SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 Commission File number: 000-22054 COMMUNITY BANKSHARES, INC. (Exact Name of Registrant as Specified in its Charter) South Carolina 57-0966962 (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 791 Broughton St., Orangeburg, South Carolina 29115 (Address of Principal Executive Office, Zip Code) (803) 535-1060 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 3,204,220 shares of common stock outstanding as of August 1, 2001. 10-Q TABLE OF CONTENTS Part I-Financial Statements Page Item 1 Financial Statements .............................................. 3 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................. 9 Item 3 Quantitative and Qualitative Disclosures About Market Risk .... 18 Part II-Other Information Item 4 Submission of Matters to a Vote of Security Holders ............... 19 Item 6 Exhibits and Reports on Form 8-K .................................. 20 2 Part I. Item 1. Financial Statements COMMUNITY BANKSHARES, INC. - CONSOLIDATED BALANCE SHEETS $ amounts in thousands UNAUDITED June 30, December 31, ASSETS 2001 2000 ---- ---- Cash and due from other financial institutions: Non-interest bearing .................................................................. $ 12,272 $ 10,209 Federal funds sold .................................................................... 23,727 8,130 --------- --------- Total cash and cash equivalents ................................................... 35,999 18,339 Interest bearing deposits in other banks ................................................... 4,477 594 Investment securities: Securities held to maturity ........................................................... 4,148 12,371 Securities available for sale ......................................................... 27,353 41,195 Loans held for resale ...................................................................... 406 343 Loans ...................................................................................... 208,094 195,077 Less, allowance for loan losses ....................................................... (2,635) (2,424) --------- --------- Net loans ......................................................................... 205,459 192,653 Premises and equipment ..................................................................... 4,349 4,411 Accrued interest receivable ............................................................... 1,775 2,330 Deferred income taxes ...................................................................... 690 795 Other assets ............................................................................... 566 292 --------- --------- Total assets ...................................................................... $ 285,222 $ 273,323 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing .................................................................. $ 33,781 $ 31,219 Interest bearing ...................................................................... 198,718 187,592 --------- --------- Total deposits .................................................................... 232,499 218,811 Federal funds purchased and securities sold under agreements to repurchase ................................................... 8,579 9,352 Federal Home Loan Bank advances ............................................................ 17,850 20,350 Other liabilities .......................................................................... 1,544 1,671 --------- --------- Total liabilities ................................................................. 260,472 250,184 --------- --------- Shareholders' equity: Common stock No par, authorized shares 12,000,000, issued and outstanding 3,204,220 in 2001 and 3,199,180 in 2000 ............................... 15,967 15,928 Retained earnings ..................................................................... 8,726 7,342 Accumulated other comprehensive income (loss) ......................................... 57 (131) --------- --------- Total shareholders' equity ........................................................ 24,750 23,139 --------- --------- Total liabilities and shareholders' equity ........................................ $ 285,222 $ 273,323 ========= ========= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS 3 COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY for the six months ended June 30, 2001 and 2000 (Unaudited) ($ amounts in thousands) Common Stock Accumulated ------------ Other Total Retained Comprehensive Shareholders' Shares Amount Earnings Income (Loss) Equity ------ ------ -------- ------------- ------ Balances at Dec. 31, 1999 ............................... 3,191,462 $ 14,207 $ 6,549 $ (511) $ 20,245 Comprehensive income: Net income ......................................... 1,477 1,477 Other comprehensive income (loss) net of tax: Unrealized gain (loss) on securities ............... (134) (134) Cash-in-lieu of shares in connection with Jan. 31, 2000 stock div ....................... (137) Market value of shares issued in five percent stock dividend ........................ - 1,709 (1,709) - Shares issued under option agreement .................... 2,520 19 19 Costs of stock dividend ................................. (10) (10) Dividends paid .......................................... - - (319) - (319) ---------- ---------- ---------- ---------- ---------- Balances at June 30 , 2000 .............................. 3,193,845 $ 15,925 $ 5,998 $ (645) $ 21,278 ========== ========== ========== ========== ========== Balances at Dec. 31, 2000 ............................... 3,199,180 $ 15,928 $ 7,342 $ (131) $ 23,139 Comprehensive income: Net income ......................................... 1,831 1,831 Other comprehensive income (loss) net of tax: Unrealized gain (loss) on securities ............... 188 188 Shares issued under option agreement .................... 5,040 39 39 Dividends paid .......................................... - - (447) - (447) ---------- ---------- ---------- ---------- ---------- Balances at June 30, 2001 ............................... 