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 Sept. 30, 2001 Commission File number: 000-22054
COMMUNITY BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
South Carolina 57-0966962
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
791 Broughton St., Orangeburg, South Carolina 29115
(Address of Principal Executive Office, Zip Code)
(803) 535-1060
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,299,674 shares of common
stock outstanding as of November 1, 2001.
10-Q TABLE OF CONTENTS
Part I-Financial Statements Page
Item 1 Financial Statements ............................................. 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................... 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk ....... 19
Part II-Other Information
Item 6 Exhibits and Reports on Form 8-K ................................. 20
2
Part I. Item 1. Financial Statements
COMMUNITY BANKSHARES, INC. - CONSOLIDATED BALANCE SHEETS
($ amounts in thousands) UNAUDITED
Sept. 30, December 31,
2001 2000
---- ----
ASSETS
Cash and due from other financial institutions:
Non-interest bearing .................................................................. $ 10,738 $ 10,209
Federal funds sold .................................................................... 18,267 8,130
--------- ---------
Total cash and cash equivalents ................................................... 29,005 18,339
Interest bearing deposits in other banks ................................................... 4,129 594
Investment securities:
Securities held to maturity ........................................................... 2,149 12,371
Securities available for sale ......................................................... 33,002 41,195
Loans held for resale ...................................................................... 154 343
Loans ...................................................................................... 219,125 195,077
Less, allowance for loan losses ....................................................... (2,761) (2,424)
--------- ---------
Net loans ......................................................................... 216,364 192,653
Premises and equipment ..................................................................... 4,423 4,411
Accrued interest receivable ............................................................... 1,780 2,330
Deferred income taxes ...................................................................... 648 795
Other real estate owned .................................................................... 267 -
Other assets ............................................................................... 360 292
--------- ---------
Total assets ...................................................................... $ 292,281 $ 273,323
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing .................................................................. $ 32,548 $ 31,219
Interest bearing ...................................................................... 201,243 187,592
--------- ---------
Total deposits .................................................................... 233,791 218,811
Federal funds purchased and securities
sold under agreements to repurchase ................................................... 10,976 9,352
Federal Home Loan Bank advances ............................................................ 20,280 20,350
Other liabilities .......................................................................... 1,688 1,671
--------- ---------
Total liabilities ................................................................. 266,735 250,184
--------- ---------
Shareholders' equity:
Common stock
No par, authorized shares 12,000,000, issued and
outstanding 3,204,220 in 2001 and 3,199,180 in 2000 ............................... 15,967 15,928
Retained earnings ..................................................................... 9,463 7,342
Accumulated other comprehensive income (loss) ......................................... 116 (131)
--------- ---------
Total shareholders' equity ........................................................ 25,546 23,139
--------- ---------
Total liabilities and shareholders' equity ........................................ $ 292,281 $ 273,323
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
3
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
for the nine months ended September 30, 2001 and 2000 (Unaudited)
($ amounts in thousands)
Accumulated
Common Stock Other Total
------------ Retained Comprehensive Shareholders'
Shares Amount Earnings Income (Loss) Equity
------ ------ -------- ------------- ------
(dollar amounts in thousands)
Balances at Dec. 31, 1999 ................................ 3,191,462 $ 14,207 $ 6,549 $(511) $ 20,245
Comprehensive income:
Net income .......................................... 2,342 2,342
Other comprehensive income (loss) net of tax:
Unrealized gain (loss) on securities ................ 88 88
Cash-in-lieu of shares in connection with Jan. 31,
2000 stock dividend.................................. (137)
Market value of shares issued in
five percent stock dividend.......................... - 1,709 (1,709) -
Shares issued under option agreement ..................... 2,520 19 19
Costs of stock dividend .................................. (10) (10)
Dividends paid ........................................... - - (452) - (452)
---------- ---------- ---------- ----- ----------
Balances at Sept. 30, 2000 ............................... 3,193,845 $ 15,925 $ 6,730 $(423) $ 22,232
========== ========== ========== ===== ==========
Balances at Dec. 31, 2000 ................................ 3,199,180 $ 15,928 $ 7,342 $(131) $ 23,139
Comprehensive income:
Net income .......................................... 2,793 2,793
Other comprehensive income (loss) net of tax:
Unrealized gain (loss) on securities ................ 247 247
Shares issued under option agreement ..................... 5,040 39 39
Dividends paid ........................................... - - (672) - (672)
---------- ---------- ---------- ----- ----------
Balances at September 30, 2001 ........................... 3,204,220 $ 15,967 $ 9,463 $ 116 $ 25,546
========== ========== ========== ===== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
4
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine months ended Sept. 30, Three months ended Sept. 30,
--------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
($ amounts in thousands)
Interest and dividend income:
Interest and fees on loans ................................. $ 13,694 $ 12,184 $ 4,578 $ 4,421
Deposits with other financial institutions ................. 144 53 38 25
Investment securities:
Interest - U. S. Treasury and
U. S. Government Agencies .............................. 1,602 2,159 408 727
Dividends ................................................ 118 96 49 36
---------- ---------- ---------- ----------
