UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002 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)
Registrant's Telephone Number, Including Area Code: (803) 535-1060
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value - American Stock Exchange
(Title of Class) - (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all the
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of the last business day of the registrant's most
recently completed second fiscal quarter, June 30, 2002, was approximately.
$42,156,000.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates on March 7, 2002 was approximately $49,547,000. As of
March 12, 2003 there were 4,304,384 shares of the Registrant's Common Stock, no
par value, outstanding. For purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of
Shareholders - Part III
--------------------------------------------------------------------------------
10-K TABLE OF CONTENTS
Part I Page
Item 1 Description of Business 3
Item 2 Description of Property 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Part II
Item 5 Market for Common Equity and Related Stockholder Matters 11
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results of 13
Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk 31
Item 8 Financial Statements and Supplementary Data 33
Independent Auditor's Report 35
Consolidated Balance Sheets, December 31, 2002 and 2001 36
Consolidated Statements of Income, Years Ended December 31, 2002, 2001 and 2000 37
Consolidated Statements of Changes in Shareholders' Equity, Years Ended December 39
31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows, Years Ended December 31, 2002, 2001 and 41
2000
Notes to Consolidated Financial Statements 43
Quarterly Data for 2002 and 2001 74
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial 75
Disclosure
Part III
Item 10 Directors and Executive Officers *
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 75
Item 13 Certain Relationships and Related Transactions *
Item 14 Controls and Procedures 76
Part IV
Item 15 Exhibits and Reports on Form 8-K 76
* Incorporated by reference to Registrant's Proxy Statement for 2003 Annual
Meeting of Shareholders
2
PART I
Item 1. Description of Business
Form of organization
Community Bankshares, Inc. (CBI or the Corporation) is a South Carolina
corporation and a bank holding company. CBI commenced operations on July 1,
1993, upon effectiveness of the acquisition of the Orangeburg National Bank as a
wholly owned subsidiary. In June 1996 CBI acquired all the stock of Sumter
National Bank, which is also a wholly owned subsidiary. In July 1998 CBI
acquired all the stock of Florence National Bank, which is also a wholly owned
subsidiary. In July 2002 CBI acquired all the common stock of Ridgeway
Bancshares Inc., the parent company of the Bank of Ridgeway.
Orangeburg National Bank (the Orangeburg bank) is a national bank,
chartered in 1987, operating from two offices located in Orangeburg, South
Carolina.
Sumter National Bank (the Sumter bank) is a national bank, chartered in
1996, operating from two offices located in Sumter, South Carolina.
Florence National Bank (the Florence bank) is a national bank,
chartered in 1998, operating from one office located in Florence, South
Carolina.
Bank of Ridgeway (the Ridgeway bank) is a South Carolina
state-chartered bank, organized in 1898, operating from one office in Ridgeway,
one office in Winnsboro, and one office in Blythewood, South Carolina.
In November 2001 CBI acquired all the common stock of Resource Mortgage
Inc., a Columbia, South Carolina based mortgage company. The mortgage company
operates as a wholly owned subsidiary of the holding company and is now named
Community Resource Mortgage Inc. (CRM).
Business of banking
The Orangeburg, Sumter, Florence and Ridgeway banks (hereafter referred
to as the Banks) offer a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. The Federal Deposit Insurance Corporation
insures deposits up to applicable limits. Most of the Banks' deposits are
attracted from individuals and small businesses.
The Banks offer secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial and consumer
purposes. Consumer loans include: car loans, home equity improvement loans
secured by first and second mortgages, personal expenditure loans, education
loans, and the like. Commercial loans include short-term unsecured loans, short
and intermediate term real estate mortgage loans, loans secured by listed
stocks, loans secured by equipment, inventory, accounts receivable, and the
like. The Banks do not and will not discriminate against any applicant for
credit on the basis of race, color, creed, sex, age, marital status, familial
status, handicap, or derivation of income from public assistance programs.
Other services offered by the Banks include safe deposit boxes, night
depository service, VISA and Master Card charge cards (through a correspondent),
tax deposits, sale of U.S. Treasury bonds, notes and bills and other U. S.
government securities (through a correspondent), twenty-four hour automated
teller service, and Internet banking services (not yet available in the Ridgeway
bank). Each of the Banks has ATMs and they are all part of the Star and Cirrus
networks.
The Mortgage company provides a wide variety of one to four family
residential mortgage products in the Columbia, Sumter and Anderson, South
Carolina markets.
3
Competition
The market for financial institutions in our various markets is
generally highly competitive. Banks generally compete with other financial
institutions through the banking services and products offered, the pricing of
services, the level of service provided, the convenience and availability of
services, and the degree of expertise and personal concern with which services
are offered. The Banks encounter strong competition from most of the financial
institutions in their market areas.
The market area for the Orangeburg bank generally encompasses an area
extending nine miles around the city of Orangeburg. The market area for the
Sumter bank generally encompasses the county of Sumter. The market area for the
Florence bank generally encompasses the city of Florence. The market area for
the Ridgeway bank generally encompasses Fairfield County (for the Ridgeway and
Winnsboro offices) and the town of Blythewood in Richland County. In the conduct
of certain banking business, the Banks also compete with credit unions, consumer
finance companies, insurance companies, money market mutual funds, and other
financial institutions, some of which are not subject to the same degree of
regulation and restrictions imposed upon the Banks. Many of these competitors
have substantially greater resources and lending limits than the Banks and offer
certain services, such as international banking and trust services, that the
Banks do not provide. The Banks believe, however, that their relatively small
size permits them to offer more personalized services than many of their
competitors. The Banks attempt to compensate for their lower lending limits by
participating larger loans with other institutions, often with each other.
Most of the other financial institutions in the Orangeburg, Sumter,
Florence and most of the Ridgeway service areas are branch offices of large,
regional banks. At June 30, 2002, there were four financial institutions
competing with the Corporation in the city of Orangeburg, seven financial
institutions competing with the Corporation in Sumter County, and 14 financial
institutions competing with the Corporation in the city of Florence. At June 30,
2002, the Orangeburg bank had the second largest deposit base in the city of
Orangeburg. At June 30, 2002, the Sumter bank had the fifth largest deposit base
in Sumter County. At June 30, 2002, the Florence bank had the fifth largest
deposit base in the city of Florence. At June 30, 2002, The Ridgeway bank had
the largest deposit base in Fairfield County and approximately half the deposits
in the town of Blythewood.
The mortgage company has offices in Anderson, Richland and Sumter
Counties of South Carolina, where it competes with hundreds of financial
institutions and mortgage originators.
Dependence on Major Customers
The Banks do not consider themselves dependent on any single customer
or small group of customers, either in the deposit or lending areas.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of CBI and the Banks.
As discussed below under the caption "Gramm-Leach-Bliley Act", Congress
has recently adopted extensive changes in the laws governing the financial
services industry. Among the changes adopted are creation of the financial
holding company, a new type of bank holding company with powers that greatly
exceed those of standard holding companies, and creation of the financial
subsidiary, a subsidiary that can be used by national banks to engage in many,
though not all, of the same activities in which a financial holding company may
engage. The legislation also establishes the concept of functional regulation
whereby the various financial activities in which financial institutions engage
are overseen by the regulator with the relevant regulatory experience. Neither
CBI nor the Banks has yet made a decision as to how to adapt the new legislation
to its use. Accordingly, the following discussion relates to the supervisory and
regulatory provisions that apply to CBI and the Banks as they currently operate.
4
Regulation of Bank Holding Companies
General
As a bank holding company registered under the Bank Holding Company Act
("BHCA"), CBI is subject to the regulations of the Federal Reserve. Under the
BHCA, CBI's activities and those of its subsidiaries are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries or engaging in any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The BHCA prohibits CBI from acquiring direct
or indirect control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or from merging or consolidating
with another bank holding company without prior approval of the Federal Reserve.
The BHCA also prohibits CBI from acquiring control of any bank operating outside
the State of South Carolina unless such action is specifically authorized by the
statutes of the state where the bank to be acquired is located.
Additionally, the BHCA prohibits CBI from engaging in or from acquiring
ownership or control of more than 5% of the outstanding voting stock of any
company engaged in a non-banking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA generally does not place territorial restrictions on
the activities of such non-banking-related activities.
As discussed below under "Gramm-Leach-Bliley Act", a bank holding
company that meets certain requirements may now qualify as a financial holding
company and thereby significantly increase the variety of services it may
provide and the investments it may make.
CBI is also subject to limited regulation and supervision by the South
Carolina State Board of Financial Institutions (the "State Board"). A South
Carolina bank holding company may be required to provide the State Board with
information with respect to the financial condition, operations, management and
inter-company relationships of the holding company and its subsidiaries. The
State Board also may require such other information as is necessary to keep
itself informed about whether the provisions of South Carolina law and the
regulations and orders issued thereunder by the State Board have been complied
with, and the State Board may examine any bank holding company and its
subsidiaries. Furthermore, pursuant to applicable law and regulations, the
Company must receive approval of, or give notice to (as applicable) the State
Board prior to engaging in the acquisition of banking or non-banking
institutions or assets.
Obligations of Holding Company to its Subsidiary Banks
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policies that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of stockholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
5
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's shareholders', pro rata, and to the
extent necessary, if any such assessment is not paid by any shareholder after
three months notice, to sell the stock of such shareholder to make good the
deficiency.
Capital Adequacy Guidelines for Bank Holding Companies and Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC, have adopted risk-based and leverage capital adequacy guidelines
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off balance sheet exposures, as adjusted for credit risks. The
capital guidelines and CBI's capital position are summarized in Note 20 to the
Financial Statements, contained elsewhere in this report. All four of the Banks
are considered well capitalized.
Failure to meet capital guidelines could subject the Banks to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.
Payment of Dividends
CBI is a legal entity separate and distinct from the Banks. Most of the
revenues of CBI result from dividends paid to CBI by the Banks. There are
statutory and regulatory requirements applicable to the payment of dividends by
subsidiary banks as well as by CBI to its shareholders.
Each national banking association is required by federal law to obtain
the prior approval of the OCC for the payment of dividends if the total of all
dividends declared by the board of directors of such bank in any year will
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two years, less any required
transfers to surplus. In addition, national banks can only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined by regulation).South Carolina banking regulations
also restrict the amount of dividends that banks can pay shareholders. Any
dividends by a South Carolina state bank that exceed the bank's total
year-to-date earnings are subject to prior approval of the South Carolina
Commissioner of Banking and are generally payable only from undivided profits.
Payment of dividends by a state bank would also be prohibited if the effect
would be to cause the Bank's capital to fall below applicable minimum capital
requirements.
The payment of dividends by CBI and the Banks may also be affected or
limited by other factors, such as the requirements to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the Banks, could include the payment of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. The OCC has indicated that paying dividends that deplete a national
bank's capital base to an inadequate level would be an unsafe and unsound
banking practice. The Federal Reserve, the OCC and the FDIC have issued policy
6
statements, which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
Certain Transactions by CBI with its Affiliates
Federal law regulates transactions among CBI and its affiliates,
including the amount of the Banks' loans to or investments in nonbank affiliates
and the amount of advances to third parties collateralized by securities of an
affiliate. Further, a bank holding company and its affiliates are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
Because Orangeburg National Bank's, Sumter National Bank's, Florence
National Bank's and the Bank of Ridgeway's deposits are insured by the Bank
Insurance Fund of the FDIC ("BIF"), the Banks are subject to semiannual
insurance assessments imposed by the FDIC. Since January 1, 1997, the
assessments imposed on all FDIC deposits for deposit insurance have an effective
rate ranging from 0 to 27 basis points per $100 of insured deposits, depending
on the institution's capital position and other supervisory factors. However,
legislation enacted in 1996 requires that both Savings Association Insurance
Fund ("SAIF") insured and BIF insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO"). To
cover these obligations, during 2002, the FDIC assessed both BIF and SAIF
insured deposits a range of 1.82 to 1.70 basis points per $100 of deposits.
Currently, the FDIC is assessing BIF and SAIF insured deposits each 1.68 basis
points per $100 of deposits to cover the interest on the FICO obligations. The
FICO assessment will continue to be adjusted quarterly to reflect changes in the
assessment bases of the respective funds based on quarterly Call Report and
Thrift Financial Report submissions.
Regulation of the Banks
Orangeburg National Bank, Sumter National Bank, and Florence National
Bank are also subject to examination by the OCC bank examiners. The Bank of
Ridgeway is subject to examination by FDIC and the State Board. In addition, the
Banks are subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer credit and
laws relating to branch banking. The Banks' loan operations are subject to
certain federal consumer credit laws and regulations promulgated thereunder,
including, but not limited to: the federal Truth-In-Lending Act, governing
disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure
Act, requiring financial institutions to provide certain information concerning
their mortgage lending; the Equal Credit Opportunity Act and the Fair Housing
Act, prohibiting discrimination on the basis of certain prohibited factors in
extending credit; the Fair Credit Reporting Act, governing the use and provision
of information to credit reporting agencies; the Bank Secrecy Act, dealing with,
among other things, the reporting of certain currency transactions; and the Fair
Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies. The deposit operations of the Banks are
subject to the Truth in Savings Act, requiring certain disclosures about rates
paid on savings accounts; the Expedited Funds Availability Act, which deals with
disclosure of the availability of funds deposited in accounts and the collection
and return of checks by banks; the Right to Financial Privacy Act, which imposes
a duty to maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's actual
performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
7
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
Federal Deposit Insurance Act ("FDIA") restricting payment of capital
distributions and management fees; requiring the OCC to monitor the condition of
the bank; requiring submission by the bank of a capital restoration plan;
restricting the growth of the bank's assets and requiring prior approval of
certain expansion proposals. A bank that is "significantly undercapitalized" is
also subject to restrictions on compensation paid to senior management of the
bank, and a bank that is "critically undercapitalized" is further subject to
restrictions on the activities of the bank and restrictions on payments of
subordinated debt of the bank. The purpose of these provisions is to require
banks with less than adequate capital to act quickly to restore their capital
and to have the OCC move promptly to take over banks that are unwilling or
unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 ("Riegel-Neal"), CBI and any other adequately capitalized bank holding
company located in South Carolina can acquire a bank located in any other state,
and a bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. Riegle-Neal also provides that, in any state that has not
previously elected to prohibit out-of-state banks from operating interstate
branches within its territory, adequately capitalized and managed bank holding
companies can consolidate their multistate bank operations into a single bank
subsidiary and branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if it is expressly permitted by the laws of
the host state. The authority of a bank to establish and operate branches within
a state will continue to be subject to applicable state branching laws. South
Carolina law was amended, effective July 1, 1996, to permit such interstate
branching but not de novo branching by an out-of-state bank.
The Riegel-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger customers. These advantages
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region. As a result, the Banks do not generally
attempt to compete for the banking relationships of large corporations, but
concentrate their efforts on small to medium-sized businesses and on
individuals. CBI believes its Banks have competed effectively in this market
segment by offering quality, personal service.
Legislative Proposals
Other proposed legislation which could significantly affect the
business of banking has been introduced or may be introduced in Congress from
time to time. CBI cannot predict the future course of such legislative proposals
or their impact on CBI should they be adopted.
Gramm-Leach-Bliley Act
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act,
which makes it easier for affiliations between banks, securities firms and
insurance companies to take place. The Act removes Depression-era barriers that
had separated banks and securities firms, and seeks to protect the privacy of
8
consumers' financial information. Most of the provisions of the Act require the
applicable regulators to adopt regulations in order to implement these
provisions, and a significant number of regulations have already been adopted.
Under provisions of the new legislation, which were effective March 11,
2000, banks, securities firms and insurance companies are able to structure new
affiliations through a holding company structure or through a financial
subsidiary. The legislation creates a new type of bank holding company called a
"financial holding company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial activities," which are activities that are (1) financial in nature;
(2) incidental to activities that are financial in nature; or (3) complementary
to a financial activity and that do not impose a safety and soundness risk.
Significantly, the permitted financial activities for financial holding
companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.
CBI anticipates that the Act and the regulations adopted pursuant to
the Act will be likely to create new opportunities for it to offer expanded
services to customers in the future, though CBI has not yet determined what the
nature of the expanded services might be or when CBI might find it feasible to
offer them. CBI further expects that the Act will increase competition from
larger financial institutions that are currently more capable than CBI of taking
advantage of the opportunity to provide a broader range of services. However,
CBI continues to believe that its commitment to providing high quality,
personalized service to customers will permit it to remain competitive in its
market area.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
9
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of CBI are subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on CBI cannot be predicted.
Employees
At December 31, 2002 the Corporation employed 175 full time equivalent
employees. Management believes that its employee relations are excellent.
Item 2. Description of Property
The Orangeburg bank owns land located at 1820 Columbia Road NE, in
Orangeburg, South Carolina, where the Orangeburg bank maintains its main office.
The Bank operates from a one-story building of approximately 7,000 square feet.
The Orangeburg bank also owns a building, which was previously a branch of the
bank, at the corner of Broughton and Glover Streets in Orangeburg. The
Orangeburg bank currently rents this facility to the Corporation for office
space. In June 1999 the Bank moved into a new branch facility located adjacent
to the old building. This new branch office is approximately 6,500 square feet.
The Corporation's Sumter bank has fee simple title to land and a one-story 6,500
square foot building located at 683 Bultman Drive, in Sumter, South Carolina,
where the Sumter bank maintains its main office.
The Sumter bank opened a branch bank on West Liberty Street in Sumter
in February 2002. The branch is a one-story building of approximately 3,600
square feet. The land, approximately one acre, is being leased under a
noncancellable operating lease for an initial term of twenty years. The details
of the lease are discussed in Note 6 to the financial statements contained
elsewhere in this report.
The Florence bank is leasing approximately 1.7 acres of land located at
2009 Hoffmeyer Road in Florence, South Carolina. This land is the site of the
main office for the Florence bank. The details of the lease are discussed in
Note 6 to the financial statements contained elsewhere in this report. The
Corporation has constructed a one-story building for the Florence bank of
approximately 7,500 share feet on the leased site.
The Ridgeway bank's main office is located in a two story building on a
quarter acre site owned by the Bank at 100 S. Palmer St. in Ridgeway. The bank
also owns a 1,590 square foot one story branch office on a .9 acre site at 115
McNulty St. in Blythewood, SC. The bank also owns a 1,900 square foot one story
branch office on a one acre site at 610 West Moultrie St. in Winnsboro, SC.
The mortgage company operates from leased offices located at 508
Hampton St., Suite 201, Columbia, SC, 304 W. Westmark, Sumter, SC, and 2406 N.
Main St., Anderson, SC.
See Note 6 to the Corporation's audited financial statements included
in this report for further information about the lease terms.
Item 3. Legal Proceedings
The Company, the Banks and the Mortgage company are from time to time
subject to legal proceedings in the ordinary course of their business. No
proceedings were pending at December 31, 2002, that management believes are
likely to have a material adverse effect on the Company or its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the security holders during the
fourth quarter of 2002.
10
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Corporation's shares of Common Stock are traded on the American
Stock Exchange (the AMEX) under the ticker symbol SCB.
The following table summarizes the range of high and low prices for the
Corporation's Common Stock as reported on the American Stock Exchange for each
quarterly period over the last two years.
Quarter ended High Low
Mar. 31, 2001 $11.25 $10.20
June 30, 2001 $11.49 $10.65
Sept. 30, 2001 $12.60 $10.30
Dec. 31, 2001 $13.20 $11.00
Mar. 31, 2002 $14.75 $12.75
June 30, 2002 $17.75 $14.35
Sept. 30, 2002 $17.50 $15.00
Dec. 31, 2002 $16.75 $14.60
During 2002 the Corporation had a stock sales volume of 268,400 shares compared
to 133,900 shares the prior year.
There were 2,087 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 2002 compared to 1,891 the prior year.