3,204,220 $ 15,967 $ 8,726 $ 57 $ 24,750 ========== ========== ========== ========== ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS 4 COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF INCOME Six months ended June 30, Three months ended June 30, 2001 2000 2001 2000 $ amounts in thousands UNAUDITED UNAUDITED UNAUDITED UNAUDITED --------- --------- --------- --------- Interest and dividend income: Interest and fees on loans ......................................... $ 9,116 $ 7,763 $ 4,525 $ 4,033 Deposits with other financial institutions ..................... 106 28 78 24 Investment securities: Interest - U. S. Treasury and U. S. Government Agencies .................................. 1,194 1,432 469 726 Dividends .................................................... 69 60 33 31 ------- ------- ------- ------- Total investment securities ............................... 1,263 1,492 502 757 Federal funds sold and securities purchased under agreements to resell ......................... 454 188 284 74 ------- ------- ------- ------- Total interest and dividend income ........................ 10,939 9,471 5,389 4,888 ------- ------- ------- ------- Interest expense: Deposits: Certificates of deposit of $100,000 or more .................. 1,310 1,073 662 565 Other ........................................................ 3,528 2,831 1,714 1,451 ------- ------- ------- ------- Total deposits ............................................ 4,838 3,904 2,376 2,016 Federal funds purchased and securities sold under agreements to repurchase .......................... 149 64 66 40 Federal Home Loan Bank advances ................................ 596 526 295 273 ------- ------- ------- ------- Total interest expense .................................... 5,583 4,494 2,737 2,329 ------- ------- ------- ------- Net interest income ................................................ 5,356 4,977 2,652 2,559 Provision for loan losses .......................................... 277 338 135 158 ------- ------- ------- ------- Net interest income after provision for loan losses ................ 5,079 4,639 2,517 2,401 ------- ------- ------- ------- Non-interest income: Service charges on deposit accounts ............................ 928 696 516 349 Other .......................................................... 315 189 176 99 ------- ------- ------- ------- Total non-interest income ................................. 1,243 885 692 448 ------- ------- ------- ------- Non-interest expense: Salaries and employee benefits ..................................... 2,102 1,892 1,062 952 Premises and equipment ......................................... 471 456 236 232 Other .......................................................... 916 879 479 443 ------- ------- ------- ------- Total non-interest expense ................................ 3,489 3,227 1,777 1,627 ------- ------- ------- ------- Net income before taxes ............................................ 2,833 2,297 1,432 1,222 Provision for income taxes ......................................... 1,002 820 502 439 ------- ------- ------- ------- Net income ......................................................... $ 1,831 $ 1,477 $ 930 $ 783 ======= ======= ======= ======= Basic earnings per common share: Weighted average shares outstanding ............ 3,200,174 3,194,685 3,199,677 3,193,005 Net income per common share .................... $ 0.57 $ 0.46 $ 0.29 $ 0.25 Diluted earnings per common share: Weighted average shares outstanding ............ 3,217,819 3,216,207 3,217,443 3,214,555 Net income per common share .................... $ 0.57 $ 0.46 $ 0.29 $ 0.24 5 COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2001 2000 ---- ---- (dollar amounts in thousands) UNAUDITED UNAUDITED Cash flows from operating activities: Net income ................................................................................. $ 1,831 $ 1,477 Adjustments to reconcile net income to net cash (provided) by operating activities Depreciation ....................................................................... 218 240 Provision for loan losses .......................................................... 277 338 Accretion of discounts and amortization of premiums - investment securities - net ...................................................... (13) (5) Proceeds from sale of real estate loans held for sale .............................. (6,352) (2,337) Origination of real estate loans held for sale ..................................... 6,289 2,606 Changes in assets and liabilities: (Increase) decrease in interest receivable ......................................... 555 198 (Increase) decrease in other assets ................................................ 98 (828) Increase (decrease) in other liabilities ........................................... (127) (24) -------- -------- Net cash provided (used) by operating activities ........................................... 2,776 1,665 -------- -------- Cash flows from investing activities: Proceeds from maturities and sales of investment securities - held to maturity ......................................... 8,875 1,500 Purchases of investment securities - held to maturity .............................. (652) (500) Proceeds from maturities and sales of investment securities - available for sale ....................................... 43,716 2,822 Purchases of investment securities - available for sale ............................ (29,673) (8,126) Net (increase) decrease in interest bearing deposits ............................... (3,883) (554) Net increase in loans to customers ................................................. (13,083) (28,233) Increase in other real estate owned ................................................ (267) - Purchase of premises and equipment ................................................. (156) (67) -------- -------- Net cash provided (used) by investing activities ................................. 