Total investment securities ........................... 1,720 2,255 457 763
Federal funds sold and securities
purchased under agreements to resell ..................... 642 252 188 64
---------- ---------- ---------- ----------
Total interest and dividend income .................... 16,200 14,744 5,261 5,273
---------- ---------- ---------- ----------
Interest expense:
Deposits:
Certificates of deposit of $100,000 or more .............. 1,912 1,666 602 593
Other .................................................... 5,089 4,473 1,561 1,642
---------- ---------- ---------- ----------
Total deposits ........................................ 7,001 6,139 2,163 2,235
Federal funds purchased and securities
sold under agreements to repurchase ...................... 212 117 63 53
Federal Home Loan Bank advances ............................ 861 863 265 337
---------- ---------- ---------- ----------
Total interest expense ................................ 8,074 7,119 2,491 2,625
---------- ---------- ---------- ----------
Net interest income ............................................ 8,126 7,625 2,770 2,648
Provision for loan losses ...................................... 457 490 180 152
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ............ 7,669 7,135 2,590 2,496
---------- ---------- ---------- ----------
Non-interest income:
Service charges on deposit accounts ........................ 1,490 1,059 562 363
Gain on sale of securities ................................. 14 - 14 -
Other ...................................................... 483 290 168 101
---------- ---------- ---------- ----------
Total non-interest income ............................. 1,987 1,349 744 464
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits ............................. 3,172 2,831 1,070 939
Premises and equipment ..................................... 703 690 232 234
Other ...................................................... 1,447 1,331 531 452
---------- ---------- ---------- ----------
Total non-interest expense ............................ 5,322 4,852 1,833 1,625
---------- ---------- ---------- ----------
Net income before taxes ........................................ 4,334 3,632 1,501 1,335
Provision for income taxes ..................................... 1,541 1,290 539 470
---------- ---------- ---------- ----------
Net income ..................................................... $ 2,793 $ 2,342 $ 962 $ 865
========== ========== ========== ==========
Basic earnings per common share:
Weighted average shares outstanding ........................ 3,201,560 3,194,685 3,200,867 3,194,685
Net income per common share ................................ $ 0.87 $ 0.73 $ 0.30 $ 0.27
Diluted earnings per common share:
Weighted average shares outstanding ........................ 3,222,456 3,216,207 3,220,138 3,216,207
Net income per common share ................................ $ 0.87 $ 0.73 $ 0.30 $ 0.27
5
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended Sept. 30,
2001 2000
---- ----
(Dollar amounts in thousands)
Cash flows from operating activities:
Net income ................................................................................. $ 2,793 $ 2,342
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation ......................................................................... 329 360
Provision for loan losses ............................................................ 457 490
Accretion of discounts and amortization of ........................................... (18) (7)
premiums - investment securities - net
Changes in assets and liabilities:
Proceeds of sale of loans held for resale ............................................ 9,807 4,861
Origination of loans held for resale ................................................. (9,807) (4,861)
(Increase) decrease in interest receivable ........................................... 550 (543)
Decrease in other assets ............................................................. 79 62
Increase in other liabilities ........................................................ 17 295
-------- --------
Net cash provided by operating activities .................................................. 4,207 2,999
-------- --------
Cash flows from investing activities:
Net (increase) in interest bearing deposits .......................................... (3,535) (781)
Proceeds from maturities of investment ............................................... 11,375 1,500
securities - held to maturity
Purchases of investment securities - held to ......................................... (1,153) (501)
maturity
Proceeds from maturities of investment ............................................... 69,658 3,551
securities - available for sale
Purchases of investment securities - available ....................................... (61,200) (8,468)
for sale
Net (increase) in loans to customers ................................................. (23,979) (29,205)
Purchase of premises and equipment ................................................... (341) (212)
Net (increase) in other real estate .................................................. (267) -
-------- --------
Net cash (used) in investing activities ............................................ (9,442) (34,116)
-------- --------
Cash flows from financing activities:
Net increase in demand, savings, and time ............................................ 14,980 26,927
deposits
Net increase in federal funds purchased and .......................................... 1,624 2,975
securities sold under agreements to
repurchase
(Decrease) in Federal Home Loan Bank advances ........................................ (70) (370)
Common stock issued under option plan ................................................ 39 10
Dividends paid in cash ............................................................... (672) (453)
-------- --------
Net cash provided by financing activities .......................................... 15,901 29,089
-------- --------
Net increase (decrease) in cash and cash equivalents ...................................... 10,666 (2,028)
Cash and cash equivalents-beginning of period .............................................. 18,339 20,315
-------- --------
Cash and cash equivalents-end of period .................................................... $ 29,005 $ 18,287
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
6
Notes to Unaudited Consolidated Financial Statements
Summary of Significant Accounting Principles
A summary of significant accounting policies and the audited financial
statements for 2000 are included in Corporation's Annual Report on Form 10-K for
the year ended December 31, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of Community
Bankshares, Inc. (CBI), the parent company, and Orangeburg National Bank, Sumter
National Bank and Florence National Bank, its wholly owned subsidiaries. All
significant intercompany items have been eliminated in the consolidated
statements.
