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, 2005 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)
791 Broughton Street
Orangeburg, South Carolina 29115
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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 an accelerated filer
(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, 4,404,303 shares outstanding on May 3, 2005.
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 ................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 18
Item 4. Controls and Procedures ........................................ 19
PART II - OTHER INFORMATION
Item 6. Exhibits ....................................................... 20
SIGNATURES ................................................................. 21
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2005 2004
----- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................. $ 16,866 $ 14,397
Federal funds sold ...................................................................... 11,865 12,571
-------- --------
Total cash and cash equivalents .................................................. 28,731 26,968
Interest-bearing deposits with other banks .............................................. 543 852
Securities available-for-sale ........................................................... 51,894 55,471
Securities held-to-maturity (estimated fair value $1,875 for 2005
and $1,907 for 2004) ............................................................... 1,925 1,925
Other investments ....................................................................... 2,858 2,642
Loans held for sale ..................................................................... 16,116 15,090
Loans receivable ........................................................................ 406,049 393,649
Less, allowance for loan losses ..................................................... (4,722) (4,347)
-------- --------
Net loans ........................................................................ 401,327 389,302
Premises and equipment - net ............................................................ 7,728 7,739
Accrued interest receivable ............................................................. 2,484 2,419
Net deferred income tax assets .......................................................... 831 599
Goodwill ................................................................................ 4,321 4,321
Core deposit intangible assets .......................................................... 3,022 3,083
Prepaid expenses and other assets ....................................................... 1,289 1,966
-------- --------
Total assets ..................................................................... $523,069 $512,377
======== ========
Liabilities
Deposits
Non-interest bearing ................................................................ $ 65,013 $67,046
Interest-bearing .................................................................... 365,053 356,412
-------- --------
Total deposits ................................................................... 430,066 423,458
Short-term borrowings ................................................................... 6,830 6,662
Long-term debt .......................................................................... 33,571 30,573
Accrued interest payable ................................................................ 865 691
Accrued expenses and other liabilities .................................................. 1,003 966
-------- --------
Total liabilities ................................................................ 472,335 462,350
-------- --------
Shareholders' equity
Common stock - no par value; 12,000,000 shares authorized; issued and
outstanding - 4,403,016 for 2005 and
4,390,784 for 2004 .................................................................. 30,182 30,042
Retained earnings ....................................................................... 20,996 20,075
Accumulated other comprehensive income (loss) ........................................... (444) (90)
-------- --------
Total shareholders' equity ....................................................... 50,734 50,027
-------- --------
Total liabilities and shareholders' equity ....................................... $523,069 $512,377
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
---------
2005 2004
----- ----
(Dollars in thousands,
except per share)
Interest and dividend income
Loans, including fees ........................... $ 6,614 $ 5,331
Interest-bearing deposits with other banks ...... 8 4
Debt securities ................................. 437 496
Dividends ....................................... 24 19
Federal funds sold .............................. 68 58
------- -------
Total interest and dividend income .......... 7,151 5,908
------- -------
Interest expense
Deposits
Time deposits $100M and over .................... 527 313
Other deposits .................................. 1,208 919
------- -------
Total interest expense on deposits .......... 1,735 1,232
Short-term borrowings ........................... 43 105
Long-term debt .................................. 438 303
------- -------
Total interest expense ...................... 2,216 1,640
------- -------
Net interest income .................................. 4,935 4,268
Provision for loan losses ............................ 450 233
------- -------
Net interest income after provision .................. 4,485 4,035
------- -------
Noninterest income
Service charges on deposit accounts ............. 762 845
Mortgage brokerage income ....................... 794 749
Net securities gains or (losses) ................ (10) (4)
Other ........................................... 221 256
------- -------
Total noninterest income .................... 1,767 1,846
------- -------
Noninterest expenses
Salaries and employee benefits .................. 2,278 2,111
Premises and equipment .......................... 535 491
Other ........................................... 1,306 1,131
------- -------
Total noninterest expenses .................. 4,119 3,733
------- -------
Income before income taxes ........................... 2,133 2,148
Income tax expense ................................... 773 763
