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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002 Commission File number: 000-22054
COMMUNITY BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
South Carolina 57-0966962
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
791 Broughton St., Orangeburg, South Carolina 29115
(Address of Principal Executive Office, Zip Code)
(803) 535-1060
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,299,674 shares of common
stock outstanding as of May 1, 2002.
--------------------------------------------------------------------------------
10-Q TABLE OF CONTENTS
Part I-Financial Statements Page
Item 1 Financial Statements ......................................... 3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 9
Item 3 Quantitative and Qualitative Disclosure About Market Risk .... 18
Part II-Other Information
Item 6 Exhibits and Reports on Form 8-K ............................. 19
2
Part I. Item 1. Financial Statements
COMMUNITY BANKSHARES, INC. - CONSOLIDATED BALANCE SHEETS
$ amounts in thousands
UNAUDITED
March 31, December 31,
ASSETS 2002 2001
---- ----
Cash and due from other financial institutions:
Non-interest bearing ............................................................ $ 12,213 $ 14,586
Federal funds sold .............................................................. 20,929 11,063
--------- ---------
Total cash and cash equivalents ............................................. 33,142 25,649
Interest bearing deposits in other banks ............................................. 988 2,376
Investment securities:
Securities held to maturity ..................................................... 500 500
Securities available for sale ................................................... 40,363 43,207
Loans held for resale ................................................................ 8,988 10,265
Loans ................................................................................ 240,625 229,905
Less, allowance for loan losses ................................................. (2,961) (2,830)
--------- ---------
Net loans ................................................................... 237,664 227,075
Premises and equipment ............................................................... 5,352 5,177
Accrued interest receivable ......................................................... 1,941 1,762
Deferred income taxes ................................................................ 958 870
Goodwill ............................................................................. 921 921
Other assets ......................................................................... 908 815
--------- ---------
Total assets ................................................................ $ 331,725 $ 318,617
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ............................................................ $ 35,092 $ 35,882
Interest bearing ................................................................ 232,620 219,551
--------- ---------
Total deposits .............................................................. 267,712 255,433
Federal funds purchased and securities
sold under agreements to repurchase ............................................. 4,419 4,171
Federal Home Loan Bank advances ...................................................... 20,280 20,280
Lines of credit payable .............................................................. 8,670 9,028
Other liabilities .................................................................... 2,399 2,158
--------- ---------
Total liabilities ........................................................... 303,480 291,070
--------- ---------
Shareholders' equity:
Common stock
No par, authorized shares 12,000,000, issued and ............................ 17,208 17,208
outstanding 3,299,674 in 2002 and 3,199,180 in 2001
Retained earnings ............................................................... 11,207 10,346
Accumulated other comprehensive income (loss) ................................... (170) (7)
--------- ---------
Total shareholders' equity .................................................. 28,245 27,547
--------- ---------
Total liabilities and shareholders' equity .................................. $ 331,725 $ 318,617
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
3
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
for the three months ended March 31, 2002 and 2001 (Unaudited)
(amounts in thousands, except per share data)
Accumulated
Other Total
Common Common Retained Comprehensive Shareholders'
Shares Stock Earnings Income (Loss) Equity
------ ----- -------- ------------- ------
Balances at Dec. 31, 2000 ..................................... 3,199,180 $ 15,928 $ 7,342 $ (131) $ 23,139
Comprehensive income:
Net income ............................................... 901 901
Change in unrealized gain (loss) on securities
available for sale, net of tax effect ................ 163 163
Dividends paid ................................................ - - (224) - (224)
--------- -------- -------- -------- --------
Balances at Mar. 31, 2001 ..................................... 3,199,180 $ 15,928 $ 8,019 $ 32 $ 23,979
========= ======== ======== ======== ========
Balances at Dec. 31, 2001 ..................................... 3,299,674 $ 17,208 $ 10,346 $ (7) $ 27,547
Comprehensive income:
Net income ............................................... 1,125 1,125
Change in unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment and tax effect ............................ (163) (163)
Dividends paid ................................................ - - (264) - (264)
--------- -------- -------- -------- --------
Balances at Mar. 31, 2002 ..................................... 3,299,674 $ 17,208 $ 11,207 $ (170) $ 28,245
========= ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
4
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31,
2002 2001
In thousands, except per share data UNAUDITED UNAUDITED
--------- ---------
Interest and dividend income:
Loans, including fees ....................................................... $ 4,324 $ 4,591
Deposits with other financial institutions .................................. 6 28
Debt securities ............................................................. 375 725
Dividends ................................................................... 31 36
Federal funds sold .......................................................... 87 170
---------- ----------
Total interest and dividend income ..................................... 4,823 5,550
