio is comprised of available for sale securities.
CBI and its four banks usually purchase short-term issues (ten years or less) of
U. S Treasury and U. S. Government agency securities for investment purposes. At
March 31, 2003 the available for sale portfolio totaled $46,380,000 compared to
$53,066,000 at December 31, 2002, a decrease of 12.6% or $6,686,000. The decline
in the investment portfolio is related primarily to calls prior to maturity and
the lack of attractive investment options in the bond market. The proceeds of
these calls and maturities have generally been reinvested in federal funds. The
following chart summarizes the investment portfolios at March 31, 2003 and
December 31, 2002.
March 31, 2003
--------------
Amortized Fair
Available for sale Cost Value
---- -----
(Dollar amounts in thousands)
U.S. Government and federal agencies ............. $34,892 $35,101
State and local governments ...................... 8,713 9,369
Other equity securities .......................... 1,910 1,910
------- -------
Total ............................................ $45,515 $46,380
======= =======
December 31, 2002
-----------------
Amortized Fair
Available for sale Cost Value
---- -----
(Dollar amounts in thousands)
U.S. Government and federal agencies ............. $41,488 $41,531
State and local governments ...................... 9,514 9,625
Other equity securities .......................... 1,910 1,910
------- -------
Total ............................................ $52,912 $53,066
======= =======
Loan portfolio
The loan portfolio is primarily consumer, and small and medium size
business oriented. At March 31, 2003 the loan portfolio was $313,711,000
compared to $306,484,000 at December 31, 2002, a 2.4% or $7,227,000 increase.
This increase was attributable to normal growth of the banks. The following
chart summarizes the loan portfolio at March 31, 2003 and December 31, 2002.
Mar. 31, 2003 Dec. 31, 2002
------------- -------------
(Dollar amounts in thousands)
Real estate .............................. $ 79,409 $ 78,210
Commercial ............................... 197,552 191,844
Loans to individuals ..................... 36,750 36,430
-------- --------
Total .................................... $313,711 $306,484
======== ========
14
The above loan portfolio table does not include loans held for sale.
Loans held for sale are loans originated by CBI's banks or mortgage company for
sale to others which are held pending completion of the sale. The vast majority
of such loans are originated by CRM and are one-to-four family residential
mortgage loans. At March 31, 2003 loans held for sale totaled $23,191,000
compared to $24,664,000 at December 31, 2002, a 6% or $1,473,000 decrease. The
amount of loans held for sale is subject to significant fluctuation depending on
current market conditions.
Past Due and Non-Performing Assets
CBI closely monitors past due loans and loans that are in non-accrual
status and other real estate owned. Below is a summary of past due and
non-performing assets at March 31, 2003 and December 31, 2002.
Mar. 31, 2003 Dec. 31, 2002
------------- -------------
(Dollar amounts in thousands)
Past due 90 days + and still accruing loans ............................................ $2,514 $1,740
Non-accrual loans ...................................................................... $ 822 $ 796
Impaired loans (included in nonaccrual) ................................................ $ 822 $ 796
Other real estate owned ................................................................ $ 350 $ 219
Most of the amount of accruing loans greater than 90 days past due
amount at March 31, 2003 is attributable to two unrelated loans, one in the
approximate amount of $1.3 million and the other in the approximate amount of
$.5 million. The larger loan involves principals who are having a legal dispute
with each other. Management believes that the bank's collateral position is
sufficient so that no loss is expected. The smaller loan is related to a loan
participation which management expects to be paid out in May. Management does
not expect any material loss in relation to either of these credits.
Management considers the past due and non-accrual amounts at March 31,
2003 to be reasonable in relation to the size of the portfolio and manageable in
the normal course of business.
CBI had no restructured loans during any of the above listed periods.
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan
losses, which is a direct charge to expense. Losses on specific loans are
charged against the allowance in the period in which management determines that
such loans become uncollectible. Recoveries of previously charged-off loans are
credited to the allowance.
Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and loans to individuals. The combination of
a relatively short operating history and relatively high asset quality precludes
management from establishing a meaningful specific loan loss percentage for the
15
computation of the allowance for each category. Instead management assigns an
estimated percentage factor to each in the computation of the overall allowance.
These estimates are not, however, intended to restrict CBI's ability to respond
to losses. CBI charges losses from any segment of the portfolio to the
allowance, regardless of the allocation. In general terms, the real estate
portfolio is subject to the least risk, followed by the commercial loan
portfolio, followed by the loans to individuals portfolio. The banks' internal
and external loan review programs from time to time identify loans that are
subject to specific weaknesses and such loans are reviewed for a specific loan
loss allowance.
Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 2003 will be less than the 2002
levels as such loans progress through the collection, foreclosure, and
repossession process. Management believes that the allowance for loan losses, as
of March 31, 2003, is sufficient to absorb the inherent losses that remain in
the loan portfolio. Management will continue to closely monitor the levels of
non-performing and potential problem loans and address the weaknesses in these
credits to enhance the amount of ultimate collection or recovery of these
assets. Management considers the levels and trends in non-performing and past
due loans in determining how the provision for loan losses is adjusted.
The aggregate allowance for loan losses of the banks and the mortgage
company and the aggregate activity with respect to the allowance are summarized
in the following table.