During 2002, The Corporation authorized and paid quarterly cash
dividends totaling 32 cents per share. The total cost of these dividends was
$1,218,000 or 22.6% of after tax profits. During 2001, the Corporation
authorized and paid quarterly cash dividends totaling 28 cents per share. The
total cost of these dividends was $904,000 or 23% of after tax profits. The
dividend policy of the Corporation is subject to the discretion of the Board of
Directors and depends upon a number of factors, including earnings, financial
condition, cash needs and general business conditions, as well as applicable
regulatory considerations. Subject to ongoing review of these circumstances, the
Board expects to maintain a reasonable, safe, and sound dividend payment policy.
The current source of dividends to be paid by the Corporation is the
dividends received from its banking subsidiaries. Accordingly, the laws and
regulations that govern the payment of dividends by national banking
associations and state chartered banks may restrict the Corporation's ability to
pay dividends. National banks may pay dividends only out of present and past
earnings and state banks may only pay out of current earnings without regulatory
approval. Both are subject to numerous limitations designed to ensure that the
Banks have adequate capital to operate safely and soundly (See Item 1.
Description of Business - Supervision and Regulation - Payment of Dividends). At
December 31, 2002 the Banks could pay up to $8,070,000 in dividends without
special approval of their regulators.
The information required by Item 201(d) of Regulation S-K is set forth
in Item 12 of this Form 10-K.
Item 6. Selected Financial Data
The following is a summary of the consolidated financial position and
results of operations of the Corporation for the years ended December 31, 1998
through December 31, 2002.
11
Community Bankshares, Inc. and Subsidiaries
($ in thousands, except per share data)
Years Ended December 31, Five-Year
------------------------ Compound
2002(1) 2001(2) 2000 1999 1998(3) Growth Rate
------- ------- ---- ---- ------- -----------
INCOME STATEMENT DATA
Net interest income ............................ $ 13,867 $ 10,940 $ 10,228 $ 8,430 $ 6,766 20.6%
Provision for loan losses ...................... 1,033 650 688 612 484 23.6%
Noninterest income ............................. 7,952 3,584 1,966 1,479 1,055 59.6%
Noninterest expense ............................ 12,465 7,810 6,552 6,066 5,107 25.5%
Net income ..................................... 5,401 3,908 3,147 2,182 1,567 34.7%
-------- -------- -------- -------- -------- -----
PER COMMON SHARE
Net income - basic ............................. $ 1.42 $ 1.21 $ 0.99 $ 0.68 $ 0.52 26.4%
Net income - diluted ........................... 1.38 1.20 0.98 0.68 0.51 26.3%
Cash dividends ................................. 0.32 0.28 0.22 0.19 0.15 18.0%
Book value ..................................... 10.16 8.35 7.24 6.35 6.15 16.6%
-------- -------- -------- -------- -------- -----
BALANCE SHEET DATA (YEAR END)
Total assets ................................... $437,320 $318,617 $273,323 $228,030 $182,281 26.6%
Loans, net of unearned income .................. 327,575 237,340 192,996 155,422 117,058 29.1%
Deposits ....................................... 337,062 255,433 218,811 184,364 147,630 23.5%
Shareholders' equity ........................... 43,717 27,547 23,139 20,245 19,659 27.4%(4)
-------- -------- -------- -------- -------- --------
FINANCIAL RATIOS
Return on average assets ....................... 1.43% 1.36% 1.26% 1.06% 0.99%
Return on average equity ....................... 15.10% 15.58% 14.67% 11.12% 8.91%
Net interest margin ............................ 3.92% 4.00% 4.34% 4.37% 4.60%
-------- -------- -------- -------- --------
OPERATIONS DATA
Banks' branch offices .......................... 8 4 4 4 4
Mortgage loan offices .......................... 3 3 - - -
Employees (full-time equivalent) ............... 175 126 84 85 75
-------- -------- -------- -------- --------
(1) July, 2002 - Ridgeway Bancshares, Inc. acquired
(2) November, 2001 - Community Resource Mortgage, Inc. acquired
(3) July 1998- Florence National Bank opened
(4) Includes growth from sales of stock
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
INTRODUCTION
The discussion and data presented below analyze major factors and
trends regarding the financial condition and results of operations of Community
Bankshares Inc. and its subsidiaries for the three year period ended December
31, 2002.
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 acquisitions, revenues, adequacy of the allowance for loan losses,
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.
Critical Accounting Policies
The Corporation has adopted various accounting policies, which govern
the application of accounting principles generally accepted in the United States
of America in the preparation of the Corporation's financial statements. The
significant accounting policies of the Corporation are described in detail in
the notes to the consolidated financial statements.
Certain accounting policies involve significant judgments and estimates
by management, which have a material impact on the carrying value of certain
assets and liabilities. Management considers such accounting policies to be
critical accounting policies. The judgments and estimates used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ from these judgments
and estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of operations of the Corporation.
The Corporation is a holding company for community banks and as a
financial institution believes the allowance for loan losses is a critical
accounting policy that requires the most significant judgments and estimates
used in preparation of its consolidated financial statements. Refer to the
sections "Allowance for Loan Losses" and "Provision for Loan Losses" for a
detailed description of the Corporation's estimation process and methodology
related to the allowance for loan losses.
Business of the Corporation
Community Bankshares Inc. is a bank holding company. CBI owns four
banking subsidiaries: Orangeburg National Bank, Sumter National Bank, Florence
National Bank; and the Bank of Ridgeway (acquired in July 2002) and a mortgage
company subsidiary, Community Resource Mortgage, Inc. ("CRM"), which was
acquired in November 2001. CBI provides item and data processing and other
technical services for its subsidiaries. The consolidated financial report for
2002 represents the operations of the holding company and its banks and its
mortgage company. Parent-only financial statements are presented in the notes to
the consolidated financial statements.
Orangeburg National Bank is a national banking association and
commenced operations in November 1987. It operates two offices in Orangeburg,
13
South Carolina. Sumter National Bank is a national banking association and
commenced operations in June 1996. It operates two offices in Sumter, South
Carolina. Florence National Bank is a national banking association and commenced
operations in July 1998. It operates one office in Florence, South Carolina. The
Bank of Ridgeway is a state chartered bank and operates from three offices,
located in Ridgeway, Winnsboro and Blythewood, SC. The banks provide a variety
of commercial banking services in their respective communities. Their primary
customer markets are consumers and small to medium size businesses.
Community Resource Mortgage is a South Carolina corporation which
commenced business in 1996, and was acquired by the Corporation in 2001. It is a
mortgage company that provides a variety of one to four family residential
mortgage products from offices in Columbia, Sumter and Anderson, South Carolina.
Stock Dividend
On January 31, 2000 the Corporation effected a five-percent stock
dividend. All references to per share information contained in this discussion
have been adjusted accordingly.
14
DISTRIBUTION OF ASSETS AND LIABILITIES
The following table presents the average balance sheets, the average
yield and the interest earned on earning assets, and the average rate and the
interest paid on interest bearing liabilities for the years ended December 31,
2002, 2001, and 2000.
Years ended December 31, 2002 2001 2000
---- ---- ----
(Dollar amounts in thousands) Interest Interest Interest
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Assets Balance Exp.(1) Rates(1) Balance Exp. (1) Rates(1) Balance Exp.(1) Rates(1)
------- ------- -------- ------- -------- -------- ------- ------- --------
Interest bearing deposits $ 1,229 $ 36 2.93% $ 4,044 $ 161 3.98% $ 1,024 $ 64 6.25%
Investment securities - taxable 43,980 1,970 4.48% 37,751 2,167 5.74% 47,377 3,025 6.38%
Investment securities--tax exempt 4,888 217 6.73% 766 29 5.74% 807 32 6.01%
Federal funds sold 21,364 347 1.62% 19,095 734 3.84% 6,670 430 6.45%
Loans receivable(2) 281,907 19,416 6.89% 211,901 18,110 8.55% 179,654 16,652 9.27%
-------- ------- -------- ------- -------- -------
Total interest earning assets 353,368 21,986 6.22% 273,557 21,201 7.75% 235,532 20,203 8.58%
Cash and due from banks 14,222 9,305 8,582
Allowance for loan losses (3,201) (2,655) (2,186)
Premises and equipment 6,011 4,614 4,564
Goodwill 4,360 149 -
Other assets 3,350 3,036 3,232
-------- -------- --------
Total assets $378,110 $288,006 $249,724
======== ======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits
Savings $ 55,790 $ 905 1.62% $ 38,194 $ 1,117 2.92% $ 33,445 $ 1,358 4.06%
Interest bearing
transaction accounts 41,101 285 0.69% 26,917 264 0.98% 21,039 329 1.56%
Time deposits 162,512 5,328 3.28% 136,938 7,494 5.47% 119,949 6,905 5.76%
-------- ------- -------- ------- -------- -------
Total interest bearing deposits 259,403 6,518 2.51% 202,049 8,875 4.39% 174,433 8,592 4.93%
Short term borrowing 8,419 122 1.45% 7,533 237 3.15% 4,501 218 4.84%
Warehouse lines of credit 10,293 356 3.46% - - - -
FHLB advances 20,254 1,123 5.54% 19,899 1,149 5.77% 19,385 1,165 6.01%
-------- ------- -------- ------- -------- -------
Total interest
bearing liabilities 298,369 8,119 2.72% 229,481 10,261 4.47% 198,319 9,975 5.03%
Noninterest bearing demand deposits 41,198 31,643 28,531
Other liabilities 2,783 1,799 1,421
Shareholders' equity 35,760 25,083 21,453
-------- -------- --------
Total liabilities
and shareholders' equity $378,110 $288,006 $249,724
======== ======== ========
Interest rate spread(3) 3.50% 3.28% 3.55%
Net interest income and
net yield on earning assets(4) $13,867 3.92% $10,940 4.00% $10,228 4.34%
1. Computed on a fully taxable equivalent basis using a federal tax rate of
34%.
2. Nonaccruing loans are included in the average loan balances and income from
such loans is recognized on a cash basis. Loans fees included in the
computations are immaterial.
3. Total interest earning assets yield less total interest bearing liabilities
rate.
4. Net yield equals net interest income divided by total interest earning
assets.
15
Earnings Performance, 2002 compared to 2001
The recently completed fiscal year 2002 was influenced by three major
factors: interest rates held stable for most of the year at historically low
levels, the Corporation had twelve months of operations for Community Resource
Mortgage Inc., and the Corporation acquired the Bank of Ridgeway in July. Low
interest rates have put pressure on the Banks' net interest margin, which
declined eight basis points from 2001 to 2002, but the low rates were also
responsible for the unprecedented volume of mortgage loan originations and
refinances done by CRM. Twelve months of operation for the mortgage company had
a significant impact on the Corporation's noninterest income and expense. Six
months of operation for the Bank of Ridgeway had a significant impact on the
Corporation's balance sheet and income statement. The substantial dollar and
percentage changes that are discussed throughout this document are due in large
measure to these business combination related changes in the Corporation's
structure.
The Corporation's net income was $5,401,000 or $1.42 per share in 2002.
This compares to $3,908,000 or $1.21 per share in 2001, an increase of
$1,493,000 or 38.2%.
This increase in earnings resulted from improved profit at Orangeburg
National Bank, Sumter National Bank, Florence National Bank, plus a full year of
operation for Community Resource Mortgage and the mid-year acquisition of the
Bank of Ridgeway. Earnings at the Orangeburg bank increased to $2,803,000 in
2002 from $2,506,000 in 2001, an increase of 11.9% or $297,000. Earnings at the
Sumter bank increased to $1,294,000 in 2002 from $1,184,000 in 2001, an increase
of 9.3% or $110,000. The Sumter bank opened a new banking office in Sumter in
February and the costs associated with its opening restrained the bank's
earnings somewhat. Earnings at the Florence bank increased to $413,000 in 2002
from $154,000 in 2001, an increase of 168% or $259,000. At year end the Florence
bank had recovered all of its initial operating losses and it began 2003 with
positive retained earnings.
Earnings at Community Resource Mortgage, acquired November 1, 2001,
were $447,000 for the twelve-month period ended December 31, 2002. Earnings were
$172,000 for the two-month period ended December 31, 2001. This added $275,000
more to the Corporation's profit for 2002. CRM has benefited from historically
low interest rates, which have increased demand for home mortgages and mortgage
refinancing. Earnings at CRM are expected to be more volatile than earnings at
the banks.
Earnings at the Bank of Ridgeway, acquired July 1, 2002, were $605,000
for the six-month period ended December 31, 2002. The bank earned $410,000 for
the six-month period ended June 30, 2002 for a total of $1,015,000 for 2002.
This compares to $1,087,000 for 2001, a decline of $72,000 or 6.6%. The decline
in earnings was mostly attributable to expenses related to the pending merger
with Community Bankshares Inc. Only earnings for the second half of 2002 were
included in the consolidated financial statements of the Corporation.
Interest Income and Interest Expense, 2002 compared to 2001
The Corporation's interest income and interest expense were
substantially influenced by the extraordinary and historically low interest rate
environment during 2001 and 2002. The prime lending rate started the two year
period at 9%, fell rapidly during 2001, and ended 2002 at 4.25%.
The Corporation's interest income increased slightly in 2002 from 2001.
In 2002 the Corporation earned $21,986,000 in total interest income, up from the
prior year's $21,201,000. This represented a $785,000 or a 3.7% increase. This
growth was the result of increased volume of earning assets, which more than
offset the reduction in yields.
Interest bearing deposits in other banks contributed $36,000 to
interest income in 2002, down from $161,000 the prior year, a decrease of
$125,000 or 77.6%. In 2002 the Corporation had an average of $1,229,000 in
interest bearing deposits, down from the prior year's $4,044,000, a decrease of
$2,815,000 or 69.6%. The average yield on these deposits during 2002 was 2.93%,
down from the prior year's 3.98%. Most of the decrease in this category was
associated with a change in the collateral requirements for FHLB advances at one
of our banks.
16
Taxable investments contributed $1,970,000 to interest income in 2002,
down from $2,167,000 the prior year, a decrease of $197,000 or 9.1%. The
investment portfolio averaged $43,980,000 in 2002, up from the prior year's
$37,751,000, an increase of $6,229,000 or 16.5%. The Corporation's investment
portfolio consists mostly of short-term U. S. government and agency debt issues.
The average yield on investments during 2002 was 4.48%, down from 5.74% in 2001.
The Corporation's tax-exempt securities portfolio earned $217,000
during 2002, up from $29,000 the prior year, an increase of $188,000 or 648%.
The portfolio averaged $4,888,000 in 2002, up from $766,000 in 2001, an increase
of $4,122,000 or 538%. Virtually all of the increase in this area is due to the
acquisition of the Ridgeway bank in July 2002. The average yield was 6.73%,
compared to 5.74% the prior year, on a taxable equivalent basis.
Federal funds sold represent temporary surplus funds that one bank
lends to another and they are a source of day to day operating liquidity.
Federal funds sold contributed $347,000 to interest income in 2002, down from
$734,000 in the prior year, a decrease of $387,000 or 52.7%. The Corporation had
an average of $21,364,000 in federal funds during 2002, up from the prior year's
$19,095,000, an increase of $2,269,000 or 11.9%. The average yield on federal
funds during 2002 was 1.62%, down from 3.84% in 2001. The decline in market
interest rates caused numerous investments to be called prior to maturity, which
generated unusually high amounts of cash that the Corporation placed in federal
funds.
The Corporation's major source of interest income is the loan
portfolio, which contributed $19,416,000 to interest income in 2002, up from
$18,110,000 in the prior year, an increase of $1,306,000 or 7.2%. The average
loan portfolio for 2002 was $281,907,000 compared to the prior year's
$211,901,000, an increase of $70,006,000 or 33%. The average yield on loans
during 2002 was 6.89%, down from 8.55% in 2001.
The Corporation had average earning assets in 2002 of $353,368,000,
which earned an average yield of 6.22%. The Corporation had average earning
assets in 2001 of $273,557,000, which earned an average yield of 7.75%. Average
earning assets increased $79,811,000 or 29.2%, while the average yield on these
assets decreased by 153 basis points or 19.7%.
Savings accounts consist of savings and money market accounts. Total
savings accounts averaged $55,790,000 in 2002, up from $38,194,000 in the prior
year, an increase of $17,596,000 or 46.1%. The average cost of these funds
decreased to 1.62% in 2002 from 2.92% in the prior year.
Interest bearing transaction accounts are the primary checking accounts
that the Banks offer customers. This overall category averaged $41,101,000 in
2002, up from $26,917,000 in 2001, an increase of $14,184,000 or 52.7%. The
average cost of these funds was .69% in 2002 compared to .98% in the prior year.
Time deposits are the largest category of deposits, averaging
$162,512,000 in 2002, up from $136,938,000 in the prior year, an increase of
$25,574,000 or 18.7%. The average cost of time deposits decreased to 3.28% from
5.47%.
Short-term borrowing includes federal funds purchased and securities
sold under agreements to repurchase. The repurchase agreements are entered into
with a number of larger commercial customers. These accounts are not deposits;
they are considered other obligations of the Banks. Balances in these accounts
are subject to wide fluctuation and they constitute a relatively small portion
of the balance sheet. The average balance for 2002 was $8,419,000, up from
$7,533,000 in the prior year, an increase of $886,000 or 11.8%. The average cost
of these funds decreased to 1.45% from 3.15%.
The Corporation's mortgage subsidiary, CRM, maintains warehouse lines
of credit with non-affiliated institutions to fund its mortgage loan production.
The average balance for 2002 for these lines was $10,293,000 at an average cost
of 3.46%. The average amounts outstanding for the prior year were immaterial.
The Banks, with the exception of the Bank of Ridgeway, are members of
and have the ability to borrow from the Federal Home Loan Bank of Atlanta
(FHLB). The Banks had an average $20,254,000 outstanding borrowing balance
17
during 2002 at an average cost of 5.54%. The Banks had an average $19,899,000
outstanding during 2001 at an average cost of 5.77%. Borrowings increased by
$355,000 or 1.8%. These borrowings are mostly for longer terms than other
interest bearing liabilities. These loans are secured by a blanket lien on the
Banks' one-to-four family residential mortgage loan portfolios and the stock the
Banks hold in the FHLB.
The Corporation had average total interest bearing liabilities in 2002
of $298,369,000 costing an average of 2.72% compared with interest bearing
liabilities in 2001 of $229,481,000 costing an average of 4.47%. Average
interest bearing liabilities increased $68,888,000 or 30%, while the average
cost of these liabilities decreased by 175 basis points or 39.1%.
Earnings Performance, 2001 compared to 2000
The Corporation's net income was $3,908,000 or $1.21 per share in 2001.
This compares to $3,147,000 or $.99 per share in 2000, an increase of $761,000,
or 24.2%.
This increase in earnings resulted from improved profit at all three
banks. Earnings at the Sumter bank increased to $1,184,000 in 2001 from $908,000
in 2000, an increase of 30.4% or $276,000. Earnings at the Orangeburg bank
increased to $2,507,000 in 2001 from $2,243,000 in 2000, an increase of 11.8% or
$264,000. Earnings at the Florence bank increased to $154,000 in 2001 from
$78,000 in 2000, an increase of 97.4% or $76,000.
On November 1, 2001 the Corporation acquired Community Resource
Mortgage in a purchase transaction. Resource earned $172,000 for the two month
period ended December 31, 2001.
Interest Income and Interest Expense, 2001 compared to 2000
The Corporation's interest income and interest expense were
substantially influenced by the extraordinary interest rate environment during
2001. When the year began, the prime lending rate was at 9.5%, and by year end
the rate had fallen to 4.75%, a fifty percent decline in market rates within
twelve months.
The Corporation's interest income increased slightly in 2001 from 2000.
In 2001 the Corporation earned $21,201,000 in total interest income, up from the
prior year's $20,203,000. This represented a $998,000 or a 4.9% increase. This
growth was the result of increased volume of earning assets at the banks, which
more than offset the reduction in rates.
