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 SEPTEMBER 30, 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 September 30, 1997: Common Stock, $3.00 par value, 2,768714
shares.
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COMMUNITY BANKSHARES INCORPORATED
FORM 10-Q
September 30, 1997
INDEX
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Page
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Part I. Financial Information
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 3
Consolidated Statements of Income for the six months and
fiscal year to date ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the six
months ended September 30, 1997 and 1996 5
Management's Discussion and Analysis of the Financial
Condition and Results of Operations 6
Part II. Other Information 12
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Part I. Financial Information
COMMUNITY BANKSHARES INCORPORATED
Consolidated Balance Sheets (Unaudited)
(In Thousands)
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<CAPTION>
September 30, December 31,
ASSETS 1997 1996
<S> <C>
Cash and cash equivalents:
Cash and due from banks $ 12,713 $ 13,561
Federal funds sold $ 11,079 $ 9,810
--------- ---------
Total cash and cash equivalents $ 23,792 $ 23,371
--------- ---------
Securities available for sale, at fair value $ 41,363 $ 37,330
Investment securities $ 14,442 $ 18,285
--------- ---------
Total securities $ 55,805 $ 55,615
--------- ---------
Loans, net of unearned income $ 176,660 $ 164,861
Less allowance for loan losses $ 2,074 $ 2,000
--------- ---------
Net loans $ 174,586 $ 162,861
Bank premises and equipment, net $ 4,813 $ 4,455
Other real estate owned $ 1,132 $ 1,330
Other assets $ 3,459 $ 3,379
--------- ---------
Total assets $ 263,587 $ 251,011
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Noninterest-bearing deposits $ 40,453 $ 39,111
Interest-bearing deposits $ 190,292 $ 182,199
--------- ---------
Total deposits $ 230,745 $ 221,310
Federal Funds Purchased $ -- $ --
Securities sold under agreements to repurchase $ 1,187 $ 598
Other liabilities $ 1,743 $ 1,524
Guaranteed debt of Employee Stock
Ownership Trust $ 165 $ 240
--------- ---------
Total liabilities $ 233,840 $ 223,672
--------- ---------
Stockholder's equity
Capital stock $ 8,307 $ 8,334
Surplus $ 5,657 $ 5,657
Retained earnings $ 16,009 $ 13,852
Unrealized gains (losses) on securities
available for sale, net of taxes $ (61) $ (265)
Unearned ESOP shares $ (165) $ (239)
--------- ---------
Total stockholder's equity $ 29,747 $ 27,339
--------- ---------
Total liabilities and
stockholder's equity $ 263,587 $ 251,011
========= =========
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3
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COMMUNITY BANKSHARES INCORPORATED
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Fiscal year to date
Quarter ended Nine months ended
September 30, September 30,
------------------ -------------------
1997 1996 1997 1996
----- ---- ---- ----
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Interest income:
Interest and fees on loans $ 4,379 $ 4,155 $ 12,712 $ 11,942
Interest on securities:
U.S. Treasury securities and U.S.government
agency and corporation obligations $ 823 $ 814 $ 2,351 $ 2,277
Obligations of states and political subdivisions $ 82 $ 88 $ 298 $ 292
Other securities $ 11 $ 6 $ 85 $ 131
Interest on Federal funds sold $ 104 $ 88 $ 301 $ 273
-------- -------- -------- --------
Total interest income $ 5,399 $ 5,151 $ 15,747 $ 14,915
Interest expense:
Interest on deposits $ 2,174 $ 2,088 $ 6,391 $ 6,246
Interest on Federal funds purchased $ -- $ -- $ -- $ --
Interest on Securities sold under
agreements to repurchase $ 14 $ -- $ 36 $ 5
-------- -------- -------- --------
Total interest expense $ 2,188 $ 2,088 $ 6,427 $ 6,251
-------- -------- -------- --------
Net interest income $ 3,211 $ 3,063 $ 9,320 $ 8,664
-------- -------- -------- --------
Provision for loan losses $ 5 $ 117 $ 30 $ 294
Net interest income after provision
for loan losses $ 3,206 $ 2,946 $ 9,290 $ 8,370
-------- -------- -------- --------
Other income:
Service charges, commissions and fees $ 293 $ 326 $ 963 $ 1,065
Security gains (losses) $ -- $ 1 $ (7) $ 30
Gain on sale of bank premises and equipment $ -- $ -- $ -- $ --
Gain on sale of other real estate $ -- $ -- $ -- $ 60
Other operating income $ 150 $ 36 $ 324 $ 77
-------- -------- -------- --------
Total other income $ 443 $ 363 $ 1,280 $ 1,232
Other expenses:
Salaries and benefits $ 1,126 $ 1,043 $ 3,388 $ 3,028
Expense on premises and fixed assets, net $ 294 $ 267 $ 877 $ 802
Other operating expenses $ 487 $ 440 $ 1,823 $ 1,487
-------- -------- -------- --------
Total other expenses $ 1,907 $ 1,750 $ 6,088 $ 5,317
Income before income taxes $ 1,742 $ 1,559 $ 4,482 $ 4,285