(Dollar amounts in thousands) Mar. 31, 2003 Dec. 31, 2002 Mar. 31, 2002
------------- ------------- -------------
Allowance at beginning of period ........................... $ 3,572 $ 3,274 $ 2,830
Provision expense .......................................... 264 1,033 169
Net charge offs ............................................ (69) (734) (38)
------- ------- -------
Allowance at end of period ................................. $ 3,767 $ 3,573 $ 2,961
======= ======= =======
Allowance / outstanding loans .............................. 1.20% 1.17% 1.23%
Intangible assets
CBI has adopted FASB No. 142, Goodwill and Other Intangible Assets, as
of January 1, 2002. As of March 31, 2003 intangible assets totaled $7,835,000,
compared to $7,896,000 at December 31, 2002, a decrease of $61,000. The decrease
represented amortization of the core deposit intangible acquired in conjunction
with the RW acquisition.
Deposits
Deposits at March 31, 2003 were $9,608,000, or 2.9%, higher than at
December 31, 2002. This increase was the result of normal business growth for
the banks.
Time deposits greater than $100,000 at March 31, 2003 were $155,000 or
..23% greater than December 31, 2002, essentially unchanged.
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
16
customers for loans and deposit withdrawals in a timely and economical manner.
The most manageable sources of liquidity are composed of liabilities, with the
primary focus of liquidity management being the ability to attract deposits
within the Banks' service areas. Core deposits (total deposits less certificates
of deposit of $100,000 or more) provide a relatively stable funding base.
Certificates of deposit of $100,000 or more are generally more sensitive to
changes in rates, so they must be monitored carefully. Asset liquidity is
provided by several sources, including amounts due from banks, federal funds
sold, and investments available-for-sale.
As of March 31, 2003 the loan to deposit ratio was 90.5% compared to
90.9% at December 31, 2002 and 89.9% at March 31, 2002. The RW acquisition in
July 2002 did provide a significant amount of additional liquidity to the
company as a whole, and the additional liquidity has been used in meeting the
overall demand for loans since the acquisition.
In the opinion of management, CBI's current and projected liquidity
position is adequate.
Capital resources
As summarized in the table below, CBI maintains a strong capital
position.
Minimum required
for capital
Mar. 31, 2003 Dec. 31, 2002 adequacy
------------- ------------- --------
Tier 1 capital to average total assets ............................... 8.56% 8.29% 4.00%
Tier 1 capital to risk weighted assets ............................... 11.59% 11.56% 4.00%
Total capital to risk weighted assets ................................ 12.74% 12.70% 8.00%
In the opinion of management, the Company's current and projected
capital positions are adequate. In each case the ratios exceed by a substantial
margin the regulatory requirement for being considered well capitalized.
Dividends
CBI declared and paid a quarterly cash dividend of nine cents per share
during the first quarter of 2003. The total cost of this dividend was $387,000.
Commitments
On March 31, 2003 the Board of CBI approved a project to introduce
imaging technology into the company. This technology will enable the banks to
provide imaged statements to customers and it will also provide for imaging of
documents. The estimated cost of the project is $700,000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. CBI's market risk arises principally from interest rate risk inherent
in its lending, deposit and borrowing activities. Management actively monitors
17
and manages its interest rate risk exposure. Although CBI manages other risks,
such as credit quality and liquidity risk in the normal course of business,
management considers interest rate risk to be its most significant market risk
and this risk could potentially have the largest material effect on CBI's
financial condition and results of operations. Other types of market risks such
as foreign currency exchange risk and commodity price risk do not arise in the
normal course of community banking activities.
CBI's Asset/Liability Committee uses a simulation model to assist in
achieving consistent growth in net interest income while managing interest rate
risk. According to the model as of March 31, 2003 CBI is positioned so that net
interest income would increase $418,000 and net income would increase $278,000
in the next twelve months if interest rates rose 200 basis points. Conversely,
net interest income would decline $418,000 and net income would decline $278,000
in the next twelve months if interest rates declined 200 basis points. In the
current interest rate environment, it is unlikely that there will be any large
rate decreases in the immediate future. Computation of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates and loan prepayment, and should not be
relied upon as indicative of actual results. Further, the computations do not
contemplate any actions CBI and its customers could undertake in response to
changes in interest rates.
As of March 31, 2003 there was no significant change from the interest
rate sensitivity analysis for the various changes in interest rates calculated
as of December 31, 2002. The foregoing disclosures related to the market risk of
CBI should be read in connection with Management's Discussion and Analysis of
Financial Position and Results of Operations included in the 2002 Annual Report
on Form 10-K.
Item 4. Controls and Procedures
(a) Based on their evaluation of the issuer's disclosure controls and procedures
(as defined in 17 C.F.R. Sections 240.13a-14(c) and 240.15d-14(c)) as of a date
within 90 days prior to the filing of this quarterly report, the issuer's chief
executive officer and chief financial officer concluded that the effectiveness
of such controls and procedures was adequate.
(b) There were no significant changes in the issuer's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Part II--Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
b) Reports on Form 8-K. Form 8-K filed April 25, 2003, pursuant to Item 9 of
that Form with respect to the information provided pursuant to Item 12 of that
Form.
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: May 13, 2003
COMMUNITY BANKSHARES, INC.
By: s/ E. J. Ayers, Jr.,
----------------------
E. J. Ayers, Jr.,
Chief Executive Officer
By: s/ William W. Traynham
------------------------
William W. Traynham
President and Chief Financial Officer
(Principal Accounting Officer)
19
CERTIFICATIONS
I, E. J. Ayers, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community
Bankshares Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 s/E. J. Ayers, Jr.
-----------------------------------
E. J. Ayers, Jr.
Chairman and CEO
20
CERTIFICATIONS
I, William W. Traynham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community
Bankshares Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 s/William W. Traynham
-----------------------------------
William W. Traynham
President and CFO