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, 2008 Commission File No. 000-22054
COMMUNITY BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
South Carolina 57-0966962
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
102 Founders Court
Orangeburg, South Carolina 29118
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(Address of principal executive offices, zip code)
(803) 535-1060
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(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 a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, no par
or stated value,4,455,056 shares outstanding on May 2, 2008.
COMMUNITY BANKSHARES, INC.
FORM 10-Q
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4T. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
24
Item 6. Exhibits
25
SIGNATURES 26
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2008 2007
----- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................. $ 18,887 $ 18,701
Federal funds sold ...................................................................... 23,405 6,985
--------- ---------
Total cash and cash equivalents .................................................. 42,292 25,686
Interest-bearing deposits with other banks .............................................. 641 911
Securities available-for-sale ........................................................... 59,333 57,868
Securities held-to-maturity (estimated fair value $1,650 for 2008
and $1,650 for 2007) ............................................................... 1,650 1,650
Other investments ....................................................................... 3,768 3,209
Loans held for sale ..................................................................... 4,655 3,509
Loans receivable ........................................................................ 452,467 464,039
Less, allowance for loan losses ..................................................... (5,735) (5,343)
--------- ---------
Net loans ........................................................................ 446,732 458,696
Premises and equipment - net ............................................................ 10,708 10,820
Accrued interest receivable ............................................................. 3,323 3,547
Net deferred income tax assets .......................................................... 1,290 1,357
Goodwill ................................................................................ 4,321 4,321
Core deposit intangible assets .......................................................... 2,284 2,345
Prepaid expenses and other assets ....................................................... 3,616 2,648
--------- ---------
Total assets ..................................................................... $ 584,613 $ 576,567
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................. $ 58,591 $ 57,738
Interest-bearing .................................................................... 417,474 423,969
--------- ---------
Total deposits ................................................................... 476,065 481,707
Short-term borrowings ................................................................... 9,124 9,893
Long-term debt .......................................................................... 42,177 29,679
Accrued interest payable ................................................................ 1,430 1,501
Accrued expenses and other liabilities .................................................. 1,505 142
--------- ---------
Total liabilities ................................................................ 530,301 522,922
--------- ---------
Shareholders' equity
Common stock - no par value; 12,000,000 shares authorized; issued and
outstanding - 4,457,556 for 2008 and 4,446,456 for 2007 ............................. 30,476 30,505
Retained earnings ....................................................................... 23,379 22,812
Accumulated other comprehensive income .................................................. 457 328
--------- ---------
Total shareholders' equity ....................................................... 54,312 53,645
--------- ---------
Total liabilities and shareholders' equity ....................................... $ 584,613 $ 576,567
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2008 2007
----- ----
(Dollars in thousands,
except per share)
Interest and dividend income
Loans, including fees ........................................................... $8,441 $8,157
Interest-bearing deposits with other banks ...................................... 11 33
Debt securities ................................................................. 746 1,016
Dividends ....................................................................... 59 47
Federal funds sold .............................................................. 181 180
------ ------
Total interest and dividend income .......................................... 9,438 9,433
------ ------
Interest expense
Deposits
Time deposits $100M and over .................................................... 1,243 993
Other deposits .................................................................. 2,233 2,645
------ ------
Total interest expense on deposits .......................................... 3,476 3,638
Short-term borrowings ........................................................... 59 116
Long-term debt .................................................................. 491 437
------ ------
Total interest expense ...................................................... 4,026 4,191
------ ------
Net interest income .................................................................. 5,412 5,242
Provision for loan losses ............................................................ 470 375
------ ------
Net interest income after provision .................................................. 4,942 4,867
------ ------
Noninterest income
Service charges on deposit accounts ............................................. 927 891
Mortgage brokerage income ....................................................... 522 655
Net securities gains ............................................................ 34 2
Other ........................................................................... 284 277
------ ------
Total noninterest income .................................................... 1,767 1,825
------ ------
Noninterest expenses
Salaries and employee benefits .................................................. 2,847 2,934
Premises and equipment .......................................................... 623 562
Advertising ..................................................................... 161 143
Supplies ........................................................................ 97 125
Other ........................................................................... 1,258 1,350
------ ------
Total noninterest expenses .................................................. 4,986 5,114
------ ------
Income before income taxes ........................................................... 1,723 1,578
Income tax expense ................................................................... 622 573
------ ------
Net income ........................................................................... $1,101 $1,005
====== ======
Per share
Net income ...................................................................... $ 0.25 $ 0.23
Net income - diluted ............................................................ 0.25 0.22
Cash dividends declared ......................................................... 0.12 0.12
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common Stock
------------ Accumulated
Number of Retained Other Comprehensive
Shares Amount Earnings Income (Loss) Total
------ ------ -------- ------------- -----
(Dollars in thousands, except per share)
Balance, January 1, 2007 ................................ 4,441,220 $ 30,603 $ 22,382 $ (361) $ 52,624
----------
Comprehensive income
Net income .......................................... - - 1,005 - 1,005
----------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income
taxes of $48 ...................................... - - - 99 99
Reclassification adjustment for losses (gains)
realized in income, net of
income taxes of $1 ................................ - - - (1) (1)
----------
Total other comprehensive income (loss) ......... - - - - 98
----------
Total comprehensive income .................... - - - - 1,103
----------
Share-based compensation ................................ - 27 - - 27
Proceeds of sale of common stock ........................ 500 8 - - 8
Exercise of employee stock options ...................... 26,782 232 - - 232
Cash dividends declared, $.12 per share ................. - - (536) - (536)
---------- ---------- ---------- ---------- ----------
Balance, March 31, 2007 ................................. 4,468,502 $ 30,870 $ 22,851 $ (263) $ 53,458