Income tax expense $ 575 $ 499 $ 1,551 $ 1,426
-------- -------- -------- --------
Net income $ 1,167 $ 1,060 $ 2,931 $ 2,859
-------- -------- -------- --------
Earnings per common and common equivalent
shares (based on 2,847,169; 2,869,452
2,859,549; 2,841,333 respectively) $ 0.41 $ 0.37 $ 1.02 $ 1.01
-------- -------- -------- --------
Earnings per common share, assuming full
dilution( based on 2,916,303; 2,923,333 $ 0.40 $ 0.36 $ 1.00 $ 0.99
-------- -------- -------- --------
2,930,682; 2,886,283 respectively)
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4
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COMMUNITY BANKSHARES INCORPORATED
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1997 and 1996
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<CAPTION>
1997 1996
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Cash Flows from Operating Activities
Net income $ 2,931 $ 2,036
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment $ 381 $ 278
Provision for loan losses $ 30 $ 195
Amortization and accretion of investment securities $ (28) $ (11)
(Gain) loss on sale of bank premises and equipment $ -- $ --
(Gain) loss on sale of other securities $ 7 $ (3)
(Gain) loss on sale of other real estate $ 32 $ (60)
Changes in operating assets and liabilities:
(Increase) Decrease in accrued interest receivable $ (111) $ (108)
(Increase) Decrease in prepaid expenses $ (155) $ (264)
(Increase) Decrease in accrued interest payable $ (11) $ (19)
(Increase) Decrease in unrealized securities losses $ 250 $ (519)
(Increase) Decrease in deferred income taxes $ 119 $ (209)
Net change in other operating assets and liabilities $ 146 $ (108)
-------- --------
Net cash and cash equivalents provided
by operating activities $ 3,591 $ 1,208
Cash Flows from Investing Activities
Proceeds from sale of investment securities $ 7,456 $ 12,827
Proceeds from maturities of investment securities $ 8,724 $ 3,274
Purchase of investment securities $(15,849) $(14,045)
Purchase of other real estate $ (639) $ (262)
Net increase in loans $(11,705) $(11,759)
Proceeds from sale of bank premises and equipment $ -- $ --
Proceeds from sale of other real estate $ 874 $ 256
Capital expenditures $ (748) $ (441)
-------- --------
Net cash and cash equivalents used in
investing activities $(11,887) $(10,150)
Cash Flows from Financing Activities
Net increase (decease) in deposits $ 8,507 $ 4,528
Net increase (decrease) in federal funds purchased $ -- $ --
Issuance of common stock $ 209 $ 250
Dividends paid $ (399) $ (232)
-------- --------
Net cash and cash equivalents provided
by financing activities $ 8,317 $ 4,546
======== ========
Increase (decrease) in cash and cash equivalents $ 21 $ (4,396)
-------- --------
Cash and cash equivalents at beginning of period $ 23,001 $ 19,163
-------- --------
Cash and cash equivalents at end of period $ 23,022 $ 14,767
-------- --------
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 6,398 $ 4,956
-------- --------
Income taxes $ 1,350 $ 907
-------- --------
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5
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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,
and County Bank of Chesterfield. All 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 twelve 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 nine months of 1997 of $2.931 million was an
increase of 7.52% over the first nine months of 1996. Earnings per share (on a
fully diluted basis) for the nine months ended September 30, 1997 was $1.00
compared to $0.99 for the same period last year.
The Company's return on average equity decreased for the first nine months
of 1997 over 1996. The return on average equity was 10.26% for the nine months
ended September 30, 1997, compared to 11.16% in 1996. The return on average
assets amounted to 1.14% and 1.18% for the nine months ended September 30, 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 7.57% to $9.320 million for the first nine
months of 1997. This increase was attributable to the growth in the Company's
loan portfolio. Total loans outstanding increased 7.16%, or $11.799 million for
the first nine 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
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decisions is an operating characteristic that often 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
57.79% 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 nine months ended September 30, 1997, increased
2.82% to $6.427 million as compared to $6.251 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
increased, $30,000 for the first nine months of 1997 as compared to $294,000 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 $2.074 million at September 30, 1997
or 1.17% of total loans, as compared to $2.000 or 1.21% at December 31, 1996.