Interest bearing deposits in other banks contributed $161,000 to
interest income in 2001, up from $64,000 the prior year, an increase of $97,000
or 152%. In 2001 the Corporation had an average of $4,044,000 in interest
bearing deposits, up from the prior year's $1,024,000, an increase of $3,020,000
or 295%. The average yield on these deposits during 2001 was 3.98%, down from
the prior year's 6.25%. The decline in market interest rates caused a large
number of investments to be called prior to maturity, generating extra cash
which was placed in interest bearing deposits and federal funds sold.
Taxable investments contributed $2,167,000 to interest income in 2001,
down from $3,025,000 the prior year, a decrease of $858,000 or 28.4%. The
investment portfolio averaged $37,751,000 in 2001, down from the prior year's
$47,377,000, a decrease of $9,626,000 or 20.3% primarily resulting from higher
yielding investments being called prior to maturity. The Corporation's
investment portfolio consists primarily of short-term U. S. government and
agency debt issues. The average yield on investments during 2001 was 5.74%, down
from 6.38% in 2000.
The Corporation's tax-exempt securities portfolio earned $29,000 during
2001, down from $32,000 the prior year, a decrease of $3,000 or 9.4%. The
portfolio averaged $766,000 in 2001, down from $807,000 in 2000, a decrease of
$41,000 or 5.1%. The average yield was 5.74%, compared to 6.01% the prior year,
on a fully taxable equivalent basis.
Federal funds sold contributed $734,000 to interest income in 2001, up
from $430,000 in the prior year, an increase of $304,000 or 70.7%. The
Corporation had an average of $19,095,000 in federal funds during 2001, up from
18
the prior year's $6,670,000, an increase of $12,425,000 or 186%. The average
yield on federal funds during 2001 was 3.84%, down from 6.45% in 2000. As noted
above, the decline in market interest rates caused numerous investments to be
called prior to maturity, which generated unusually high amounts of cash that
the Company placed in interest bearing deposits and federal funds.
The loan portfolio contributed $18,110,000 to interest income in 2001,
up from $16,652,000 in the prior year, an increase of $1,458,000 or 8.8%. The
average loan portfolio for 2001 was $211,901,000 compared to the prior year's
$179,654,000, an increase of $32,247,000 or 17.95%. The average yield on loans
during 2001 was 8.55%, down from 9.27% in 2000.
The Corporation had average earning assets in 2001 of $273,557,000,
which earned an average yield of 7.75%. The Corporation had average earning
assets in 2000 of $235,532,000, which earned an average yield of 8.58%. Average
earning assets increased $38,025,000 or 16.1%, while the average yield on these
assets decreased by 83 basis points or 9.7%.
Total savings accounts averaged $38,194,000 in 2001, up from
$33,445,000 in the prior year, an increase of $4,749,000 or 14.2%. The average
cost of these funds decreased to 2.92% in 2001 from 4.06% in the prior year.
Interest bearing transaction accounts averaged $26,917,000 in 2001, up
from $21,039,000 in 2000, an increase of $5,878,000 or 27.9%. The average cost
of these funds was .98% in 2001 compared to 1.56% in the prior year.
Time deposits averaged $136,938,000 in 2001, up from $119,949,000 in
the prior year, an increase of $16,989,000 or 14.2%. The average cost of time
deposits decreased to 5.47% from 5.76%.
The average balance of short-term borrowing for 2001 was $7,533,000, up
from $4,501,000 in the prior year, an increase of $3,032,000 or 67.4%. The
average cost of these funds decreased to 3.15% from 4.84%.
The Banks had an average $19,899,000 outstanding borrowing balance
during 2001 at an average cost of 5.77%. The Banks had an average $19,385,000
outstanding during 2000 at an average cost of 6.01%. Borrowings increased by
$514,000 or 2.7%.
The Corporation had average total interest bearing liabilities in 2001
of $229,481,000 costing an average of 4.47% compared with interest bearing
liabilities in 2000 of $198,319,000 costing an average of 5.03%. Average
interest bearing liabilities increased $31,162,000 or 15.7%, while the average
cost of these liabilities decreased by 56 basis points or 11.1%.
Volume and Rate Variance Analysis
The table "Volume and Rate Variance Analysis" provides a summary of
changes in net interest income resulting from changes in volume and changes in
rate. (The changes in volume are the difference between the current and prior
year's balances times the prior year's rate. The changes in rate are the
difference between the current and prior year's rate times the prior year's
balance.)
As reflected in the table, the increase in 2002 net interest income of
$2,927,000 is mostly due to changes in volume. The increased volume in the loan
portfolio was the strongest factor driving the $785,000 increase in interest
income. The decreased cost of time deposits was the strongest factor driving the
$2,142,000 decrease in interest expense.
As reflected in the table, the increase in 2001 net interest income of
$712,000 is also mostly due to changes in volume. The increased volume in the
loan portfolio was the strongest factor driving the $998,000 increase in
interest income. The increased cost of time deposits was the strongest factor
driving the $286,000 increase in interest expense.
As discussed above, the prime interest rate has changed dramatically
over the last two years. In January 2001 the Federal Reserve began a series of
19
rate cuts that brought the prime rate down from 9% to 4.25% by December 2002.
Management expects interest rates to be fairly stable in the near term.
Therefore, as in 2002, any improvements in net interest income during 2003 are
more likely to be the result of changes in volume and the mix of earning assets
and interest bearing liabilities than changes in rates.
Volume and Rate Variance Analysis
2002 compared to 2001 2001 compared to 2000
--------------------- ---------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest earning assets (Dollar amounts in thousands)
Interest bearing deposits ...................... $ (90) $ (35) $ (125) $ 127 $ (30) $ 97
Investment securities taxable .................. 299 (496) (197) (574) (284) (858)
Investment securities--tax exempt .............. 182 6 188 (2) (1) (3)
Federal funds sold ............................. 78 (465) (387) 536 (232) 304
Loans receivable ............................... 5,252 (3,946) 1,306 2,827 (1,369) 1,458
------- ------- ------- ------- ------- -------
Total interest income ........................ 5,721 (4,936) 785 2,914 (1,916) 998
------- ------- ------- ------- ------- -------
Interest bearing liabilities
Savings ........................................ 391 (603) (212) 175 (416) (241)
Interest bearing transaction accounts .......... 111 (90) 21 77 (142) (65)
Time deposits .................................. 1,213 (3,379) (2,166) 942 (353) 589
------- ------- ------- ------- ------- -------
Total interest bearing deposits .............. 1,715 (4,072) (2,357) 1,194 (911) 283
Short term borrowing ........................... 25 (140) (115) 113 (94) 19
Warehouse lines of credit ...................... 356 - 356 - - -
FHLB advances .................................. 21 (47) (26) 31 (47) (16)
------- ------- ------- ------- ------- -------
Total interest expense ....................... 2,117 (4,259) (2,142) 1,338 (1,052) 286
------- ------- ------- ------- ------- -------
Net interest income ............................ $ 3,604 $ (677) $ 2,927 $ 1,576 $ (864) $ 712
======= ======= ======= ======= ======= =======
The change in interest due to both volume and yield/rate has been allocated to
change due to volume and change due to yield/rate in proportion to the absolute
value of the change in each.
PREMISES AND EQUIPMENT
Premises and equipment were $6,376,000 at December 31, 2002 compared to
$5,177,000 the prior year, an increase of $1,199,000 or 23.2%. Most of the
increase was due to the acquisitions of the Ridgeway bank in July. Premises and
equipment are discussed further in Note 6 to the consolidated financial
statements.
INVESTMENT PORTFOLIO
The Corporation's investment portfolio consists primarily of short-term
U. S. government and agency debt issues. The acquisition of the Ridgeway bank
has significantly increased the Corporation's tax exempt portfolio. Investment
securities averaged $48.9 million in 2002, $38.5 million in 2001, and $48.2
million in 2000. Note 4 to the consolidated financial statements provides
further information on the investment portfolio.
20
The table below gives the amortized cost and fair value of the
Corporation's investment portfolio for the past three years.
2002 2001 2000
---- ---- ----
Amortized Fair Amortized Fair Amortized Fair
cost value cost value cost value
---- ----- ---- ----- ---- -----
Securities held-to-maturity (Dollar amounts in thousands)
U.S. government and agencies ............. $ - $ - $ 500 $ 500 $12,371 $12,217
State and local government ............... - - - - - -
------- ------- ------- ------- ------- -------
Total held-to-maturity ............. $ - $ - $ 500 $ 500 $12,371 $12,217
======= ======= ======= ======= ======= =======
Securities available-for sale
U.S. government and agencies ............. $41,213 $41,531 $40,437 $40,415 $38,599 $38,403
State and local government ............... 9,114 9,625 801 811 813 810
Other securities ......................... 1,910 1,910 1,981 1,981 1,982 1,982
------- ------- ------- ------- ------- -------
Total available for sale ........... $52,237 $53,066 $43,219 $43,207 $41,394 $41,195
======= ======= ======= ======= ======= =======
Information on the maturity distribution of the investment portfolio is
presented in Note 4 to the consolidated financial statements. Other securities
consists of non-marketable equity investments in Federal Reserve stock, FHLB
stock and Bankers Bank stock. Further information is detailed in Note 4.
At December 31, 2002 the Corporation's available for sale portfolio
showed a net of taxes other comprehensive gain in the equity section of the
balance sheet of $98,000 compared to a loss of $7,000 the prior year. The change
in the valuation of the investment portfolio was directly related to the changes
in market interest rates during the year.
LOAN PORTFOLIO
The average size of the loan portfolio was $281.9 million in 2002,
$211.9 million in 2001 and $179.7 million in 2000.
At December 31, 2002 the net loan portfolio was $302.9 million,
compared to $227.1 million the prior year, an increase of $75.8 million or
33.4%.
Management believes the loan portfolio is adequately diversified. There
are no foreign loans and few agricultural loans.
The table, "Loan Portfolio Composition," in the following section,
indicates the amounts of loans outstanding according to the type of loan at the
dates indicated.
Loan Portfolio Composition
The following table shows the composition of the loan portfolio for the
years ended December 31, 1998 through 2002.
Loan category 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Commercial, financial and agricultural ............ $ 78,210 $ 56,515 $ 52,264 $ 40,220 $ 29,943
Real estate - construction ......................... 23,345 19,557 15,389 9,156 5,738
Real estate - mortgage ............................. 168,499 127,002 98,154 84,680 62,789
Loans to individuals ............................... 36,430 26,831 29,270 23,033 19,325
-------- -------- -------- -------- --------
Total loans - gross ........................... $306,484 $229,905 $195,077 $157,089 $117,795
======== ======== ======== ======== ========
21
Commercial, financial, and agricultural loans, primarily representing
loans made to small and medium size businesses, increased by $21.7 million or
38.4% during 2002. These loans may be made on either a secured or an unsecured
basis. When taken, security usually consists of liens on inventories,
receivables, equipment, and furniture and fixtures. Unsecured business loans are
generally short-term with emphasis on repayment strengths and low debt-to-worth
ratios.
Real estate loans consist of construction loans and loans secured by
mortgages. Construction loans are also generally secured with mortgages. Because
the Corporation's subsidiaries are community banks, real estate loans comprise
the bulk of the loan portfolio. Construction loans increased $3.8 million or
19.4% in 2002. Mortgage loans increased $41.5 million or 32.7% in 2002. The
increase in these categories is reflective of the low interest rate environment
for 2002.
The Corporation's Banks generally do not compete with 15 and 30 year
fixed rate secondary market mortgage interest rates, so they have elected to
pursue the origination of mortgage loans that could be easily sold into the
secondary mortgage market. Community Resource Mortgage also originates loans for
sale in the secondary market. These loans are generally pre-qualified with the
underwriters to avoid problems in the sale of the loans. In 2002, 2001 and 2000
the Corporation sold $176 million, $34.9 million and $5.9 million, respectively,
in such loans. These loans are usually sold at par so no gain or loss is
recognized at the time of sale. However, the origination and sale of these loans
generates fee income. The Corporation also makes mortgage loans for its own loan
portfolio. Such loans are usually for a shorter term than loans originated to
sell and usually have a variable rather than a fixed interest rate.
Loans to individuals are generally for personal or household purposes,
they may be secured or unsecured. These loans increased $9.6 million or 35.8% in
2002.
Interest income from the loan portfolio was $19.4 million in 2002
compared to $18.1 million in 2001, an increase of $1.3 million or 7.2%. The
average yield on the portfolio was 6.89% in 2002 compared to 8.55% in 2001.
Maturity Distribution of Loans
The following table sets forth the maturity distribution of the
Corporation's loans, by type, as of December 31, 2002 as well as the type of
interest on loans due after one year.
After one
year but
Within one within five Over five
Category year years years Total
-------- ----- ----- ----- -----
(Dollar amounts in thousands)
Commercial .................................. $ 41,918 $ 32,422 $ 3,870 $ 78,210
Real estate ................................. 50,623 100,435 40,786 191,844
Individuals ................................. 10,191 24,678 1,561 36,430
-------- -------- ------- --------
Total ....................................... $102,732 $157,535 $46,217 $306,484
======== ======== ======= ========
Loans due after one year:
Predetermined interest rate ............ $201,712
Floating interest rate. ................ 2,040
--------
Total ....................................... $203,752
========
22
Lending Risks
Because extending credit involves a certain degree of risk, management
has established loan and credit policies designed to control both the types and
amounts of risks assumed and to minimize losses. Such policies include
limitations on loan-to-collateral values for various types of collateral,
requirements for appraisals of real estate collateral, problem loan management
practices and collection procedures, and nonaccrual and charge-off guidelines.
The Corporation also conducts internal loan reviews to monitor on an ongoing
basis the quality of its portfolio.
The Corporation has a geographic concentration of loans within its
Banks' local service areas in South Carolina because its primary business is
community banking.
Concentrations of credit also occur where a number of customers are
engaged in similar business activities. A concentration is generally defined for
this purpose as a concentration of loans exceeding 10% of total loans. The banks
regularly review their business lending in an effort to detect, monitor and
control such loan concentrations. At December 31, 2002 the Corporation had no
such loan concentrations.
Nonaccrual and Past Due Loans
The nonaccrual, past due and impaired loans and other real estate owned
are summarized in Note 5 to the consolidated financial statements. The
Corporation had no restructured loans in the past five years.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Nonaccrual loans ............................................ $ 796 $ 281 $ 238 $ 90 $ 31
Accruing loans 90 days or more past due ..................... 1,740 17 93 6 187
------ ------ ------ ---- ------
Total .................................................. $2,536 $ 298 $ 331 $ 96 $ 218
====== ====== ====== ==== ======
Total as a % of outstanding loans ...................... 0.83% 0.13% 0.17% 0.06% 0.19%
====== ====== ====== ==== ======
Other Real Estate Owned ..................................... $ 219 $ 267 $ - $ - $ 266
====== ====== ====== ==== ======
Impaired Loans (included in non accrual) .................... $ 796 $ 281 $ 238 $ 90 $ 31
====== ====== ====== ==== ======
Most of the increase in the accruing loans greater than 90 days past
due is due to one loan relationship of $1.3 million. This account involves
principals who are having a legal dispute. Management believes that the bank's
collateral position is sufficient that no loss is expected. Approximately half
the increase in nonaccrual loans is related to the addition of the Ridgeway
bank, these credits represent a number of smaller dollar amounts. Management
does not expect any material loss in relation to these credits.
Gross income that would have been recorded for the years ended December
31, 2002 and 2001, if nonaccrual loans had been performing in accordance with
their original terms was approximately $39,000 and $7,000 respectively. No
interest income was recognized in the current period on the non-accrual loans.
The Corporation's policies on nonaccrual and impaired loans are
discussed in Note 2 to the consolidated financial statements.
Nonaccrual loans and impaired loans were not material in relation to
the portfolio as a whole in 2002. Management is aware of no trends, events or
uncertainties that would cause nonaccrual loans to change materially in 2003.
Potential Problem Loans
At December 31, 2002 the Corporation's internal loan review program had
identified $5,273,000 (1.7% of the portfolio) in various loans where information
23
about credit problems of borrowers had caused management to have concerns about
the ability of the borrowers to comply with original repayment terms. The amount
identified does not represent management's estimate of the potential losses
since a large portion of these loans are secured by real estate and other
marketable collateral.
Secured versus Unsecured Loans
The Corporation does not aggressively seek to make unsecured loans,
since these loans may be somewhat more risky than collateralized loans. There
are, however, occasions when it is in the business interests of the Corporation
to provide short-term, unsecured loans to certain customers. In 2002 the
Corporation had $20.2 million in unsecured loans or 6.6% of its loan portfolio.
In 2001 the Corporation had $16.1 million in unsecured loans or 6.6% of its loan
portfolio. Such loans are made on the basis of management's evaluation of the
customer's ability to repay and net worth.
Loan Participations
Periodically, the Corporation's banking subsidiaries enter into sales
or purchases of loan participations with one another and other financial
institutions. The banks generally only sell participations in loans that would
cause the bank to exceed its lending limitation to a single customer. As the
Banks' lending limits increase they may buy back such loan participations. Such
loans are usually commercial in nature, subject to the purchasing Bank's
standard underwriting requirements, and all risks associated with the portion of
the loan sold flow to the purchaser.
At the end of 2002 the four banks had $26,953,000 in loan
participations purchased. Of these loans $8,658,000 was with nonaffiliated
banks.
At the end of 2001 the three banks had $16,868,000 in loan
participations purchased. Of these loans $5,265,000 was with nonaffiliated
banks.
At the end of 2002 the four banks had $20,173,000 in loan
participations sold. Of these loans $2,373,000 was with nonaffiliated banks.
At the end of 2001 the three banks had $11,953,000 in loan
participations sold. Of these loans $801,000 was with nonaffiliated banks.
Other Real Estate
Other real estate, consisting of foreclosed properties, was $219,000 in
2002, $267,000 in 2001 and $0 in 2000. Other real estate is initially recorded
at the lower of net loan balance or its estimated fair value, net of estimated
disposal costs. The estimate of fair value for foreclosed properties is
determined by appraisal at the time of acquisition.
SUMMARY OF LOAN LOSS EXPERIENCE
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan
losses, which is a direct charge to expense. Losses on specific loans are
charged against the allowance in the period in which management determines that
such loans become uncollectible. Recoveries of previously charged-off loans are
credited to the allowance. At December 31, 2002 and 2001 the allowance for loan
losses was 1.17% and 1.23%, respectively, of total loans. The following table
provides details on the changes in the allowance for loan losses during the past
five fiscal years.
24
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Average amount of loans outstanding ............................ $281,907 $211,901 $179,654 $139,215 $103,500
======== ======== ======== ======== ========
Allowance for loan losses - January 1* ......................... $ 3,274 $ 2,424 $ 1,936 $ 1,459 $ 1,140
-------- -------- -------- -------- --------
Loan charge-offs:
Real estate ................................................ 175 9 78 - 7
Installment ................................................ 223 202 116 95 111
Credit cards and related plans ............................. - 9 9 5 6
Commercial and other ....................................... 374 87 33 80 56
-------- -------- -------- -------- --------
Total charge-offs .............................................. 772 307 236 180 180
-------- -------- -------- -------- --------
Recoveries:
Real Estate ................................................ 1 - 3 - -
Installment ................................................ 20 33 25 17 12
Credit cards and related plans ............................. - 2 2 3 3
Commercial ................................................. 17 - 6 25 -
-------- -------- -------- -------- --------
Total recoveries ............................................... 38 35 36 45 15
-------- -------- -------- -------- --------
Net charge-offs ................................................ 734 272 200 135 165
Provision for loan losses ...................................... 1,033 678 688 612 484
-------- -------- -------- -------- --------
Allowance for loan losses - Dec. 31 ............................ $ 3,573 $ 2,830 $ 2,424 $ 1,936 $ 1,459
======== ======== ======== ======== ========
Ratios
Net charge-offs to average loans
outstanding ............................................... 0.26% 0.13% 0.11% 0.10% 0.16%
Net charge-offs to loans outstanding at
end of year ............................................... 0.24% 0.12% 0.10% 0.09% 0.14%
Allowance for loan losses to average
loans ..................................................... 1.27% 1.34% 1.35% 1.39% 1.41%
Allowance for loan losses to total loans
at end of year ............................................ 1.17% 1.23% 1.24% 1.23% 1.24%
Net charge-offs to allowance for losses ........................ 20.54% 9.61% 8.25% 6.97% 11.31%
Net charge-offs to provision for loans
losses .................................................... 71.06% 40.12% 29.07% 22.06% 34.09%
* Allowance balance includes $444 acquired when Ridgeway Bancshares was merged
into the Corporation on July 1, 2002
25
Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and loans to individuals. The combination of
a relatively short operating history and relatively high asset quality precludes
management from establishing a meaningful specific loan loss percentage for the
computation of the allowance for each category. Instead management assigns an
estimated percentage factor to each in the computation of the overall allowance.