========== ========== ========== ========== ==========
Balance, January 1, 2008 ................................ 4,446,456 $ 30,505 $ 22,812 $ 328 $ 53,645
----------
Comprehensive income
Net income .......................................... - - 1,101 - 1,101
----------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income
taxes of $79 ...................................... - - - 151 151
Reclassification adjustment for losses (gains)
realized in income, net of
income taxes of $12 ............................... - - - (22) (22)
----------
Total other comprehensive income (loss) ......... - - - - 129
----------
Total comprehensive income .................... - - - - 1,230
----------
Share-based compensation ................................ - 7 - - 7
Proceeds of sale of common stock ........................ 10,600 119 - - 119
Exercise of employee stock options ...................... 1,000 11 - - 11
Common stock repurchased and cancelled .................. (13,700) (166) - - (166)
Restricted stock grants to employees .................... 13,200 - - - -
Cash dividends declared, $.12 per share ................. - - (534) - (534)
---------- ---------- ---------- ---------- ----------
Balance, March 31, 2008 ................................. 4,457,556 $ 30,476 $ 23,379 $ 457 $ 54,312
========== ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2008 2007
----- ----
(Dollars in thousands)
Operating activities
Net income .............................................................................. $ 1,101 $ 1,005
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization .................................................... 300 289
Net accretion of securities ...................................................... (51) (8)
Provision for loan losses ........................................................ 470 375
Net securities gains ............................................................. (34) (2)
Proceeds of sales of loans held for sale ......................................... 26,473 36,283
Originations of loans held for sale .............................................. (27,097) (35,415)
Gains on sales of loans held for sale ............................................ (522) (656)
Losses on sales of foreclosed assets ............................................. - 5
Decrease (increase) in accrued interest receivable ............................... 224 (1)
(Increase) decrease in prepaid expenses and other assets ......................... (975) 828
Decrease in accrued interest payable ............................................. (71) (5)
Increase (decrease) in accrued expenses and other liabilities .................... 1,281 (709)
Provision for off balance sheet credit exposure .................................. 115 72
Share-based compensation ......................................................... 7 27
-------- --------
Net cash provided by operating activities .................................... 1,221 2,088
-------- --------
Investing activities
Net decrease in interest-bearing deposits with other banks .............................. 270 231
Purchases of available-for-sale securities .............................................. (27,043) (1,966)
Maturities, calls and paydowns of available-for-sale securities ......................... 25,859 5,635
Proceeds of sales of other investments .................................................. 116 238
Purchases of other investments .......................................................... (675) (337)
Net decrease (increase) in loans made to customers ...................................... 11,444 (15,016)
Purchases of premises and equipment ..................................................... (127) (276)
Proceeds from sales of foreclosed assets ................................................ 24 379
-------- --------
Net cash provided (used) by investing activities ............................. 9,868 (11,112)
-------- --------
Financing activities
Net decrease in deposits ................................................................ (5,642) (13,851)
Net decrease in short-term borrowings ................................................... (769) (823)
Proceeds from issuing long-term debt .................................................... 15,000 7,500
Repayment of long-term debt ............................................................. (2,502) (4,003)
Proceeds from sale of stock ............................................................. 119 8
Exercise of employee stock options ...................................................... 11 232
Common stock repurchased and cancelled .................................................. (166) -
Cash dividends paid ..................................................................... (534) (536)
-------- --------
Net cash provided (used) by financing activities ............................. 5,517 (11,473)
-------- --------
Increase (decrease) in cash and cash equivalents ............................................. 16,606 (20,497)
Cash and cash equivalents, beginning of period ............................................... 25,686 46,724
-------- --------
Cash and cash equivalents, end of period ..................................................... $ 42,292 $ 26,227
======== ========
See accompanying notes to unaudited consolidated financial statements.
6
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Three Months Ended
March 31,
2008 2007
---- ----
(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash payments for interest .......................................................... $4,097 $4,196
====== ======
Cash payments for income taxes ...................................................... $ 1 $ 48
====== ======
Supplemental disclosures of non-cash investing activities
Transfers of loans receivable to foreclosed assets .................................. $ 50 $ 276
====== ======
See accompanying notes to unaudited consolidated financial statements.
7
COMMUNITY BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements
Accounting Principles - A summary of significant accounting policies and the
audited financial statements for 2007 are included in Community Bankshares,
Inc.'s (the "Company" or "CBI") Annual Report on Form 10-K for the year ended
December 31, 2007 filed with the Securities and Exchange Commission.
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 2007 Annual Report on Form 10-K.
Nonperforming Loans - As of March 31, 2008, there were $6,929,000 in nonaccrual
loans and $192,000 in loans 90 or more days past due and still accruing
interest.
Earnings Per Share - Basic earnings per share is computed by dividing net income
applicable to common shares by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing applicable net
income by the weighted average number of shares outstanding and any dilutive
potential common shares and dilutive stock options. It is assumed that all
dilutive stock options are exercised at the beginning of each period and that
the proceeds are used to purchase shares of the Company's common stock at the
average market price during the period. Net income per share and net income per
share, assuming dilution, were computed as follows:
(Unaudited)
Three Months Ended
March 31,
2008 2007
---- ----
(Dollars in thousands,
except per share amounts)
Net income per share, basic
Numerator - net income ........................................................... $ 1,101 $ 1,005
========== ==========
Denominator
Weighted average common shares issued and outstanding .......................... 4,449,501 4,448,546
========== ==========
Net income per share, basic ......................................... $ .25 $ .23
========== ==========
Net income per share, assuming dilution
Numerator - net income ........................................................... $ 1,101 $ 1,005
========== ==========
Denominator
Weighted average common shares issued and outstanding .......................... 4,449,501 4,448,546
Effect of dilutive stock options ............................................... 9,748 62,091
---------- ----------
Total shares ........................................................ 4,459,249 4,510,637
========== ==========
Net income per share, assuming dilution ............................. $ .25 $ .22
========== ==========
8
Stock-Based Compensation - Effective January 1, 2006, the Company began
accounting for compensation expenses related to stock options granted to
employees and directors under the recognition and measurement principles of
Statement of Accounting Standards No. 123(R) "Share-Based Payment" ("SFAS
123(R)) using the modified prospective application method.
At March 31, 2008, the Company awarded 13,200 shares of restricted stock and
45,650 stock appreciation rights to certain employees under the 2007 Equity
Plan. The restricted shares will vest in five years. The SARs will vest 20% per
year over the next five years. Compensation expense for the awards will be
recognized beginning in April 2008.