---------- ----------
Interest expense:
Deposits:
Certificates of deposit of $100,000 or more ............................... 468 648
Other ..................................................................... 1,152 1,814
---------- ----------
Total deposits ......................................................... 1,620 2,462
Federal funds purchased and securities
sold under agreements to repurchase ....................................... 22 83
Other borrowed funds ........................................................ 364 301
---------- ----------
Total interest expense ................................................. 2,006 2,846
---------- ----------
Net interest income .............................................................. 2,817 2,704
Provision for loan losses ........................................................ 169 142
---------- ----------
Net interest income after provision for loan losses .............................. 2,648 2,562
---------- ----------
Non-interest income:
Service charges on deposit accounts ......................................... 544 412
Gains on sales of securities ................................................ 42 -
Mortgage banking income ..................................................... 956 -
Other ....................................................................... 145 139
---------- ----------
Total non-interest income .............................................. 1,687 551
---------- ----------
Non-interest expense:
Salaries and employee benefits .............................................. 1,655 1,040
Premises and equipment ...................................................... 297 235
Other ....................................................................... 626 437
---------- ----------
Total non-interest expense ............................................. 2,578 1,712
---------- ----------
Income before income taxes ....................................................... 1,757 1,401
Income tax expense ............................................................... 632 500
---------- ----------
Net income ....................................................................... $ 1,125 $ 901
========== ==========
Basic earnings per common share:
Weighted average shares outstanding ......................................... 3,299,674 3,199,180
Net income per common share ................................................. $ 0.34 $ 0.28
Diluted earnings per common share:
Weighted average shares outstanding ......................................... 3,361,108 3,217,067
Net income per common share ................................................. $ 0.33 $ 0.28
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
5
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31,
$ amounts in thousands 2002 2001
UNAUDITED UNAUDITED
--------- ---------
Cash flows from operating activities:
Net income ............................................................................... $ 1,125 $ 901
Adjustments to reconcile net income
to net cash provided (used) by operating activities
Depreciation and amortization .................................................... 169 109
Provision for loan losses ........................................................ 169 142
Accretion of discounts and amortization of premiums -
investment securities - net .................................................... (1) (8)
Net realized (gains) on sale of securities ....................................... (42) -
Proceeds from sale of real estate loans held for sale ............................ 45,029 2,164
Origination of real estate loans held for sale ................................... (43,752) (2,436)
Changes in operating assets and liabilities:
(Increase) decrease in interest receivable ....................................... (179) 37
(Increase) decrease in other assets .............................................. (181) 104
Increase in other liabilities .................................................... 241 469
-------- --------
Net cash provided by operating activities ..................................... 2,578 1,482
-------- --------
Cash flows from investing activities:
Net increase (decrease) in interest bearing deposits
with other banks ............................................................ 1,388 (7,849)
Proceeds from maturities of held to maturity securities .......................... - 3,999
Purchases of available for sale securities ....................................... (15,577) (17,544)
Proceeds from maturities of available for sale securities ........................ 18,259 28,105
Proceeds from sales of available for sale securities ............................. 42 -
Net (increase) in loans to customers ............................................. (10,758) (6,577)
Purchase of premises and equipment ............................................... (344) (92)
-------- --------
Net cash provided by (used in) investing activities ........................... (6,990) 42
-------- --------
Cash flows from financing activities:
Net increase in demand, savings, & time deposits ................................. 12,279 9,411
Net decrease (increase) in federal funds purchased and
securities sold under agreement to repurchase .............................. 248 (4,100)
(Decrease) in Other Borrowings ................................................... (358) -
Dividend payments ................................................................ (264) (224)
-------- --------
Net cash provided by financing activities ..................................... 11,905 5,087
-------- --------
Net increase in cash and cash equivalents ................................................ 7,493 6,611
Cash and cash equivalents - beginning of period .......................................... 25,649 18,339
-------- --------
Cash and cash equivalents - end of period ................................................ $ 33,142 $ 24,950
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
6
Summary of Significant Accounting Principles
A summary of significant accounting policies and the audited financial
statements for 2001 are included in Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
Principles of Consolidation
The consolidated financial statements include the accounts of Community
Bankshares, Inc. (CBI), the parent company, and Orangeburg National Bank, Sumter
National Bank, Florence National Bank and Community Resource Mortgage Inc., 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 2001 Annual Report on Form 10-K.