------- -------
Net income ........................................... $ 1,360 $ 1,385
======= =======
Per share
Net income ...................................... $ 0.31 $ 0.32
Net income - diluted ............................ 0.30 0.31
Cash dividends declared ......................... 0.10 0.10
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common Stock Accumulated
------------ Other
Number of Retained Comprehensive
Shares Amount Earnings Income (Loss) Total
------ ------ -------- ------------- -----
(Dollars in thousands, except per share)
Balance, January 1, 2004 ....................................... 4,331,460 $ 29,402 $ 18,610 $ 58 $ 48,070
---------
Comprehensive income
Net income ................................................. - - 1,385 - 1,385
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $171 ........... - - - 304 304
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $1 ............ - - - 3 3
---------
Total other comprehensive income ........................... - - - - 307
---------
Total comprehensive income ................................. - - - - 1,692
---------
Exercise of employee stock options ............................. 4,652 45 - - 45
Cash dividends declared, $.10 per share ........................ - - (433) - (433)
--------- --------- --------- --------- ---------
Balance, March 31, 2004 ........................................ 4,336,112 $ 29,447 $ 19,562 $ 365 $ 49,374
========= ========= ========= ========= =========
Balance, January 1, 2005 ....................................... 4,390,784 $ 30,042 $ 20,075 $ (90) $ 50,027
---------
Comprehensive income
Net income ................................................. - - 1,360 - 1,360
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $203 ........... - - - (361) (361)
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $3 ............ - - - 7 7
---------
Total other comprehensive income (loss) .................... - - - - (354)
---------
Total comprehensive income ................................. - - - - 1,006
---------
Exercise of employee stock options ............................. 12,232 140 - - 140
Cash dividends declared, $.10 per share ........................ - - (439) - (439)
--------- --------- --------- --------- ---------
Balance, March 31, 2005 ........................................ 4,403,016 $ 30,182 $ 20,996 $ (444) $ 50,734
========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
---------
2005 2004
----- ----
(Dollars in thousands)
Operating activities
Net income ............................................................................ $ 1,360 $ 1,385
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Depreciation and amortization .................................................. 286 283
Net amortization of securities ................................................. 32 71
Provision for loan losses ...................................................... 450 233
Net securities losses .......................................................... 10 4
Proceeds of sales of loans held for sale ....................................... 43,781 37,663
Originations of loans held for sale ............................................ (44,807) (41,752)
(Increase) decrease in accrued interest receivable ............................. (65) 67
Decrease (increase) in other assets ............................................ 652 (633)
Gains on sales of other real estate ............................................ - (9)
Increase in accrued interest payable ........................................... 174 90
Increase in other liabilities .................................................. 30 238
-------- --------
Net cash provided (used) by operating activities ........................... 1,903 (2,360)
-------- --------
Investing activities
Net decrease in interest-bearing deposits with other banks ............................ 309 51
Purchases of available-for-sale securities ............................................ (3,500) (10,739)
Maturities, calls and paydowns of available-for-sale securities ....................... 2,069 11,979
Proceeds of sales of available-for-sale securities .................................... 4,412 7,927
Purchases of other investments ........................................................ (216) -
Net increase in loans made to customers ............................................... (12,475) (7,084)
Purchases of premises and equipment ................................................... (214) (133)
Proceeds from sales of other real estate .............................................. - 59
-------- --------
Net cash (used) provided by investing activities ........................... (9,615) 2,060
-------- --------
Financing activities
Net increase (decrease) in deposits ................................................... 6,608 (11,099)
Net increase (decrease) in short-term borrowings ...................................... 168 (4,950)
Proceeds from issuing long-term debt .................................................. 2,998 10,310
Exercise of employee stock options .................................................... 140 45
Cash dividends paid ................................................................... (439) (433)
-------- --------
Net cash provided (used) by financing activities ........................... 9,475 (6,127)
-------- --------
Increase (decrease) in cash and cash equivalents ........................................... 1,763 (6,427)
Cash and cash equivalents, beginning of period ............................................. 26,968 41,875
-------- --------
Cash and cash equivalents, end of period ................................................... $ 28,731 $ 35,448
======== ========
Supplemental disclosures of cash flow information
Cash payments for interest ............................................................ $ 2,042 $ 1,550
======== ========
Cash payments for income taxes ........................................................ $ - $ 179
======== ========
Supplemental disclosures of non-cash investing activities
Transfers of loans receivable to other real estate .................................... $ - $ 11
======== ========
See accompanying notes to unaudited consolidated financial statements.