Variable Interest Entities - On March 8, 2004, CBI sponsored the creation of a
Delaware trust, SCB Capital Trust I (the "Trust"), and is the sole owner of the
common securities issued by the Trust. On March 10, 2004, the Trust issued
$10,000,000 in floating rate capital securities. The proceeds of this issuance,
and the amount of CBI's capital investment, were used to acquire $10,310,000
principal amount of CBI's floating rate junior subordinated deferrable interest
debt securities ("Debentures") due April 7, 2034, which securities, and the
accrued interest thereon, now constitute the Trust's sole assets. The interest
rate associated with the debt securities, and the distribution rate on the
common securities of the Trust, was established initially at 3.91% and is
adjustable quarterly at 3 month LIBOR plus 280 basis points. The index rate
(LIBOR) may not be lower than 1.11%. CBI may defer interest payments on the
Debentures for up to twenty consecutive quarters, but not beyond the stated
maturity date of the Debentures. In the event that such interest payments are
deferred by CBI, the Trust may defer distributions on the common securities. In
such an event, CBI would be restricted in its ability to pay dividends on its
common stock and perform under other obligations that are not senior to the
junior subordinated Debentures.
The Debentures are redeemable at par at the option of CBI, in whole or in part,
on any interest payment date on or after April 7, 2009. Prior to that date, the
Debentures are redeemable at 105% of par upon the occurrence of certain events
that would have a negative effect on the Trust or that would cause it to be
required to be registered as an investment company under the Investment Company
Act of 1940 or that would cause the trust preferred securities not to be
eligible to be treated as Tier 1 capital by the Federal Reserve Board. Upon
repayment or redemption of the Debentures, the Trust will use the proceeds of
the transaction to redeem an equivalent amount of trust preferred securities and
trust common securities. The Trust's obligations under the trust preferred
securities are unconditionally guaranteed by CBI.
The Company's investment in the Trust is carried at cost in other assets and the
debentures are included in long-term debt in the consolidated balance sheet.
Fair Value Measurements
The Company implemented Statement of Financial Accounting Standards No. 157,
"Fair Value Measurements," ("SFAS No. 157") as required on January 1, 2008. SFAS
No. 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly fashion between market
participants at the measurement date, and establishes a framework for measuring
fair value. It also establishes a three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date, eliminates the consideration of large
position discounts for financial instruments quoted in active markets, requires
consideration of the Company's creditworthiness when valuing its liabilities,
9
and expands disclosures about instruments measured at fair value. The following
is a summary of the measurement attributes applicable to financial assets and
liabilities that are measured at fair value on a recurring basis:
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description March 31, 2008 (Level 1) (Level 2) (Level 3)
----------- -------------- --------- --------- ---------
(Dollars in thousands)
Assets
Securities available-for-sale ....... $ - $ 59,333 $ -
Deriviatives ........................ - 20 -
Liabilities
Derivatives ......................... - 20 -
Pricing for the Company's securities available-for-sale is obtained from an
independent third-party that uses a process that may incorporate current market
prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, other reference data and industry
and economic events that a market participant would be expected to use in
valuing the securities. Not all of the inputs listed apply to each individual
security at each measurement date. The independent third party assigns specific
securities into an "asset class" for the purpose of assigning the applicable
level of the fair value hierarchy used to value the securities. The techniques
used after adoption of SFAS No. 157 are consistent with the methods used
previously.
No cumulative effect adjustments were required upon initial application of SFAS
No. 157. Available-for-sale securities continue to be measured at fair value
with unrealized gains or losses recorded in other comprehensive income.
The following is a summary of the measurement attributes applicable to assets
and liabilities that are measured at fair value on a non-recurring basis:
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description March 31, 2008 (Level 1) (Level 2) (Level 3)
----------- -------------- --------- --------- ---------
(Dollars in thousands)
Collateral dependent impaired loans .... $ - $ - $ 4,982
Foreclosed Assets ...................... - 879 -
Goodwill ............................... - - 4,321
Core deposit intangibles ............... - - 2,284
Collateral dependent impaired loans consist of nonaccrual loans for which the
underlying collateral provides the sole repayment source. The Company measures
the amount of the impairment for such loans by determining the difference
between the fair value of the underlying collateral and the recorded amount of
the loan. The fair value of the underlying collateral generally is based on
appraisals performed in accordance with applicable appraisal standards by
independent appraisers engated by the Company. In many cases, management updates
values reflected in older appraisals obtained at the time of loan origination
and already in the Company's possession using its own knowledge, judgments and
assumptions about current market and other conditions in lieu of obtaining a new
independent appraisal. If the fair value of the collateral is less than the
recorded amount of the loan, a valuation allowance is established for the
difference; otherwise, no valuation allowance is established. The valuation
allowance for impaired loans is a component of the allowance for loan losses.
Periodically, management reevaluates the fair value of the collateral and makes
adjustments to the valuation allowance as appropriate. However, if the fair
value of the collateral subsequently recovers in value such that it exceeds the
recorded loan amount, no adjustment is made in the loan's value for the excess.
The amount of the valuation allowance for the Company's collateral dependent
impaired loans was $1,947,000 as of March 31, 2008.
10
Foreclosed assets consist of assets acquired through, or in lieu of, loan
foreclosure, are held for sale and initially were recorded at fair value, less
estimated costs to sell at the date of acquisition, thus establishing a new cost
basis. Loan losses arising from the acquisitions of such property are charged
against the allowance for loan losses at the date the property is acquired.
Subsequent to acquisition, valuations are performed periodically and the assets
are carried at the lower of the new cost basis or fair value. Revenues and
expenses from operations and changes in any subsequent valuation allowance are
included in net foreclosed assets costs and expenses.
Goodwill was initially recorded as the difference between the purchase price and
the fair values of tangible assets, separately identifiable intangible assets,
and liabilities acquired in prior business combination transactions. Goodwill is
tested for impairment no less than annually. The Company previously has not
recognized any impairment of goodwill.
Core deposit intangibles represent the excess of the purchase price of core
deposits over their fair values at the date of their acquisition in a purchase
transaction. The core deposit intangible is amortized as a component of other
expense over the estimated lives of the deposits acquired. During the first
quarter of 2008, $61,000 of such amortization was included in net income.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 159 "The Fair Value Option for Financial Assets and
Financial Liabilities," ("SFAS No. 159" or the "Statement") which was effective
for the Company as of January 1, 2008. Under the provisions of SFAS No. 159,
entities may choose, but are not required, to measure many financial instruments
and certain other items at their fair values, with changes in the fair values of
those instruments reported in earnings. The Company has not elected to measure
at fair value any financial instruments under the provisions of SFAS No. 159.
The adoption of the Statement had no effect on the Company's financial
statements.
New Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160 "Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51" ("SFAS No. 160"). SFAS No. 160 is effective for years
beginning after December 31, 2008 and is to be applied prospectively with
retrospective presentation and disclosure requirements for comparative financial
statements. Early adoption is prohibited. SFAS No. 160 seeks to improve the
relevance, comparability and transparency of financial information that a
reporting entity provides in its consolidated financial statements by separately
identifying and reporting several financial statement components into amounts
that are attributable to the reporting entity or that are attributable to
noncontrolling interests. SFAS No. 160 also specifies the conditions under which
an entity is required to deconsolidate its interest in a subsidiary. The Company
currently has no consolidated subsidiaries that are not wholly owned nor are any
transactions contemplated that would result in such a condition. Therefore, it
is expected that the adoption of SFAS No. 160 in January 2009 will have no
effect on the Company's consolidated financial statements.
CAUTIONARY NOTICE WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
the securities laws. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forwarding-looking statements.
11
All statements that are not historical facts are statements that could
be "forward-looking statements." You can identify these forward-looking
statements through the use of words such as "may," "will," "should," "could,"
"would," "expect," "anticipate," "assume," indicate," "contemplate," "seek,"
"plan," "predict," "target," "potential," "believe," "intend," "estimate,"
"project," "continue," or other similar words. Forward-looking statements
include, but are not limited to, statements regarding the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, income, business operations and proposed services.
These forward-looking statements are based on current expectations,
estimates and projections about the banking industry, management's beliefs, and
assumptions made by management. Such information includes, without limitation,
discussions as to estimates, expectations, beliefs, plans, strategies, and
objectives concerning future financial and operating performance. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
results may differ materially from those expressed or forecasted in such
forward-looking statements. The risks and uncertainties include, but are not
limited to:
o future economic and business conditions;
o lack of sustained growth in the economies of the Company's market
areas;
o government monetary and fiscal policies;
o the effects of changes in interest rates on the levels,
composition and costs of deposits, loan demand, and the values of
loan collateral, securities, and interest sensitive assets and
liabilities;
o the effects of competition from a wide variety of local,
regional, national and other providers of financial, investment,
and insurance services, as well as competitors that offer banking
products and services by mail, telephone, computer and/or the
Internet;
o credit risks;
o the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates, including the
value of collateral securing loans;
o the risks of opening new offices, including, without limitation,
the related costs and time of building customer relationships and
integrating operations as part of these endeavors and the failure
to achieve expected gains, revenue growth and/or expense savings
from such endeavors;
o changes in laws and regulations, including tax, banking and
securities laws and regulations;
o changes in accounting policies, rules and practices;
o changes in technology or products may be more difficult or
costly, or less effective, than anticipated;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions
and economic confidence; and
o other factors and information described in this report and in any
of the other reports that we file with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
All forward-looking statements are expressly qualified in their
entirety by this cautionary notice. The Company has no obligation, and does not
undertake, to update, revise or correct any of the forward-looking statements
after the date of this report. The Company has expressed its expectations,
beliefs and projections in good faith and believes they have a reasonable basis.
However, there is no assurance that these expectations, beliefs or projections
will result or be achieved or accomplished.
12
References to our Website Address
References to our website address throughout this Quarterly Report on
Form 10-Q and in any documents incorporated into this Form 10-Q by reference are
for informational purposes only, or to fulfill specific disclosure requirements
of the Securities and Exchange Commission's rules or the American Stock Exchange
listing standards. These references are not intended to, and do not, incorporate
the contents of our website by reference into this Form 10-Q or the accompanying
materials.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
CBI has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of CBI's financial statements. The significant
accounting policies of CBI are described in detail in the notes to CBI's audited
consolidated financial statements included in CBI's 2007 Annual Report on Form
10-K filed with the Securities and Exchange Commission.
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 a community bank 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 2007 for a detailed description of CBI's
estimation process and methodology related to the allowance for loan losses.
RESULTS OF OPERATIONS
Changes in Financial Condition
During the three months ended March 31, 2008, deposits decreased by
$5,642,000, or 1.2%, primarily due to a net seasonal outflow of deposits related
to local government tax receipts. Long-term debt increased by $12,498,000, or
42.1%. Federal funds sold increased by $16,420,000, or 235.1%, and loans
decreased by $11,572,000, or 2.5%. during the period. Real estate construction
loans decreased by $4,660,000 or 9.34%, and commercial, financial and
agricultural loans decreased by $3,382,000, or 4.75% during the first quarter of
2008.
The seasonal outflows of local governmental deposits is a
well-understood, recurring event as local governments accumulate annual tax
13
receipts near year end and then begin withdrawing the funds for use or
allocation. Early in the quarter, $15 million in long-term financing was
obtained from the Federal Home Loan Bank of Atlanta to provide management with
the flexibility to reduce some higher cost time deposits and provide liquidity
for anticipated demand for new loans. However, demand over the first quarter for
loans declined related to the overall slowdown in business activity. Temporarily
the surplus liquidity was maintained in federal funds, but early in the second
quarter management decided to purchase a combination of U.S. Agency and
Government Sponsored Enterprise mortgage backed pass-through bonds in order to
lock a positive spread on the new debt.
Earnings Performance
For the quarter ended March 31, 2008, CBI earned consolidated net
income of $1,101,000, compared with $1,005,000 for the comparable period of
2007, an increase of $96,000 or 9.6%. Basic earnings per share were $.25 for the
2008 period, compared with $.23 for the 2007 quarter. Diluted earnings per share
were $.25 for the 2008 period and $.22 for the 2007 period.
Net interest income for the first quarter of 2008 was $170,000 more
than the amount reported for the first quarter of 2007. The positive effects of
higher average amounts of loans and higher rates earned on securities in 2008
were substantially offset by lower yields on loans. However, primarily by
reducing the rates paid for savings and interest bearing transaction deposits
aggressively, interest expense for the first quarter of 2008 was $165,000 lower
than for the 2007 period. The Federal Reserve's Open Market Committee (the
"Committee") lowered interest rates 100 basis points during the last four months
of 2007 and 200 basis points through the first quarter of 2008. The Company's
funding sources primarily are short-term deposits, and rates associated with
those sources, as well as any short-term borrowings and long-term debt incurred
during the 2008 period, have also been affected by those actions. The net
interest margin for the first quarter of 2008 at 3.97% was 4 basis points lower
than for the prior year period.