Changes in Comprehensive Income Components
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," effective for
fiscal years beginning after December 15, 1997. This Statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Disclosure as required by
the Statement is as follows:
Three months ended March 31,
2002 2001
---- ----
(Dollars in thousands)
Unrealized holding gains (losses)
on available for sale securities ................ $(293) $ 251
Less: Reclassification adjustment
for gains (losses) realized in income ........... 42 -
----- -----
Net unrealized gains (losses) ..................... (251) 251
Tax effect ........................................ 88 (88)
----- -----
Net-of-tax amount ................................. $(163) $ 163
===== =====
7
COMMUNITY BANKSHARES, INC. - AVERAGE BALANCE SHEETS, YIELDS, AND RATES
($ in thousands)
Quarter ended March 31, 2002 2001
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense Rates Balance Expense Rates
-------- -------- ------ ------- -------- -----
Interest bearing deposits .................................. $ 1,735 $ 6 1.38% $ 1,830 $ 28 6.12%
Investment securities taxable .............................. 36,688 403 4.39% 46,655 754 6.46%
Investment securities--tax exempt .......................... 341 3 5.33% 793 7 5.35%
Federal funds sold ......................................... 20,935 87 1.66% 12,117 170 5.61%
Loans receivable ........................................... 243,987 4,324 7.09% 199,047 4,591 9.23%
-------- ------ -------- ------
Total interest earning assets ......................... 303,686 4,823 6.35% 260,442 5,550 8.52%
Cash and due from banks .................................... 12,326 9,269
Allowance for loan losses .................................. (2,960) (2,487)
Premises and equipment ..................................... 5,541 4,411
Goodwill ................................................... 921 -
Other assets ............................................... 3,130 3,283
-------- --------
Total assets .......................................... $322,644 $274,918
======== ========
Liabilities and Shareholders' Equity
Interest bearing deposits
Savings .................................................... $ 44,327 $ 189 1.71% $ 35,684 $ 350 3.92%
Interest bearing transaction accounts ...................... 41,530 83 0.80% 21,267 68 1.28%
Time deposits .............................................. 140,419 1,348 3.84% 135,324 2,044 6.04%
-------- ------ -------- ------
Total interest bearing deposits ....................... 226,276 1,620 2.86% 192,275 2,462 5.12%
Short term borrowing ....................................... 4,463 22 1.97% 7,304 83 4.55%
Other borrowings ........................................... 28,081 364 5.19% 20,350 301 5.92%
-------- ------ -------- ------
Total interest bearing liabilities .................... 258,820 2,006 3.10% 219,929 2,846 5.18%
Noninterest bearing demand deposits ........................ 33,569 29,582
Other liabilities .......................................... 2,028 1,717
Shareholders' equity ....................................... 28,227 23,690
-------- --------
Total liabilities and equity .......................... $322,644 $274,918
======== ========
Interest rate spread ....................................... 3.25% 3.34%
Net interest income and net yield on earning assets ........ $2,817 3.71% $2,704 4.15%
====== ==== ====== ====
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as `forward looking statements'
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. The words "estimate," "project," "intend,",
"expect," "believe," "anticipate," "plan," and similar expressions identify
forward-looking statements. The Corporation cautions readers that forward
looking statements, including without limitation, those relating to the
Corporation's future business prospects, ability to successfully integrate
recent and proposed acquisitions, 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: QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED
MARCH 31, 2001
Net Income
For the first quarter of 2002 CBI earned a consolidated profit of
$1,125,000 compared to $901,000 for the first quarter of 2001, an increase of
24.9% or $224,000. Basic and diluted earnings per share were $.34 and $.33,
respectively, for the 2002 period compared to $.28 for both in the 2001 period.