Management Opinion
The interim financial statements in this report are unaudited. In the
opinion of management, all the adjustments necessary to present a fair statement
of the results for the interim period have been made. Such adjustments are of a
normal and recurring nature.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for an entire year. These interim
financial statements should be read in conjunction with the annual financial
statements and notes thereto contained in the 2000 Annual Report on Form 10-K.
Changes in Comprehensive Income Components
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," effective for
fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Disclosure as required by the Statement
is as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ............................. $(640,000) $217,000 $(423,000)
--------- -------- ---------
Other comprehensive income, Sept. 30, 2000 ........................................... $(640,000) $217,000 $(423,000)
========= ======== =========
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period .............................. $176,000 $(60,000) $116,000
-------- --------- --------
Other comprehensive income, Sept. 30, 2001 ........................................... $176,000 $(60,000) $116,000
======== ========= ========
7
COMMUNITY BANKSHARES, INC. - AVERAGE BALANCE SHEETS, YIELDS, AND RATES
Nine months ended Sept. 30,
(Dollars in Thousands) ---------------------------
2001 2000
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense Rates Balance Expense Rates
------- -------- ------ ------- -------- -----
Interest bearing deposits .................................... $ 4,441 $ 144 4.32% $ 1,159 $ 53 6.10%
Investment securities taxable ................................ 36,490 1,699 6.21% 46,646 2,230 6.37%
Investment securities--tax exempt ............................ 746 21 5.69% 806 25 6.27%
Federal funds sold ........................................... 19,514 642 4.39% 5,324 252 6.31%
Loans receivable ............................................. 206,419 13,694 8.85% 175,774 12,184 9.24%
-------- ------- -------- -------
Total interest earning assets ........................... 267,610 16,200 8.07% 229,709 14,744 8.56%
Cash and due from banks ...................................... 9,166 8,365
Allowance for loan losses .................................... (2,605) (2,130)
Premises and equipment ....................................... 4,475 4,582
Other assets ................................................. 3,058 3,171
-------- --------
Total assets ............................................ $281,704 $243,697
======== ========
Liabilities and Shareholders' Equity
Interest bearing deposits
Savings ...................................................... $ 37,290 $ 927 3.31% $32,650 $ 955 3.90%
Interest bearing transaction accounts ........................ 23,389 165 0.94% 20,519 241 1.57%
Time deposits ................................................ 136,836 5,909 5.76% 117,735 4,943 5.60%
-------- ------- -------- -------
Total interest bearing deposits ......................... 197,515 7,001 4.73% 170,904 6,139 4.79%
Short term borrowing ......................................... 7,414 212 3.81% 3,553 117 4.39%
FHLB advances ................................................ 19,773 861 5.81% 19,342 863 5.95%
-------- ------- -------- -------
Total interest bearing liabilities ...................... 224,702 8,074 4.79% 193,799 7,119 4.90%
Noninterest bearing demand deposits .......................... 30,779 27,568
Other liabilities ............................................ 1,735 1,283
Shareholders' equity ......................................... 24,488 21,047
-------- --------
Total liabilities & shareholders' equity ................ $281,704 $243,697
======== ========
Interest rate spread ......................................... 3.28% 3.66%
Net interest income and net yield on earning assets .......... $ 8,126 4.05% $ 7,625 4.43%
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as 'forward looking statements'
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. The Corporation cautions readers that forward
looking statements, including without limitation, those relating to the
Corporation's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Corporation's reports filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
SEPTEMBER 30, 2000
Net Income
For the nine months ended September 30, 2001 CBI earned a consolidated
profit of $2,793,000 compared to $2,342,000 for the comparable period in 2000,
an increase of 19.3% or $451,000. Basic and diluted earnings per share were $.87
in the 2001 period compared to $.73 for the 2000 period.
For the 2001 period Orangeburg National Bank reported a profit of
$1,869,000 compared to $1,687,000 for the 2000 period, an increase of 10.8% or
$182,000.
For the 2001 period Sumter National Bank reported a profit of $849,000
compared to $634,000 for the 2000 period, an increase of 33.9% or $215,000. The
Sumter bank began operation in September 1996.
For the 2001 period Florence National Bank reported a profit of
$125,000 compared to $39,000 for the 2000 period, an increase of 220% or
$86,000. The Florence bank began operation in July 1998.
As noted above, consolidated net income for the nine months ended
September 30, 2001, increased from the prior year by 19.3% or $451,000. The
major components of this increase are discussed below. Net interest income
before provision for loan losses for the nine months ended September 30, 2001
increased to $8,126,000 compared to $7,625,000 for the same period in 2000, an
increase of 6.6% or $501,000. For the 2001 period the provision for loan losses
was $457,000 compared to $490,000 for the 2000 period, a decrease of 6.7% or
$33,000. Non-interest income for the 2001 period was $1,987,000 compared to
$1,349,000 for the 2000 period, a 47.3% or $638,000 increase. For the same
periods, non-interest expense was $5,322,000 compared to $4,852,000, a 9.7% or
$470,000 increase.