The results for the 2008 period were affected unfavorably by the
regular evaluation of the Company's allowance for loan losses, which resulted in
an increase of $95,000 in the provision for loan losses compared with the same
period of 2007.
Noninterest income for the 2008 first quarter was $58,000 less than for
the same period of 2007, primarily due to a decrease of $133,000 in mortgage
brokerage income. However, noninterest expense reductions in the mortgage
division substantially offset the reduction in fee income. Service charges
assessed on deposit accounts and for other services increased by $36,000 in the
2008 period over the prior year amount.
Noninterest expense for the first quarter of 2008 was $128,000 less
than for the same period of 2007, primarily due to a decrease of $87,000 in
salaries and employee benefits that resulted largely from the elimination of the
mortgage division's wholesale operations in the first quarter of 2008.
14
Summary Income Statement
------------------------
(Dollars in thousands)
For the Three Months Ended March 31, 2008 2007 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income ............................................ $9,438 $9,433 $ 5 0.1%
Interest expense ........................................... 4,026 4,191 (165) -3.9%
------ ------ ------
Net interest income ........................................ 5,412 5,242 170 3.2%
Provision for loan losses .................................. 470 375 95 25.3%
Noninterest income ......................................... 1,767 1,825 (58) -3.2%
Noninterest expenses ....................................... 4,986 5,114 (128) -2.5%
Income tax expense ......................................... 622 573 49 8.6%
------ ------ ------
Net income ................................................. $1,101 $1,005 $ 96 9.6%
====== ====== ======
Net Interest Income
Net interest income is the amount of interest income earned on interest
earning assets (loans, securities, interest bearing deposits in other banks, and
federal funds sold), less the interest expense incurred on interest bearing
liabilities (interest bearing deposits, short-term borrowings, and long-term
debt), and is the principal source of the Company's earnings. Net interest
income is affected by the level of interest rates, volume and mix of interest
earning assets and interest bearing liabilities and the relative funding of
those assets.
Interest income for the first quarter of 2008 was substantially
unchanged from the first quarter of 2007. However, the individual components of
interest income changed significantly, reflecting management's decisions about
the Company's investments in the various categories of earning assets. Interest
income from loans increased to $8,441,000 in the 2008 period from $8,157,000 in
the 2007 period due to a higher average volume of loans outstanding in the 2008
period. The amount of interest earned on investment securities in the first
quarter of 2008 decreased by $258,000, or 24.3%, from the amount earned in the
2007 period due to lower average volumes in the current year. Although the
average amount of federal funds sold in the 2008 quarter increased by 58.8% over
the prior year period, the interest income from those assets was just $1,000, or
..6%, more than in the prior year period due to a reduction of 192 basis points
in the yield associated with those assets.
Interest expense for deposits decreased to $3,476,000 from $3,638,000
for the 2007 period. The decrease primarily was caused by lower average amounts
of savings deposits and lower rates paid for interest bearing transaction
accounts and savings deposits. Higher average amounts of time deposits in the
2008 period resulted in an increase of $226,000 in interest expense for those
deposits. The rate paid for those deposits was substantially unchanged from the
prior year rate.
The average rate paid for all interest bearing deposits was 3.28%
during the 2008 period, compared with 3.56% during the 2007 period. The Company
has lowered the rates offered for its various deposit products in conjunction
with the overall decline in market interest rates paid for deposits.
In the first quarter of 2008, interest expense for long-term debt,
which includes junior subordinated debentures and advances obtained from the
Federal Home Loan Bank of Atlanta, totaled $491,000, an increase of $54,000, or
12.4%, from the amount for the same period of 2007. Average amounts of long-term
debt outstanding increased by $11,069,000, or 42.1%, and the average rate paid
for those funds decreased by 145 basis points. During the 2008 period,
15
$15,000,000 of long-term fixed-rate debt was acquired at a weighted average
interest rate of 2.35%. The debt had a weighted average life of 7.5 years at the
time it was acquired.
Interest expense for short-term borrowings in the first quarter of 2008
was $59,000, a decrease of $57,000, or 49.1%, from the amount for the same
period of 2007, as a result of a slight decrease in the average amount of those
borrowings and a 193 basis point reduction in the rate paid.
Average Balances, Yields and Rates
Three Months Ended March 31,
----------------------------
2008 2007
-------------------------------------- --------------------------------------
Interest Interest
Average Income / Yields / Average Income / Yields /
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest bearing deposits with other banks ....... $ 1,358 $ 11 3.26% $ 2,547 $ 33 5.25%
Investment securities - taxable .................. 56,342 766 5.47% 84,722 1,020 4.88%
Investment securities - tax exempt (2) ........... 4,261 39 3.68% 4,750 43 3.67%
Federal funds sold ............................... 22,474 181 3.24% 14,155 180 5.16%
Loans, including loans held for sale (2)(3) ...... 464,498 8,441 7.31% 423,632 8,157 7.81%
--------- ------- -------- -------
Total interest earning assets .......... 548,933 9,438 6.92% 529,806 9,433 7.22%
Cash and due from banks .......................... 20,432 17,330
Allowance for loan losses ........................ (5,625) (4,864)
Premises and equipment ........................... 10,771 10,313
Intangible assets ................................ 6,634 6,880
Other assets ..................................... 7,189 7,497
--------- ---------
Total assets ........................... $ 588,334 $ 566,962
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ...... $ 79,736 $ 168 0.85% $ 77,051 $ 259 1.36%
Savings .................................... 86,297 375 1.75% 96,148 672 2.83%
Time deposits .............................. 259,749 2,933 4.54% 241,571 2,707 4.54%
--------- ------- --------- -------
Total interest bearing deposits ........ 425,782 3,476 3.28% 414,770 3,638 3.56%
Short-term borrowings ............................ 11,590 59 2.05% 11,826 116 3.98%
Long-term debt ................................... 37,345 491 5.29% 26,276 437 6.74%
--------- ------- --------- -------
Total interest bearing liabilities ..... 474,717 4,026 3.41% 452,872 4,191 3.75%
Noninterest bearing demand deposits .............. 57,351 59,068
Other liabilities ................................ 1,881 1,820
Shareholders' equity ............................. 54,385 53,202
--------- ---------
Total liabilities and
shareholders' equity ................. $ 588,334 $ 566,962
========= =========
Interest rate spread ............................. 3.51% 3.47%
Net interest income and net yield
on earning assets .......................... $ 5,412 3.97% $ 5,242 4.01%
----------------------------------
(1) Yields and rates are annualized.