These estimates are not, however, intended to restrict the Corporation's ability
to respond to losses. The Corporation charges losses from any segment of the
portfolio to the allowance, regardless of the allocation. In general terms, the
real estate portfolio is subject to the least risk, followed by the commercial
loan portfolio, followed by the loans to individuals portfolio. The Banks'
internal and external loan review programs from time to time identify loans that
are subject to specific weaknesses and such loans are reviewed for a specific
loan loss allowance.
The Corporation operates four independent community banks in South
Carolina. Under the provisions of law and regulations governing banks, 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 (the "OCC") or the Federal
Deposit Insurance Corporation (the "FDIC") As a normal part of a safety and
soundness examination, the bank examiners assess and comment on the adequacy of
a bank's allowance for loan losses. The allowance presented in the consolidated
financial statements is on an aggregated basis and as such might differ from the
allowance that would be presented if the Corporation had only one banking
subsidiary.
The nature of community banking is such that the individual loan
portfolios are predominantly comprised of small and medium size business and
individual loans. As community banks, there is by definition a 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.
Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 2003 will be less than the 2002
levels as such loans progress through the collection, foreclosure, and
repossession process. Management believes that the allowance for loan losses, as
of December 31, 2002 is sufficient to absorb 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 the provision for loan losses is adjusted.
The following table presents the allocation of the allowance for loan
losses, as of December 31, 1998 through 2002, compared with the percent of loans
in the applicable categories to total loans.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
% of % of % of % of % of
(Dollar amounts loans in loans in loans in loans in loans in
in thousands) Allowance category Allowance category Allowance category Allowance category Allowance category
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Commercial ...... $1,479 26% $1,019 24% $ 801 27% $ 660 28% $ 364 25%
Real estate ..... 1,548 63% 1,322 65% 1,136 58% 916 57% 707 59%
Individual ...... 546 11% 489 11% 487 15% 360 15% 388 16%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total ...... $3,573 100% $2,830 100% $2,424 100% $1,936 100% $1,459 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
The Corporation maintains an allowance for loan losses it believes is
sufficient to cover estimated losses inherent in the portfolio. The allowance is
allocated to different segments of the portfolio, based on management's
expectations of risk in that segment of the portfolio. This allocation is an
estimate only and is not intended to restrict the Corporation's ability to
26
respond to losses. The Corporation charges losses from any segment of the
portfolio to the allowance, regardless of the allocation.
In reviewing the adequacy of the allowance for loan losses at the end
of each period, the Corporation 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. The
allowance for loan losses is management's best estimate of probable loan losses
that have been incurred as of December 31, 2002.
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio, general
economic conditions and the adequacy of the allowance for loan losses. The
amount of the provision is the amount which management believes, based on its
continuing analysis, is necessary to cause the allowance to be adequate.
Provisions for loan losses totaled $1,033,000 and $678,000 in 2002 and 2001,
respectively. The increase in the provision expense in 2002 was related to a
very small number of commercial loan relationships and is not indicative of a
portfolio trend. Based on the available information, the Corporation considers
its 2002 provision for loan losses adequate.
Net charge-offs in 2002 were $734,000 or 71.1% of the provision for
loan losses compared to $272,000 or 40.1% of the provision for loan losses in
the prior year. See "Allowance for Loan Losses" for a discussion of the factors
management considers in its review of the adequacy of the allowance and
provision for loan losses.
AVERAGE DEPOSITS
The Corporation's average deposits in 2002 were $ 301 million compared
to $234 million in 2001, an increase of $67 million or 28.6%.
The total average deposits for the Corporation for the years ended
December 31, 2002, 2001 and 2000 are summarized below:
2002 2001 2000
---- ---- ----
Average Average Average Average Average Average
balance cost balance cost balance cost
------- ---- ------- ---- ------- ----
(Dollar amounts in thousands)
Noninterest bearing demand $ 41,198 $ 31,643 $ 28,531
Interest bearing transaction accounts 41,101 0.69% 26,917 0.98% 21,039 1.56%
Savings-regular 14,469 1.01% 8,705 1.60% 8,414 2.12%
Savings- money market 41,321 1.85% 29,489 3.37% 25,031 4.73%
Time deposits less than $100,000 104,509 3.30% 92,515 5.45% 81,797 5.66%
Time deposits greater than $100,000 58,003 3.28% 44,423 5.50% 38,152 6.10%
-------- -------- --------
Total average deposits $300,601 $233,692 $202,964
======== ======== ========
At December 31, 2002 the Corporation had $67,946,000 in certificates of
deposit of $100,000 or more. The maturities of these certificates are as
follows:
Maturity
(Dollar amounts in thousands)
Of 3 months or less ..................... $23,362
From 3 to 6 months ...................... 14,254
From 6 to 12 months ..................... 21,381
Over 12 months .......................... 8,949
-------
Total .......................... $67,946
=======
27
RETURN ON EQUITY AND ASSETS
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2002, 2001, and 2000.
2002 2001 2000
---- ---- ----
Return on assets (ROA) .................. 1.43% 1.36% 1.26%
Return on equity (ROE) .................. 15.10% 15.58% 14.67%
Dividend payout ratio ................... 22.55% 23.13% 20.50%
Equity as a percent of assets ........... 9.46% 8.71% 8.59%
The decline in return on equity is related to the issuance in July 2002 of one
million shares of CBI common stock in connection with the acquisition of the
Ridgeway bank.
SHORT-TERM BORROWINGS
The Corporation's short-term borrowings consist of federal funds
purchased and securities sold under agreements to repurchase, which generally
mature each business day. Information is provided in the following table.
2002 2001 2000
---- ---- ----
(Dollar amounts in thousands)
Outstanding at year-end ....................... $16,302 $ 4,171 $ 9,352
Interest rate at year-end ..................... .78% 2.08% 5.01%
Maximum month-end balance during the year ..... $16,302 $10,976 $ 9,532
Average amount outstanding during the year .... $ 8,419 $ 7,533 $ 4,501
Weighted average interest rate during the year 1.45% 3.15% 4.84%
LINES OF CREDIT
Lines of credit payable represent warehouse lines funding loan
production for CRM. At year end these balances totaled $18,249,000. Of this
amount, $12,326,000 was borrowed from BB&T at the one month LIBOR rate plus
1.95%. The BB&T line expires in October 2003. The line is secured with the value
of the underlying mortgages and the guarantee of the Corporation to a maximum of
$14 million. The remaining $5,923,000 is the balance on a line outstanding with
First Horizon, priced at the individual mortgage loan note rate. The operations
of CRM are included in the consolidated financial statements for the two month
period ended December 31, 2001, and for the year ended December 31, 2002.
FEDERAL HOME LOAN BANK ADVANCES
The Corporation's banking subsidiaries, with the exception of the
Ridgeway bank, are members of the Federal Home Loan Bank of Atlanta. As such
they have access to long-term borrowing from the FHLB. Information on these
borrowings is provided in the following table.
2002 2001 2000
---- ---- ----
(Dollar amounts in thousands)
Outstanding at year-end ....................... $20,210 $20,280 $20,350
Interest rate at year-end ..................... 5.54% 5.54% 6.04%
Maximum month-end balance during the year ..... $20,280 $20,350 $20,350
Average amount outstanding during the year .... $20,254 $19,899 $19,385
Weighted average interest rate during the year 5.54% 5.77% 6.01%
28
CAPITAL
Dividends
During 2002 the Corporation paid cash dividends to shareholders of 32
cents per share, which totaled $1,218,000. This represented a dividend payout
ratio (dividends divided by net income) of 22.5%. During 2001 the Corporation
paid cash dividends to shareholders of 28 cents per share, which totaled
$904,000. This represented a dividend payout ratio of 23%.
Common Stock Account
The common stock account at December 31, 2002 totaled $29,090,000
compared to $17,208,000 the prior year, an increase of 69% or $11,882,000. This
increase was related to the issuance of 1,000,000 shares in connection with the
acquisition of Ridgeway Bancshares Inc. (the parent of the Bank of Ridgeway) at
July 1, 2002.
Capital Adequacy
The Federal Reserve and federal bank regulatory agencies have adopted
risk-based capital standards for assessing the capital adequacy of a bank
holding company or financial institution. The minimum required ratio is 8%. All
four bank subsidiaries are each considered `well capitalized' for regulatory
purposes. This category requires a minimum risk based capital ratio of 10%.
Detailed information on the Corporation's capital position, as well as that of
its subsidiary banks, is provided in Note 20 to the consolidated financial
statements. The Corporation considers its current and projected capital position
to be adequate.
NONINTEREST INCOME AND EXPENSE
Noninterest income, 2002 compared to 2001
Noninterest income increased to $7,952,000 in 2002 from $3,584,000 in
2001, a $4,368,000 or 122% increase. There were two major components of this
increase. Mortgage banking income was up $3.4 million, virtually all of which
was related to having Community Resource Mortgage for twelve months during 2002,
versus two months the prior year. Also during the second quarter of 2001 the
banks began offering an automated overdraft protection product to customers.
This product enables customers to overdraw their accounts within specific dollar
limits in exchange for a fee. They then have thirty days to bring their account
into a positive balance. The product accounted for most of the increase in
service charge income, which was $2,760,000 for 2002 compared to $2,058,000 for
2001.
Noninterest expense, 2002 compared to 2001
Overall, non-interest expenses increased to $12,465,000 in 2002 from
$7,810,000 in 2001, an increase of $4,655,000 or 59.6%. Of this increase,
approximately $2.6 million or 56% is associated with having twelve months of
operations of Community Resource Mortgage included rather than only two months
the prior year. Also, approximately $1.1 million or 24% is related to six months
of operations for the Ridgeway bank. The remaining increases were related to
normal growth in the business of the other banks.
Income Taxes, 2002 compared to 2001
The Corporation pays U. S. corporate income taxes and South Carolina
bank and corporate income taxes. The 2002 provision for income taxes was
$2,920,000 compared to $2,156,000 the prior year, an increase of $764,000 or
35.4%. The Corporation's effective average tax rate was 35.1% in 2002 compared
to 35.6% the prior year.
29
Noninterest income, 2001 compared to 2000
Noninterest income increased to $3,584,000 in 2001 from $1,966,000 in
2000, a $1,618,000 or 82.3% increase. There were two major components of this
increase. The Corporation acquired a mortgage company during the fourth quarter
of 2001. This accounted for most of the increase in gains on sales of loans,
which was $1,033,000 in 2001 compared to only $98,000 in 2000. Also during the
second quarter of 2001, the banks began offering an automated overdraft product
to customers. This product enables customers to overdraw their accounts within
specific dollar limits in exchange for a fee. They then have thirty days to
bring their account into a positive balance. The product accounted for most of
the increase in service charge income, which was $2,058,000 in 2001 compared to
$1,475,000 in 2000.
Noninterest expense, 2001 compared to 2000
Overall, non-interest expenses increased to $7,810,000 in 2001 from
$6,552,000 in 2000, an increase of $1,258,000 or 19.2%. Of this increase,
approximately $515,000 or 41% is associated with the operations of Community
Resource Mortgage during the last two months of 2001. The remaining increases
were attributable to normal volume related increases with the banks.
Income Taxes, 2001 compared to 2000
The 2001 provision for income taxes was $2,156,000 compared to
$1,807,000 the prior year, an increase of $349,000 or 19.3%. The Corporation's
effective average tax rate was 35.6% in 2001 compared to 36.5% the prior year.
INFLATION
The assets and liabilities of the Corporation are mostly monetary in
nature. Accordingly, the financial results and operations of the Corporation are
much more affected by changes in interest rates than changes in inflation. There
is, however, a strong correlation between increasing inflation and increasing
interest rates. The impact of inflation has been very moderate over the past
several years, about 1.6% during 2002. Prospects appear reasonable for continued
low inflation, despite some risk related to energy prices and the political and
military situation in the Middle East. Although inflation does not normally
affect a financial institution as dramatically as it does businesses with large
investments in plants and inventories, it does have an effect. During periods of
high inflation there are usually corresponding increases in the money supply and
banks experience above average growth in assets, loans, and deposits. General
increases in the prices of goods and services also result in increased operating
expenses.
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.
The Corporation 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. The Corporation has in the past
maintained 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. The Corporation
30
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.
The Corporation has substantially more liabilities that mature in the
next 12 months than it has assets maturing in the same period. Further, the
Corporation has legal obligations to extend credit pursuant to loan commitments,
lines of credit and standby letters of credit which totaled $14,603,000,
$20,493,000, and $2,506,000, respectively, at December 31, 2002 (see Note 14 to
the consolidated financial statements). However, based on its historical
experience, and that of similar financial institutions, the Corporation believes
that it is unlikely that so many deposits would be withdrawn, without being
replaced by other deposits, and extensions of credit would be required, that the
Corporation would be unable to meet its liquidity needs with the proceeds of
maturing assets, in the ordinary course of business.
The Corporation also maintains various federal funds lines of credit
with correspondent banks and is able to borrow from the Federal Home Loan Bank
of Atlanta and the Federal Reserve's discount window.
The Corporation, through its Banks, has a demonstrated ability to
attract deposits from its market area. Deposits have grown from $147 million in
1998 to over $337 million in 2002. This stable growing base of deposits is the
major source of operating liquidity.
The Corporation's long-term liquidity needs are expected to be
primarily affected by the maturing of long-term certificates of deposit. At
December 31, 2002 the Corporation had approximately $28.4 million in
certificates of deposit and other obligations maturing in one to five years. The
Corporation had $17.2 million in obligations maturing after five years. The
Corporation's assets maturing in the same periods were $134.1 million and $42.9
million, respectively. With a substantially larger dollar amount of assets
maturing in both periods than liabilities, the Corporation believes that it will
not have any significant long-term liquidity problems.
In the opinion of management, the current and projected liquidity
position is adequate.
Item 7A. 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 material 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 forecast possible. The forecast 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 December 31, 2002 the Corporation is
positioned so that net interest income would increase $1,153,000 and net income
would increase $709,000 if interest rates were to rise 300 basis points in the
next twelve months. Conversely, net interest income would decline $768,000 and
net income would decline $473,000 if interest rates were to 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
31
results. Further, the computations do not contemplate any actions the
Corporation could undertake in response to changes in interest rates or the
effects of responses by others.
The Market Risk table, which follows this discussion, shows the
Corporation's financial instruments that are sensitive to changes in interest
rates. The Corporation uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments, and prepayment of principal and potential calls.
For core deposits without contractual maturity (i.e., interest checking, savings
and money market accounts), the table presents principal cash flows based on
management's judgment concerning their most likely runoff. The actual maturities
and runoff could vary substantially if future prepayments, runoff and calls
differ from the Corporation's historical experience.
Average
rate 2003 2004 2005 2006 2007 Thereafter Balance Fair value
---- ---- ---- ---- ---- ---- ---------- ------- ----------
(Dollar amounts in thousands)
Earnings assets
Interest bearing deposits ........... 2.93% $ 511 $ - $ - $ - $ - $ - $ 511 $ 511
Investment securities ............... 4.70% 3,971 1,917 18,524 9,798 6,599 12,257 53,066 53,066
Federal funds sold .................. 1.62% 23,831 - - - - - 23,831 23,831
Loans ............................... 6.89% 148,111 22,503 24,286 38,133 39,234 34,217 306,484 307,418
Interest bearing liabilities
Savings ............................. 1.62% 65,660 - - - - - 65,660
Interest bearing transaction accts . 0.69% 40,963 - - - - - 40,963
Time deposits < $100,000 ............ 3.30% 98,973 11,106 3,936 846 504 - 115,365
Time deposits > $100,000 ............ 3.28% 58,998 5,874 2,674 400 - 67,946
-------- --------
Total deposits ...................... 2.51% 289,934 290,911
Short term borrowing ................ 1.45% 16,302 - - - - - 16,302 16,306
Warehouse lines of credit ........... 3.46% 18,249 - - - - - 18,249 18,249
FHLB advances ....................... 5.54% $ 70 $ 70 $ 1,370 $ 500 $ 1,000 $17,200 $ 20,210 $ 22,335
The static interest rate sensitivity gap position, while not a complete
measure of interest sensitivity, is also reviewed periodically to provide
insights related to the static repricing structure of the Banks' assets and
liabilities. At December 31, 2002 on a cumulative basis through twelve months,
rate sensitive liabilities exceeded rate sensitive assets, by $92 million. The
liability sensitive position is largely due to the assumption that the Banks'
$107 million in interest bearing transaction accounts, savings accounts and
money market accounts will reprice within a year. This assumption may or may not
be valid, since these accounts vary greatly in their sensitivity to interest
rate changes in the market.
The following table summarizes the Corporation's interest sensitivity
position as of December 31, 2002.
32
Interest Sensitivity Analysis
Within 3 Over 5
months 4-12 months 1-5 years years Total
------ ----------- --------- ----- -----
(Dollar amounts in thousands)
Interest earning assets
Interest bearing deposits ......................... $ 511 $ - $ - $ - $ 511
Taxable investment securities ..................... 21,460 12,336 6,235 3,614 43,645
Tax exempt investment securities .................. 400 510 3,817 4,694 9,421
Federal funds sold ................................ 23,831 - - - 23,831
Loans, net of unearned income ..................... 126,672 21,223 124,002 34,587 306,484
--------- --------- --------- --------- ---------
Total interest earning assets ................... 172,874 34,069 134,054 42,895 383,892
--------- --------- --------- --------- ---------
Interest bearing liabilities
Savings ........................................... 65,660 - - - 65,660
Interest bearing transaction accounts ............. 40,963 - - - 40,963
Time deposits < $100M ............................. 32,673 66,200 16,492 - 115,365
Time deposits > $100M ............................. 23,149 35,848 8,949 - 67,946
Short term borrowing .............................. 16,302 - - - 16,302
FHLB advances ..................................... - 70 2,940 17,200 20,210
Lines of credit payable ........................... 18,249 - - - 18,249
--------- --------- --------- --------- ---------
Total interest bearing liabilities .............. $ 196,996 $ 102,118 $ 28,381 $ 17,200 $ 344,695
--------- --------- --------- --------- ---------
Interest sensitivity gap ............................ $ (24,122) $ (68,049) $ 105,673 $ 25,695 $ 39,197
Cumulative gap ...................................... (24,122) (92,171) 13,502 39,197
RSA/RSL ............................................. 88% 33%
Cumulative RSA/RSL .................................. 88% 69%
RSA - rate sensitive assets; RSL- rate sensitive liabilities
The above table reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amortizing fixed rate loans are reflected at the scheduled maturity date.
Variable rate amortizing loans are reflected at the earliest date at which they
may be repriced contractually. Deposits in other banks and debt securities are
reflected at each instrument's ultimate maturity date. Overnight federal funds
sold are reflected as instantly repriceable. Interest bearing liabilities with
no contractual maturity, such as savings deposits and interest bearing
transaction accounts, are reflected in the earliest repricing period possible.
Fixed rate time deposits are reflected at the earlier of their next repricing or
maturity dates.
Item 8. Financial Statements and Supplementary Data
Please see the attached audited financial statements for the period
ended December 31, 2002.
