SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
Commission File No. 2-89588
COMMUNITY BANKSHARES INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia 54-1290793
(State of Incorporation) (I.R.S. Employer Identification No.)
200 North Sycamore Street
P.O. Box 2166
Petersburg, Virginia 23804
(Address of principal executive offices)
(804) 861-2320
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of March 31, 1997: Common Stock, $3.00 par value, 1,901,080
shares.
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
FORM 10-Q
March 31, 1997
INDEX
Page
----
Part I. Financial Information
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 3
Consolidated Statements of Income for the three months and
fiscal year to date ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 5
Management's Discussion and Analysis of the Financial
Condition and Results of Operations 6
Part II. Other Information 12
<PAGE>
Part I. Financial Information
COMMUNITY BANKSHARES INCORPORATED
Consolidated Balance Sheets (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
March 31, December 31,
ASSETS 1997 1996
- ------ ---- ----
Cash and cash equivalents:
Cash and due from banks $ 9,094 $ 9,338
Federal funds sold $ 6,058 $ 5,392
--------- ---------
Total cash and cash equivalents $ 15,152 $ 14,730
--------- ---------
Securities available for sale, at fair value $ 19,559 $ 19,337
Investment securities $ 16,180 $ 16,886
--------- ---------
Total securities $ 35,739 $ 36,223
--------- ---------
Loans, net of unearned income $ 117,894 $ 116,381
Less allowance for loan losses $ 1,369 $ 1,246
--------- ---------
Net loans $ 116,525 $ 115,135
Bank premises and equipment, net $ 2,594 $ 2,653
Other real estate owned $ 501 $ 767
Accrued interest receivable $ 1,180 $ 1,081
Other assets $ 1,640 $ 1,425
--------- ---------
Total assets $ 173,331 $ 172,014
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Demand deposits $ 25,495 $ 28,498
Interest-bearing demand deposits $ 42,933 $ 39,865
Savings deposits $ 28,871 $ 27,479
Time Deposits, $100,000 and over $ 11,132 $ 10,752
Other time deposits $ 44,176 $ 45,412
--------- ---------
Total deposits $ 152,607 $ 152,006
--------- ---------
Accrued interest payable $ 480 $ 478
Other liabilities $ 779 $ 541
Guaranteed debt of Employee Stock
Ownership Trust $ 240 $ 240
--------- ---------
Total liabilities $ 154,106 $ 153,265
--------- ---------
Stockholder's equity
Capital stock $ 5,703 $ 5,703
Surplus $ 1,712 $ 1,712
Retained earnings $ 12,413 $ 11,717
Unrealized gains (losses) on securities
available for sale, net of taxes $ (365) $ (145)
--------- ---------
Total stockholder's equity $ 19,463 $ 18,987
--------- ---------
Unearned ESOP shares $ (238) $ (238)
Total liabilities and
stockholder's equity $ 173,331 $ 172,014
========= =========
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED
Consolidated Statements of Income (Unaudited)
<CAPTION>
Fiscal year to date
Quarter ended Three months ended
March 31, March 31,
----------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
Interest income:
Interest and fees on loans $2,837 $2,728 $2,837 $2,728
Interest on securities:
U.S. Treasury securities and U.S.government
agency and corporation obligations $ 576 $ 516 $ 576 $ 516
Obligations of states and political subdivisions
Taxable securities $ 5 $ 5 $ 5 $ 5
Tax-exempt securities $ 25 $ 12 $ 25 $ 12
Other securities $ 15 $ 22 $ 15 $ 22
Interest on Federal funds sold $ 56 $ 74 $ 56 $ 74
------ ------ ------ ------
Total interest income $3,514 $3,357 $3,514 $3,357
Interest expense:
Interest on deposits $1,355 $1,347 $1,355 $1,347
Interest on Federal funds purchased $ -- $ 2 $ -- $ 2
------ ------ ------ ------
Total interest expense $1,355 $1,349 $1,355 $1,349
------ ------ ------ ------
Net interest income $2,159 $2,008 $2,159 $2,008