For the first quarter of 2002 Orangeburg National Bank reported a
profit of $670,000 compared to $609,000 for the first quarter of 2001, an
increase of 10% or $61,000.
For the first quarter of 2002 Sumter National Bank reported a profit of
$321,000 compared to $250,000 for the first quarter of 2001, an increase of
28.4% or $71,000. The Sumter bank opened its first branch in February 2002.
For the first quarter of 2002 Florence National Bank reported a profit
of $53,000 compared to $47,000 for the first quarter of 2001, an improvement of
12.8% or $6,000. The Florence bank began operation in July 1998.
For the first quarter of 2002 Community Resource Mortgage Inc. reported
a profit of $107,000. It was acquired by Community Bankshares in November 2001.
As noted above, consolidated net income for the quarter ended March 31,
2002, increased from the prior year by 24.9% or $224,000. The major components
of this increase are discussed below. Net interest income before provision for
9
loan losses for the three months ended March 31, 2002 increased to $2,817,000
compared to $2,704,000 for the same period in 2001, an increase of 4.2% or
$113,000. For the same period, the provision for loan losses was $169,000
compared to $142,000 for the 2001 period, an increase of 19% or $27,000.
Non-interest income for the 2002 period increased to $1,687,000 from $551,000
for the 2001 period, a 206% or $1,136,000 increase. Non-interest expense
increased to $2,578,000 from $1,712,000, a 50.6% or $866,000 increase. The
addition of the mortgage company in November, 2001, is responsible for most of
the increase in noninterest income and noninterest expense.
Profitability
One of the best ways to review earnings is 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. Based on operating results for the quarters ended March
31, 2002 and 2001, the following table is presented.
Quarter ended March 31, 2002 2001
---- ----
Average assets ................ $322,644 $274,918
ROA ........................... 1.39% 1.31%
Average equity ................ $28,227 $23,690
ROE ........................... 15.94% 15.21%
Net income .................... $1,125 $901
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
quarter of 2002, net interest income after provision for loan losses increased
to $2,648,000 from $2,562,000, a 3.4% or $86,000 increase over the first quarter
of 2001. Net interest income after the provision for loan losses was almost
unchanged between the periods. Average earning assets increased to $304 million
in the first quarter of 2002 from $260 million in the first quarter of 2001, but
the average yield on these earning assets decreased to 6.35% for the 2002 period
from 8.52% for the 2001 period. The changes occurred in a declining interest
rate environment, during which the average CBI prime rate fell to 4.75% for the
first quarter of 2002 as compared to 8.50% for the same period in 2001.
For the first quarter of 2002 the cost of funds averaged 3.10% compared
to 5.18% for the first quarter of 2001. The decrease in the cost of the funds
did not offset the decreased yield on earning assets. The effect of these
changes was a net interest spread (yield on earning assets less cost of interest
bearing liabilities) of 3.25% for the first quarter of 2002 compared to 3.35%
during the first quarter of 2001. CBI's net interest margin (net interest income
divided by total earning assets) was 3.71% for the first quarter of 2002
compared to 4.15% for the first quarter of 2001.
10
Interest Income
Elsewhere in this report is a table comparing the average balances,
yields, and rates for the interest rate sensitive segments of CBI's balance
sheets for the quarters ended March 31, 2002 and 2001. A discussion of that
table follows.