33
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 35
Consolidated Balance Sheets, December 31, 2002 and 2001 36
Consolidated Statements of Income, Years Ended December 31,
2002, 2001, and 2000 37
Consolidated Statements of Changes in Shareholders' Equity, Years Ended
December 31, 2002, 2001, and 2000 39
Consolidated Statements of Cash Flows, Years Ended December 31,
2002, 2001, and 2000 41
Notes to Consolidated Financial Statements 43
34
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
Community Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Community
Bankshares, Inc., and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community
Bankshares, Inc., and subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
s/J. W. Hunt and Company, L.L.P.
Columbia, South Carolina
February 13, 2003
35
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2002 AND 2001
ASSETS
($ in thousands) 2002 2001
---- ----
Cash and due from banks ................................................................... $ 14,738 $ 14,586
Federal funds sold ........................................................................ 23,831 11,063
--------- ---------
Total cash and cash equivalents ......................................................... 38,569 25,649
Interest-bearing deposits with banks ...................................................... 511 2,376
Securities available for sale, at fair value .............................................. 53,066 43,207
Securities held to maturity (fair value approximates $0
and $500 as of December 31, 2002 and 2001, respectively) ............................... - 500
Loans held for sale ....................................................................... 24,664 10,265
Loans receivable, net of allowance for loan
losses of $3,573 in 2002 and $2,830 in 2001 ............................................ 302,911 227,075
Accrued interest receivable ............................................................... 2,131 1,762
Premises and equipment - net .............................................................. 6,376 5,177
Net deferred tax asset .................................................................... 584 870
Intangible assets ......................................................................... 7,896 921
Other assets .............................................................................. 612 815
--------- ---------
Total assets ............................................................ 437,320 318,617
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non interest-bearing ........................................................ $ 47,128 $ 35,882
Interest-bearing transaction accounts ............................................... 40,963 41,564
Savings ............................................................................. 65,660 39,479
Certificates of deposit of $100 and over ............................................ 67,946 51,374
Other time deposits ................................................................. 115,365 87,134
--------- ---------
Total deposits .......................................................... 337,062 255,433
Federal funds purchased and securities sold under
agreements to repurchase ............................................................ 16,302 4,171
Federal Home Loan Bank advances ........................................................ 20,210 20,280
Lines of credit payable ................................................................ 18,249 9,028
Accrued interest payable ............................................................... 759 946
Accrued expenses and other liabilities ................................................. 1,021 1,212
--------- ---------
Total liabilities ....................................................... 393,603 291,070
--------- ---------
Shareholders' equity:
Common stock - no par value, authorized
shares - 12,000,000; issued and
outstanding - 4,304,384 shares
in 2002 and 3,299,674 shares in 2001 ................................................ 29,090 17,208
Retained earnings ...................................................................... 14,529 10,346
Accumulated other comprehensive income (loss) .......................................... 98 (7)
--------- ---------
Total shareholders' equity .............................................. 43,717 27,547
--------- ---------
Total liabilities and shareholders' equity .............................. 437,320 318,617
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
36
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, YEARS
ENDED DECEMBER 31, 2002, 2001, AND 2000
($ and shares in thousands, except per share data)
2002 2001 2000
---- ---- ----
Interest and dividend income:
Loans, including fees ........................................................................ $19,416 $18,110 $16,652
Deposits with other financial institutions ................................................... 36 161 64
Debt securities:
Taxable ..................................................................................... 1,872 2,040 2,891
Tax exempt .................................................................................. 217 29 32
Dividends ..................................................................................... 98 127 134
Federal funds sold and securities
purchased under agreements to resell ...................................................... 347 734 430
------- ------- -------
Total interest and dividend income ......................................................... 21,986 21,201 20,203
------- ------- -------
Interest expense:
Deposits:
Interest-bearing transaction accounts ..................................................... 285 264 329
Savings ................................................................................... 905 1,117 1,358
Certificates of deposit of $100 and over .................................................. 1,876 2,415 2,279
Certificates of deposit of less than $100 ................................................. 3,452 5,079 4,626
------- ------- -------
Total interest on deposits .................................................... 6,518 8,875 8,592
Federal funds purchased and securities sold
under agreements to repurchase ............................................................ 122 237 218
Other borrowings .............................................................................. 1,479 1,149 1,165
------- ------- -------
Total interest expense .................................................................... 8,119 10,261 9,975
------- ------- -------
Net interest income ............................................................................. 13,867 10,940 10,228
Provision for loan losses ....................................................................... 1,033 650 688
------- ------- -------
Net interest income after provision
for loan losses ............................................................................ 12,834 10,290 9,540
------- ------- -------
Noninterest income:
Service charges on deposit accounts .......................................................... 2,760 2,058 1,475
Mortgage banking income ....................................................................... 4,413 1,033 98
Gains on sales of securities ................................................................. 119 31 -
Deposit box rent ............................................................................. 39 27 25
Bank card fees ............................................................................... 29 28 29
Credit life insurance commissions ............................................................ 62 62 77
Other ........................................................................................ 530 345 262
------- ------- -------
Total noninterest income ...................................................... 7,952 3,584 1,966
------- ------- -------
Noninterest expenses:
Salaries and employee benefits ............................................................... 7,812 4,651 3,779
Premises and equipment ....................................................................... 1,444 1,009 942
Marketing .................................................................................... 338 266 207
Regulatory fees .............................................................................. 205 181 140
Supplies ..................................................................................... 284 166 160
Director fees ................................................................................ 190 162 137
FDIC insurance ............................................................................... 50 48 33
Other ........................................................................................ 2,142 1,327 1,154
------- ------- -------
Total noninterest expenses .................................................... 12,465 7,810 6,552
------- ------- -------
(Continued) - 1
37
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME,
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
Income before provision for income taxes ............................... 8,321 6,064 4,954
Provision for income taxes ............................................. 2,920 2,156 1,807
------ ------ ------
Net income ......................................................... $5,401 $3,908 $3,147
====== ====== ======
Average number of common shares outstanding
Basic ............................................................. 3,804 3,218 3,194
Diluted ........................................................... 3,914 3,246 3,216
Earnings per common share:
Basic ............................................................. $ 1.42 $ 1.21 $ .99
Diluted ........................................................... $ 1.38 $ 1.20 $ .98
(Concluded) -2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
38
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
($ in thousands, except per share data)
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
------ ------ -------- ------------- -----
Balance, December 31, 1999 ......................... 3,191,462 $ 14,207 $ 6,549 $ (511) $ 20,245
Shares issued by DRIP .............................. 5,335 3 - - 3
Common stock issued under options .................. 2,520 19 - - 19
Costs of stock dividend ............................ - (10) - - (10)
Cash-in-lieu of 5% stock dividend .................. (137) - - - -
Market value of 5% stock dividend .................. - 1,709 (1,709) - -
Comprehensive income:
Net income .................................... - - 3,147 - 3,147
Change in unrealized gain (loss)
on securities available for
sale, net of reclassification
adjustment and tax effects ................ 380 380
----------
Total comprehensive income ................ 3,527
----------
Cash dividends ($.22 per share) .................... - - (645) - (645)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 ......................... 3,199,180 15,928 7,342 (131) 23,139
---------- ---------- ---------- ---------- ----------
(Continued)-1
39
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY,
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
($ in thousands, except per share data) ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
------ ------ -------- ------------- -----
Common stock issued in purchase of
Community Resource Mortgage Inc. .............. 95,454 1,241 1,241
Common stock issued under options .................. 5,040 39 39
Comprehensive income:
Net income .................................... 3,908 3,908
Change in unrealized gain (loss)
on securities available for
sale, net of reclassification
adjustment and tax effects ................ 124 124
----------
Total comprehensive income ................ 4,032
----------
Cash dividends ($.28 per share) .................... - - (904) - (904)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 ......................... 3,299,674 17,208 10,346 (7) 27,547
---------- ---------- ---------- ---------- ----------
Common stock issued in purchase of
Ridgeway Bankshares Inc. ...................... 1,000,000 12,020 12,020
Common stock issued under options .................. 4,710 40 40
Costs associated with merger ....................... (178) (178)
Comprehensive income:
Net income .................................... 5,401 5,401
Change in unrealized gain (loss)
on securities available for
sale, net of reclassification
adjustment and tax effects ................ 105 105
----------
Total comprehensive income ................ 5,506
----------
Cash dividends ($.32 per share) .................... - - (1,218) - (1,218)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 ......................... 4,304,384 $ 29,090 $ 14,529 $ 98 $ 43,717
========== ========== ========== ========== ==========
(Continued)-2
40
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
($ in thousands)
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income ................................................................... $ 5,401 $ 3,908 $ 3,147
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization .......................................... 766 467 478
Net amortization (accretion) of investment securities .................. 9 (23) 15
Provision for loan losses .............................................. 1,033 650 688
Net realized gains on sale of securities
available-for-sale .............................................. (119) (31) -
Proceeds from sales of real estate loans held for sale ................. 176,011 34,915 5,868
Originations of real estate loans held for sale ........................ (190,410) (34,414) (5,942)
Deferred income taxes .................................................. 286 (140) (148)
Net changes in operating assets and liabilities:
Accrued interest receivable ............................................ (369) 568 (630)
Other assets ........................................................... 203 (477) 101
Accrued interest payable ............................................... (187) (278) 454
Other liabilities ...................................................... (191) 522 (2)
--------- --------- ---------
Net cash (used for) provided by operating
activities .............................................. (7,567) 5,667 4,029
--------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in banks ................ 1,865 (1,729) 194
Purchases of investment securities held-to-maturity .......................... - (1,650) -
Purchases of investment securities available-for-sale ........................ (91,018) (84,959) (16,797)
Proceeds from maturities of investment securities
held-to-maturity ........................................................... 500 13,525 1,000
Proceeds from maturities of investment securities
available-for-sale ......................................................... 60,831 76,111 6,742
Proceeds from sales of investment securities available-for-sale .............. 20,543 7,074 -
Acquisitions accounted for under the purchase method of
accounting ................................................................. 8,922 529 -
Cash paid in connection with merger .......................................... (4,000) - -
Loan originations and principal collections, net ............................. (76,869) (35,113) (38,188)
Purchases of premises and equipment .......................................... (1,842) (1,164) (270)
--------- --------- ---------
Net cash used by investing activities ......................... (81,068) (27,376) (47,319)
--------- --------- ---------
(Continued) - 1.
41
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
Cash flows from financing activities:
Net increase in deposits ............................................. $ 81,629 $ 36,622 $ 34,447
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase ..................... 12,131 (5,181) 6,570
Federal Home Loan Bank advances (repayments) ......................... (70) (70) 930
Net increase (decrease) under lines of credit ........................ 9,221 (1,445) -
Stock issuance cost .................................................. - - (10)
Proceeds from issuance of common stock ............................... 40 39 22
Costs incurred in business combinations ............................... (178) (42) -
Dividends paid ....................................................... (1,218) (904) (645)
--------- --------- ---------
Net cash provided by financing activities ............. 101,555 29,019 41,314
--------- --------- ---------
Net change in cash and cash equivalents ................................. 12,920 7,310 (1,976)
Cash and cash equivalents at beginning of year .......................... 25,649 18,339 20,315
--------- --------- ---------
Cash and cash equivalents at end of year ................................ $ 38,569 $ 25,649 $ 18,339
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash payments for interest ........................................ $ 8,306 $ 10,539 $ 9,590
========= ========= =========
Cash payments for income taxes .................................... $ 3,130 $ 2,240 $ 1,927
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Transfers of loans receivable to other
real estate owned .............................................. $ 219 $ 267 $ 145
========= ========= =========
Transfer from retained earnings to
common stock outstanding for the market
value of the 5% stock dividend ................................. $ - $ - $ 1,709
========= ========= =========
Fair value of shares issued for purchase of
Community Resource Mortgage, Inc. .............................. $ - $ 1,241 $ -
========= ========= =========
Fair value of shares issued for purchase of
Ridgeway Bancshares, Inc. ...................................... $ 12,020 $ - $ -
========= ========= =========
(Concluded) - 2
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
42
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
NOTE 1 - ORGANIZATION:
Community Bankshares, Inc. (the "Corporation"), was organized under the laws of
the State of South Carolina and was chartered as a business corporation on
November 30, 1992. Pursuant to the provisions of the Federal Bank Holding
Company Act, an application was filed with and approved by the Board of
Governors of the Federal Reserve System for the Corporation to become a bank
holding company by the acquisition of Orangeburg National Bank (ONB).
In June 1996, Sumter National Bank (SNB), and in July 1998, Florence National
Bank (FNB), commenced operations in Sumter and Florence, South Carolina,
respectively, following approval by the Comptroller of the Currency and other
regulators. Upon completion of their organization, the common stock of SNB and
FNB was acquired by the Corporation.
In November 2001 the Corporation acquired all the common stock of Resource
Mortgage Inc., a Columbia, South Carolina based mortgage company. The
Corporation issued 95,454 shares of its common stock in exchange for 100% of the
common stock of Resource Mortgage Inc. The subsidiary was renamed Community
Resource Mortgage Inc. (CRM).
In July 2002 the Corporation acquired the common stock of Ridgeway Bancshares
Inc., the holding company for the Bank of Ridgeway (BOR). The Corporation issued
1,000,000 shares of its stock and paid $4,000,000 cash in exchange for 100% of
the common stock of Ridgeway Bancshares Inc. The transaction was consummated
July 1, 2002.
The banks and the mortgage company operate as wholly-owned subsidiaries of the
Corporation with separate Boards of Directors and operating policies and they
provide a variety of financial services to individuals and businesses throughout
South Carolina. The primary deposit products are checking, savings and term
certificate accounts. The primary lending products are consumer, commercial and
mortgage loans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
43
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the balance sheet and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the related deferred tax
asset.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of the Corporation's activities are with customers located within South
Carolina. Note 4 discusses the types of securities the Corporation purchases.
Note 5 discusses the types of lending that the Corporation engages in. The Banks
grant agribusiness, commercial, consumer and residential loans to customers
throughout South Carolina. Although the Banks have diversified loan portfolios,
a substantial portion of their debtors' ability to honor their contracts is
dependent upon the economies of various South Carolina communities. The mortgage
company originates and sells loans into the secondary market; it generally does
not maintain loans for its own portfolio.
ORGANIZATION, STOCK OFFERING AND PREOPENING COSTS:
Preopening costs associated with the organization of the Banks were expensed as
incurred while stock issuance costs were charged to common stock as incurred.
CASH AND CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows, the Corporation has
defined cash and cash equivalents as those amounts included in the balance
sheets under the caption, "Cash and due from banks" and "Federal funds sold",
all of which mature within ninety days.
INTEREST-BEARING DEPOSITS WITH BANKS:
Interest-bearing deposits with banks generally mature within one year and are
carried at cost.
SECURITIES:
Securities that management has both the ability and positive intent to hold to
maturity are classified as held to maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. The Corporation has made a management decision to avoid
acquiring further held to maturity securities. Securities that may be sold prior
to maturity for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment risk, increase in
regulatory capital, or other similar factors, are classified as available for
sale and are carried at fair value. Unrealized gains and losses on securities
available for sale are excluded from earnings and reported in other
comprehensive income. Gains and losses on the sale of securities available for
sale are recorded on the trade date and are determined using the specific
identification method. Declines in the fair value of held to maturity and
available for sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on
securities.
No securities are being held for short-term resale; therefore, the Corporation
does not currently use a trading account classification.
44
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS HELD FOR SALE:
The Corporation originates loans for sale generally without recourse to other
financial institutions under commitments or other arrangements in place prior to
loan origination. Sales are completed at or near the loan origination date.
Mortgage loans originated by the Banks and intended for sale in the secondary
market are carried at the lower of cost or estimated fair value in the
aggregate. Gains and losses, if any, on the sale of such loans are determined
using the specific identification method. All fees and other income from these
activities are recognized in income when loan sales are completed.
The Corporation's mortgage subsidiary, Community Resource Mortgage, Inc.,
engages in the origination and sale of residential mortgage loans. Virtually all
the loans it originates are sold into the secondary market within thirty days.
Accordingly, fees and costs associated with this process are recognized when
received or incurred.
LOANS RECEIVABLE:
The Corporation grants mortgage, commercial and consumer loans to customers. The
ability of the Corporation's debtors to honor their contracts is dependent upon
the general economic conditions in its service areas. Loans receivable that
management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off generally are reported at their outstanding unpaid
principal balance adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans, or unamortized premiums or
discounts on purchased loans. Interest income is accrued on the unpaid principal
balance. In management's judgment the effect of amortizing loan fees and related
costs would be immaterial in relation to the results of operation for the
Corporation. Accordingly, fees are recognized as income when received and costs
are recognized when incurred.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well collateralized and
in process of collection. Residential real estate loans are typically placed on
nonaccrual at the time the loan is 120 days delinquent. Unsecured personal
credit lines and certain consumer finance loans are typically charged off no
later than the time the loan is 180 days delinquent.
Other consumer loans are charged off at the time the loan is 120 days
delinquent. In all cases, loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual status. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established through a provision for loan losses
charged against earnings as losses are estimated to have occurred. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Management of each Bank reviews its allowance for loan losses in three broad
categories: commercial and industrial, loans secured by real estate and loans to
individuals, and assigns an estimated percentage factor to each in the
determination of the estimate of the allowance for loan losses. Where the Banks'
45
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
internal and external loan review programs identify loans that are subject to
specific weaknesses such loans are reviewed for a specific loan loss allowance.
A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
known circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
DERIVATIVE FINANCIAL INSTRUMENTS AND CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement requires that all derivatives be recognized as assets
or liabilities in the balance sheet and measured at fair value.
Rate Lock Commitments
On March 13, 2002, the Financial Accounting Standards Board (FASB) determined
that loan commitments related to the origination or acquisition of mortgage
loans that will be held for sale must be accounted for as derivative
instruments, effective for fiscal quarters beginning after April 10, 2002.
Accordingly, the Corporation adopted such accounting on July 1, 2002.
The Corporation enters into commitments to originate loans whereby the interest
rate on the loan is determined prior to funding (rate lock commitments). Rate
lock commitments on mortgage loans that are intended to be sold are considered
to be derivatives. Accordingly, such commitments, along with any related fees
received from potential borrowers, are recorded at fair value in derivative
assets or liabilities, with changes in fair value recorded in the net gain or
loss on sale of mortgage loans. Fair value is based on fees currently charged to
enter into similar agreements, and for fixed-rate commitments also considers the
difference between current levels of interest rates and the committed rates.
Prior to July 1, 2002, such commitments were recorded to the extent of fees
received. Fees received were subsequently included in the net gain or loss on
sale of mortgage loans.
The cumulative effect of adopting SFAS No. 133 for rate lock commitments as of
July 1, 2002 was not material.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No 25, "Accounting for Stock Issued to
Employees", whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Corporation's stock option plans have no intrinsic value at the grant date, and
under Opinion No. 25 no compensation cost is recognized for them. The
Corporation has elected to continue with the accounting methodology in Opinion
No. 25 and, as a result, has provided pro forma disclosures of net income and
46
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
earnings per share and other disclosures, as if the fair value based method of
accounting had been applied.
FORECLOSED ASSETS:
Foreclosed assets, which are recorded in other assets, include properties
acquired through foreclosure or in full or partial satisfaction of the related
loan and are held for sale.
Foreclosed assets are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
management periodically performs valuations and the assets are carried at the
lower of carrying amount or fair value less costs to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in other
expenses.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
computed principally on the straight-line method over the estimated useful lives
of the assets. Useful lives of assets are outlined below:
Building 32-40 years
Building components 5-30 years
Vault doors, safe deposit boxes, night depository, etc. 40 years
Furniture, fixtures and equipment 5-25 years
INCOME TAXES:
Deferred income tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The provision (benefit) for income taxes of each
subsidiary is recorded as if each subsidiary filed a separate return.
OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS:
In the ordinary course of business the Banks enter into commitments to extend
credit and grant standby letters of credit. Such off-balance-sheet financial
instruments are recorded in the consolidated financial statements when they are
funded.