------ ------ ------ ------
Provision for loan losses $ -- $ 50 $ -- $ 50
Net interest income after provision
for loan losses $2,159 $1,958 $2,159 $1,958
------ ------ ------ ------
Other income:
Service charges, commissions and fees $ 237 $ 266 $ 237 $ 266
Security gains (losses) $ -- $ 29 $ -- $ 29
Gain on sale of bank premises and equipment $ -- $ -- $ -- $ --
Gain on sale of other real estate $ -- $ 40 $ -- $ 40
Other operating income $ 61 $ 5 $ 61 $ 5
------ ------ ------ ------
Total other income $ 298 $ 340 $ 298 $ 340
Other expenses:
Salaries and benefits $ 767 $ 707 $ 767 $ 707
Expense on premises and fixed assets, net $ 211 $ 209 $ 211 $ 209
Other operating expenses $ 371 $ 317 $ 371 $ 317
------ ------ ------ ------
Total other expenses $1,349 $1,233 $1,349 $1,233
Income before income taxes $1,108 $1,065 $1,108 $1,065
Income tax expense $ 411 $ 374 $ 411 $ 374
------ ------ ------ ------
Net income $ 697 $ 691 $ 697 $ 691
------ ------ ------ ------
Earnings per common and common equivalent
shares (based on 1,973,848; 1,999,930
1,973,848; 1,939,101 respectively) $0.35 $0.35 $0.35 $0.35
------ ------ ------ ------
Earnings per common share, assuming full
dilution( based on 1,973,848; 1,999,930
1,973,848; 1,999,930 respectively) $0.35 $0.35 $0.35 $0.35
------ ------ ------ ------
- 4 -
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1997 and 1996
<CAPTION>
1997 1996
---- ----
Cash Flows from Operating Activities
Net income $ 755 $ 691
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment $ 86 $ 91
Provision for loan losses $ -- $ 50
Amortization and accretion of investment securities $ 4 $ 5
(Gain) loss on sale of bank premises and equipment $ -- $ --
(Gain) loss on sale of other securities $ -- $ --
(Gain) loss on sale of other real estate $ 30 $ (40)
Changes in operating assets and liabilities:
(Increase) Decrease in accrued interest receivable $ (99) $ (95)
(Increase) Decrease in prepaid expenses $ (9) $ (61)
(Increase) Decrease in accrued interest payable $ 2 $ (21)
(Increase) Decrease in unrealized securities losses $ (211) $ (119)
(Increase) Decrease in deferred income taxes $ (177) $ (72)
Net change in other operating assets and liabilities $ 213 $ 15
-------- --------
Net cash and cash equivalents provided
by operating activities $ 594 $ 444
Cash Flows from Investing Activities
Proceeds from sale of investment securities $ 1,220 $ 4,722
Proceeds from maturities of investment securities $ 1,091 $ 1,214
Purchase of investment securities $ (1,345) $ (6,457)
Purchase of other real estate $ (206) $ (20)
Net increase in loans $ (1,389) $ (3,460)
Proceeds from sale of bank premises and equipment $ -- $ --
Proceeds from sale of other real estate $ 441 $ 185
Capital expenditures $ (27) $ (37)
-------- --------
Net cash and cash equivalents used in
investing activities $ (215) $ (3,853)
Cash Flows from Financing Activities
Net increase (decease) in deposits $ 44 $ (473)
Net increase (decrease) in federal funds purchased $ -- $ 720
Issuance of common stock $ -- $ 102
Dividends paid $ -- $ --
-------- --------
Net cash and cash equivalents provided
by financing activities $ 44 $ 349
Increase (decrease) in cash and cash equivalents $ 423 $ (3,060)
Cash and cash equivalents at beginning of period $ 14,729 $ 13,652
-------- --------
Cash and cash equivalents at end of period $ 15,152 $ 10,592
-------- --------
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 1,352 $ 1,382
-------- --------
Income taxes $ -- $ 456
-------- --------
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Community Bankshares Incorporated (the "Company") is a multi-bank holding
company organized under Virginia law which provides financial services through
its wholly-owned subsidiaries, The Community Bank and Commerce Bank of Virginia.