(2) Yields on tax-exempt securities and loans have not been stated on a
tax-equivalent basis.
(3) Nonaccruing loans are included in the loan balance and income from such
loans is recognized on a cash basis. The amounts of such loans and income
are not material.
16
Provision and Allowance for Loan Losses
The provision for loan losses for the 2008 first quarter was $470,000,
an increase of $95,000, or 25.3%, from the $375,000 provided for the same period
of 2007. This increase was caused by increases in nonaccrual and potential
problem loans during the 2008 first quarter, as discussed later in this section.
Also contributing to the increase in provision was slowing of the economy in our
market areas.
Net charge-offs during the three months ended March 31, 2008 were
$78,000, compared with $76,000 for the same period of 2007. The allowance for
loan losses as of March 31, 2008 was 1.27% of loans outstanding, compared with
1.15% as of December 31, 2007 and 1.17% as of March 31, 2007.
The activity in the allowance for loan losses is summarized in the
following table:
Three Months Three Months
Ended Year Ended Ended
March 31, December 31, March 31,
2008 2007 2007
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period .................................. $ 5,343 $ 4,662 $ 4,662
Provision for loan losses ......................................... 470 3,155 375
Net charge-offs ................................................... (78) (2,474) (76)
--------- --------- ---------
Allowance at end of period ........................................ $ 5,735 $ 5,343 $ 4,961
========= ========= =========
Allowance as a percentage of loans outstanding .................... 1.27% 1.15% 1.17%
Loans at end of period ............................................ $ 452,467 $ 464,039 $ 424,328
========= ========= =========
Non-performing loans, consisting of nonaccrual loans and loans 90 or
more days past due which are still accruing interest, totaled $6,929,000 as of
March 31, 2008, compared with $6,542,000 as of December 31, 2007. The majority
of non-performing loans as of March 31, 2008 and December 31, 2007 were secured
by commercial and residential real estate and other collateral. Accordingly, the
amount of such non-performing loans does not reflect the amount of probable loss
that management estimates will be incurred with respect to those loans. The
amount of such estimated loss is included in the allowance for loan losses.
Following is a summary of non-performing loans as of March 31, 2008 and
December 31, 2007:
17
March 31, December 31,
2008 2007
---- ----
(Dollars in thousands)
Non-performing loans
Nonaccrual loans .................................. $6,929 $ 6,542
Past due 90 days or more and still accruing ....... 192 -
------ ---------
Total ............................... $7,121 $ 6,542
====== =========
Non-performing loans as a percentage of:
Loans outstanding ................................. 1.57% 1.41%
Allowance for loan losses ......................... 124.17% 122.44%
The following table shows quarterly changes in non-performing and
potential problem loans since December 31, 2005. Potential problem loans are
loans as to which information about the borrowers' possible credit problems
causes management to have serious doubts about their ability to comply with
current repayment terms, which may result in subsequent classification of such
loans as non-performing loans.
90 Days or
More Past Due Total Percentage Percentage
Nonaccrual and Still Nonperforming of Total Potential of Total
Loans Accruing Loans Loans Problem Loans Loans
----- -------- ----- ----- ------------- -----
(Dollars in thousands)
December 31, 2005 .................. $ 11,651 $ 729 $ 12,380 2.99% $ 29,313 7.08%
Net change ......................... 3,128 949 4,077 (2,767)
-------- ------- -------- --------
March 31, 2006 ..................... 14,779 1,678 16,457 3.94% 26,546 6.36%
Net change ......................... (3,628) (1,476) (5,104) (3,461)
-------- ------- -------- --------
June 30, 2006 ...................... 11,151 202 11,353 2.71% 23,085 5.51%
Net change ......................... (2,483) 175 (2,308) (219)
-------- ------- -------- --------
September 30, 2006 ................. 8,668 377 9,045 2.19% 22,866 5.55%
Net change ......................... (3,954) (145) (4,099) (7,475)
-------- ------- -------- --------
December 31, 2006 .................. 4,714 232 4,946 1.21% 15,391 3.76%
Net change ......................... 1,612 (65) 1,547 (1,143)
-------- ------- -------- --------
March 31, 2007 ..................... 6,326 167 6,493 1.53% 14,248 3.36%
Net change ......................... (1,169) (167) (1,336) 385
-------- ------- -------- --------
June 30, 2007 ...................... 5,157 - 5,157 1.15% 14,633 3.27%
Net change ......................... 2,323 - 2,323 1,332
-------- ------- -------- --------
September 30, 2007 ................. 7,480 - 7,480 1.64% 15,965 3.50%
Net change ......................... (938) - (938) (810)
-------- ------- -------- --------
December 31, 2007 .................. 6,542 - 6,542 1.41% 15,155 3.27%
Net change ......................... 387 192 579 6,880
-------- ------- -------- --------
March 31, 2008 ..................... $ 6,929 $ 192 $ 7,121 1.57% $ 22,035 4.87%
======== ======= ======== ========
18
During the first quarter of 2008, nonaccrual loans increased by
$387,000. The primary drivers of this increase included approximately $2.6
million of loans that were moved into nonaccrual status. Of this amount,
approximately $1.7 million represents two relationships, both of which are real
estate secured coastal properties. Other elements of the increase were
attributable to a large number of smaller dollar volume loans that were moved
into nonaccrual status as a result of normal risk management processes. One
major relationship of approximately $1.6 million, a commercial business loan in
our Florence region that had been in nonaccrual status, was paid off during the
quarter without loss to the bank. Other loans were removed from nonaccrual
status by chargeoffs or payoffs.
The $6.9 million increase in potential problem loans during the quarter
resulted from management concerns about changes to the overall economic
conditions in our various markets and improvements in our risk management
processes for loan review. The Bank's primary loan review function is now
in-house rather than outsourced and this provides for a more timely and more
broadly based assessment of risk in the loan portfolio. Although these loans do
have a higher than normal credit concern for management, the amounts do not
represent management's expectations of potential losses.
Management will continue to monitor the levels of non-performing and
potential problem loans and dedicate the resources it believes are necessary to
address the weaknesses in these credits in order to enhance the probability of
collection or recovery of these assets. Management considers the levels and
trends in non-performing loans and past due loans in determining how the
provision and allowance for loan losses is estimated and adjusted.