SEGMENTS:
Community Bankshares, Inc. through its banking subsidiaries, ONB, SNB, FNB, BOR
and its mortgage subsidiary, CRM, provides a broad range of financial services
to individuals and companies in South Carolina. These services include demand,
time, and savings deposits; lending services; ATM processing; and similar
financial services. While the Corporation's decision makers monitor the revenue
streams of the various financial products and services, operations are managed
and financial performance is evaluated on a corporate-wide basis. Accordingly,
the subsidiary operations are not considered by management to comprise more than
one reportable operating segment.
COMPREHENSIVE INCOME:
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on securities available for
sale, are reported as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of comprehensive
47
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income. Currently, the Corporation's only component of Comprehensive Income
(Loss) is its unrealized gains (losses) on securities available for sale.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Corporation, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Corporation does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the FASB issued SFAS No. 141, Business Combinations. No. 141
eliminates the pooling-of-interests method of accounting for business
combinations and requires that all business combinations in its scope be
accounted for using the purchase method of accounting. No.141 is effective for
business combinations initiated after June 30, 2001. No. 141 was adopted by the
Corporation and was applied to the acquisition of Community Resource Mortgage,
Inc. and Ridgeway Bancshares, Inc. The adoption of this standard did not have a
material effect on the financial position or operations of the Corporation.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets). No. 142 requires that goodwill and other intangible assets that have
indefinite lives are to no longer be amortized but should be evaluated at least
annually for impairment. No. 142 is effective for fiscal years beginning after
December 15, 2001. The adoption of this standard did not have a material effect
on the financial position or operations of the Corporation.
In July 2001, the FASB issued No. 143, Accounting for Asset Retirement
Obligations. No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate can be made, and that the associated asset retirement costs
be capitalized as part of the carrying amount of the long-lived asset. No. 143
will be adopted by the Corporation for its fiscal year beginning January 1,
2003. The adoption of this standard is not expected to have a material effect on
the financial position or operations of the Corporation.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposition of Long-Lived Assets. SFAS No. 144 requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and by broadening the presentation
of discounted operations to include primarily all disposal transactions. It
further establishes criteria to determine when a long-lived asset is held for
sale and establishes measurement criteria at the asset's or group of assets'
lower of unamortized cost or fair value at the date the asset is reclassified as
held and used. SFAS No. 144 was adopted by the Company upon its required
effective date, for its fiscal year ended December 31, 2002. The adoption of
this standard did not have a material effect on the financial position or
operations of the Corporation.
FASB Technical Bulletin No. 01-1 deferred until 2002 application of the
isolation standards of FASB SFAS No. 140 as applied to financial institutions.
FASB SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, provides accounting and reporting standards
for transfers of financial assets and extinguishments of liabilities based on a
financial components approach that focuses on retention or surrender of control
of such assets or liabilities. The Statement also requires the reclassification
of financial assets pledged as collateral under certain circumstances. FASB SFAS
No. 140 was effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001, and effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 31, 2000. The adoption of FASB SFAS No. 140 in 2001 and the deferral
allowed by FASB Technical Bulletin No. 01-01 has not had any material effect on
the financial position or operations of the Corporation.
48
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FASB SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No 13, and Technical Corrections, addresses financial accounting
and reporting for extinguishment of debt and for certain lease modifications
that have economic effects similar to sale-leaseback transactions. This
Statement requires that gains and losses from debt extinguishments that are part
of an entity's recurring operations not be accounted for as extraordinary items.
Furthermore, gains and losses from debt extinguishments that are not part of an
entity's recurring operations are required to be evaluated using the criteria in
Accounting Principles Board Opinion No. 30, Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions to
determine whether extraordinary treatment is warranted for those transactions.
The provisions of this Statement related to debt extinguishments are required to
be applied in fiscal years beginning after May 15, 2002, with early application
encouraged. Restatement is required for amounts that previously were classified
as extraordinary, but that do not meet the criteria in Opinion No. 30 for
extraordinary treatment. The Statement's other provisions were required to be
applied either to transactions occurring after May 15, 2002 or for financial
statements issued on or after May 15, 2002, with early application encouraged.
The adoption of SFAS No. 145 as of January 1, 2002 did not have any material
effect on the financial position or operations of the Corporation.
FASB SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, addresses financial accounting and reporting for costs associated
with exit or disposal activities. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized at its fair
value when the liability is incurred, rather than the previous recognition of a
liability at the date that an entity committed to an exit plan. The provisions
of this Statement are effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. The adoption of SFAS No.
146 is not expected to have any material effect on the financial position or
operations of the Corporation.
SFAS No. 147, Acquisitions of Certain Financial Institutions, addresses the
financial accounting and reporting for the acquisition of all or part of a
financial institution, and provides guidance on accounting for the impairment or
disposal of acquired long-term customer-relationship intangible assets. This
Statement requires that acquisitions of all or part of a financial institution
that meet the definition of a business combination be accounted for by the
purchase method in accordance with SFAS No. 141, Business Combinations.
Acquisitions that do not qualify as business combinations are to be accounted
for in accordance with paragraphs 4-8 of Statement No. 141. This Statement also
makes the provisions of SFAS No.144, Accounting for the Impairment or Disposal
of Long-Lived Assets, applicable to long-term customer-relationship intangible
assets recognized in the acquisition of a financial institution. The provisions
of this Statement were generally effective as of October 1, 2002, with earlier
application permitted. The adoption of this standard did not have a material
effect on the financial position or operations of the Corporation.
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, amends SFAS No. 123 to provide alternative methods of transition for
entities that voluntarily change to the fair value method of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
compensation. The provisions of this Statement related to transition provisions
and disclosure requirements were effective for financial statements for fiscal
years ending after December 15, 2002. Adoption of this Statement as of December
15, 2002 did not have any material effect on the financial position or
operations of the Corporation for the years ended December 31, 2002, 2001 and
2000, nor is it expected to have any such effects on the Company's future
financial position or results of operations.
The American Institute of Certified Public Accountants ("AICPA") Accounting
Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP")
01-6, Accounting by Certain Entities That Lend to or Finance the Activities of
Others, that reconciles existing differences in the accounting and financial
reporting guidance in the AICPA Audit and Accounting Guides for banks, credit
unions and thrifts. The SOP is effective for fiscal years beginning after
December 15, 2001. The adoption of this SOP had no material effect on the
financial position or operations of the Corporation.
49
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The FASB issued its Interpretation 45 ("FIN 45"), Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which addresses a guarantor's measurement and
recognition of its liabilities under certain guarantee transactions at inception
and provides for new disclosures regarding the nature and extent of such
guarantees. The disclosure requirements are effective for interim and annual
financial statements ending after December 15, 2002. FIN 45's initial
recognition and measurement provisions are effective prospectively; that is, for
guarantees issued or modified on or after January 1, 2003. The adoption of the
disclosure provisions of this Interpretation as of December 31, 2002 had no
material effect on the financial statements of the Company. Furthermore, the
adoption of the Interpretation's measurement and recognition provisions as of
January 1, 2003 is not expected to have any material adverse or beneficial
effects on the financial position and operations of the Corporation.
ADVERTISING COSTS:
The cost of advertising is expensed as incurred.
OTHER:
Certain amounts previously reported in the statements have been reclassified to
conform to the current year's presentation and disclosure requirements. These
reclassifications had no effect on net income.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
The Banks are required to maintain average reserve balances with the Federal
Reserve or in available cash. The average daily reserve balance requirements at
December 31, 2002 were approximately $1.8 million.
At December 31, 2002, the Corporation had cash balances with correspondent banks
totaling approximately $786,000, all but $520,000 of which was fully insured by
the FDIC.
NOTE 4 - SECURITIES:
Securities held to maturity consist of the following (in thousands of dollars):
December 31, 2002
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and federal agencies ........... $ - $ - $ - $ -
====== ====== ====== =====
December 31, 2001
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and federal agencies ........... $500 $ - $ - $500
==== ===== ===== ====
50
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities available for sale consist of the following (in thousands of
dollars):
December 31, 2002
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and federal agencies ........... $41,488 $ 43 $ - $41,531
State and local government ..................... 9,514 115 (4) 9,625
Federal Home Loan Bank stock ................... 1,260 - - 1,260
Federal Reserve stock .......................... 408 - - 408
Equity securities .............................. 242 - - 242
------- ---- ------ -------
Total ........................................ $52,912 $157 $ (4) $53,066
======= ==== ======= =======
December 31, 2001
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Government and federal agencies .......... $40,437 $ 150 $ (172) $40,415
State and local government .................... 801 10 - 811
Federal Home Loan Bank stock .................. 1,396 - - 1,396
Federal Reserve stock ......................... 408 - - 408
Equity securities ............................. 177 - - 177
------- ------ ------- -------
Total ....................................... $43,219 $ 160 $ (172) $43,207
======= ====== ======== =======
The amortized cost and fair value of debt securities at December 31, 2002, by
contractual maturity are detailed below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
(In thousands of dollars) Held to Maturity Available for Sale Total
---------------- ------------------ -----
Amortized Amortized Amortized
cost Fair Value cost Fair Value cost Fair Value
---- ---------- ---- ---------- ---- ----------
Within 1 year .............................. - - 4,011 3,970 4,011 3,970
Over 1 through 5 years ..................... - - 38,185 36,701 38,185 36,701
After 5 through 10 years ................... - - 8,764 10,445 8,764 10,445
Over 10 years .............................. - - 42 40 42 40
--- --- ------- ------- ------- -------
subtotal ................................... - - 51,002 51,156 51,002 51,156
Equities ................................... - - 1,910 1,910 1,910 1,910
--- --- ------- ------- ------- -------
Grand total ........................... $ - $ - $52,912 $53,066 $52,912 53,066
=== === ======= ======= ======= =======
51
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENT SECURITIES (CONTINUED):
The following is a summary of maturities and weighted average yields of
securities held to maturity and securities available for sale as of December 31,
2002 (in thousands of dollars):
Less than One year to After Five but After
one year five years within ten years ten years Total
-------- ---------- ---------------- --------- -----
Securities held to maturity:
Federal agency obligations ...... $ - 0.00% $ - $ - $ - $ - 0.00%
------ ----- ------- ------- ------ ------- -----
Total held to maturity .. - 0.00% - - - 0.00%
------ ----- ------- ------- ------- -----
Securities available for sale:
US Government obligations ....... 998 1.10% - 0.0% - 0.0% - 0.0% 998 1.10%
Federal agency obligations ...... 2,052 5.85% 32,910 3.59% 5,531 4.57% 40 8.04% 40,533 3.83%
State and local governments ..... 920 6.67% 3,791 7.03% 4,914 6.31% - 9,625 6.63%
Equities ........................ - - - 1,910 6.55% 1,910 6.55%
------ ------- ------- ------ ----- ------- -----
Total available for sale . 3,970 4.57% 36,701 3.94% 10,445 5.39% 1,950 6.60% 53,066 4.37%
------ ----- ------- ----- ------- ----- ------ ----- ------- -----
Total for portfolio ............... 3,970 4.57% 36,701 3.94% 10,445 5.39% 1,950 6.58% 53,066 4.37%
====== ===== ======= ===== ======= ===== ====== ===== ======= =====
Yields on tax exempt obligations have been computed on a tax equivalent
basis using the statutory federal tax rate of 34%.
The Banks, with the exception of the BOR, as members of the Federal Home Loan
Bank of Atlanta ("FHLB"), are required to own capital stock in the FHLB of
Atlanta based generally upon their balances of residential mortgage loans and
FHLB advances. FHLB capital stock owned by the banks is pledged as collateral on
FHLB advances. No ready market exists for this stock and it has no quoted market
value. However, redemption of this stock has historically been at par value.
All equity securities including investments in the FHLB stock and Federal
Reserve Bank stock (as required of the respective banks) have no contractual
maturity and are classified in the maturity category of over ten years.
At December 31, 2002 and 2001, investment securities with a carrying value of
$12,328,000 and $29,167,000, respectively, were pledged to secure public
deposits, FHLB advances, and for other purposes required and permitted by law.
At December 31, 2002 and 2001, the carrying amount of securities pledged to
secure repurchase agreements was approximately $24,590,000 and $6,108,000,
respectively.
52
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE:
The following is a summary of loans by category at December 31, 2002 and 2001
(in thousands of dollars):
2002 2001
---- ----
Commercial, financial and agricultural ........... $ 78,210 $ 56,515
Real estate - construction ....................... 23,345 19,557
Real estate - mortgage ........................... 168,499 127,002
Installment loans to individuals ................. 36,430 26,831
-------- --------
Total loans - gross .................... 306,484 229,905
======== ========
The loan portfolio included fixed rate and adjustable rate loans totaling
$191,440,000 and $115,044,000 respectively, at December 31, 2002.
Total overdrawn demand deposits totaling $748,000 and $1,304,000 have been
reclassified as loan balances at December 31, 2002 and 2001, respectively.
Gross proceeds on mortgage loans originated for resale were approximately
$176,011,000, $34,915,000, and $5,868,000 for the years ended December 31, 2002,
2001, and 2000, respectively. All of these loans were sold at par; therefore, no
gain or loss was recognized on the sales.
Loans outstanding to directors, executive officers, principal holders of equity
securities, or to any of their associates totaled $13,942,000 at December 31,
2002, and $10,367,000 at December 31, 2001. A total of $17,162,000 in loans were
made or added, while a total of $13,587,000 were repaid or deducted during 2002.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. Changes in the composition of the board of directors or the
group comprising executive officers also result in additions to or deductions
from loans outstanding to directors, executive officers or principal holders of
equity securities.
53
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the allowance for loan losses and related ratios for the years ended
December 31, 2002, 2001, and 2000, were as follows (in thousands of dollars):
2002 2001 2000
---- ---- ----
Average amount of loans outstanding ............................................................ $281,907 $211,901 $179,654
======== ======== ========
Allowance for loan losses - January 1 * ........................................................ $ 3,274 $ 2,424 $ 1,936
-------- -------- --------
Loan charge-offs:
Real estate ............................................................................... 175 9 78
Installment ............................................................................... 223 202 116
Credit cards and related plans ............................................................ - 9 9
Commercial and other ...................................................................... 374 87 33
-------- -------- --------
Total charge-offs .............................................................................. 772 307 236
-------- -------- --------
Recoveries:
Real estate ............................................................................... 1 - 3
Installment ............................................................................... 20 33 25
Credit cards and related plans ............................................................ - 2 2
Commercial ................................................................................ 17 - 6
-------- -------- --------
Total recoveries ............................................................................... 38 35 36
-------- -------- --------
Net charge-offs ................................................................................ 734 272 200
Provision for loan losses ** ................................................................... 1,033 678 688
-------- -------- --------
Allowance for loan losses at end of year ....................................................... $ 3,573 $ 2,830 $ 2,424
======== ======== ========
Ratios
Net charge-offs to average loans outstanding ................................................... 0.26% 0.13% 0.11%
Net charge-offs to loans outstanding at end of
year ...................................................................................... 0.24% 0.12% 0.10%
Allowance for loan losses to average loans ..................................................... 1.26% 1.34% 1.35%
Allowance for loan losses to total loans at
end of year ............................................................................... 1.17% 1.23% 1.24%
Net charge-offs to allowance for losses ........................................................ 20.54% 9.61% 8.25%
Net charge-offs to provision for loans losses .................................................. 71.06% 40.12% 29.07%
* Allowance balance for 2002 includes $444 acquired when Ridgeway Bancshares was
merged into the Corporation on July 1, 2002
**Provision expense for 2001 includes $28 acquired with Community Resource
Mortgage merger
54
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of information pertaining to impaired loans:
Year Ended December 31,
2002 2001
---- ----
(In thousands)
Impaired loans without a valuation allowance ............. $ - $ -
Impaired loans with a valuation allowance ................ 796 281
---- ----
Total impaired loans ..................................... 796 281
==== ====
Valuation allowance related to impaired loans ............ $119 $ 42
==== ====
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Average investment in impaired loans ...................................... $ 862 $ 260 $ 331
===== ===== =====
Interest income recognized on impaired loans .............................. $ - $ - $ -
===== ===== =====
Interest income recognized on a cash basis on
impaired loans ......................................................... $ - $ - $ -
===== ===== =====
No additional funds are committed to be advanced in connection with impaired
loans.
Nonaccrual, past due loans, and other real estate owned at December 31, 2002 and
2001, were as follows (in thousands of dollars):
2002 2001
---- ----
Nonaccrual loans ......................................... $ 796 $ 281
Accruing loans 90 days or more past due .................. 1,740 17
------ ------
Total .......................................... 2,536 298
====== ======
Total as a percentage of outstanding loans ..... 0.83% 0.13%
Other real estate owned .................................. $ 219 $ 267
Gross interest income that would have been recorded for the years ended December
31, 2002, 2001, and 2000 if nonaccrual loans had been performing in accordance
with their original terms was approximately $39,000, $7,000, and $33,000,
respectively.
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 2002 and 2001, consist of the following
(in thousands of dollars):
2002 2001
---- ----
Land ............................................... $1,149 $ 867
Building and components ............................ 3,975 3,454
Furniture, fixtures and equipment .................. 4,719 3,576
------ ------
Total .................................... 9,843 7,897
Less, accumulated depreciation ..................... 3,467 2,720
------ ------
Premises and equipment - net ............. 6,376 5,177
====== ======
Depreciation expense was approximately $643,000, $467,000, and $478,000, for the
years ended December 31, 2002, 2001, and 2000, respectively.
The FNB office building was built on leased land. The land is being leased under
a noncancellable operating lease for an initial term of ten years. The lease
terms provide for two ten year renewal options and a third renewal of two years.
FNB is responsible for property taxes and improvements. The annual basic rent in
lease years one through five is $48,000 and in years six through ten $53,000.
55
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense for FNB totaled $48,000 per year for 2002, 2001, and 2000,
respectively.
SNB constructed a branch office on West Liberty Street in Sumter, SC. The
building was opened for business in February 2003. The building is approximately
3,600 square feet and cost approximately $547,000. The land, approximately one
acre, is being leased under a noncancellable operating lease for an initial term
of twenty years. The lease terms provide for four five-year renewal options
after the initial term. SNB is responsible for property taxes and improvements.
The annual basic rent in lease years one through five is $35,000; in years six
through ten $36,000; in years eleven through fifteen $38,000; and in years
sixteen through twenty $40,000. Rent expense for SNB, which began in October
2001, totaled $35,000 and $9,000 in 2002 and 2001, respectively.
Until November 2002 CRM rented all three of its current locations. Rent expense
for 2002 totaled $66,000. Rent expense for November and December 2001 totaled
$10,000. In November CRM relocated its Columbia office to the Congaree Building
on Hampton Street in Columbia. The Columbia office is being leased for a five
year term beginning November 2002 and ending October 2007, after which the lease
will renew automatically on a month-to-month basis. Lease expense in years 1
through 3 is $94,080; year 4 $96,902, and year 5 $99,810. The other offices are
rented on a month-to-month basis.
NOTE 7 - DEPOSITS:
At December 31, 2002, the scheduled maturities of time deposits greater than
$100,000 are as follows (in thousands of dollars):
Maturing in
-----------
2003 $ 58,997
2004 5,876
2005 2,672
2006 401
2007 -
Thereafter -
---------
Total 67,946
=========
Deposits of directors and officers totaled approximately $5,074,000 and
$3,913,000 at December 31, 2002 and 2001, respectively.
NOTE 8 - SHORT-TERM BORROWING:
Federal funds purchased and securities sold under agreements with customers to
repurchase generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction. The Corporation monitors the
fair value of the underlying securities on a daily basis and it is the Banks'
policy to maintain a collateral value greater than the principal and accrued
interest of the transaction. All securities underlying these agreements are
institution-owned securities.
Information concerning securities sold under agreements to repurchase is
summarized as follows (in thousands of dollars):
2002 2001
---- ----
Outstanding at year-end .............................. $16,302 $ 4,171
Interest rate at year-end ............................ .78% 2.08%
Interest expense ..................................... $ 122 $ 237
Maximum month-end balance during the year ............ $16,302 $10,976
Average amount outstanding during the year ........... $ 8,419 $ 7,533
Weighted average interest rate during the year ....... 1.45% 3.15%
56
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2002 and 2001 there were no federal funds purchased.