4,877 (33,158) -------- -------- Cash flows from financing activities: Net increase in demand, savings, & time deposits ................................... 13,688 17,709 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase ................................... (773) 1,761 Sale of common stock ............................................................... 39 9 Increase (repayment) of FHLB advances .............................................. (2,500) 4,700 Dividends .......................................................................... (447) (319) -------- -------- Net cash provided by financing activities ........................................ 10,007 23,860 -------- -------- Net increase (decrease) in cash and cash equivalents ...................................... 17,660 (7,633) Cash and cash equivalents -beginning of period ............................................. 18,339 20,315 -------- -------- Cash and cash equivalents -end of period ................................................... $ 35,999 $ 12,682 ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS 6 Notes to Unaudited Consolidated Financial Statements Summary of Significant Accounting Principles A summary of significant accounting policies and the audited financial statements for 2000 are included in Corporation's Annual Report on Form 10-K for the year ended December 31, 2000. Principles of Consolidation The consolidated financial statements include the accounts of Community Bankshares, Inc. (CBI), the parent company, and Orangeburg National Bank, Sumter National Bank and Florence National Bank, its wholly owned subsidiaries. All significant intercompany items have been eliminated in the consolidated statements. Management Opinion The interim financial statements in this report are unaudited. In the opinion of management, all the adjustments necessary to present a fair statement of the results for the interim period have been made. Such adjustments are of a normal and recurring nature. The results of operations for any interim period are not necessarily indicative of the results to be expected for an entire year. These interim financial statements should be read in conjunction with the annual financial statements and notes thereto contained in the 2000 Annual Report on Form 10-K. Changes in Comprehensive Income Components The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Disclosure as required by the Statement is as follows: Before-Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------ ---------- ------ Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ................... $(977,000) $ 332,000 $(645,000) --------- --------- --------- Other comprehensive income, June 30, 2000 ................................. $(977,000) $ 332,000 $(645,000) ========= ========= ========= Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ................... $ 87,000 $ (30,000) $ 57,000 --------- --------- --------- Other comprehensive income, June 30, 2001 ................................. $ 87,000 $ (30,000) $ 57,000 ========= ========= ========= 7 COMMUNITY BANKSHARES, INC. - AVERAGE BALANCE SHEETS, YIELDS, AND RATES Six months ended June 30, 2001 2000 (Dollar amounts in thousands) Interest Interest Average Income/ Yields/ Average Income/ Yields/ Assets Balance Expense Rates Balance Expense Rates ------- -------- ------ ------- -------- ----- Interest bearing deposits ........................ $ 4,427 $ 106 4.79% $ 985 $ 28 5.69% Investment securities taxable .................... 39,370 1,250 6.35% 46,367 1,476 6.37% Investment securities--tax exempt ................ 730 13 5.40% 806 16 6.02% Federal funds sold ............................... 18,900 454 4.80% 6,062 188 6.20% Loans receivable ................................. 201,885 9,116 9.03% 170,429 7,763 9.11% -------- ------- -------- ------ Total interest earning assets .................... 265,312 10,939 8.25% 224,649 9,471 8.43% Cash and due from banks .......................... 9,019 8,298 Allowance for loan losses ........................ (2,547) (2,084) Premises and equipment ........................... 4,401 4,560 Other assets ..................................... 3,159 3,085 -------- -------- Total assets ..................................... $279,344 $238,508 ======== ======== Liabilities and Shareholders' Equity Interest bearing deposits Savings ..................................... $ 36,526 $ 651 3.56% $ 31,364 $ 610 3.89% Interest bearing trans.accounts ............. 23,063 123 1.07% 20,050 147 1.47% Time deposits ............................... 135,934 4,064 5.98% 116,441 3,147 5.41% -------- ------- -------- ------ Total interest bearing deposits .................. 195,523 4,838 4.95% 167,855 3,904 4.65% Short term borrowing ............................. 7,391 149 4.03% 3,134 64 4.08% FHLB advances .................................... 20,295 596 5.87% 18,311 526 5.75% -------- ------- -------- ------ Total interest bearing liabilities ............... 223,209 5,583 5.00% 189,300 4,494 4.75% Noninterest bearing demand deposits .............. 30,332 27,353 Other liabilities ................................ 1,750 1,222 Shareholders' equity ............................. 