Both subsidiary banks are full service retail commercial banks offering a wide
range of banking services, including demand and time deposits, as well as
commercial, industrial, residential construction, residential mortgage and
consumer loans. The Company's primary trade areas are the Petersburg, Virginia
area and the Richmond, Virginia area. The Company operates nine branch locations
in these trade areas.
The following discussion provides information about the major components of
the results of operations and financial condition, liquidity and capital
resources of Community Bankshares Incorporated. This discussion and analysis
should be read in conjunction with the Consolidated Financial Statements.
Overview. Net income for the first three months of 1997 of $0.697 million was an
increase of .87% over the first three months of 1996. Earnings per share for the
three months ended March 31, 1997 was $.35 compared to $.35 for the same period
last year.
The Company's return on average equity has decreased for the first three
months of 1997 over 1996. The return on average equity was 14.31% for the three
months ended March 31, 1997, compared to 16.52% in 1996. The return on average
assets amounted to 1.61% and 1.71% for the three months ended March 31, 1997 and
1996.
Net Interest Income. Net interest income represents the principal source of
earnings for the Company. Net interest income equals the amount by which
interest income exceeds interest expense. Changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, as well as their
respective yields and rates, have a significant impact on the level of net
interest income.
Net interest income increased 10.27% to $2.159 million for the first three
months of 1997. This increase was attributable to the growth in the Company's
loan portfolio. Total loans outstanding increased 1.21%, or $1.21 million for
the first three months of 1997. The Company has had a consistent increase in
loan demand. It is management's belief that the increase in the lending volume
is a result of competitive pricing and, responsiveness to loan demands. The
ability to make timely loan decisions is an operating characteristic that often
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<PAGE>
allows the Company the opportunity to meet the needs of borrowers before their
competitors. The Company is competitive with rates and origination fees charged
on loans. However, since 67.31% of the entire loan portfolio may be repriced in
one year or less, the Company has the ability to respond quickly to market
changes in rate structures.
Interest expense for the three months ended March 31, 1997, increased only
0.44% to $1.355 million as compared to $1.349 million for the same period one
year earlier. This small increase was due to an increase in the volume of
interest-bearing liabilities.
Provision for Possible Loan Losses. The provision for possible loan losses was
not increased for the first three months of 1997 as compared to $50,000 for the
same period one year earlier. This provision is an estimate of an amount deemed
adequate to provide for potential losses in the portfolio. The level of losses
is affected by general economic trends as well as conditions affecting
individual borrowers. The allowance is also subject to regulatory examinations
and determination as to adequacy, which may take into account such factors as
the methodology used to calculate the allowance and comparison to peer groups.
The allowance for loan losses totaled $1.369 million at March 31, 1997 or
1.16% of total loans, as compared to $1.246 or 1.07% at December 31, 1996.
Non-performing assets totaled $1.686 million at March 31,1997 compared to $2.070
million at December 31, 1996. The multiple of the allowance for loan losses to
non-performing assets was 0.81x at March 31, 1997 and 0.61x at December 31,
1996. Management constantly evaluates non-performing loans relative to their
collateral value and makes appropriate reductions in the carrying value of those
loans based on that review.
The allowance for loan losses related to loans identified as impaired is
primarily based on the excess of the loan's current outstanding principal
balance over the estimated fair market value of the related collateral. For a
loan that is not collateral-dependent, the allowance is recorded at the amount
by which the outstanding principal balance exceeds the current best estimate for
the future cash flows on the loan discounted at the loan's effective interest
rate.