6
Notes to Unaudited Consolidated Financial Statements
Accounting Principles - A summary of significant accounting policies and the
audited financial statements for 2004 are included in Community Bankshares,
Inc.'s (the "Company" or "CBI") Annual Report on Form 10-K for the year ended
December 31, 2004.
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 2004 Annual Report on Form 10-K.
Nonperforming Loans - As of March 31, 2005, there were $5,059,000 in nonaccrual
loans and $353,000 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,
---------
2005 2004
---- ----
(Dollars in thousands,
except per share amounts)
Net income per share, basic
Numerator - net income ........................... $ 1,360 $ 1,385
========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................ 4,394,078 4,333,718
========= =========
Net income per share, basic .............. $ .31 $ .32
========== ==========
Net income per share, assuming dilution
Numerator - net income ........................... $ 1,360 $ 1,385
========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................ 4,394,078 4,333,718
Effect of dilutive stock options ................. 102,720 142,560
---------- ----------
Total shares ............................. 4,496,798 4,476,278
========== ==========
Net income per share, assuming dilution .. $ .30 $ .31
========== ==========
Stock Based Compensation - On April 14, 2005, the Securities and Exchange
Commission adopted a rule amending the compliance date for the adoption of
Statement of Accounting Standards No. 123(R)
7
until the first interim or annual reporting period of the registrant's first
fiscal year beginning on or after June 15, 2005. The Company has elected to
continue using the methodology of Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," to account for
compensation expenses related to stock-based compensation. Options issued under
the Company's plans have no intrinsic value at the grant date and no
compensation cost is recognized in accordance with APB No. 25. Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation," requires entities to provide pro forma disclosures of
net income, and earnings per share, as if the fair value based method of
accounting promulgated by that standard had been applied. The Company has
adopted and intends to continue using the disclosure provisions of SFAS No. 123,
as amended, until the required adoption of the provisions of SFAS 123(R) on
January 1, 2006. Had compensation cost for the Company's stock option plan been
determined based on the fair value as of the grant dates for awards under the
plans consistent with the method prescribed by SFAS No. 123, the Company's net
income and earnings per share would have been adjusted to the pro forma amounts
indicated below:
(Unaudited)
Three Months Ended
March 31,
---------
2005 2004
---- ----
(Dollars in thousands,
except per share amounts)
Net income, as reported ............................ $ 1,360 $ 1,385
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of any related tax effects ............... 83 214
--------- ---------
Pro forma net income ............................... $ 1,277 $ 1,171
========= =========
Net income per share, basic
As reported .................................. $ 0.31 $ 0.32
Pro forma .................................... 0.29 0.27
Net income per share, assuming dilution
As reported .................................. $ 0.30 $ 0.31
Pro forma .................................... 0.28 0.26
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.
8
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 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Statements included in this report 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. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use the of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "projects," and similar expressions.
The Company's expectations, beliefs, estimates and projections are expressed in
good faith and are believed by the Company to have a reasonable basis, including
without limitation, management's examination of historical operating trends,
data contained in the Company's records and other data available from third
parties, but there can be no assurance that management's expectations, beliefs,
estimates or projections will result or be achieved or accomplished. The Company
cautions readers that forward-looking statements, including without limitation,
those relating to the Company's recent and continuing expansion, its future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, income, and adequacy of the allowance for loan losses, are
subject to 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 Company's reports filed with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
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.
9
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 Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and estimates
by management, which have a material impact on the carrying value of certain
assets and liabilities. Management considers such accounting policies to be
critical accounting policies. The judgments and estimates used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ from these judgments
and estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of operations of CBI.