24,053 20,633 -------- -------- Total liabilities and equity ..................... $279,344 $238,508 ======== ======== Interest rate spread 3.24% 3.68% Net interest income and net yield on $5,356 4.04% $4,977 4.43% earning assets 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical in nature are intended to be, and are hereby identified as `forward looking statements' for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation cautions readers that forward looking statements, including without limitation, those relating to the Corporation's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements, due to several important factors herein identified, among others, and other risks and factors identified from time to time in the Corporation's reports filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO JUNE 30, 2000 Net Income For the first half of 2001 CBI earned a consolidated profit of $1,831,000 compared to $1,477,000 for the first half of 2000, an increase of 24% or $354,000. Basic and diluted earnings per share were $.57 in the 2001 period compared to $.46 for the 2000 period. For the first half of 2001 Orangeburg National Bank reported a profit of $1,222,000 compared to $1,104,000 for the first half of 2000, an increase of 10.7% or $118,000. For the first half of 2001 Sumter National Bank reported a profit of $552,000 compared to $393,000 for the first half of 2000, an increase of 40.5% or $159,000. The Sumter bank began operation in June 1996. For the first half of 2001 Florence National Bank reported a profit of $86,000 compared to net loss of $12,000 for the first half of 2000, an improvement of $98,000. The Florence bank began operation in July 1998. As noted above, consolidated net income for the six months ended June 30, 2001, increased from the prior year by 24% or $354,000. The major components of this increase are discussed below. Net interest income before provision for loan losses for the six months ended June 30, 2001 increased to $5,356,000 compared to $4,977,000 for the same period in 2000, an increase of 7.6% or $379,000. For the same period the provision for loan losses was $277,000 compared to $338,000 for the 2000 period, a decrease of 18% or $61,000. Non-interest income for the 2001 period increased to $1,243,000 from $885,000 for the 2000 period, a 40.5% or $358,000 increase. Non-interest expense increased to $3,489,000 from $3,227,000, an 8.1% or $262,000 increase. 9 Profitability Profitability may be measured through the ROA (return on average assets) and the ROE (return on average equity). Return on assets is the income for the period divided by the average assets for the period, annualized. Return on equity is the income for the period divided by the average equity for the period, annualized. Operating results for the six months ended June 30, 2001 and 2000 yield the results in the table shown below. Period ended June 30, 2001 2000 ---- ---- (dollars in thousands) Average assets $279,344 $238,508 ROA 1.31% 1.24% Average equity $24,053 $20,633 ROE 15.22% 14.32% Net income $1,831 $1,477 Net interest income Net interest income, the major component of CBI's income, is the amount by which interest and fees on interest earning assets exceeds the interest paid on interest bearing deposits and other interest bearing funds. During the first six months of 2001 net interest income after provision for loan losses increased to $5,079,000 from $4,639,000, a 9.5% or $440,000 increase over the first six months of 2000. This improvement was mostly the result of a $40 million increase in the average volume of earning assets. The average yield on earning assets decreased to 8.25% for the 2001 period from 8.43% for the 2000 period. This decline in yield was the result of market interest rate declines. During the first half of 2001 the prime lending rate declined from 9.5% to 6.75%, during the first half of 2000 the prime lending rate increased from 8.75% to 9.5%. For the first six months of 2001 the cost of funds averaged 5.00%, increased from 4.75% for the first six months of 2000. The effect of these changes was a net interest spread (yield on earning assets less cost of interest bearing liabilities) of 3.24% for the first six months of 2001, decreased from 3.68% during the first six months of 2000. CBI's net interest margin (net interest income divided by total earning assets) was 4.04% for the first six months of 2001 compared to 4.43% for the first six months of 2000. Interest Income Elsewhere in this report is a table comparing the average balances, yields, and rates for the interest rate sensitive segments of the Corporation's balance sheets for the six months ended June 30, 2001 and 2000. A discussion of that table follows. Total interest income for the first six months of 2001 was $10,939,000 compared with $9,471,000 for the same period in 2000, a 15.5% or $1,468,000 increase. The yield on average earning assets for the 2001 period was 8.25%, decreased from 8.43% for the 2000 period. Total average interest earning assets for the 2001 period were $265,312,000 compared to $224,649,000 for the 2000 period, an increase of 18.1% or $40,663,000. 10 The loan portfolio earned $9,116,000 for the first six months of 2001 compared to $7,763,000 for the same period of 2000, a 17.4% or $1,353,000 increase. The yield decreased to 9.03% for the 2001 period from 9.11% for the 2000 period. The average size of the loan portfolio was $201,885,000 for the 2001 period compared to $170,429,000 for the 2000 period, an increase of 18.5% or $31,456,000 primarily as the result of continuing strong loan demand. The taxable investment portfolio earned $1,250,000 for the first six months in 2001 compared to $1,476,000 for the same period in 2000, a 15.3% or $226,000 decrease. The yield decreased to 6.35% in the 2001 period from 6.37% in the 2000 period. The average size of the portfolio was $39,370,000 in the 2001 period compared to $46,367,000 in the 2000 period, a decrease of 15.1% or $6,997,000. As market interest rates declined during the first half of 2001 the Corporation had numerous securities called prior to maturity. The tax-exempt investment portfolio earned $13,000 for the first six months in 2001 compared to $16,000 for the same period in 2000, an 18.8% or $3,000 decrease. The yield (on a taxable equivalent basis) on the portfolio was 5.4%, a decrease from 6.02%. The average size of the portfolio was $730,000 for the 2001 period compared to $806,000 in the 2000 period, a decrease of 9.4% or $76,000. Interest bearing deposits in other banks contributed $106,000 for the first six months of 2001 compared to $28,000 during the prior year, an increase of 279% or $78,000. The yield on these deposits decreased to 4.79% for the 2001 period from 5.69% in the 2000 period. CBI averaged $4,427,000 in interest bearing balances in the first six months of 2001 