9
Profitability
Profitability may be measured through the ROA (return on average
assets) and the ROE (return on average equity). Return on assets is the income
for the period divided by the average assets for the period, annualized. Return
on equity is the income for the period divided by the average equity for the
period, annualized. Operating results for the nine months ended September 30,
2001 and 2000 yield the results in the table shown below.
Nine months ended Sept. 30,
2001 2000
---- ----
(dollars in thousands)
Average assets ............. $281,704 $243,697
ROA ........................ 1.32% 1.28%
Average equity ............. $24,488 $21,047
ROE ........................ 15.21% 14.84%
Net income ................. $2,793 $2,342
Net interest income
Net interest income, the major component of CBI's income, is the amount
by which interest and fees on interest earning assets exceeds the interest paid
on interest bearing deposits and other interest bearing funds. During the first
nine months of 2001 net interest income after provision for loan losses
increased to $7,669,000 from $7,135,000, a 7.5% or $534,000 increase over the
first nine months of 2000. This improvement was the result of a $38 million
increase in the average volume of earning assets. The average yield on earning
assets decreased to 8.07% for the 2001 period from 8.56% for the 2000 period.
This decline was the result of market interest rate declines. During the first
nine months of 2001 the prime lending rate declined from 9.0% to 5.50%. During
the first nine months of 2000 the prime lending rate increased from 8.75% to
9.50%.
For the first nine months of 2001 the cost of funds averaged 4.79%,
decreased from 4.90% for the first nine months of 2000. The effect of these
changes was a net interest spread (yield on earning assets less cost of interest
bearing liabilities) of 3.28% for the 2001 period, decreased from 3.66% for the
2000 period. CBI's net interest margin (net interest income divided by total
earning assets) was 4.05% for the 2001 period compared to 4.43% for the 2000
period.
Interest Income
Elsewhere in this report is a table comparing the average balances,
yields, and rates for the interest rate sensitive segments of the Corporation's
balance sheets for the nine months ended September 30, 2001 and 2000. A
discussion of that table follows.
Total interest income for the first nine months of 2001 was $16,200,000
compared with $14,744,000 for the same period in 2000, a 9.9% or $1,456,000
increase. The yield on average earning assets for the 2001 period was 8.07%,
decreased from 8.56% for the 2000 period. The decline in yields was directly
related to the overall decline in market interest rates. Total average interest
earning assets for the 2001 period were $267,610,000 compared to $229,709,000
for the 2000 period, an increase of 16.5% or $37,901,000.
10
The loan portfolio earned $13,694,000 for the first nine months of 2001
compared to $12,184,000 for the same period of 2000, a 12.4% or $1,510,000
increase. The yield decreased to 8.85% for the 2001 period from 9.24% for the
2000 period. The average size of the loan portfolio was $206,419,000 for the
2001 period compared to $175,774,000 for the 2000 period, an increase of 17.4%
or $30,645,000.
The taxable investment portfolio earned $1,699,000 for the first nine
months in 2001 compared to $2,230,000 for the same period in 2000, a 23.8% or
$531,000 decrease. The yield decreased to 6.21% in the 2001 period from 6.37% in
the 2000 period. The average size of the portfolio was $36,490,000 in the 2001
period compared to $46,646,000 in the 2000 period, a decrease of 21.8% or
$10,156,000. As bond market interest rates declined during 2001 the Corporation
had numerous securities called prior to maturity.
The tax-exempt investment portfolio earned $21,000 for the first nine
months in 2001 compared to $25,000 for the same period in 2000, a 16% or $4,000
decrease. The yield (on a taxable equivalent basis) on the portfolio was 5.69%
for the 2001 period, decreased from 6.27% for the 2000 period. The average size
of the portfolio was $746,000 for the 2001 period compared to $806,000 in the
2000 period, a decrease of 7.4% or $60,000.
Interest bearing deposits in other banks contributed $144,000 for the
first nine months of 2001 compared to $53,000 for the same period in 2000, an
increase of 172% or $91,000. The yield on these deposits decreased to 4.32% for
the 2001 period from 6.10% in the 2000 period. CBI averaged $4,441,000 in the
2001 period compared to $1,159,000 in the 2000 period, an increase of 283% or
$3,282,000. The increase in these deposits was the result of declining market
interest rates, which caused numerous calls of investment securities prior to
maturity. The funds resulting from these calls were temporarily invested in
interest bearing deposits and federal funds.
Federal funds sold earned $642,000 the first nine months of 2001
compared to $252,000 for the same period in 2000, an increase of 155% or
$390,000. Yields decreased to 4.39% for the 2001 period from 6.31% for the 2000
period. For the 2001 period CBI increased its average volume in federal funds
sold to $19,514,000 compared to $5,324,000 for the 2000 period, a 267% or
$14,190,000 increase.