LINES OF CREDIT PAYABLE
Lines of credit payable represent warehouse lines funding loan production for
CRM. At year end these balances totaled $18,249,000. Of this amount, $12,326,000
was borrowed from BB&T at the one month LIBOR rate plus 1.95%. The BB&T line
expires in October 2003. The line is secured with the value of the underlying
mortgages and the guarantee of the Corporation to a maximum of $14 million. The
remaining $5,923,000 is the balance on a line outstanding with First Horizon,
priced at the individual mortgage loan note rate. The operations of CRM are
included in the consolidated financial statements for the two month period ended
December 31, 2001, and for the year ended December 31, 2002.
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES:
The Banks, with the exception of BOR, are members of the Federal Home Loan Bank
of Atlanta and as such, have access to long-term borrowing. The collateral for
any such borrowings consists of blanket liens on the Banks' one-to-four family
residential loans and all the banks' stock in the Federal Home Loan Bank of
Atlanta. Borrowings during 2002 and 2001 are summarized as follows (in thousands
of dollars):
2002 2001
---- ----
Outstanding at year-end .............................. $20,210 $20,280
Interest rate at year-end ............................ 5.54% 5.54%
Maximum amount outstanding at any month-end .......... $20,280 $20,350
Average amount outstanding during the year ........... $20,254 $19,899
Weighted average interest rate during the year ....... 5.54% 5.77%
Required principal reductions are as follows (in thousands of dollars):
Year ended Dec. 31,
2003 $ 70
2004 70
2005 1,370
2006 500
2007 1,000
Thereafter 17,200
-------
Total 20,210
=======
NOTE 10 - COMMON STOCK:
The Corporation declared a five percent stock dividend in January 2000. The
average number of common shares outstanding and all earnings per common share
amounts included in the accompanying consolidated financial statements and notes
are based on the increased number of shares giving retroactive effect for the
stock dividend.
The Corporation issued 95,454 shares of its common stock in November 2001 in
exchange for 100% of the common stock of Resource Mortgage, Inc. The shares were
valued at the then market price of $13.00 and totaled approximately $1.2
million.
The Corporation issued 1,000,000 shares of its common stock in July 2002 in
exchange for 100% of the common stock of Ridgeway Bancshares, Inc., the parent
of the Bank of Ridgeway. The shares were valued at the market price of $12.02 at
the time of the public announcement of the proposed merger, in November 2001,
and totaled approximately $12 million.
57
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Corporation's Dividend Reinvestment Plan, shareholders may reinvest
all or part of their cash dividends in shares of common stock and also purchase
additional shares of common stock. During the three year period ended December
31, 2002 all shares purchased under this plan were purchased in the market, not
issued by the Corporation.
NOTE 11 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES:
At December 31, 2002, 485,600 common shares were reserved for issuance pursuant
to an employee stock option plan and 624,655 common shares were reserved for
issuance pursuant to the dividend reinvestment and additional stock purchase
plan.
During 2001 the Corporation amended its 1997 Stock Option Plan to increase by
200,000 shares the number of shares reserved for issuance upon exercise of
options and to permit participation in the plan by non-employee directors. Under
the Plan, as amended, up to 485,600 shares of common stock were authorized to be
granted to selected officers, other employees, and non-employee directors of the
Corporation and/or its subsidiaries pursuant to exercise of incentive and
nonqualified stock options. Of such shares, 290,050 were reserved for issuance
pursuant to exercise of incentive stock options and 195,550 were reserved for
issuance pursuant to exercise of nonqualified stock options.
The exercise price of any incentive option granted is equal to the fair value of
the common stock on the date the option is granted. Nonqualified options can be
issued for less than fair value; however, the Corporation has not elected to
issue these options for less than fair value at the date of the grant. The
options are vested upon issuance, but may be exercised no earlier than one year
after issuance.
58
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of options issued pursuant to the Corporation's 1997
pre-amended stock option plan is presented below:
2002 2001 2000
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Fixed options:
Outstanding at beginning
of year ........................ 54,600 $ 7.60 61,320 $ 7.60 63,840 $ 7.60
Granted ............................. - - - -
Exercised ........................... (3,150) 7.60 (5,040) 7.60 (2,520) 7.60
Forfeited ........................... (1,680) 7.60 (1,680) 7.60 - -
------ ------ ------
Outstanding at end of
year .......................... 49,770 7.60 54,600 7.60 61,320 7.60
====== ====== ======
Options exercisable at
year-end ........................... 49,770 7.60 54,600 7.60 61,320 7.60
A summary of the status of options issued pursuant to of the Corporation's 1997
stock option plan, as amended in 1999, is presented below:
2002 2001 2000
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Fixed options:
Outstanding at beginning
of year ........................ 154,665 $ 12.83 157,920 $ 12.83 161,700 $ 12.83
Granted ............................. - - - - - -
Exercised ........................... (250) 12.83 - - - -
Forfeited ........................... (7,455) 12.83 (3,255) 12.83 (3,780) 12.83
------- ------- -------
Outstanding at end of
year .......................... 146,960 12.83 154,665 12.83 157,920 12.83
======= ======= =======
Options exercisable at
year-end ........................... 146,960 $ 12.83 154,665 $ 12.83 157,920 $ 12.83
A summary of the status of options issued pursuant to of the Corporation's 1997
stock option plan, as amended in 2001, is presented below:
2002 2001 2000
---- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Fixed options:
Outstanding at beginning
of year ............................. 189,900 $ 11.00 - $ - - $ -
Granted .................................. - - 191,400 11.00 - -
Exercised ................................ (600) 11.00 - - - -
Forfeited ................................ (2,750) 11.00 (1,500) 11.00 - -
------- ------- ----
Outstanding at end of
year ............................... 186,550 11.00 189,900 11.00 - -
======= ======= ====
Options exercisable at
year-end ................................ 186,550 $ 11.00 - $ - - $ -
Weighted average fair value
of options granted during
the year ............................... - $ - - $ 3.04 - $ -
59
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information pertaining to options outstanding at December 31, 2002 is as
follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$7.60-$12.83 383,280 6.4 years $11.27 383,280 $11.27
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized. Had compensation cost for the Corporation's stock
option plans been determined based on the fair value at the grant dates for
awards under the plans consistent with the method prescribed by SFAS No. 123,
the Corporation's net income and earnings per share would have been adjusted to
the pro forma amounts indicated below:
Year Ended December 31
(In thousands, except per share data)
-------------------------------------
2002 2001 2000
---- ---- ----
Net income - as reported ................................................. $ - $ 3,908 $ -
Less total stock based employee compensation expense
determined under fair value based method for all
awards net of related tax effects ................................... - (582) -
------------ --------- ------------
Net income - pro forma ................................................... - 3,326 -
============ ========= ============
Basic earnings per share - as reported ................................... - 1.21 -
Basic earnings per share - pro forma ..................................... - 1.02 -
Diluted earnings per share - as reported ................................. - 1.20 -
Diluted earnings per share - pro forma ................................... - 1.02 -
No options were granted in 2002 or 2000.
NOTE 12 - INCOME TAXES:
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The provision for income taxes consists of the following (in thousands of
dollars):
2002 2001 2000
---- ---- ----
Current tax provision:
$ 2,768 $ 2,177 $ 1,801
Federal
South Carolina ................. 167 119 154
Deferred tax benefit .............. (15) (140) (148)
------- ------- -------
Total ................... 2,920 2,156 1,807
======= ======= =======
The provision for income taxes differs from that computed by applying federal
statutory rates to income before federal income tax expense as indicated in the
following summary (in thousands of dollars):
60
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 2001 2000
---- ---- ----
Income tax at statutory rate on income
before income taxes .............................................. $ 2,823 $ 2,062 $ 1,684
Increase (decrease) resulting from:
South Carolina bank tax, net of federal
tax benefit ................................................... 221 164 147
Tax exempt interest .............................................. (78) (16) (17)
(17) (16) (24)
Amortization of organization costs
(35) (38) 17
------- ------- -------
Other
Provision for income taxes ................................ 2,920 2,156 1,807
======= ======= =======
Temporary differences, which give rise to deferred tax assets and liabilities at
December 31, 2002 and 2001, are as follows (in thousands of dollars):
2002 2001
---- ----
Deferred tax assets:
Allowance for loan losses .......................................................... $1,131 $ 908
Net unrealized losses on securities
available for sale .............................................................. - 4
Preopening costs ................................................................... 5 20
State tax net operating loss carry forward ......................................... - 43
Other .............................................................................. 1 -
------ ------
Total deferred tax assets .................................................. 1,137 975
------ ------
Deferred tax liabilities:
Depreciation ....................................................................... 206 105
9 -
Accretion
Net unrealized gains on securities
available for sale .............................................................. 298 -
40 -
------ ------
Net fair value effect of business combination
553 105
------ ------
Total deferred tax liabilities
Net deferred tax asset ..................................................... 584 870
====== ======
NOTE 13 - EMPLOYEE BENEFIT PLANS:
The Corporation provides a defined contribution plan with an Internal Revenue
Code Section 401(k) provision. All employees who have completed 500 hours of
service during a six-month period and have attained age 21 may participate in
the plan.
A participant may elect to make tax deferred contributions up to a maximum of
12% of eligible compensation. The Corporation will make matching contributions
on behalf of each participant for 100% of the elective deferral, not exceeding
3% of the participant's compensation. The Corporation may also make nonelective
contributions determined at the discretion of the Board of Directors.
61
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's contributions for 401(k) related profit sharing for the years
ended December 31, 2002, 2001, and 2000 totaled approximately $132,000,
$146,000, and $119,000, respectively. Since 2001 the senior officers of the
Corporation are no longer included in this profit sharing program.
NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES:
The Banks are parties to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Banks' exposure to credit loss is represented by the contractual amount of
these commitments. The Banks use the same credit policies in making commitments
as they do for on-balance-sheet instruments.
At December 31, 2002 and 2001, the following financial instruments were
outstanding whose contract amounts represent credit risk:
Contract Amount
---------------
2002 2001
---- ----
(In thousands)
Commitments to grant loans ......................... $14,603 $11,596
Unfunded commitments under lines of credit ......... 20,493 18,342
Standby letters of credit .......................... 2,506 2,877
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include personal
residences, accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support private borrowing arrangements. All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks generally hold collateral supporting those
commitments if deemed necessary. Since many of the standby letters of credit are
expected to expire without being drawn upon, the total letter of credit amounts
do not necessarily represent future cash requirements.
To reduce credit risk related to the use of credit-related financial
instruments, the Bank might deem it necessary to obtain collateral. The amount
and nature of the collateral obtained is based on the Banks' credit evaluation
of the customer. Collateral held varies but may include cash, securities,
accounts receivable, inventory, property, plant and equipment and real estate.
NOTE 15 - EARNINGS PER COMMON SHARE:
Basic earnings per common share represent income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the year. Diluted earnings per common share reflect additional common
shares that would have been outstanding if dilutive potential common shares had
been issued. Potential common shares that may be issued by the Corporation
relate solely to outstanding stock options, and are determined using the
treasury stock method.
62
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per common share have been computed based on the following:
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Net income ............................................................. $ 5,401 $ 3,908 $ 3,147
========== ========== ==========
Average number of common shares outstanding ............................ 3,803,737 3,217,902 3,194,129
Effect of dilutive options ............................................. 110,313 28,576 21,403
---------- ---------- ----------
Average number of common shares outstanding used to
calculate diluted earnings per common share ........................ 3,914,050 3,246,478 3,215,532
========== ========== ==========
NOTE 16 - OTHER COMPREHENSIVE INCOME:
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Unrealized holding gains (losses) on available for
sale securities ........................................................... $ 283 $ 225 $ 594
Less: Reclassification adjustment for gains
(losses) realized in income ............................................... (119) (31) -
----- ----- -----
Net unrealized gains (losses) ................................................ 164 194 594
Tax effect ................................................................... (59) (70) (214)
----- ----- -----
Net-of-tax amount ............................................................ 105 124 380
===== ===== =====
NOTE 17 - CREDIT RISK CONCENTRATIONS
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.
The Banks regularly monitor various segments of their credit risk portfolio to
assess potential concentration risks and to obtain collateral when considered
necessary.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented may not necessarily represent the underlying fair value
of the Corporation.
63
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate fair values.
Interest-bearing deposits with banks. The carrying amounts of
interest-bearing deposits with banks approximate their fair values.
Securities available for sale and held to maturity. Fair values for
securities, excluding FHLB and Federal Reserve Bank of Richmond stock, are
based on quoted market prices. The carrying value of FHLB and Federal
Reserve Bank of Richmond stock approximates fair value based on the
redemption provisions of the FHLB and Federal Reserve Bank of Richmond. The
market values of state and local government securities are established with
the assistance of an independent pricing service. The values are based on
data which often reflect transactions of relatively small size and are not
necessarily indicative of the value of the securities when traded in large
volumes.
Loans held for sale. The carrying amounts approximate their fair values.
Loans receivable. Fair values for certain mortgage loans (for example,
one-to-four family residential) and other consumer loans are based on
quoted market prices of similar loans sold, adjusted for differences in
loan characteristics. Fair values for all other performing loans are
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for non-performing loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). Fair values for CDs are estimated using
a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-term borrowings. The carrying amounts of federal funds purchased and
borrowings under repurchase agreements approximate their fair values.
FHLB advances. The fair values of the FHLB advances are estimated using
discounted cash flow analyses based on the Corporation's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest. The carrying amounts of accrued interest approximate fair
value.
Off-balance-sheet instruments. Fair values for off-balance-sheet
credit-related financial instruments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standings.
The estimated fair values and related carrying or notional amounts of the
Corporation's financial instruments at December 31, 2002 and 2001, are as
follows (in thousands of dollars):
64
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 2001
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Cash and cash equivalents ........................................... $ 38,569 $ 38,569 $ 25,649 $ 25,649
Interest-bearing deposits with banks ................................ 511 511 2,376 2,376
Investment securities ............................................... 53,066 53,066 43,707 43,707
Loans held for sale ................................................. 24,664 24,664 10,265 10,265
Loans receivable .................................................... 302,911 303,845 227,075 228,915
Accrued interest receivable ......................................... 2,131 2,131 1,762 1,762
Financial liabilities:
Deposits ............................................................ $337,062 $338,039 $255,433 $256,952
Federal funds purchased and
securities sold under agreements
to repurchase .................................................... 16,302 16,306 4,171 4,175
Federal Home Loan Bank advances ..................................... 20,210 22,335 20,280 19,656
Lines of credit payable ............................................. 18,249 18,249 9,028 9,028
Accrued interest payable ............................................ 759 759 946 946
Off-balance-sheet credit related financial instruments:
Commitments to extend credit ..................................... 14,603 14,603 11,596 11,596
Unfunded commitments under
lines of credit ............................................... 20,493 20,493 18,342 18,342
Standby letters of credit ........................................ 2,506 2,506 2,877 2,877
NOTE 19 - CONTINGENCIES:
CLAIMS AND LAWSUITS:
The Corporation is subject at times to claims and lawsuits arising out of the
normal course of business. As of December 31, 2002, no claims or lawsuits were
pending which, in the opinion of management are likely to have a material effect
on the Corporation's consolidated financial statements.
NOTE 20 - REGULATORY MATTERS:
The Banks are subject to the dividend restrictions set forth by various banking
regulators. Under such restrictions, the national banks may not, without the
prior approval, declare dividends in excess of the sum of the current year's
earnings (as defined) plus the retained earnings (as defined) from the prior two
years and the state bank may not declare dividends in excess of the current
year's earnings. The dividends, at December 31, 2002, that the Banks could
declare, without the approval of their primary bank regulator, amounted to
approximately $8,070,000. In addition, dividends paid by the Banks to the
Corporation would be prohibited if the effect thereof would cause the Banks'
capital to be reduced below applicable minimum capital requirements.
Under Federal Reserve regulation, the Banks also are limited as to the amount
they may lend to the Corporation unless such loans are collateralized by
specified obligations. The maximum amount available for transfer from the Banks
to the Corporation in the form of loans or advances totaled approximately
$3,285,000 at December 31, 2002.
Also the Banks are limited by law as to the amount they may loan any
non-depository affiliate, such as CRM. Such loans are subject to the
requirements of Section 23A of the Federal Reserve Act and in general are
limited to not more than 10% of capital and must have at least 120% collateral
to loan amount.
65
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material adverse effect on the Corporation's and the Banks'
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Banks must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2002 and
2001, that the Corporation and the Banks met all capital adequacy requirements
to which they are subject.
As of December 31, 2002, for ONB, for SNB, for FNB, and for BOR the most recent
notifications from the FDIC categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since the notifications that management believes have
changed the Banks' categories. The Corporation's and the Banks' actual capital
amounts and ratios are also presented in the following table (in thousands of
dollars).