Total interest income for the first quarter 2002 was $4,823,000
compared with $5,550,000 for the same quarter in 2001, a 13.1% or $727,000
decrease. The yield on earning assets for the 2002 quarter was 6.35%, decreased
from 8.52% for the 2001 quarter. Total average interest earning assets for the
2002 quarter were $303,686,000 compared to $260,442,000 for the 2001 quarter, an
increase of 16.6% or $43,244,000.
The loan portfolio earned $4,324,000 for the first quarter 2002
compared with $4,591,000 for the same quarter of 2001, a 5.8% or $267,000
decrease. The yield on loans for the 2002 quarter was 7.09%, decreased from
9.23% for the 2001 quarter. The average size of the loan portfolio for the 2002
quarter was $243,987,000 compared to $199,047,000 for the 2001 quarter, an
increase of 22.6% or $44,940,000.
The taxable investment portfolio earned $403,000 for the first quarter
in 2002 compared with $754,000 for the 2001 quarter, a 46.6% or $351,000
decrease. The yield was 4.39% for the 2002 quarter, decreased from 6.46% for the
2001 quarter. The average size of the portfolio for the 2002 quarter was
$36,688,000 compared to $46,655,000 for the 2001 quarter, a decrease of 21.4 %
or $9,967,000.
The tax-exempt investment portfolio earned $3,000 for the first quarter
in 2002 compared with $7,000 for the 2001 quarter, a 57.1% or $4,000 decrease.
The taxable equivalent yield on the portfolio was 5.33%, decreased from 5.35%.
The average size of the portfolio was $341,000 for the 2002 quarter compared to
$793,000 in the 2001 quarter, a decrease of 57% or $452,000.
Interest bearing deposits in other banks earned $6,000 for the first
quarter in 2002 compared to $28,000 for the 2001 quarter, a decrease of 78.6% or
$22,000. The yield on these deposits was 1.38% for the 2002 quarter, decreased
from 6.12% for the 2001 quarter. CBI averaged $1,735,000 in interest bearing
balances in the first quarter 2002 compared to $1,830,000 the 2001 quarter, a
decrease of 5.2% or $95,000.
Federal funds sold earned $87,000 the first quarter of 2002 compared to
$170,000 for the 2001 quarter, a decrease of 48.8% or $83,000. The yield was
1.66% for the 2002 quarter, decreased from 5.61% for the 2001 quarter. CBI's
average volume in federal funds sold was $20,935,000 for the 2002 quarter
compared to $12,117,000 for the 2001 quarter, a 72.8% or $8,818,000 increase.
Interest Expense
Interest expense decreased to $2,006,000 for the first quarter of 2002
from $2,846,000 for the 2001 quarter, a 29.5% or $840,000 decrease. For the same
periods, the volume of interest bearing liabilities was $258,820,000 compared to
$219,929,000, a 17.7% or $38,891,000 increase. The average rate paid for
interest-bearing liabilities was 3.10% for the 2002 quarter, down from 5.18% for
the 2001 quarter.
11
Savings accounts cost $189,000 in the first quarter in 2002 compared to
$350,000 in the first quarter of 2001, a 46% or $161,000 decrease. For the same
periods, average savings deposit balances were $44,327,000 compared to
$35,684,000, an increase of 24.2% or $8,643,000. The average rate paid on these
funds decreased to 1.71% from 3.92%.
Interest bearing transaction accounts cost $83,000 for the first
quarter in 2002 compared to $68,000 for the first quarter of 2001, a 22.1% or
$15,000 increase. The volume of these deposits was $41,530,000 for the first
quarter in 2002 compared to $21,267,000 for the first quarter of 2001, a 95.3%
or $20,263,000 increase. The majority of this increase was associated with an
increase in public deposits, which will probably be short lived. The average
rate paid on these funds decreased to .80% from 1.28%.