CBI is a holding company for four community banks and a mortgage
company and, as a financial institution, believes the allowance for loan losses
is a critical accounting policy that requires the most significant judgments and
estimates used in preparation of its consolidated financial statements. Refer to
the sections "Allowance for Loan Losses" and "Provision for Loan Losses" in the
Annual Report on Form 10-K for 2004 for a detailed description of CBI's
estimation process and methodology related to the allowance for loan losses.
RESULTS OF OPERATIONS
Earnings Performance
For the quarter ended March 31, 2005, CBI earned consolidated net
income of $1,360,000, compared with $1,385,000 for the comparable period of
2004. This represents a decrease of $25,000 or 1.8%. Basic earnings per share
were $.31 in the 2005 period, compared with $.32 for the 2004 quarter. Diluted
earnings per share were $.30 for the 2005 period and $.31 for the 2004 period.
Operating results for the first quarter of 2005 were affected by
increased net interest income resulting from both higher average amounts of
loans and higher rates earned by those assets, which was partially offset by
higher interest expenses associated mainly with interest bearing transaction
accounts and time deposits. The Federal Reserve's Open Market Committee (the
"Committee") continued to raise the federal funds rates throughout the 2005
first quarter. It is expected that such actions will continue until the
Committee is satisfied that inflation does not pose a significant threat to the
economy. The principal effects of those rate increases has been to increase
market rates of interest in the short-to-medium term range, while longer term
interest rates have been affected to a lesser degree. For example, since the
Committee initiated its actions in June of 2004, the Prime Rate, the short-term
rate that banks charge to their most credit-worthy customers, has increased by
175 basis points to 5.75%, rates on one-year treasuries have risen by 118 basis
points and rates on 20 year Treasury securities have fallen by 56 basis points.
Similarly, rates for conventional mortgages have fallen by 36 basis ponts over
the same time period. For the Company, these changes in interest rates generally
result in increases in rates associated with new and pre-existing variable rate
loans, increased rates charged for new and renewed loans, and higher rates
realized for federal funds sold and new investments in securities. Also, since
10
the Company's funding sources are generally short-term deposits, rates
associated with those sources, as well as any short-term borrowings, are subject
to increases, as well.
Also, the results for the 2005 period were affected adversely by
continuing reevaluation of the Company's allowance for loan losses, which
resulted in an increase of $217,000 in the provision for loan losses when
compared with the same period of 2004.
Noninterest income for the 2005 first quarter was $79,000 less than for
the same period of 2004 due to decreased service charges assessed on deposit
accounts and for other services. Mortgage brokerage income for the 2005 period
was $45,000 more than for the same period of 2004, due to a slight increase in
mortgage lending activity.
Noninterest expense for the first quarter of 2005 was $386,000 more
than for the same period of 2004 due to increases of $167,000 in salaries and
employee benefits, $44,000 in premises and equipment expenses and $175,000 in
other expenses, primarily related to increased expenses to facilitate future
compliance with the internal control over financial reporting provisions of the
Sarbanes-Oxley Act of 2002.
Summary Income Statement
------------------------
(Dollars in thousands)
For the Three Months Ended March 31, 2005 2004 Dollar Change Percentage Change
------------------------------------ ---- ---- ------------- -----------------
Interest income ..................................... $ 7,151 $ 5,908 $1,243 21.0%
Interest expense .................................... 2,216 1,640 576 35.1%
------- ------- ------
Net interest income ................................. 4,935 4,268 667 15.6%
Provision for loan losses ........................... 450 233 217 93.1%
Noninterest income .................................. 1,767 1,846 (79) -4.3%
Noninterest expenses ................................ 4,119 3,733 386 10.3%
Income tax expense .................................. 773 763 10 1.3%
------- ------- ------
Net income .......................................... $ 1,360 $ 1,385 $ (25) -1.8%
======= ======= ======
Net Interest Income
Net interest income is the amount of interest income earned on interest
earning assets (primarily loans, securities, interest bearing deposits in other
banks, and federal funds sold), less the interest expense incurred on interest
bearing liabilities (interest bearing deposits and other borrowings), 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 increased by $1,243,000, or 21.0%, in the 2005 first
quarter compared with the same 2004 period. Interest income from loans increased
from $5,331,000 in the 2004 period to $6,614,000 in the 2005 period primarily
due to larger volumes of loans outstanding, supplemented by slightly higher
interest rates associated with those loans. The amounts of interest earned on
all other categories of interest earning assets decreased by $40,000, in the
aggregate, as increases in the average yields earned on those assets were offset
by smaller average balances held.