66
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - REGULATORY MATTERS (CONTINUED):
MINIMUM REQUIRED
TO BE WELL CAPITALIZED
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
At December 31, 2002
Tier I Capital (to Average Assets)
Consolidated .................................... $35,724 8.3% $17,233 4.0% $21,542 5.0%
ONB ............................................. 14,820 8.7% 6,831 4.0% 8,538 5.0%
SNB ............................................. 7,734 7.4% 4,176 4.0% 5,220 5.0%
FNB ............................................. 4,501 8.3% 2,176 4.0% 2,720 5.0%
BOR ............................................. 6,271 7.8% 3,229 4.0% 4,037 5.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated .................................... $35,724 11.6% 12,366 4.0% 18,549 6.0%
ONB ............................................. 14,820 12.3% 4,828 4.0% 7,242 6.0%
SNB ............................................. 7,734 9.0% 3,456 4.0% 5,184 6.0%
FNB ............................................. 4,501 9.6% 1,870 4.0% 2,805 6.0%
BOR ............................................. 6,271 13.8% 1,823 4.0% 2,805 6.0%
Total Capital (to Risk Weighted Assets)
Consolidated .................................... 39,255 12.7% 24,732 8.0% 30,915 10.0%
ONB ............................................. 16,329 13.5% 9,656 8.0% 12,070 10.0%
SNB ............................................. 8,734 10.1% 6,912 8.0% 8,640 10.0%
FNB ............................................. 5,009 10.7% 3,740 8.0% 4,675 10.0%
BOR ............................................. 6,715 14.7% 3,646 8.0% 4,558 10.0%
At December 31, 2001
Tier I Capital (to Average Assets)
Consolidated .................................... $26,633 7.9% $13,498 4.0% $16,872 5.0%
ONB ............................................. 13,270 7.9% 6,760 4.0% 8,450 5.0%
SNB ............................................. 6,736 7.6% 3,550 4.0% 4,438 5.0%
FNB ............................................. 4,087 8.8% 1,854 4.0% 2,317 5.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated .................................... $26,633 11.4% 9,383 4.0% 14,074 6.0%
ONB ............................................. 13,270 11.6% 4,568 4.0% 6,852 6.0%
SNB ............................................. 6,736 8.9% 3,023 4.0% 4,534 6.0%
FNB ............................................. 4,087 10.4% 1,573 4.0% 2,359 6.0%
Total Capital (to Risk Weighted Assets)
Consolidated .................................... 29,368 12.5% 18,766 8.0% 23,457 10.0%
ONB ............................................. 14,698 12.9% 9,136 8.0% 11,420 10.0%
SNB ............................................. 7,638 10.1% 6,045 8.0% 7,556 10.0%
FNB ............................................. 4,492 11.4% 3,145 8.0% 3,932 10.0%
67
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only) (in thousands of dollars):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
December 31,
------------
2002 2001
---- ----
Balance Sheets:
Assets:
Cash .................................................. $ 712 $ 1,399
Investment in banking subsidiaries .................... 41,357 24,598
Securities available for sale, at fair value .......... 50 50
Premises and equipment (net of accumulated
depreciation of $515 in 2002 and $620 in 2001) .... 429 403
Goodwill .............................................. 921 921
Other assets .......................................... 404 294
------- -------
Total assets ............................................... $43,873 $27,665
======= =======
Liabilities and shareholders' equity:
Other liabilities ..................................... $ 156 $ 118
Shareholders' equity .................................. 43,717 27,547
------- -------
Total liabilities and shareholders' equity ................. $43,873 $27,665
======= =======
68
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 2001 2000
---- ---- ----
Statements of Income:
Income:
Management fees assessed subsidiaries .................................... $ 1,725 $ 1,440 $ 1,352
Dividends from subsidiaries .............................................. 1,550 1,460 1,027
Interest ................................................................. 32 79 67
Noninterest income ....................................................... 11 - -
------- ------- -------
Total ........................................................ 3,318 2,979 2,446
------- ------- -------
Expenses:
Salaries and employee benefits ........................................... 1,159 976 842
Premises and equipment ................................................... 217 278 272
Supplies ................................................................. 79 69 61
Director fees ............................................................ 24 22 22
Other general expenses ................................................... 541 314 276
------- ------- -------
Total ........................................................ 2,020 1,659 1,473
------- ------- -------
Income before income tax (provision) benefit and equity in
undistributed earnings of subsidiaries .................................... 1,298 1,320 973
Applicable income tax (provision) benefit ...................................... 91 53 (28)
Equity in undistributed earnings of subsidiaries ............................... 4,012 2,535 2,202
------- ------- -------
Net income ..................................................................... $ 5,401 $ 3,908 $ 3,147
======= ======= =======
69
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 2001 2000
---- ---- ----
Statements of Cash Flows:
Cash flows from operating activities:
Net income ................................................................ $ 5,401 $ 3,908 $ 3,147
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization ........................................... 130 103 107
Decrease (increase) in other assets ..................................... (84) (156) 28
Increase (decrease) in other liabilities ................................ 37 62 6
Equity in undistributed earnings of subsidiaries ........................ (4,012) (2,535) (2,202)
-------- -------- --------
Net cash provided by operating activities ............................. 1,472 1,382 1,086
-------- -------- --------
Cash flows from investing activities:
Investment in SNB ......................................................... - - (250)
Investment in BOR ......................................................... (621) - -
Purchase of equipment ..................................................... (182) (269) (50)
-------- -------- --------
Net cash used by investing activities ................................. (803) (269) (300)
-------- -------- --------
Cash flows from financing activities:
Expenses associated with merger ........................................... (178) (43) -
Common stock issued under stock options ................................... 40 39 22
Stock issuance cost ....................................................... - - (10)
Cash dividends paid ....................................................... (1,218) (904) (645)
-------- -------- --------
Net cash provided (used) by financing activities ...................... (1,356) (908) (633)
-------- -------- --------
Net increase (decrease) in cash .............................................. (687) 205 153
Cash at beginning of year .................................................... 1,399 1,194 1,041
-------- -------- --------
Cash at end of year .......................................................... $ 712 $ 1,399 $ 1,194
======== ======== ========
Supplemental disclosures of cash flow information:
Cash payments for income taxes ............................................ $ 2,893 $ 2,043 $ 1,780
======== ======== ========
Supplemental schedule of non-cash investing activities:
Transfer from retained earnings to common stock outstanding
for the market value of the 5% stock dividend ........................... - - $ 1,709
======== ======== ========
Fair value of shares issued for purchase of Community Resource
Mortgage Inc. ........................................................... - $ 1,241 -
======== ======== ========
Fair value of shares issued for purchase of Ridgeway
Bancshares Inc. ......................................................... $ 12,020 - -
======== ======== ========
70
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - ACQUISITION:
RESOURCE MORTGAGE INC. (NOW COMMUNITY RESOURCE MORTGAGE INC.):
On November 1, 2001 the Corporation acquired 100% of the common stock of
Resource Mortgage Inc., which was renamed Community Resource Mortgage, Inc.
(CRM). The results of CRM's operations have been included in the consolidated
financial statements since that date. CRM is a mortgage company with offices
located in Columbia, Anderson and Sumter, South Carolina. As a result of the
acquisition the Corporation expects to be able to provide a greater variety of
one to four family mortgage products than it was previously able to provide.
The aggregate purchase price was $1.2 million, which was comprised of 95,454
shares of the Corporation's common stock. One-third of the shares were issued at
the consummation of the transaction. The remainder was held in escrow pending
the attainment of certain financial goals. The value of the 95,454 shares was
determined based on the average market price of the Corporation's common stock
for the two day period before and after the announcement of the acquisition.
Based on the operating results for the year ended December 31, 2001 in March
2002, 47,727 additional shares were distributed to the former shareholders of
Resource Mortgage, Inc. At December 31, 2002 15,909 shares were held in escrow.
These shares were distributed in March 2003.
The following table summarizes the estimated fair market value of the assets
acquired and liabilities assumed at the date of the acquisition.
At November 1, 2001
(thousands of dollars)
Current assets ............................................ $ 582
Property, plant and equipment ............................. 69
Mortgages receivable ...................................... 10,395
Other assets .............................................. 46
Goodwill .................................................. 879
--------
Total assets acquired ..................................... 11,971
Liabilities acquired ...................................... (10,730)
--------
Net assets acquired .................................. 1,241
========
Subsequent to the acquisition date the Corporation recognized an additional
$42,000 in costs directly associated with the purchase of CRM. Accordingly, the
balance in goodwill at December 31, 2002 is $921,000.
RIDGEWAY BANCSHARES INC.:
On July 1, 2002 the Corporation acquired 100% of the common stock of Ridgeway
Bancshares. Inc., the parent company of the Bank of Ridgeway. The results of
BOR's operations for the six months ended December 31, 2002 have been included
in the consolidated financial statements for the Corporation. As a result of the
acquisition, the Corporation has greatly expanded its market presence in the
northeast Columbia, and Fairfield County, South Carolina, areas.
The aggregate purchase price was $16 million, which was comprised of 1,000,000
shares of the Corporation's common stock and $4,000,000 cash. The value of the
shares was determined based on the average market price of the Corporation's
common stock for the two day period immediately before and after the
announcement of the acquisition in late November 2001, $12.02 per share.
Immediately subsequent to the merger, BOR paid a special dividend of $3.5
million to the Corporation. Corporation used the $3.5 million to help defray the
$4 million cash portion of the purchase transaction. On the bank's books cash
and other liabilities were reduced by the amount of the special dividend, as
were goodwill and shareholders' equity.
71
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the estimated fair market value of the assets
acquired and liabilities assumed at the date of the acquisition of BOR.
At July 1, 2002 ($ in thousands)
Cash and cash equivalents ...................................... $ 9,626
Interest bearing deposits ...................................... 148
Investment securities .......................................... 24,727
Loans, net of allowance ........................................ 44,078
Premises and fixed assets, net ................................. 1,021
Other assets ................................................... 817
Core deposit intangible ........................................ 3,698
Goodwill ....................................................... 3,061
-------
Total assets acquired ....................................... 87,176
-------
Deposits ....................................................... 66,696
Interest payable ............................................... 88
Securities sold under agreements to repurchase ................. 3,600
Other liabilities .............................................. 4,272
-------
Total liabilities acquired .................................. 74,656
-------
Net assets acquired ....................................... $12,520
=======
Included in the fair value of the loan portfolio is a fair value adjustment of
$243,000. Based on actual loan history and anticipated customer behavior,
management is amortizing this to loan interest income over a five year period.
Amortization expense recognized in 2002 totaled $24,000. Included in the fair
value of the deposits is a fair value adjustment of $162,000. Based on
contracted maturities management is amortizing this as a reduction of interest
expense over an 18 month period. Amortization recognized in 2002 totaled
$54,000.
72
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma financial impact of the merger is represented below as if the
merger had been effected January 1 of each reported year ("CBI" is the
Corporaton, "RW" is Ridgeway Bancshares Inc.).
2002 2001
---- ----
For the year ended December 31, CBI RW Total CBI RW Total
--- -- ----- --- -- -----
Total interest and noninterest income ................ 29,938 2,693 32,631 24,785 5,972 30,757
Net interest income .................................. 13,867 1,674 15,541 10,940 3,116 14,056
Net income ........................................... 5,401 410 5,811 3,908 1,087 4,995
Net income per share, basic
As reported ....................................... $1.42 $1.21
Pro forma ......................................... $1.35 $1.18
Net income per share, diluted:
As reported ....................................... $1.38 $1.20
Pro forma ......................................... $1.32 $1.18
NOTE 23 - INTANGIBLE ASSETS
The changes in the carrying amounts of goodwill attributable to CRM and BOR for
the year ended December 31, 2002 are as follows:
CRM BOR Total
--- --- -----
Balance, beginning of year .............. $ 921 $ - $ 921
Goodwill acquired during year ........... - 3,061 3,061
Impairment losses ....................... - - -
------ ------ ------
Balance, end of year .................... $ 921 $3,061 $3,982
====== ====== ======
Goodwill for CRM was tested for impairment during mid-2002 by an outside firm.
No impairment was determined. Goodwill for the BOR will be tested for impairment
during 2003.
As part of the valuation of BOR, conducted by a third party valuation firm, a
core deposit intangible was computed of $3,698,000. The estimated life of this
intangible was determined to be 15 years. Amortization expense totaled $123,000
in 2002 and will total $246,000 in 2003 and beyond.
73
COMMUNITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24 - QUARTERLY DATA (UNAUDITED):
Years ended December 31,
------------------------
2002 2001
---- ----
Fourth Third Second First Fourth Third Second First
quarter quarter quarter quarter quarter quarter quarter quarter
------- ------- ------- ------- ------- ------- ------- -------
Interest and dividend income .............. $ 6,082 $ 6,140 $ 4,941 $ 4,823 $ 5,001 $ 5,261 $ 5,389 $ 5,550
Interest expense .......................... (2,084) (2,165) (1,864) (2,006) (2,187) (2,491) (2,737) (2,846)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ....................... 3,998 3,975 3,077 2,817 2,814 2,770 2,652 2,704
Provision for loan losses ................. (436) (239) (189) (169) (193) (180) (135) (142)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses ............. 3,562 3,736 2,888 2,648 2,621 2,590 2,517 2,562
Noninterest income ........................ 2,386 2,114 1,688 1,645 1,597 727 678 551
Gains (losses) on sale of sec ............. - 15 62 42 - 17 14 -
-------
Noninterest expense ....................... (3,702) (3,440) (2,745) (2,578) (2,488) (1,833) (1,777) (1,712)
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ................ 2,246 2,425 1,893 1,757 1,730 1,501 1,432 1,401
Provision for income taxes ................ (781) (825) (682) (632) (615) (539) (502) (500)
------- ------- ------- ------- ------- ------- ------- -------
Net income ................................ $ 1,465 $ 1,600 $ 1,211 $ 1,125 $ 1,115 $ 962 $ 930 $ 901
------- ------- ------- ------- ------- ------- ------- -------
Earnings per share
Basic .................................. $ 0.34 $ 0.37 $ 0.37 $ 0.34 $ 0.34 $ 0.30 $ 0.29 $ 0.28
Diluted ................................ $ 0.33 $ 0.36 $ 0.36 $ 0.33 $ 0.33 $ 0.30 $ 0.29 $ 0.28
BOR was acquired on July 1, 2002, and CRM was acquired November 1, 2001.
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
74
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with or changes in accountants.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Management - Directors"
and "Management - Executive Officers" and under "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement to be used in conjunction
with the 2003 Annual Meeting of Shareholders (the "Proxy Statement"), which will
be filed within 120 days of the Corporation's fiscal year end, is incorporated
herein by reference.
Item 11. Executive Compensation
With the exception of the information set forth under the captions
"Board Report on Executive Officer Compensation" and "Shareholder Performance
Graph", which is not incorporated herein by reference, the information set forth
under the caption "Management Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
Equity Compensation Plan Information
The following table sets forth aggregated information as of December
31, 2002 about all of the Corporation's compensation plans (including individual
compensation arrangements) under which equity securities of the Corporation are
authorized for issuance.
Number of securities
remaining available for
Number of securities to be Weighted average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
Stock option plan (a) (b) (c)
----------------- -------------------------- -------------------------- -------------------------
Equity compensation plans approved by
security holders ......................... 383,280 $11.27 102,320
Equity compensation plans not approved
by security holders ...................... na na na
------- ------ -------
Total .................................... 383,280 $11.27 102,320
======= ====== =======
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
75
Item 14. Controls and Procedures
(a) Based on their evaluation of the issuer's disclosure controls and procedures
(as defined in 17 C.F.R. Sections 240.13a-14(c) and 240.15d-14(c)) as of a date
within 90 days prior to the filing of this quarterly report, the issuer's chief
executive officer and chief financial officer concluded that the effectiveness
of such controls and procedures was adequate.
(b) There were no significant changes in the issuer's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Item 15. Exhibits and Reports on Form 8-K
(a) (1) All financial statements:
Consolidated Balance Sheets, December 31, 2002 and 2001
Consolidated Statements of Income, Years Ended December 31, 2002, 2001
and 2000
Consolidated Statements of Changes in Shareholders' Equity, Years
Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows, Years Ended December 31, 2002,
2001 and 2000
Notes to Consolidated Financial Statements
(2) Financial statement schedules:
Quarterly Data for 2002 and 2001
(3)
Exhibit No. Description
(from item 601 of
S-K)
2.1 Agreement and Plan of Merger between Registrant and Ridgeway Bancshares,
Inc. (incorporated by reference to exhibits filed in the Registrant's
Form S-4, Commission File No. 333-819000).
3.1 Articles of Incorporation, as amended (incorporated by reference to
exhibits filed in the Registrant's Form 10-QSB filed September 30,
1997).
3.2 Bylaws, as amended (incorporated by reference to exhibits filed in the
Registrant's Form S-4, Commission File No. 33-55314).
4 Stock certificate (incorporated by reference to exhibits filed in the
Registrant's Registration Statement on Form S-2, filed September 11,
1995, Commission File No. 33-96746).
10.1 1997 Stock Option Plan, as amended (incorporated by reference to
Registrant's Form S-8, filed June 22, 2001, Commission File No.
333-63598).
10.2 Lease for site of Florence National Bank (incorporated by reference to
Registrant's Form 10-K for the year ended December 31, 1999).
10.3 Change of Control Agreements between the Registrant and each of William W.
Traynham, Michael A. Wolfe, William H. Nock and Jesse A. Nance
(incorporated by reference to exhibits to Registrant's Form 10-QSB
for the quarter ended June 30, 1999).
76
10.4 Loan Agreement, dated November 1, 2001, among Registrant, Resource
Mortgage, Inc. and Branch Bank and Trust Company (incorporated by
reference to exhibits filed in the Registrant's Form 10-Q for the
quarter end September 30, 2001).
10.5 Amended and Restated Guaranty, dated October 7, 2002, by Registrant of
obligations of Community Resource Mortgage, Inc. to Branch Bank and
Trust Company (incorporated by reference to exhibits filed in the
Registrant's Form 10-Q for the quarter end September 30, 2002).
10.6 Employment Agreement between Community Resource Mortgage Inc. and A. Wade
Douroux (incorporated by reference to exhibits filed in the
Registrant's Form S-4, Commission File No. 333-819000).
10.7 Form of Employment Agreement between the Corporation and William A.
Harwell (incorporated by reference to exhibits filed in the
Registrant's Form S-4, Commission File No. 333-819000).
21 Subsidiaries of the registrant
23 Consent of J. W. Hunt and Company, LLP
(b) Reports on Form 8-K. None.
77
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 2003
By: s/E. J. Ayers, Jr.
-------------------
Chief Executive Officer
By s/William W. Traynham, Jr.
--------------------------
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date:______________
-------------------------
Alvis J. Bynum, Director
s/ Martha Rose C. Carson Date: March 17, 2003
------------------------
Martha Rose C. Carson, Director
s/ Anna O. Dantzler Date: March 17m 2003
-------------------
Anna O. Dantzler, Director
Date:______________
--------------------
Thomas B. Edmunds, Director
s/ A. Wade Douroux Date: March 17, 2003
------------------
A. Wade Douroux, Director
s/J. M. Guthrie Date: March 26, 2003
---------------
J. M. Guthrie, Director
s/ William A. Harwell Date: March 17, 2003
---------------------
William A. Harwell, Director
Date:______________
---------------------
Richard L. Havekost, Director
s/ Phil P. Leventis Date: March 17, 2003
-------------------
Phil P. Leventis, Director
s/Jess A. Nance Date: March 17, 2003
---------------
Jess A. Nance, Director
s/John V. Nicholson Date: March 17, 2003
-------------------
John V. Nicholson, Director
s/William H. Nock Date: March 17, 2003
-----------------
William H. Nock, Director
s/ Samuel F. Reid, Jr. Date: March 25, 2003
----------------------
Samuel F. Reid, Jr., Director
s/ J. Otto Warren, Jr. Date: March 26, 2003
----------------------
J. Otto Warren, Jr., Director
s/Wm. Reynolds Williams Date: March 17, 2003
-----------------------
Wm. Reynolds Williams, II, Director
s/ Michael A. Wolfe Date: March 17, 2003
-------------------
Michael A. Wolfe, Director
78
CERTIFICATIONS
I, E. J. Ayers, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Community
Bankshares Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 s/E. J. Ayers, Jr.
--------------- --------------------------------
E. J. Ayers, Jr.
Chairman and CEO
79
CERTIFICATIONS
I, William W. Traynham, certify that:
1. I have reviewed this annual report on Form 10-K of Community
Bankshares Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 s/William W. Traynham
--------------- ------------------------------
William W. Traynham
President and CFO
80
EXHIBIT INDEX
Exhibit No. Description
(from item 601 of
S-K)
2.1 Agreement and Plan of Merger between Registrant and Ridgeway Bancshares,
Inc. (incorporated by reference to exhibits filed in the Registrant's
Form S-4, Commission File No. 333-819000).
3.1 Articles of Incorporation, as amended (incorporated by reference to
exhibits filed in the Registrant's Form 10-QSB filed September 30,
1997).
3.2 Bylaws, as amended (incorporated by reference to exhibits filed in the
Registrant's Form S-4, Commission File No. 33-55314).
4 Stock certificate (incorporated by reference to exhibits filed in the
Registrant's Registration Statement on Form S-2, filed September 11,
1995, Commission File No. 33-96746).
10.1 1997 Stock Option Plan, as amended (incorporated by reference to
Registrant's Form S-8, filed June 22, 2001, Commission File No.
333-63598).
10.2 Leasefor site of Florence National Bank (incorporated by reference to
Registrant's Form 10-K for the year ended December 31, 1999).
10.3 Change of Control Agreements between the Registrant and each of William W.
Traynham, Michael A. Wolfe, William H. Nock and Jesse A. Nance
(incorporated by reference to exhibits to Registrant's Form 10-QSB
for the quarter ended June 30, 1999).
10.4 Loan Agreement, dated November 1, 2001, among Registrant, Resource
Mortgage, Inc. and Branch Bank and Trust Company (incorporated by
reference to exhibits filed in the Registrant's Form 10-Q for the
quarter end September 30, 2001).
10.5 Amended and Restated Guaranty, dated October 7, 2002, by Registrant of
obligations of Community Resource Mortgage, Inc. to Branch Bank and
Trust Company (incorporated by reference to exhibits filed in the
Registrant's Form 10-Q for the quarter end September 30, 2002).
10.6 Employment Agreement between Community Resource Mortgage Inc. and A. Wade
Douroux (incorporated by reference to exhibits filed in the
Registrant's Form S-4, Commission File No. 333-819000).
10.7 Form of Employment Agreement between the Corporation and William A.
Harwell (incorporated by reference to exhibits filed in the
Registrant's Form S-4, Commission File No. 333-819000).
21 Subsidiaries of the registrant
23 Consent of J. W. Hunt and Company, LLP
81