Time deposits cost $1,348,000 for the first quarter of 2002 compared to
$2,044,000 for the first quarter of 2001, a decrease of 34.1% or $696,000. The
volume was $140,419,000 for the first quarter in 2002 compared to $135,324,000
for the first quarter of 2001, a 3.8% or $5,095,000 increase. The average rate
paid on these funds decreased to 3.84% from 6.04%.
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 $22,000 for the first quarter in 2002
compared to $83,000 for the first quarter of 2001, a 73.5% or $61,000 decrease.
The volume of these funds was $4,463,000 in the first quarter 2002 compared to
$7,304,000 in the first quarter of 2001, a decrease of 38.9% or $2,841,000. The
average rate paid on these funds decreased to 1.97% from 4.55%.
Other borrowings include lines of credit payable and advances from the
Federal Home Loan Bank of Atlanta. They cost $364,000 for the first quarter in
2002 compared to $301,000 for the first quarter in 2001, an increase of 20.9% or
$63,000. The borrowings averaged $28,081,000 during the 2002 quarter compared to
$20,350,000 for the prior year quarter, a 38% or $7,731,000 increase. The major
reason for the increase in volume was the addition of lines of credit for
Community Resource Mortgage, which was acquired in November, 2001. The average
rate paid on these funds decreased to 5.19% from 5.92%.
Non-Interest Income
Non-interest income for the first quarter 2002 grew to $1,687,000 from
$551,000 in the first quarter of 2001, a 206% or $1,136,000 increase. The vast
majority of this increase was due to mortgage banking income of $956,000 earned
during the first quarter, virtually all of which was generated by Community
Resource Mortgage, Inc.
Non-Interest Expense
For the first quarter of 2002 non-interest expenses increased to
$2,578,000 from $1,712,000 for the first quarter of 2001, a 50.6% or $866,000
increase. Approximately three quarters of this increase was associated with the
operation of Community Resource Mortgage.
For the 2002 period, personnel costs were $1,655,000 compared to
$1,040,000 for the 2001 period, an increase of 59.1% or $615,000.
12
For the 2002 period, premises and equipment expense were $297,000
compared to $235,000 for the 2001 period, an increase of 26.4% or $62,000.
For the 2002 period, other costs were $626,000 compared to $437,000 for
the 2001 period, an increase of 43.2% or $189,000.
Income Taxes
CBI provided $632,000 for federal and state income taxes during the
first quarter of 2002 compared to $500,000 for the same period in 2001, a 26.4%
or $132,000 increase. The average tax rate for the 2002 period was 36% and for
the 2001 period it was 35.7%.
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 March 31, 2002 the held to
maturity portfolio totaled $500,000, unchanged from December 31, 2001. At March
31, 2002 the available for sale portfolio totaled $40,363,000 compared to
$43,207,000 at December 31, 2001, a decrease of 6.6% or $2,844,000. The
following chart summarizes the investment portfolios at March 31, 2002 and
December 31, 2001.
March 31, 2002
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and federal agencies .................... $ 500 $ 480 $ 38,452 $ 38,186
Tax exempt securities .................................... - - 195 196
Other equity securities .................................. - - 1,981 1,981
----- -------- -------- --------
Total .................................................... $ 500 $ 480 $ 40,628 $ 40,363
===== ======== ======== ========
Unrealized (loss) ........................................ $ (20) $ (265)
===== ========
December 31, 2001
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and federal agencies .................... $ 500 $ 500 $ 40,437 $ 40,415
Tax exempt securities .................................... - - 802 811
Other equity securities .................................. - - 1,981 1,981
----- -------- -------- --------
Total .................................................... $ 500 $ 500 $ 43,220 $ 43,207
===== ======== ======== ========
Unrealized (loss) ........................................ $ - $ (13)
===== ========
13
Loan portfolio
The loan portfolio is primarily consumer and small business oriented.
At March 31, 2002 the loan portfolio was $240,625,000 compared to $229,905,000
at December 31, 2001, a 4.7% or $10,720,000 increase. The following chart
summarizes the loan portfolio at March 31, 2002 and December 31, 2001.