compared to $985,000 the first six months of the prior year, an increase of 349% or $3,442,000. The increase in these deposits was the result of declining market interest rates, which caused numerous calls of investment securities prior to maturity. The funds resulting from these calls were temporarily put into interest bearing deposits and federal funds. Federal funds sold earned $454,000 the first six months of 2001 compared to $188,000 the prior year, an increase of 142% or $266,000. Yields decreased to 4.80% for the first six months in 2001 from 6.20% for the first six months in 2000. For the first six months of 2001 CBI increased its average volume in federal funds sold to $18,900,000 compared to $6,062,000 for the first six months of 2000, a 212% or $12,838,000 increase. Interest Expense Interest expense for the first six months of 2001 was $5,583,000 compared to the prior year's $4,494,000, a 24.2% or $1,089,000 increase. The volume of interest bearing liabilities was $223,209,000 for the first six months in 2001 compared to $189,300,000 for the first six months of 2000, a 17.9% or $33,909,000 increase. The average rate paid for interest-bearing liabilities during the 2001 period was 5.00%, up from 4.75% for the 2000 period. The cost of savings accounts was $651,000 in the first six months in 2001 compared to $610,000 in the first six months of 2000, a 6.7% or $41,000 increase. Average savings deposit balances were $36,526,000 for the first six months in 2001 compared to $31,364,000 for the first six months of 2000, an increase of 16.5% or $5,162,000. The average rate paid on these funds decreased to 3.56% from 3.89%. 11 Interest bearing transaction accounts cost $123,000 for the first six months in 2001 compared to the prior year's $147,000, a decrease of 16.3% or $24,000. The volume of these deposits was $23,063,000 for the first six months in 2001 compared to $20,050,000 for the first six months of 2000, a 15% or $3,013,000 increase. The average rate paid on these funds for the first six months in 2001 decreased to 1.07% from 1.47% for the first six months of 2000. Time deposits cost $4,064,000 for the first six months of 2001 compared to $3,147,000 for the first six months of the prior year, an increase of 29.1% or $917,000. The volume was $135,934,000 for the first six months in 2001 compared to $116,441,000 for the first six months of 2000, a 16.7% or $19,493,000 increase. The average rate paid on these funds increased to 5.98% for the first six months in 2001 from 5.41% for the first six months in 2000. This increase runs contrary to market interest rates nationally but reflects increased competition for deposits in the Corporation's local markets. Short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase. This is a relatively small and volatile part of the balance sheet. It cost $149,000 for the first six months in 2001 compared to $64,000 for the first six months of 2000, an increase of 133% or $85,000. The volume of these funds was $7,391,000 in the first six months of 2001 compared to $3,134,000 in the first six months of 2000, an increase of 136% or $4,257,000. The average rate paid on these funds decreased to 4.03% from 4.08%. Borrowings from the Federal Home Loan Bank cost $596,000 for the first six months in 2001 compared to $526,000 for the first six months in 2000, an increase of 13.3% or $70,000. The advances averaged $20,295,000 during the 2001 period compared to $18,311,000 for the prior year period, a 10.8% or $1,984,000 increase. The average rate paid on these funds increased to 5.87% from 5.75%. Non-Interest Income Non-interest income for the first six months of 2001 grew to $1,243,000 compared to $885,000 in the first six months of 2000, a 40.5% or $358,000 increase. Much of this increase resulted from the introduction of a new service, an automated overdraft courtesy line for customers. Non-Interest Expense For the first six months of 2001 non-interest expenses increased to $3,489,000 from $3,227,000 for the first six months of 2000, an 8.1% or $262,000 increase. This increase is related to higher levels of business activity and included the following components: For the 2001 period, personnel costs were $2,102,000 compared to $1,892,000 for the 2000 period, an increase of 11.1% or $210,000; For the 2001 period, premises and equipment expenses were $471,000 compared to $456,000 for the 2000 period, an increase of 3.3% or $15,000; and For the 2001 period, other costs were $916,000 compared to $879,000 for the 2000 period, an increase of 4.2% or $37,000. 12 Income Taxes CBI provided $1,002,000 for federal and state income taxes during the first six months of 2001 compared to $820,000 for the same period in 2000, a 22.2% or $182,000 increase. The average tax rate for the 2001 period was approximately 35.4% and for the 2000 period it was approximately 35.7%. RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2001 AND 2000 Net Income For the quarter ended June 30, 2001, CBI earned a consolidated profit of $930,000, compared to $783,000 for the comparable period of 2000, an increase of 18.8% or $147,000. Basic earnings per share were $.29 in the 2001 period, compared to $.25 for the 2000 period. The changes in the items comprising net interest income, which are discussed below, resulted from essentially the same factors discussed above regarding the results of operation for the six months ended June 30, 2001. Net interest income Net interest income before provision for loan losses for the quarter ended June 30, 2001, increased to $2,652,000 compared to $2,559,000 for the same period in 2000, an increase of 3.6% or $93,000. For the same period the provision for loan losses was $135,000 compared to $158,000 for the 2000 period, a decrease of 14.6% or $23,000. Interest Income Total interest income for the second quarter 2001 was $5,389,000 compared with $4,888,000 for the same period in 2000, a 10.2% or $501,000 increase. The loan portfolio earned $4,525,000 for the second quarter 2001 compared to $4,033,000 for the same period of 2000, a 12.2% or $492,000 increase. The investment portfolio earned $469,000 for the second quarter 2001 compared to $726,000 for the 2000 period, a 35.4% or $257,000 decrease. Interest bearing deposits in other banks contributed $78,000 for the second quarter 2001 compared to $24,000 during the prior year, an increase of 225% or $54,000. Federal funds sold earned $284,000 the second quarter of 2001 compared to $74,000 the prior year, an increase of 284% or $210,000. Interest expense Interest expense for the second quarter of 2001 was $2,737,000 compared to the prior year's $2,329,000, a 17.5% or $408,000 increase. 