Noninterest Income
Noninterest income for the first quarter of 2008 decreased by $58,000,
or 3.2%, from the $1,825,000 reported for the 2007 period. Mortgage brokerage
income decreased by $133,000 or 20.3%, from $655,000 for the 2007 period, due to
continuing weakness in the residential real estate market, a decrease in the
number of loans originated and sold during the quarter, and the elimination of
the mortgage banking subsidiary's wholesale lending division during the 2008
first quarter. The Company in mid-2006 refocused its mortgage-lending efforts to
emphasize production for sale of conventional one-to-four family mortgages, and
limited wholesale mortgage production to a select group of high-quality
originators. However, due to recent conditions in the wholesale market,
management decided early in the first quarter of 2008 to exit the wholesale
lending business entirely.
Service charges on deposit accounts increased by $36,000 over the first
quarter of 2007, primarily as a result of increased volumes of overdraft fee
income. Net securities gains increased in the 2008 period due to the
issuer-initiated early redemptions of securities that were purchased at a
discount. Because interest rates have decreased quickly in a short period of
time, many issuers of debt securities have seized the opportunity to refinance
and, accordingly, have initiated such redemptions.
Noninterest Expenses
Salaries and employee benefits for the first quarter of 2008 were
$87,000, or 3.0%, less than in the same 2007 period. This decrease resulted
19
primarily from the elimination of the mortgage brokerage subsidiary's wholesale
dvision in the first quarter of 2008. Partially offsetting those cost
reductions, the Bank opened a new branch office in northeast Richland County
during the first quarter of 2008.
Income Taxes
Income tax expense for the first quarter of 2008 increased $49,000, or
8.6%, over the amount for the first quarter of 2007. The average tax rate for
2008 was 36.1% compared with 36.3% for the 2007 period.
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in a timely and economical manner.
The most manageable sources of liquidity are composed of liabilities, with the
primary focus of liquidity management being the ability to attract deposits
within CBI's market areas. Individual and commercial deposits are the primary
source of funds for credit activities, along with long-term borrowings from the
Federal Home Loan Bank of Atlanta and the net proceeds of issuing $10,000,000 of
trust preferred securities. Cash and amounts due from banks and federal funds
sold are CBI's primary sources of asset liquidity. These funds provide a cushion
against short-term fluctuation in cash flow from both loans and deposits.
Securities available-for-sale are CBI's principal source of secondary asset
liquidity. However, the availability of this source is limited by pledging
commitments for public deposits and securities sold under agreements to
repurchase, and is influenced by market conditions.
The Bank has further sources of liquidity which include several large
federal funds borrowing lines with correspondent banks and significant unused
additional borrowing capacity for short and long-term debt with the Federal Home
Loan Bank of Atlanta.
Total deposits as of March 31, 2008 were $476,065,000, a decrease of
$5,642,000, or 1.2%, from the amount as of December 31, 2007. As of March 31,
2008 the loan to deposit ratio was 95.0%, compared with 96.3% at December 31,
2007 and 90.3% at March 31, 2007. Loans held-for-sale have not been included in
the numerator of the calculation of the loan to deposit ratio.
Management believes CBI and the Bank's liquidity sources are adequate
to meet their current and projected operating needs.
CAPITAL RESOURCES
CBI and the Bank are subject to regulatory risk-based capital adequacy
standards. Under these standards, bank holding companies and banks are required
to maintain certain minimum ratios of capital to risk-weighted assets and
average total assets. Under the provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991, federal bank regulatory authorities are
required to implement prescribed "prompt corrective actions" upon the
deterioration of the capital position of a bank. If the capital position of an
affected institution were to fall below a certain level, increasingly stringent
regulatory corrective actions would be mandated.
20
The March 31, 2008 risk-based capital ratios for CBI and the Bank are
presented in the following table, compared with the "well capitalized" (Bank
only) and minimum ratios under the regulatory definitions and guidelines:
March 31, 2008
--------------
Tier 1 Total Capital Leverage
------ ------------- --------
Community Bankshares, Inc. ........................................... 12.77% 14.02% 9.84%
Community Resource Bank .............................................. 11.44% 12.69% 8.77%
Minimum "well capitalized" requirement ............................... 6.00% 10.00% 6.00%
Minimum requirement .................................................. 4.00% 8.00% 5.00%
As shown in the table above, the Bank's capital ratios exceed the
regulatory requirement to be considered "well capitalized." In the opinion of
management, the current and projected capital positions of CBI and the Bank are
adequate.
OFF-BALANCE-SHEET ARRANGEMENTS
In the normal course of business, CBI engages in transactions that, in
accordance with generally accepted accounting principles, are not recorded in
the financial statements (generally commitments to extend credit) or are
recorded in amounts that differ from their notional amounts (generally
derivatives). These transactions involve elements of credit, interest rate and
liquidity risk of varying degrees. Such transactions are used by CBI for general
corporate purposes.
Variable Interest Entity
As discussd under "Results of Operations - Net Interest Income" and in
the notes to unaudited consolidated financial statements under "Variable
Interest Entities," as of March 31, 2008, CBI held an equity interest in, and
guarantees the liabilities of, a non-consolidated variable interest entity, SCB
Capital Trust I.
Commitments
The Bank is party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve varying
degrees of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. Exposure to credit loss is represented by the
contractual, or notional, amounts of these commitments. The same credit policies
are used in making commitments as for on-balance-sheet instruments.
The following table sets forth the contractual amounts of commitments
which represent credit risk:
21
March 31, 2008
--------------
(Dollars in
thousands)
Loan commitments ....................... $61,536
Standby letters of credit .............. 1,591
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by management upon extension of credit, is based on management's
credit evaluation of the counter-party. Collateral held varies but may include
personal residences, accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support private borrowing arrangements. All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Generally, collateral supporting those commitments is
held if deemed necessary. Since many of the standby letters of credit are
expected to expire without being drawn upon, the total letter of credit amounts
do not necessarily represent future cash requirements.