Loans, including impaired loans, are generally placed in non-accrual status
when they are delinquent in principal and interest payments greater than 90 days
and the loan is not well secured and in process of collection. Accruals of
interest are discontinued until it becomes certain that both principal and
interest can be repaid. The Company does have loans that are contractually past
- 7 -
<PAGE>
due greater than 90 days that are not in non-accrual status, however, those
loans are still accruing because they are well secured and in the process of
collection. A loan is well secured if collateralized by liens on real or
personal property, including securities, that have a realizable value sufficient
to discharge the debt in full or by the guarantee of a financially responsible
party.
If foreclosure of property is required, the property is generally sold at a
public auction in which the Company may participate as a bidder. If the Company
is the successful bidder, the acquired real estate property is then included in
the Company's real estate owned account until it is sold.
Non-Interest Income. For the three months ended March 31, 1997, non-interest
income decreased $42,000 or 12.35% to $0.298million as compared to $0.340
million one year earlier. The decrease was primarily due to a one time gain on
the sale of other real estate owned in the amount of $40,000 in the first
quarter of last year.
Non-Interest Expense. Non-interest expense of $1.349 million for the three
months ended March 31, 1997, was an increase of $0.116 million or 9.41% over the
$1.233 million for the same period last year. Salaries and employee benefits,
the largest component on non-interest expense increased 8.49% to $0.767 million
for the first three months of 1997.
Financial Condition
Total assets as of March 31, 1997 were $173.331 million, an increase of
0.77% from $172.014 million at December 31, 1996. Net loan volume for the three
months ended March 31, 1997 stood at $116.525 million, an increase of $1.390
million or 1.21% over the $115.135 million recorded at December 31, 1996.
Deposits for the three months ended March 31, 1997 stood at $152.607
million an increase of $0.601 million or 0.40% over the $152.006 at December 31,
1996.
Total securities for the three months ended March 31, 1997 were $35.739
million a decrease of $0.484 million or 1.21% from the $36.223 million at
December 31, 1996. The securities portfolio is maintained to manage excess funds
in order to provide diversification and liquidity in the overall asset
management policy. The maturity of securities purchased are based on the needs
of the Company and current yields and other market conditions.
Securities are classified as held-to-maturity when management has the
positive intent and the Company has the ability at the time of purchase to hold
them until maturity. These securities are carried at cost, adjusted for
amortization of premium and accretion of discount. Securities to be held for
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<PAGE>
indefinite periods of time and not intended to be held-to-maturity or on a
long-term basis are classified as available-for-sale and accounted for at fair
market value on an aggregate basis. Unrealized gains or losses are reported as
increases or decreases in stockholder's equity, net of the related tax effect.
Capital Resources
Capital resources represent funds, earned or obtained, over which financial
institutions can exercise greater or longer control in comparison with deposits
or borrowed funds. The adequacy of the Company's capital is reviewed by
management on an ongoing basis with reference to the size, composition, and
quality of the Company's resources and consistency with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
will assure an adequate level of capital to support anticipated asset growth and
absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, has adopted capital guidelines to
supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the guidelines categorize
assets and off-balance sheet items into four risk-weighted categories. The
minimum ratio of qualifying total capital to risk-assets is 8.0% of which 4.0%
must be Tier 1 capital, consisting of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items.
- 9 -
<PAGE>
At March 31, 1997, the Company's ratio of total capital to risk-weighted
assets was 18.02% and its ratio of Tier 1 capital to risk-weighted assets was
16.85%. Both ratios exceeded the fully phased-in capital requirements. The
following summarizes the Company's regulatory capital and related ratios at
March 31, 1997 (dollars in thousands):
Tier 1 Capital $ 19.590
Tier 2 Capital $ 1.369
Total risk-based capital $ 19.590
Total risk-weighted assets $116.285
Capital Ratios:
Tier 1 risk-based capital ratio 16.85%
Total risk-based capital ratio 18.02%
Tier 1 Capital to average total assets 11.56%
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. As a result of the Company's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Company maintains overall
liquidity sufficient to satisfy its depositors' requirements and to meet its
customer's credit needs.