13 Non-interest income and expense Non-interest income for the 2001 period was $692,000 compared to $448,000 for the 2000 period, a 54.5% or $244,000 increase. This increase was mostly the result of the introduction of the new automated overdraft service. Non-interest expense was $1,777,000 compared to $1,627,000, a 9.2% or $150,000 increase. CHANGES IN FINANCIAL POSITION Investment portfolio The investment portfolio is comprised of held to maturity securities and available for sale securities. CBI and its three banks usually purchase short-term issues (ten years or less) of U. S Treasury and U. S. Government agency securities for investment purposes. At June 30, 2001, the held to maturity portfolio totaled $4,148,000 compared to $12,371,000 at December 31, 2000, a decrease of 66.5% or $8,223,000. At June 30, 2001, the available for sale portfolio totaled $27,353,000 compared to $41,195,000 at December 31, 2000, a decrease of 33.6% or $13,842,000. Most of the decline in the banks' investment portfolios was due to the call of many securities during the first half of 2001, which resulted from the decline in bond market interest rates. The following chart summarizes the investment portfolios at June 30, 2001, and December 31, 2000. June 30, 2001 Held to maturity Available for sale Amortized cost Fair value Amortized cost Fair value -------------- ---------- -------------- ---------- (dollars in thousands) U. S. Government and agencies ................................. $4,148 $4,152 $24,481 $24,561 Tax exempt securities ......................................... - - 804 811 Other equity securities ....................................... - - 1,981 1,981 ------ ------ ------- ------- Total ......................................................... $4,148 $4,152 $27,266 $27,353 ====== ====== ======= ======= Unrealized gain ............................................... $ 4 $ 87 ======= ======= December 31, 2000 Held to maturity Available for sale Amortized cost Fair value Amortized cost Fair value -------------- ---------- -------------- ---------- (dollars in thousands) U. S. Government and agencies ................................. $12,371 $12,217 $38,599 $38,404 Tax exempt securities ......................................... - - 814 810 Other equity securities ....................................... - - 1,981 1,981 ------- ------- ------- ------- Total ......................................................... $12,371 $12,217 $41,394 $41,195 ======= ======= ======= ======= Unrealized (loss) ............................................. $ (154) $ (199) ======= ======= 14 Loan portfolio The loan portfolio is primarily consumer and small business oriented. At June 30, 2001 the loan portfolio was $208,094,000 compared to $195,077,000 at December 31, 2000, a 6.7% or $13,017,000 increase. The following chart summarizes the loan portfolio at June 30, 2001 and December 31, 2000. Jun. 30, 2001 Dec. 31, 2000 ------------- ------------- (dollars in thousands) Real estate ........................... $120,418 $113,543 Commercial ............................ 56,863 52,264 Loans to individuals .................. 30,813 29,270 -------- -------- Total ................................. $208,094 $195,077 ======== ======== Past Due and Non-Performing Assets and the Allowance for Loan Losses CBI closely monitors past due loans and loans that are in non-accrual status and other real estate owned. Below is a summary of past due and non-performing assets at June 30, 2001 and December 31, 2000. Jun. 30, 2001 Dec. 31, 2000 ------------- ------------- (dollars in thousands) Past due 90 days + accruing loans ........ $145 $93 Non-accrual loans ........................ $489 $238 Impaired loans (included in nonaccrual) .. $489 $238 Other real estate owned .................. $267 $- Management considers the past due and non-accrual amounts at June 30, 2001 to be reasonable in relation to the size of the portfolio and manageable in the normal course of business. The increase in non-accrual assets is associated with a small number of loans and is not indicative, in the opinion of management, of any trend. CBI had no restructured loans during any of the above listed periods. Allowance for Loan Losses The Corporation operates three independent community banks in central South Carolina. Under the provisions of the National Bank Act each board of directors is responsible for determining the adequacy of its bank's loan loss allowance. In addition, each bank is supervised and regularly examined by the Office of the Comptroller of the Currency of the U. S. Treasury Department. As a normal part of a safety and soundness examination, the OCC examiners will assess and comment on the adequacy of a national bank's allowance for loan losses. The allowance presented in this discussion is on an aggregated basis. The nature of community banking is such that the loan portfolios will be predominantly comprised of small and medium size business and consumer loans. As community banks, there is a natural geographic concentration of loans within the Banks' respective cities or counties. Management at each bank monitors the loan concentrations and loan portfolio quality on an ongoing basis including, but not limited to: quarterly analysis of loan concentrations, monthly reporting 15 of past dues, non-accruals, and watch loans, and quarterly reporting of loan charge-offs and