Interest Expense
Interest expense for the first nine months of 2001 was $8,074,000
compared to the prior year's $7,119,000, a 13.4% or $955,000 increase. The
average volume of interest bearing liabilities was $224,702,000 for the 2001
period compared to $193,799,000 for the 2000 period, a 15.9% or $30,903,000
increase. The average rate paid for interest-bearing liabilities during the 2001
period was 4.79%, decreased from 4.90% for the 2000 period.
The cost of savings accounts was $927,000 in the first nine months in
2001 compared to $955,000 in the first nine months of 2000, a 2.9% or $28,000
decrease. Average savings deposit balances were $37,290,000 for the 2001 period
compared to $32,650,000 for the 2000 period, an increase of 14.2% or $4,640,000.
The average rate paid on these funds decreased to 3.31% from 3.90%.
Interest bearing transaction accounts cost $165,000 for the first nine
months in 2001 compared to the prior year's $241,000, a decrease of 31.5% or
11
$76,000. The volume of these deposits was $23,389,000 for the 2001 period
compared to $20,519,000 for the 2000 period, a 14% or $2,870,000 increase. The
average rate paid on these funds in the 2001 period decreased to .94% from 1.57%
in the 2000 period.
Time deposits cost $5,909,000 for the first nine months of 2001
compared to $4,943,000 for the first nine months of the prior year, an increase
of 19.5% or $966,000. The volume was $136,836,000 for the 2001 period compared
to $117,735,000 for the 2000 period, a 16.2% or $19,101,000 increase. The
average rate paid on these funds increased to 5.76% for the 2001 period from
5.60% for the 2000 period. This increase runs contrary to market interest rates
but reflects increased competition for time deposits in the Corporation's
markets.
Short-term borrowings consist of federal funds purchased and securities
sold under agreements to repurchase. This is a relatively small and volatile
part of the balance sheet. It cost $212,000 for the first nine months in 2001
compared to $117,000 for the first nine months of 2000, an increase of 81.2% or
$95,000. The volume of these funds was $7,414,000 in the 2001 period compared to
$3,553,000 in the 2000 period, an increase of 109% or $3,861,000. The average
rate paid on these funds decreased to 3.81% from 4.39%.
Borrowings from the Federal Home Loan Bank cost $861,000 for the first
nine months in 2001 compared to $863,000 for the first nine months in 2000,
virtually unchanged. The advances averaged $19,773,000 during the 2001 period
compared to $19,342,000 for the 2000 period, a 2.2% or $431,000 increase. The
average rate paid on these funds decreased to 5.81% from 5.95%.
Non-Interest Income
Non-interest income for the first nine months of 2001 grew to
$1,987,000 compared to $1,349,000 in the first nine months of 2000, a 47.3% or
$638,000 increase. Much of this increase resulted from the introduction of a new
service, an automated overdraft courtesy line for customers. This service
provides for a flat fee for paying customer checks in overdraft that is
equivalent to the fee charged for returned checks. Customers who use this
service are subject to other terms and conditions. Also, some of the increase
was due to increased fee income from mortgages originated for sale into the
secondary market.
Non-Interest Expense
For the first nine months of 2001 non-interest expenses were $5,322,000
compared to $4,852,000 for the first nine months of 2000, a 9.7% or $470,000
increase. This increase is related to higher levels of business activity and
included the following components:
For the 2001 period personnel costs were $3,172,000 compared to
$2,831,000 for the 2000 period, an increase of 12% or $341,000;
For the 2001 period premises and equipment expenses were $703,000
compared to $690,000 for the 2000 period, an increase of 1.9% or $13,000; and
For the 2001 period other costs were $1,447,000 compared to $1,331,000
for the 2000 period, an increase of 8.7% or $116,000.
12
Income Taxes
CBI provided $1,541,000 for federal and state income taxes during the
first nine months of 2001 compared to $1,290,000 for the same period in 2000, a
19.5% or $251,000 increase. The average tax rate for the 2001 period was 35.6%
and for the 2000 period it was 35.5%.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
Net Income
For the quarter ended September 30, 2001, CBI earned a consolidated
profit of $962,000, compared to $865,000 for the comparable period of 2000, an
increase of 11.2% or $97,000. Basic or diluted earnings per share were $.30 in
the 2001 period, compared to $.27 for the 2000 period. The changes in the items
comprising net interest income, which are discussed below, resulted from
essentially the same factors discussed above regarding the results of operation
for the nine months ended September 30, 2001.
Net interest income
Net interest income before provision for loan losses for the quarter
ended September 30, 2001 increased to $2,770,000 compared to $2,648,000 for the
same period in 2000, an increase of 4.6% or $122,000. For the same period the
provision for loan losses was $180,000 compared to $152,000 for the 2000 period,
an increase of 18.4% or $28,000.
Interest Income
Total interest income for the third quarter 2001 was $5,261,000
compared to $5,273,000 for the same period in 2000, virtually unchanged.
The loan portfolio earned $4,578,000 for the third quarter 2001
compared to $4,421,000 for the same period of 2000, a 3.6% or $157,000 increase.
The investment portfolio earned $457,000 for the third quarter 2001
compared to $763,000 for the same period of 2000 period, a 40.1% or $306,000
decrease.