For the three months ended March 31, 1997 the Company provided cash or
liquidity from operations in the amount of $0.594 million. This increase in
funds in addition to $.044 million in net cash provided by an increase in
deposits and other financing activities provided a total of $0.638 million
available for investing during the first three months of 1997. The Company's net
investing activities used $0.215 million in the same period, which produced a
net increase in liquidity of approximately $0.423 million. Cash and cash
equivalents on hand at March 31, 1997 totaled $15.152 million. With 67.31% of
the loan portfolio repricing or maturing in the next twelve months, the Company
has enough asset liquidity to meet the needs of maturing deposits.
- 10 -
<PAGE>
Other Matters
On January 14, 1997, the Board of Directors unanimously voted to enter into
an Agreement and Plan for Reorganization (the plan) with County Bank of
Chesterfield to combine their businesses. County Bank of Chesterfield is a
Virginia state bank with its principal office located in Midlothian, Virginia.
The combination of the two companies was consummated through a Share Exchange
under Virginia law. Under the terms of the Plan, County Bank of Chesterfield
will become a wholly-owned subsidiary of Community Bankshares Incorporated. For
each share owned, the shareholders of County Bank of Chesterfield will receive
1.1054 shares of stock of Community Bankshares Incorporated. The transaction
will be accounted for as a pooling of interests. CBI received an opinion from
its independent accounting firm that the transaction does qualify for such
accounting treatment. The Stockholders of Community Bankshares Incorporated and
County Bank of Chesterfield will vote on approval of the Agreement at their
Annual Meetings on June 5, 1997. If adopted by the shareholders, it is
anticipated that the transaction will become effective in the third quarter of
1997. The proposed transaction is subject to approval by regulatory authorities.
If the transaction had been consummated prior to March 31, 1997, the
accompanying financial statements would have included the financial position and
results of operations of Count Bank of Chesterfield. Interest income, net
income, and net income per share for the two years ended March 31, 1997 would
have been as follows:
3/31/97 3/31/96 12/31/96
(In thousands, except earnings per share data)
Interest Income $1,571 $1,471 $6,167
Net Income $ 185 $ 196 $ 831
Earnings per common
and equivalent share $ .23 $ .25 $ 1.05
Earnings per common
share, assuming full
dilution $ .23 $ .25 $ 1.05
- 11 -
<PAGE>
Part II. Other Information
Item: 1 Legal proceedings None
2 Changes in securities None
3 Defaults upon senior securities None
4 Results of votes of security holders None
5 Other information None
6 Exhibits and Reports on Form 8-K None
- 12 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
COMMUNITY BANKSHARES INCORPORATED
s/ Nathan S. Jones, 3rd.
- -------------------------------------------------
Nathan S. Jones, 3rd
President and Chief Executive Officer
s/ Thomas H. Caffrey, Jr.
- -------------------------------------------------
Thomas H. Caffrey, Jr.
Senior Vice President and Chief Financial Officer
Date: May 14, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,094
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,058
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,559
<INVESTMENTS-CARRYING> 16,180
<INVESTMENTS-MARKET> 15,828
<LOANS> 117,894
<ALLOWANCE> 1,369
<TOTAL-ASSETS> 173,331
<DEPOSITS> 152,607
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,499
<LONG-TERM> 0
0
0
<COMMON> 19,463
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 173,331
<INTEREST-LOAN> 2,837
<INTEREST-INVEST> 677
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,514
<INTEREST-DEPOSIT> 1,355
<INTEREST-EXPENSE> 1,355
<INTEREST-INCOME-NET> 2,159
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,349
<INCOME-PRETAX> 1,108
<INCOME-PRE-EXTRAORDINARY> 1,108
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 697
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 0.088
<LOANS-NON> 240
<LOANS-PAST> 945
<LOANS-TROUBLED> 49
<LOANS-PROBLEM> 1,185
<ALLOWANCE-OPEN> 1,246
<CHARGE-OFFS> 35
<RECOVERIES> 158
<ALLOWANCE-CLOSE> 1,369
<ALLOWANCE-DOMESTIC> 1,369
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