Mar. 31, 2002 Dec. 31, 2001
------------- -------------
(dollars in thousands)
Real estate ................................ $154,155 $146,559
Commercial ................................. 59,688 56,515
Loans to individuals ....................... 26,782 26,831
-------- --------
Total ...................................... $240,625 $229,905
======== ========
The loan portfolio does not include loans held for sale. Loans held for
sale are loans originated by CBI for sale to others which are held by CBI
pending completion of the sale. The vast majority of such loans are originated
by Community Resource Mortgage, Inc. and are one-to-four family residential
mortgage loans. At March 31, 2002 loans held for sale totaled $8,988,000
compared to $10,265,000 at December 31, 2001, a 12.4% or $1,277,000 decrease.
Past Due and Non-Performing Assets
CBI closely monitors past due loans and loans that are in non-accrual
status and other real estate owned. Below is a summary of past due and
non-performing assets at March 31, 2002 and December 31, 2001.
Mar. 31, 2002 Dec. 31, 2001
------------- -------------
(dollars in thousands)
Past due 90 days + accruing loans ......... $222 $ 17
Non-accrual loans ......................... $330 $281
Impaired loans (included in nonaccrual) ... $330 $281
Other real estate owned ................... $267 $267
Management considers the past due and non-accrual amounts at March 31,
2002 to be reasonable in relation to the size of the portfolio and manageable in
the normal course of business.
CBI had no restructured loans during any of the above listed periods.
Allowance for Loan Losses
CBI 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.
14
In addition, each bank is supervised and regularly examined by the Office of the
Comptroller of the Currency (OCC) 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 city or county. Management at each bank monitors the loan
concentrations and loan portfolio quality on an ongoing basis including, but not
limited to: quarterly analysis of loan concentrations, monthly reporting of past
dues, non-accruals, and watch loans, and quarterly reporting of loan charge-offs
and recoveries. These efforts focus on historical experience and are bolstered
by quarterly analysis of local and state economic conditions, which is part of
the Banks' assessment of the adequacy of their allowances for loan losses.
Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and installment loans. However, management
does not believe it would be useful to maintain a separate allowance for each
category. Instead management assigns an estimated risk percentage factor to each
category in the computation of the overall allowance. In general terms, the real
estate portfolio is subject to the least risk, followed by the commercial loan
portfolio, followed by the installment loan 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 2002 will at least approximate the
2001 levels as such loans progress through the collection process. Management
believes that the allowance for loan losses, as of March 31, 2002 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.
Mar. 31, 2002 Dec. 31, 2001 Mar. 31, 2001
------------- ------------- -------------
Allowance at beginning of period ........................... $ 2,830 $ 2,424 $ 2,424
Provision expense .......................................... 169 678 142
Net charge offs ............................................ (38) (272) (10)
------- ------- -------
Allowance at end of period ................................. $ 2,961 $ 2,830 $ 2,556
======= ======= =======
Allowance/outstanding loans ................................ 1.23% 1.23% 1.26%
15
Goodwill
CBI has adopted FASB No. 142, Goodwill and Other Intangible Assets, as
of January 1, 2002. As of March 31, 2002 the balance in goodwill, our only
intangible asset, totaled $921,000, unchanged from December 31, 2001. The
Company will evaluate the goodwill for impairment later in 2002.
The balance in goodwill was acquired in connection with the purchase of
Community Resource Mortgage Inc., consummated in November 2001.
Deposits
Deposits were $267,712,000 at March 31, 2002 compared to $255,433,000
at December 31, 2001, an increase of 4.8% or $12,279,000.
Time deposits greater than $100,000 were $55,581,000 at March 31, 2002
compared to $51,374,000 at December 31, 2001, an increase of 8.2% or $4,207,000.
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 Banks' service areas. Core deposits (total deposits less certificates
of deposit of $100,000 or more) provide a relatively stable funding base.