Interest expense for deposits increased from $1,232,000 for the 2004
period to $1,735,000 for the 2005 period primarily due to increased rates
11
associated with all categories of interest bearing deposits. Larger average
amounts of interest-bearing deposits also contributed to this increased interest
expense.
During the first quarter of 2004, CBI sponsored the creation of a Trust
that issued $10,000,000 in trust preferred securities. The Trust invested the
proceeds of this issuance and $310,000 of capital provided by CBI into
$10,310,000 of junior subordinated debentures ("Debentures") issued by CBI.
Interest payments on the Debentures are due quarterly at a variable interest
rate. CBI used the proceeds of the Debentures to repay certain pre-existing debt
obligations, to enhance the capital position of two of the subsidiary banks, to
provide an additional funding mechanism for its mortgage brokerage activities,
and for other general corporate purposes. Under current regulatory guidelines,
the trust preferred securities issued by the Trust are includible in Tier 1
capital for risk-based capital purposes.
In the first quarter of 2005, interest expenses for long-term debt,
which includes the Debentures and FHLB advances, totaled $438,000, an increase
of $135,000, or 44.6%, over the amount for the same period of 2004. Average
amounts outstanding increased by $8,370,000, or 36.8%, and the interest rate
paid for such borrowings increased by 30 basis points.
Partially offsetting these factors were decreased interest expenses for
short-term borrowings, which were $62,000 lower in the 2005 quarter than in the
2004 period, resulting from lower average amounts of such borrowings and a 48
basis point reduction in the rate paid.
12
Average Balances, Yields and Rates
Three Months Ended March 31,
----------------------------
2005 2004
---- ----
Interest Interest
Average Income / Yields / Average Income / Yields /
Balances Expense Rates * Balances Expense Rates *
-------- ------- ------- -------- ------- -------
(Dollars in thousands)
Assets
Interest earning deposits ............................ $ 794 $ 8 4.09% $ 1,110 $ 4 1.46%
Investment securities - taxable ...................... 52,075 405 3.15% 57,236 431 3.05%
Investment securities - tax exempt ................... 6,825 56 3.33% 10,208 84 3.34%
Federal funds sold ................................... 11,744 68 2.35% 24,647 58 0.95%
Loans, including loans held for sale ................. 415,869 6,614 6.45% 341,982 5,331 6.32%
---------- ------- --------- -------
Total interest earning assets ............... 487,307 7,151 5.95% 435,183 5,908 5.51%
Cash and due from banks .............................. 15,826 17,314
Allowance for loan losses ............................ (4,816) (4,162)
Premises and equipment ............................... 7,888 7,073
Intangible assets .................................... 7,372 7,618
Other assets ......................................... 4,165 3,860
---------- ---------
Total assets ................................ $ 517,742 $ 466,886
========== =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ........... $ 64,420 $ 95 0.60% $ 57,474 $ 66 0.47%
Savings ......................................... 90,073 307 1.38% 79,663 183 0.93%
Time deposits ................................... 208,779 1,333 2.59% 181,616 983 2.20%
---------- ------- --------- -------
Total interest bearing deposits ............. 363,272 1,735 1.94% 318,753 1,232 1.57%
Short-term borrowings ................................ 8,446 43 2.06% 16,767 105 2.54%
Long-term debt ....................................... 31,088 438 5.71% 22,718 303 5.41%
---------- ------- --------- -------
Total interest bearing liabilities .......... 402,806 2,216 2.23% 358,238 1,640 1.86%
Noninterest bearing demand deposits .................. 62,815 58,045
Other liabilities .................................... 1,456 1,836
Shareholders' equity ................................. 50,665 48,767
---------- ---------
Total liabilities and shareholders' equity ........... $ 517,742 $ 466,886
========== =========
Interest rate spread ................................. 3.72% 3.65%
Net interest income and net yield
on earning assets ............................... $ 4,935 4.11% $ 4,268 3.98%
* Yields and rates are annualized.