recoveries. These efforts focus on historical experience and are bolstered by quarterly analysis of local and state economic conditions, which is part of the Banks' assessment of the adequacy of their allowances for loan losses. Management reviews its allowance for loan losses in three broad categories: commercial, real estate and installment loans. However, management does not believe it would be useful to maintain a separate allowance for each category. Instead management assigns an estimated risk percentage factor to each category in the computation of the overall allowance. In general terms, the real estate loan portfolio is subject to the least risk, followed by the installment loan portfolio, which in turn is followed by the commercial portfolio. The Banks' internal and external loan review programs will from time to time identify loans that are subject to specific weaknesses and such loans will be reviewed for a specific loan loss allowance. Based on the current levels of non-performing and other problem loans, management believes that loan charge-offs in 2001 will at least approximate the 2000 levels as such loans progress through the collection process. Management believes that the allowance for loan losses, as of June 30, 2001 is sufficient to absorb the expected charge-offs and provide adequately for the inherent losses that remain in the loan portfolio. Management will continue to closely monitor the levels of non-performing and potential problem loans and address the weaknesses in these credits to enhance the amount of ultimate collection or recovery of these assets. Management considers the levels and trends in non-performing and past due loans in determining how historical loan loss rates are adjusted. The aggregate allowance for loan losses of the banks and the aggregate activity with respect to those allowances are summarized in the following table. Six months ended Year ended Six months ended (Dollars in thousands) June 30, 2001 Dec. 31, 2000 June 30, 2000 ------------- ------------- ------------- Allowance at beginning of period ........................... $ 2,424 $ 1,936 $ 1,936 Provision expense .......................................... 277 688 338 Net charge offs ............................................ (66) (200) (124) ------- ------- ------- Allowance at end of period ................................. $ 2,635 $ 2,424 $ 2,150 ======= ======= ======= Allowance / outstanding loans .............................. 1.27% 1.24% 1.16% In reviewing the adequacy of the allowance for loan losses at the end of each period, management of each bank considers historical loan loss experience, current economic conditions, loans outstanding, trends in non-performing and delinquent loans, and the quality of collateral securing problem loans. After charging off all known losses, management of each bank considers the allowance adequate to provide for estimated losses inherent in the loan portfolio at June 30, 2001. Deposits Deposits were $232,499,000 at June 30, 2001 compared to $218,811,000 at December 31, 2000, an increase of 6.3% or $13,688,000. 16 Time deposits greater than $100,000 were $48,890,000 at June 30, 2001 compared to $38,702,000 at December 31, 2000, an increase of 26.3% or $10,188,000. Liquidity Liquidity is the ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of additional liabilities. Adequate liquidity is necessary to meet the requirements of customers for loans and deposit withdrawals in a timely and economical manner. The most manageable sources of liquidity are composed of liabilities, with the primary focus of liquidity management being the ability to attract deposits within the Orangeburg National Bank, Sumter National Bank, and Florence National Bank service areas. Core deposits (total deposits less certificates of deposit of $100,000 or more) provide a relatively stable funding base. Certificates of deposit of $100,000 or more are generally more sensitive to changes in rates, so they must be monitored carefully. Asset liquidity is provided by several sources, including amounts due from banks, federal funds sold, and investments available for sale. CBI and its banks maintain an available for sale and a held to maturity investment portfolio. While all these investment securities are purchased with the intent to be held to maturity, such securities are marketable and occasional sales may occur prior to maturity as part of the process of asset/liability and liquidity management. Such sales will generally be from the available for sale portfolio. Management deliberately maintains a short-term maturity schedule for its investments so that there is a continuing stream of maturing investments. CBI intends to maintain a short-term investment portfolio in order to continue to be able to supply liquidity to its loan portfolio and for customer withdrawals. CBI has substantially more liabilities (mostly deposits, which may be withdrawn) which mature in the next 12 months than it has assets maturing in the same period. However, based on its historical experience, and that of similar financial institutions, CBI believes that it is unlikely that so many deposits would be withdrawn, without being replaced by other deposits, that CBI would be unable to meet its liquidity needs with the proceeds of maturing assets. CBI through its banking subsidiaries also maintains federal funds lines of credit with correspondent banks, and is able to borrow from the Federal Home Loan Bank and from the Federal Reserve's discount window. CBI through its banking subsidiaries has a demonstrated ability to attract deposits from its markets. Deposits have grown from $30 million in 1989 to over $232 million in 2001. This base of deposits is the major source of operating liquidity. CBI's long term liquidity needs are expected to be primarily affected by the maturing of long-term certificates of deposit. At June 30, 2001 CBI had approximately $24.6 million and $11.35 million in certificates of deposit and other interest bearing liabilities maturing in one to five years and over five years, respectively. CBI's assets maturing or repricing in the same periods were $106.3 million and $36.6 million, respectively. CBI expects to be able to manage its current balance sheet structure without experiencing any material liquidity problems. In the opinion of management, CBI's current and projected liquidity position is adequate. 