Derivative Financial Instruments
In April, 2003, the Financial Accounting Standards Board issued
Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." Among other requirements, this Statement provides that loan
commitment contracts entered into or modified after June 30, 2003 that relate to
the origination of mortgage loans that will be held for sale shall be accounted
for as derivative instruments by the issuer of the loan commitment. In March,
2004, the SEC issued its Staff Accounting Bulletin No 105 "Application of
Accounting Principles to Loan Commitments," which resulted in no changes in
CBI's accounting for such commitments. CBI issues mortgage loan rate lock
commitments to potential borrowers to facilitate its origination of home
mortgage loans that are intended to be sold. Between the time that CBI issues
its commitments and the time that the loans close and are sold, CBI is subject
to variability in the selling prices related to those commitments due to changes
in market rates of interest. However, CBI offsets this variability through the
use of so-called "forward sales contracts" to investors in the secondary market.
Under these arrangements, an investor agrees to purchase the closed loans at a
predetermined price. CBI generally enters into such forward sales contracts at
the same time that rate lock commitments are issued. These arrangements
effectively insulate CBI from the effects of changes in interest rates during
the time the commitments are outstanding, but the arrangements do not qualify as
fair value hedges. These derivative financial instruments are carried in the
balance sheet at estimated fair value and changes in the estimated fair values
of these derivatives are recorded in the statement of income in net gains or
losses on loans held for sale.
Derivative financial instruments are written in amounts referred to as
notional amounts. Notional amounts only provide the basis for calculating
payments between counterparties and do not represent amounts to be exchanged
between parties or a measure of financial risk. The following table includes the
notional principal amounts of rate lock commitments and forward sales contracts
as of March 31, 2008, and the estimated fair values of those financial
22
instruments included in other assets and liabilities in the balance sheet as of
that date.
March 31, 2008
--------------
Estimated
Fair Value
Notional Asset
Amount (Liability)
------ -----------
(Dollars in thousands)
Rate lock commitments to potential borrowers
to originate mortgage loans to be
held for sale .................................. $12,087 $ (20)
Forward sales contracts with investors
of mortgage loans to be held for sale .......... $12,087 $ 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. CBI's market risk arises principally from interest rate risk inherent
in its lending, deposit and borrowing activities. Management actively monitors
and manages its interest rate risk exposure. Although CBI manages other risks,
such as credit quality and liquidity risk in the normal course of business,
management considers interest rate risk to be its most significant market risk
and this risk could potentially have the largest material effect on CBI's
financial condition and results of operations. Other types of market risks such
as foreign currency exchange risk and commodity price risk do not arise in the
normal course of community banking activities.
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, 2008, CBI is positioned so that
net interest income would decrease $14,000 and net income would decrease $11,000
in the next twelve months if interest rates rose 100 basis points. Conversely,
net interest income would increase $14,000 and net income would increase $11,000
in the next twelve months if interest rates declined 100 basis points. In the
current interest rate environment, it is not expected that there will be any
large decreases in market interest rates 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, 2008 there was no significant change from the interest
rate sensitivity analysis for the various changes in interest rates calculated
as of December 31, 2007. 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 2007 Annual Report
on Form 10-K.
23
Item 4T. Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that such controls and
procedures, as of the end of the period covered by this report, were effective.
In connection with management's evaluation required by 17 C.F.R.
240.13a-15(d) or 240.15d-15(d) of the Company's internal control over financial
reporting, management has determined that there has been no change in the
Company's internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II--OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
On February 1 and February 4, 2008, the Company sold 600 and 10,000
shares, respectively, of its common stock to an executive officer and a director
for aggregate sales prices of $6,720 and $112,000, respectively. Issuance of the
securities was not registered under the Securities Act of 1933 in reliance on
the exemption provided by Section 4(2) thereof because no public offering was
involved.
(c) Purchases of Securities
ISSUER PURCHASES OF EQUITY SECURITIES (1)
-----------------------------------------
(c) Total (d) Maximum
Number of Number of
Shares Purchased Shares
as Part of That May Yet
(a) Total Publicly Be Purchased
Number of (b) Average Announced Under the
Shares Price per Plans or Plans or
Period Purchased Share Programs Programs
--------- ----- -------- --------
2/1/08 - 2/28/08 ............................ 5,200 $ 12.18 5,200 448,700
3/1/08 - 3/31/08 ............................ 8,500 $ 12.11 8,500 440,200
------ ------ -------
Total ....................................... 13,700 $ 12.14 13,700 440,200
====== ====== =======
(1) On July 30, 2007, the Board of Directors authorized the repurchase of up to
500,000 shares of the Company's common stock. The program expires on July 30,
2008.
24
Item 6. Exhibits
Exhibits 10-1 Employment Agreement between the Company and Samuel L.
Erwin, as amended December 6, 2007 in accordance with
Internal Revenue Code Section 409A and regulations
thereunder.
10-2 Employment Agreement between the Company and William W.
Traynham, as amended December 7, 2007 in accordance with
Internal Revenue Code Section 409A and regulations
thereunder.
10-3 Employment Agreement between the Company and Michael A.
Wolfe, as amended December 7, 2007 in accordance with
Internal Revenue Code Section 409A and regulations
thereunder.
31-1 Rule 13a-14(a)/15d-14(a) Certification of principal
executive officer
31-2 Rule 13a-14(a)/15d-14(a) Certification of principal
financial officer
32 Certifications Pursuant to 18 U.S.C. Section 1350
25
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 12, 2008
COMMUNITY BANKSHARES, INC.
By: s/ Samuel L. Erwin
-------------------------------------------
Samuel L. Erwin
Chief Executive Officer
By: s/ William W. Traynham
--------------------------------------------
William W. Traynham
President and Chief Financial Officer
(Principal Accounting Officer)
26
EXHIBIT INDEX
10-1 Employment Agreement between the Company and Samuel L.
Erwin, as amended December 6, 2007 in accordance with
Internal Revenue Code Section 409A and regulations
thereunder.
10-2 Employment Agreement between the Company and William W.
Traynham, as amended December 7, 2007 in accordance with
Internal Revenue Code Section 409A and regulations
thereunder.
10-3 Employment Agreement between the Company and Michael A.
Wolfe, as amended December 7, 2007 in accordance with
Internal Revenue Code Section 409A and regulations
thereunder.
31-1 Rule 13a-14(a)/15d-14(a) Certification of principal
executive officer
31-2 Rule 13a-14(a)/15d-14(a) Certification of principal
financial officer
32 Certifications Pursuant to 18 U.S.C. Section 1350
27