Provision and Allowance for Loan Losses
The provision for loan losses for the 2005 first quarter was $450,000,
an increase of $217,000, or 93.1%, from the $233,000 for the same period of
2004. This increase was due primarily to an increase in non-performing loans
during the 2005 first quarter, as discussed further below.
Net charge-offs during the three months ended March 31, 2005 were
$75,000, compared with $234,000 for the same period of 2004. The allowance for
loan losses as of March 31, 2005 was 1.16% of loans outstanding, compared with
1.10% as of December 31, 2004 and 1.24% as of March 31, 2004.
13
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,
2005 2004 2004
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period ................................. $ 4,347 $ 4,206 $ 4,206
Provision for loan losses ........................................ 450 5,102 233
Net charge-offs .................................................. (75) (4,961) (234)
--------- --------- ---------
Allowance at end of period ....................................... $ 4,722 $ 4,347 $ 4,205
========= ========= =========
Allowance as a percentage of loans outstanding ................... 1.16% 1.10% 1.24%
Loans at end of period ........................................... $ 406,049 $ 393,649 $ 338,945
========= ========= =========
Non-performing loans, consisting of nonaccrual loans and loans 90 or
more days past due which are still accruing interest, totaled $5,412,000 as of
March 31, 2005, compared with $5,078,000 as of December 31, 2004, an increase of
$334,000 or 6.6%. The majority of non-performing loans at March 31, 2005 were
secured by commercial real estate and other collateral. The coverage ratio
(allowance for loan losses divided by non-performing loans) was .9x as of both
March 31, 2005 and December 31, 2004. Non-performing loans as of March 31, 2004
totaled $1,482,000.
Following is a summary of non-performing loans as of March 31, 2005 and
December 31, 2004:
March 31, December 31,
2005 2004
---- ----
(Dollars in thousands)
Non-performing loans
Nonaccrual loans ................................... $5,059 $4,941
Past due 90 days or more and still accruing ........ 353 137
------ ------
Total ........................... $5,412 $5,078
====== ======
Nonperforming loans as a percentage
of loans outstanding ............................... 1.33% 1.29%
Included in nonaccrual loans as of March 31, 2005, is one credit
relationship totaling $2,444,000, or 48.3% of total nonaccrual loans. This
credit originated in 2004 to finance the borrower's purchase of a business. The
business did not perform as expected and the borrower subsequently discovered
problems with information supporting an appraisal of the business. Because of
deterioration of the borrower's financial condition, proceeds from sale of the
business are expected to be the primary source of repayment. During the fourth
quarter of 2004, a partial charge-off of $1,001,000 was recorded. The borrower
is cooperating with management to maximize ultimate collection by actively
pursuing sale of the business as an operating concern. If the business cannot be
sold for a sufficient price within a reasonable period of time, further
write-downs might be necessary which could decrease net income. Approximately
$367,000 of the allowance for loan losses is allocated to this credit as of
March 31, 2005.
Management will continue to monitor the levels of non-performing and
potential problem loans and address the weaknesses in these credits in order to
enhance the probability of collection or recovery of these assets. Management
14
considers the levels and trends in non-performing assets and past due loans in
determining how the provision and allowance for loan losses is estimated and
adjusted.
Noninterest Income
Noninterest income for the 2005 period decreased $79,000, or 4.3%, from
the $1,846,000 reported for the 2004 period. Service charges on deposit accounts
decreased by $83,000 from the prior year amount. This decrease was the result of
fewer assessable transactions. Mortgage brokerage income increased $45,000 or
6.0%, from $749,000 for the 2004 period, due to a small increase in the number
of loans originated in the quarter.
Noninterest Expenses
Salaries and employee benefits for the 2005 period were $167,000 or
7.9%, more than in the same 2004 period. This increase resulted primarily from
expenses associated with the hiring of a new chief executive officer and several
other administrative officers since the end of the first quarter of 2004.