17 Capital resources As summarized in the table below, CBI maintains a strong capital position. Minimum required for capital June 30, 2001 Dec. 31, 2000 adequacy ------------- ------------- -------- Tier 1 capital to average total assets ............................... 8.67% 8.20% 4.00% Tier 1 capital to risk weighted assets ............................... 11.89% 11.10% 4.00% Total capital to risk weighted assets ................................ 13.07% 12.30% 6.00% In the opinion of management, the Corporation's current and projected capital positions are adequate. Dividends CBI declared and paid a quarterly cash dividend of seven cents per share during the first and second quarters of 2001. The total cost of these dividends was $447,000. Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Corporation's market risk arises principally from interest rate risk inherent in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Corporation manages other risks, such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk and this risk could potentially have the largest material effect on the Corporation's financial condition and results of operations. Other types of market risks such as foreign currency exchange risk and commodity price risk do not arise in the normal course of community banking activities. Achieving consistent growth in net interest income is the primary goal of the Corporation's asset/liability function. The Corporation attempts to control the mix and maturities of assets and liabilities to achieve consistent growth in net interest income despite changes in market interest rates. The Corporation seeks to accomplish this goal while maintaining adequate liquidity and capital. The Corporation's asset/liability mix is sufficiently balanced so that the effect of interest rates moving in either direction is not expected to be significant over time. The Corporation's Asset/Liability Committee uses a simulation model to assist in achieving consistent growth in net interest income while managing interest rate risk. The model takes into account interest rate changes as well as changes in the mix and volume of assets and liabilities. The model simulates the Corporation's balance sheet and income statement under several different rate scenarios. The model's inputs (such as interest rates and levels of loans and deposits) are updated on a quarterly basis in order to obtain the most accurate projection possible. The projection presents information over a twelve-month period. It reports a base case in which interest rates remain flat and reports variations that occur when rates increase and decrease 100 and 200 basis points. According to the model as of June 30, 2001 the Corporation is positioned so that net interest income would be expected to increase $303,000 and net income would be expected to increase $186,000 in the next twelve months 18 if interest rates rise 100 basis points. Conversely, net interest income would be expected to decline $303,000 and net income would be expected to decline $186,000 in the next twelve months if interest rates decline 100 basis points. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates and loan prepayment, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Corporation could undertake in response to changes in interest rates. As of June 30, 2001 there was no significant change from the interest rate sensitivity analysis for the various changes in interest rates calculated as of December 31, 2000. The foregoing disclosures related to the market risk of the Corporation should be read in connection with Management's Discussion and Analysis of Financial Position and Results of Operations included in the 2000 Annual Report on Form 10-K. Part II--Other Information Item 4. Submission of Matters to a Vote of Security Holders. CBI had an Annual Meeting of Shareholders on April 24, 2001 The following persons were elected to the Board for terms of three years: Three year term: Anna O. Dantzler, Richard L. Havekost, William H. Nock, Samuel F. Reid, and William W. Traynham. An amendment to the 1997 Stock Option Plan was approved that increases the number of shares reserved for issuance under the Plan and permits non-employee directors to participate in the Plan. The other item approved was the ratification of J. W. Hunt and Co., Certified Public Accountants, as outside auditors for CBI for the year ended December 31, 2001. The vote tally was as follows: Total number of Voting shares against or to Present at eligible to withhold Voting to meeting and vote Voting for authority abstain not voting ---- ---------- --------- ------- ---------- Election of directors Anna O. Dantzler ......................... 3,198,757 2,202,304 0 0 0 Richard L. Havekost ...................... 3,198,757 2,203,505 0 0 0 William H. Nock .......................... 3,198,757 2,203,925 6,550 0 0 Samuel F. Reid ........................... 3,198,757 2,202,770 0 0 0 William W. Traynham ...................... 3,198,757 2,203,925 0 0 0 Amendment to option plan ...................... 3,198,757 2,127,099 73,961 4,255 0 Ratification of J. W. Hunt .................... 3,198,757 2,202,004 0 3,311 0 19 Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Index Exhibit No.(from item 601 of S-B) Description None. b) Reports on Form 8-K. None. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: August 13, 2001 COMMUNITY BANKSHARES, INC. By: s/ E. J. Ayers, Jr., -------------------------------------------- E. J. Ayers, Jr., Chief Executive Officer By: s/ William W. Traynham ------------------------------------------- William W. Traynham President and Chief Financial Officer (Principal Accounting Officer) 20