Certificates of deposit of $100,000 or more are generally more sensitive to
changes in rates, so they must be monitored carefully. Asset liquidity is
provided by several sources, including amounts due from banks, federal funds
sold, and investments available-for-sale.
CBI maintains an available-for-sale investment portfolio. While
investment securities purchased for this portfolio are generally 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. CBI also maintains a held-to-maturity investment
portfolio. Securities in this portfolio are generally not considered a primary
source of liquidity. 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. In addition CBI has commitments to make loans and standby letters
of credit totaling $31,058,000 and $2,881,000, respectively, outstanding at
March 31, 2002. These off balance sheet commitments are subject to various
conditions and, based on historical experience, many will never be drawn on.
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, and loan commitments and
standby letters of credit drawn on during any period, that CBI would be unable
to meet its liquidity needs with the proceeds of maturing assets.
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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 $267 million in 2002. 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 March 31, 2002 CBI had
approximately $23 million and $11 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 $138
million and $27 million, respectively. CBI expects to be able to manage its
current balance sheet structure without experiencing any material liquidity
problems.
In the opinion of management, CBI's current and projected liquidity
position is adequate.
Capital resources
As summarized in the table below, CBI maintains a strong capital
position.
Minimum required
to be well
Mar. 31, 2002 Dec. 31, 2001 capitalized
------------- ------------- -----------
Tier 1 capital to average total assets .............................. 8.48% 8.50% 5.00%
Tier 1 capital to risk weighted assets .............................. 11.25% 11.40% 6.00%
Total capital to risk weighted assets ............................... 12.44% 12.50% 10.00%
In the opinion of management, the Company's current and projected
capital positions are adequate. In each case the ratios exceed by a substantial
margin the minimum regulatory requirement for being considered well capitalized.
Dividends
CBI declared and paid a quarterly cash dividend of eight cents per
share during the first quarter of 2002. The total cost of this dividend was
$264,000. On May 8, 2002, CBI declared a second quarter dividend of eight cents
per share, payable June 28, 2002. The expected cost of this dividend is
$264,000.
Subsequent events
In late November 2001 CBI entered into an agreement to acquire the
common stock of Ridgeway Bancshares Inc., the holding company for the Bank of
Ridgeway. The agreement provides for CBI to issue 1,000,000 shares of its stock
and $4,000,000 cash in exchange for 100% of the stock of Ridgeway. The
transaction requires approval by two-thirds of the shareholders of both
companies, as well as various regulators. Shareholder meetings for both
companies were held in April 2002 and the shareholders of both companies
approved the transaction. Various regulatory approvals are still pending. CBI
anticipates that the Ridgeway bank will become part of Community Bankshares on
July 1, 2002.
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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.
Achieving consistent growth in net interest income is the primary goal
of CBI's asset/liability function. CBI 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. CBI seeks to
accomplish this goal while maintaining adequate liquidity and capital. CBI'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.
CBI'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 CBI'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 March 31, 2002 CBI is positioned so that net interest income would increase
$652,000 and net income would increase $402,000 in the next twelve months if
interest rates rose 200 basis points. Conversely, net interest income would
decline $652,000 and net income would decline $402,000 in the next twelve months
if interest rates declined 200 basis points. In the current interest rate
environment, it is unlikely that there will be any significant rate decreases in
the immediate future. Computation of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates and loan prepayment, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions CBI could undertake in response to changes in interest
rates.
As of March 31, 2002 there was no significant change from the interest
rate sensitivity analysis for the various changes in interest rates calculated
as of December 31, 2001. The foregoing disclosures related to the market risk of
the Company should be read in connection with Management's Discussion and
Analysis of Financial Position and Results of Operations included in the 2001
Annual Report on Form 10-K.
18
Part II--Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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: May 9, 2002
COMMUNITY BANKSHARES, INC.
By: s/ E. J. Ayers, Jr.,
----------------------------------------------
E. J. Ayers, Jr.,
Chief Executive Officer
By: s/ William W. Traynham
----------------------------------------------
William W. Traynham
President and Chief Financial Officer
(Principal Accounting Officer)
19