Non-performing assets totaled $1.861 million at September 30,1997 compared to
$2.826 million at December 31, 1996. The multiple of the allowance for loan
losses to non-performing assets was 1.11x at September 30, 1997 and 0.71x 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
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does have loans that are contractually past 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 nine months ended September 30, 1997, non-interest
income increased $48,000 or 3.90% to $1.280 million as compared to $1.232
million one year earlier. The increase was primarily due to an increase in
miscellaneous income.
Non-Interest Expense. Non-interest expense of $6.088 million for the nine months
ended September 30, 1997, was an increase of $0.771 million or 14.50% over the
$5.317 million for the same period last year. Salaries and employee benefits,
the largest component on non-interest expense increased 11.89% to $3.388 million
for the first nine months of 1997. Other expenses, connected with the merger
with County Bank of Chesterfield and the listing of the Company's common stock
on the NASDAQ Stock Market, added approximately $229,000 in non-recurring
expenses.
Financial Condition
Total assets as of September 30, 1997 were $263.587 million, an increase of
5.01% from $251.011 million at December 31, 1996. Net loans outstanding for the
nine months ended September 30, 1997 stood at $174.586 million, a net increase
of $11.725 million or 7.20% over the $162.861 million recorded at December 31,
1996.
Deposits for the nine months ended September 30, 1997 stood at $230.745
million an increase of $9.435 million or 4.26% over the $221.310 at December 31,
1996.
Total securities for the nine months ended September 30, 1997 were $55.805
million an increase of $0.190 million or 0.34% from the $55.615 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
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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 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.
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At September 30, 1997, the Company's ratio of total capital to
risk-weighted assets was 17.30% and its ratio of Tier 1 capital to risk-weighted
assets was 16.18%. Both ratios exceeded the fully phased-in capital
requirements. The following summarizes the Company's regulatory capital and
related ratios at September 30, 1997 (dollars in thousands):
Tier 1 Capital $ 29,973
Tier 2 Capital $ 2,074
Total risk-based capital $ 32,047
Total risk-weighted assets $ 185,205
Capital Ratios:
Tier 1 risk-based capital ratio 16.18%
Total risk-based capital ratio 17.30%
Tier 1 Capital to average total assets 11.65%
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 nine months ended September 30, 1997 the Company provided cash or
liquidity from operations in the amount of $3.591 million. The Company's net
investing activities used $11.887 million in the same period. Financing
activities provided an additional $8.317 million, consisting mainly of an
increase in deposits of $8.507. For the first nine months of 1997 this produced
a net increase in liquidity of approximately $0.021 million. Cash and cash
equivalents on hand at September 30, 1997 totaled $23.001 million. Management
believes that the Company has enough asset liquidity to meet the needs of
maturing deposits.
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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 will be 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 voted approval of the Agreement at their Annual Meetings on June 5,
1997. This transaction became effective on July 1, 1997.
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Part II. Other Information
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Item: 1 Legal proceedings: None
2 Changes in securities: None
3 Defaults upon senior securities: None
4 Results of votes of security holders: On June 4, 1997 the Shareholders of
CBI approved the Agreement and Plan of Reorganization, dated January
14, 1997, between CBI and County Bank of Chesterfield ("CBOC") and
a related Plan of Share Exchange (collectively, the "Reorganization
Agreement"), providing for a Share Exchange between CBOC and CBI
(the "Reorganization") upon the terms and conditions therein, including
among other things that each issued and outstanding share of CBOC
Common Stock will be exchanged for 1.1054 shares of CBI Common
Stock, with cash being paid in lieu of issuing fractional shares.
5 Other information: None
6 Exhibits and Reports on Form 8-K: Form 8-K was filed on
October 29, 1997, to disclose the results of the Share
Exchange as mentioned above, which was effective on July 1,
1997.
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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
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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: November 7, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,713
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,079
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,363
<INVESTMENTS-CARRYING> 14,364
<INVESTMENTS-MARKET> 14,442
<LOANS> 174,660
<ALLOWANCE> 2,074
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<DEPOSITS> 230,745
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,095
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0
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<COMMON> 29,747
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<LOAN-LOSSES> 30
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<INCOME-PRETAX> 4,482
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</TABLE>