Expenses associated with premises and equipment were $44,000, or 9.0%, higher in
the 2005 period, primarily due to adding a branch office of the Florence
National Bank subsidiary.
Income Taxes
Income tax expense for 2005 increased $10,000, or 1.3%, from the amount
for 2004. The average tax rate used for 2005 was 36.2% while in 2004 it was
35.5%. The increase in the average tax rate for 2005 is a result of a lower
percentage of income being derived from tax-exempt sources in the current
period. Interest income from tax-exempt investment securities was $28,000 less
in 2005 than in 2004 and represented 2.6% of pretax income in the 2005 period,
compared with 3.9% in the 2004 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 service 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.
Total deposits as of March 31, 2005 were $430,066,000, an increase of
$6,608,000, or 1.6%, from the amount as of December 31, 2004. As of March 31,
2005 the loan to deposit ratio was 94.4%, compared with 93.0% at December 31,
2004 and 92.2% at March 31, 2004. Loans held-for-sale have not been included in
15
the denominator of the calculation of the loan to deposit ratio. The banking
subsidiaries have significant amounts of long-term debt available under
agreements with the Federal Home Loan Bank of Atlanta.
Management believes CBI and its subsidiaries' liquidity sources are
adequate to meet their current and projected operating needs.
CAPITAL RESOURCES
CBI and its banking subsidiaries 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.
The March 31, 2005 risk-based capital ratios for CBI and its banking
subsidiaries are presented in the following table, compared with the "well
capitalized" and minimum ratios under the regulatory definitions and guidelines:
March 31, 2005
--------------
Tier 1 Total Capital Leverage
------ ------------- --------
Community Bankshares, Inc. .................... 13.75% 14.94% 10.71%
Orangeburg National Bank ...................... 11.98% 13.16% 8.63%
Sumter National Bank .......................... 9.64% 10.84% 8.18%
Florence National Bank ........................ 9.17% 10.11% 8.29%
Bank of Ridgeway .............................. 12.86% 13.76% 8.69%
Minimum "well capitalized" requirement ........ 6.00% 10.00% 6.00%
Minimum requirement ........................... 4.00% 8.00% 4.00%
As shown in the table above, each of the capital ratios exceeds the
regulatory requirement to be considered "well capitalized." In the opinion of
management, the current and projected capital positions of CBI and its banking
subsidiaries 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, 2005, CBI held an equity interest in, and
guarantees the liabilities of, a non-consolidated variable interest entity.
16
Commitments
CBI's banking and mortgage brokerage subsidiaries are parties to credit
related financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of their 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:
March 31, 2005
--------------
(Dollars in
thousands)
Loan commitments ................................. $50,954
Standby letters of credit ........................ 2,967
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.
On March 22, 2005, CBI entered into a contract for the construction of
an approximately 16,000 square foot two-story brick office building to house its
corporate headquarters and operations center. The contract price for this
project is $1,476,000. Management expects completion of the building in the
fourth quarter of 2005.
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. 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
17
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 are designated 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, 2005, and the estimated fair values of those financial
instruments included in other assets and liabilities in the balance sheet as of
that date.
March 31, 2005
--------------
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 .................................... $(13,303) $(7)
Forward sales contracts with investors
of mortgage loans to be held for sale ............ $ 13,303 $ 7
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, 2005, CBI is positioned so that
net interest income would increase $269,000 and net income would increase
$175,000 in the next twelve months if interest rates rose 100 basis points.
Conversely, net interest income would decline $269,000 and net income would
decline $175,000 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
18
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, 2005 there was no significant change from the interest
rate sensitivity analysis for the various changes in interest rates calculated
as of December 31, 2004. 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 2004 Annual Report
on Form 10-K.
Item 4. 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.
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.
19
PART II--OTHER INFORMATION
Item 6. Exhibits
Exhibits 10 Agreement Between Community Bankshares, Inc. and C. F. Evans
& Company, Inc.
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
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: May 12, 2005
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)
21