Interest bearing deposits in other banks contributed $38,000 for the
third quarter 2001 compared to $25,000 for the same period of 2000, an increase
of 52% or $13,000.
Federal funds sold earned $188,000 the third quarter of 2001 compared
to $64,000 for the same period, an increase of 194% or $124,000.
Interest expense
Interest expense for the third quarter of 2001 was $2,491,000 compared
to $2,625,000 for the same period of 2000, a 5.1% or $134,000 decrease.
13
Non-interest income and expense
Non-interest income for the 2001 period was $744,000 compared to
$464,000 for the 2000 period, a 60.3% or $280,000 increase. This increase was
mostly the result of the introduction of the new automated overdraft service.
Non-interest expense was $1,833,000 compared to $1,625,000, a 12.8% or $208,000
increase.
CHANGES IN FINANCIAL POSITION
Investment portfolio
The investment portfolio is comprised of held to maturity securities
and available for sale securities. CBI and its three banks usually purchase
short-term issues (ten years or less) of U. S Treasury and U. S. Government
agency securities for investment purposes. At September 30, 2001 the held to
maturity portfolio totaled $2,149,000 compared to $12,371,000 at December 31,
2000, a decrease of 82.6% or $10,222,000. At September 30, 2001, the available
for sale portfolio totaled $33,002,000 compared to $41,195,000 at December 31,
2000, a decrease of 19.9% or $8,193,000. Most of the decline in the banks'
investment portfolios was due to the call of many securities during 2001, which
resulted from the decline in bond market interest rates. The following chart
summarizes the investment portfolios at September 30, 2001, and December 31,
2000.
September 30, 2001
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and federal agencies ......................... $2,149 $2,157 $30,036 $30,201
Tax exempt securities ......................................... - - 803 820
Other equity securities ....................................... - - 1,981 1,981
------ ------ ------- -------
Total ......................................................... $2,149 $2,157 $32,820 $33,002
====== ====== ======= =======
Unrealized gain ............................................... $ 8 $ 182
====== =======
December 31, 2000
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and federal agencies ......................... $12,371 $12,217 $38,599 $38,404
Tax exempt securities ......................................... - - 814 810
Other equity securities ....................................... - - 1,981 1,981
------- ------- ------- -------
Total ......................................................... $12,371 $12,217 $41,394 $41,195
======= ======= ======= =======
Unrealized (loss) ............................................. $ (154) $ (199)
======== =======
14
Loan portfolio
The loan portfolio is primarily consumer and small business oriented.
At September 30, 2001 the loan portfolio was $219,125,000 compared to
$195,077,000 at December 31, 2000, a 12.3% or $24,048,000 increase. The
following chart summarizes the loan portfolio at September 30, 2001 and December
31, 2000.
Sept. 30, 2001 Dec. 31, 2000
-------------- -------------
(dollars in thousands)
Real estate ............................. $138,258 $113,543
Commercial .............................. 55,260 52,264
Loans to individuals .................... 25,607 29,270
-------- --------
Total ................................... $219,125 $195,077
======== ========
Past Due and Non-Performing Assets and the Allowance for Loan Losses
CBI closely monitors past due loans and loans that are in non-accrual
status and other real estate owned. Below is a summary of past due and
non-performing assets at September 30, 2001 and December 31, 2000.
Sept. 30, 2001 Dec. 31, 2000
-------------- -------------
(dollars in thousands)
Past due 90 days + accruing loans ........... $101 $ 93
Non-accrual loans ........................... $413 $238
Impaired loans (included in non-accrual) .... $413 $238
Other real estate owned ..................... $267 $ -
Management considers the past due and non-accrual amounts at September
30, 2001 to be reasonable in relation to the size of the portfolio and
manageable in the normal course of business. The increase in non-accrual assets
is associated with a small number of loans and is not indicative, in the opinion
of management, of any trend.
CBI had no restructured loans during any of the above listed periods.
Allowance for Loan Losses
The Corporation operates three independent community banks in central
South Carolina. Under the provisions of the National Bank Act each board of
directors is responsible for determining the adequacy of its bank's loan loss
allowance. In addition, each bank is supervised and regularly examined by the
Office of the Comptroller of the Currency of the U. S. Treasury Department. As a
normal part of a safety and soundness examination, the OCC examiners will assess
and comment on the adequacy of a national bank's allowance for loan losses. The
allowance presented in this discussion is on an aggregated basis.
15
The nature of community banking is such that the loan portfolios will
be predominantly comprised of small and medium size business and consumer loans.
As community banks, there is a natural geographic concentration of loans within
the Banks' respective cities or counties. Management at each bank monitors the
loan concentrations and loan portfolio quality on an ongoing basis including,
but not limited to: quarterly analysis of loan concentrations, monthly reporting
of past dues, non-accruals, and watch loans, and quarterly reporting of loan
charge-offs and recoveries. These efforts focus on historical experience and are
bolstered by quarterly analysis of local and state economic conditions, which is
part of the Banks' assessment of the adequacy of their allowances for loan
losses.
Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and installment loans. However, management
does not believe it would be useful to maintain a separate allowance for each
category. Instead management assigns an estimated risk percentage factor to each
category in the computation of the overall allowance. In general terms, the real
estate loan portfolio is subject to the least risk, followed by the installment
loan portfolio, which in turn is followed by the commercial portfolio. The
Banks' internal and external loan review programs will from time to time
identify loans that are subject to specific weaknesses and such loans will be
reviewed for a specific loan loss allowance.
Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 2001 will at least approximate the
2000 levels as such loans progress through the collection process. Management
believes that the allowance for loan losses, as of September 30, 2001 is
sufficient to absorb the expected charge-offs and provide adequately for the
inherent losses that remain in the loan portfolio. Management will continue to
closely monitor the levels of non-performing and potential problem loans and
address the weaknesses in these credits to enhance the amount of ultimate
collection or recovery of these assets. Management considers the levels and
trends in non-performing and past due loans in determining how historical loan
loss rates are adjusted.
The aggregate allowance for loan losses of the banks and the aggregate
activity with respect to those allowances are summarized in the following table.
(Dollars in thousands) Nine months ended Year ended Nine months ended
Sept. 30, 2001 Dec. 31, 2000 Sept. 30, 2000
------------- ------------- -------------
Allowance at beginning of period .................................. $2,424 $1,936 $1,936
Provision expense ................................................. 457 688 490
Net charge offs ................................................... (120) (200) (156)
------ ------ ------
Allowance at end of period ........................................ $2,761 $2,424 $2,270
====== ====== ======
Allowance / outstanding loans ..................................... 1.26% 1.24% 1.22%
In reviewing the adequacy of the allowance for loan losses at the end
of each period, management of each bank considers historical loan loss
experience, current economic conditions, loans outstanding, trends in
non-performing and delinquent loans, and the quality of collateral securing
problem loans. After charging off all known losses, management of each bank
considers the allowance adequate to provide for estimated losses inherent in the
loan portfolio at September 30, 2001.
16
Deposits
Deposits were $233,791,000 at September 30, 2001 compared to
$218,811,000 at December 31, 2000, an increase of 6.8% or $14,980,000.
Time deposits greater than $100,000 were $48,708,000 at September 30,
2001 compared to $38,702,000 at December 31, 2000, an increase of 25.9% or
$10,006,000.
Liquidity
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in a timely and economical manner.
The most manageable sources of liquidity are composed of liabilities, with the
primary focus of liquidity management being the ability to attract deposits
within the Orangeburg National Bank, Sumter National Bank, and Florence National
Bank service areas. Core deposits (total deposits less certificates of deposit
of $100,000 or more) provide a relatively stable funding base. Certificates of
deposit of $100,000 or more are generally more sensitive to changes in rates, so
they must be monitored carefully. Asset liquidity is provided by several
sources, including amounts due from banks, federal funds sold, and investments
available for sale.
CBI and its banks maintain an available for sale and a held to maturity
investment portfolio. While all these investment securities are purchased with
the intent to be held to maturity, such securities are marketable and occasional
sales may occur prior to maturity as part of the process of asset/liability and
liquidity management. Such sales will generally be from the available for sale
portfolio. Management deliberately maintains a short-term maturity schedule for
its investments so that there is a continuing stream of maturing investments.
CBI intends to maintain a short-term investment portfolio in order to continue
to be able to supply liquidity to its loan portfolio and for customer
withdrawals.
CBI has substantially more liabilities (mostly deposits, which may be
withdrawn) which mature in the next 12 months than it has assets maturing in the
same period. However, based on its historical experience, and that of similar
financial institutions, CBI believes that it is unlikely that so many deposits
would be withdrawn, without being replaced by other deposits, that CBI would be
unable to meet its liquidity needs with the proceeds of maturing assets.
CBI through its banking subsidiaries also maintains federal funds lines
of credit with correspondent banks, and is able to borrow from the Federal Home
Loan Bank and from the Federal Reserve's discount window.
CBI through its banking subsidiaries has a demonstrated ability to
attract deposits from its markets. Deposits have grown from $30 million in 1989
to over $233 million in 2001. This base of deposits is the major source of
operating liquidity.
CBI's long term liquidity needs are expected to be primarily affected
by the maturing of long-term certificates of deposit. At September 30, 2001 CBI
had approximately $24.7 million and $11.5 million in certificates of deposit and
other interest bearing liabilities maturing in one to five years and over five
17
years, respectively. CBI's assets maturing or repricing in the same periods were
$124.8 million and $26.1 million, respectively. CBI expects to be able to manage
its current balance sheet structure without experiencing any material liquidity
problems.
In the opinion of management, CBI's current and projected liquidity
position is adequate.
Capital resources
As summarized in the table below, CBI maintains a strong capital
position.
Minimum required
for
Sept. 30, 2001 Dec. 31, 2000 capital adequacy
-------------- ------------- ----------------
Tier 1 capital to average total assets .............................. 8.89% 8.20% 4.00%
Tier 1 capital to risk weighted assets .............................. 11.77% 11.10% 4.00%
Total capital to risk weighted assets ............................... 12.95% 12.30% 6.00%
In the opinion of management, the Corporation's current and projected
capital positions are adequate.
Dividends
CBI declared and paid a quarterly cash dividend of seven cents per
share during the first three quarters of 2001, for a total of 21 cents per
share. The total cost of these dividends was $672,000.
Subsequent event
On October 31, 2001, CBI completed its previously announced acquisition
of Resource Mortgage, Inc., a mortgage company headquartered in Columbia, SC.
Consideration for the acquisition was 95,454 shares of CBI common stock, of
which 63,636 are being held in escrow pending the attainment of certain earnings
goals by the subsidiary. The subsidiary, which was renamed Community Resource
Mortgage, Inc., has 29 employees and has offices in Columbia, Sumter and
Anderson, SC. The subsidiary originates and sells residential mortgage loans.
In connection with the acquisition, CBI has guaranteed a $9 million
line of credit with an unaffiliated lender for the subsidiary's general working
capital purposes.
Commitments
Sumter National Bank has entered into a contract to construct a new
branch bank. This building is currently under construction near the corner of
Liberty Street and Wedgefield Highway in Sumter. The contracted cost of the
building is $567,681.
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Corporation's market risk arises principally from interest rate
risk inherent in its lending, deposit and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Corporation manages other risks, such as credit quality and liquidity risk in
the normal course of business, management considers interest rate risk to be its
most significant market risk and this risk could potentially have the largest
material effect on the Corporation's financial condition and results of
operations. Other types of market risks such as foreign currency exchange risk
and commodity price risk do not arise in the normal course of community banking
activities.
Achieving consistent growth in net interest income is the primary goal
of the Corporation's asset/liability function. The Corporation attempts to
control the mix and maturities of assets and liabilities to achieve consistent
growth in net interest income despite changes in market interest rates. The
Corporation seeks to accomplish this goal while maintaining adequate liquidity
and capital. The Corporation's asset/liability mix is sufficiently balanced so
that the effect of interest rates moving in either direction is not expected to
be significant over time.
The Corporation's Asset/Liability Committee uses a simulation model to
assist in achieving consistent growth in net interest income while managing
interest rate risk. The model takes into account interest rate changes as well
as changes in the mix and volume of assets and liabilities. The model simulates
the Corporation's balance sheet and income statement under several different
rate scenarios. The model's inputs (such as interest rates and levels of loans
and deposits) are updated on a quarterly basis in order to obtain the most
accurate projection possible. The projection presents information over a
twelve-month period. It reports a base case in which interest rates remain flat
and reports variations that occur when rates increase and decrease 100 and 200
basis points. According to the model as of September 30, 2001 the Corporation is
positioned so that net interest income would be expected to increase $242,000
and net income would be expected to increase $149,000 in the next twelve months
if interest rates rise 100 basis points. Conversely, net interest income would
be expected to decline $242,000 and net income would be expected to decline
$149,000 in the next twelve months if interest rates decline 100 basis points.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates and loan prepayment, and should not be relied upon as indicative of actual
results. Further, the computations do not contemplate any actions the
Corporation could undertake in response to changes in interest rates.
As of September 30, 2001 there was no significant change from the
interest rate sensitivity analysis for the various changes in interest rates
calculated as of December 31, 2000. The foregoing disclosures related to the
market risk of the Corporation should be read in connection with Management's
Discussion and Analysis of Financial Position and Results of Operations included
in the 2000 Annual Report on Form 10-K.
19
Part II--Other Information
Item 2. Changes in Securities and Use of Proceeds
(c) On October 31, 2001, CBI issued 95,454 shares of its common stock as
consideration for the purchase of 100% of the outstanding shares of
Resource Mortgage, Inc. Of the total number of shares, 63,636 are being
held in escrow pending the attainment of certain earnings goals by the
subsidiary. Issuance of the shares by CBI was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933 because no public
offering was involved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.(from Description
item 601 of S-B)
10.1 Loan Agreement, dated November 1, 2001, among
Community Bankshares, Inc., Resource Mortgage Inc.,
and Branch Bank and Trust Company.
10.2 Guaranty, dated as of November 1, 2001 by Community
Bankshares, Inc. of obligations of Resource Mortgage
Inc. to Branch Bank and Trust Company.
b) Reports on Form 8-K. None.
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATED: November 12, 2001
COMMUNITY BANKSHARES, INC.
By: s/ E. J. Ayers, Jr.,
------------------------------------------
E. J. Ayers, Jr.,
Chief Executive Officer
By: s/ William W. Traynham
-----------------------------------------
William W. Traynham
President and Chief Financial Officer
(Principal Accounting Officer)
21
EXHIBIT INDEX
Exhibit No.(from Description
item 601 of S-B)
10.1 Loan Agreement, dated November 1, 2001, among
Community Bankshares, Inc., Resource Mortgage Inc.,
and Branch Bank and Trust Company.
10.2 Guaranty, dated as of November 1, 2001 by Community
Bankshares, Inc. of obligations of Resource Mortgage
Inc. to Branch Bank and Trust Company.
22