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 JUNE 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 June 30, 1997: Common Stock, $3.00 par value, 1,892,513
shares.
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
FORM 10-Q
June 30, 1997
INDEX
Page
Part I. Financial Information
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 3
Consolidated Statements of Income for the six months and
fiscal year to date ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 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)
June 30, December 31,
ASSETS 1997 1996
- ------ ---- ----
Cash and cash equivalents:
Cash and due from banks $ 8,388 $ 9,945
Federal funds sold $ 5,021 $ 5,392
--------- ---------
Total cash and cash equivalents $ 13,409 $ 15,337
--------- ---------
Securities available for sale, at fair value $ 21,368 $ 19,335
Investment securities $ 14,234 $ 16,886
--------- ---------
Total securities $ 35,602 $ 36,221
--------- ---------
Loans, net of unearned income $ 119,502 $ 116,384
Less allowance for loan losses $ 1,405 $ 1,246
--------- ---------
Net loans $ 118,097 $ 115,138
Bank premises and equipment, net $ 2,545 $ 2,618
Other real estate owned $ 198 $ 767
Other assets $ 2,709 $ 2,610
--------- ---------
Total assets $ 172,560 $ 172,691
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Noninterest-bearing deposits $ 26,742 $ 29,295
Interest-bearing deposits $ 123,980 $ 122,741
--------- ---------
Total deposits $ 150,722 $ 152,036
Federal Funds Purchased $ -- $ --
Securities sold under agreements to repurchase $ 1,044 $ 598
Other liabilities $ 952 $ 1,069
Guaranteed debt of Employee Stock
Ownership Trust $ 220 $ 240
--------- ---------
Total liabilities $ 152,938 $ 153,943
--------- ---------
Stockholder's equity
Capital stock $ 5,677 $ 5,703
Surplus $ 1,712 $ 1,712
Retained earnings $ 12,600 $ 11,716
Unrealized gains (losses) on securities
available for sale, net of taxes $ (149) $ (145)
Unearned ESOP shares $ (218) $ (238)
--------- ---------
Total stockholder's equity $ 19,622 $ 18,748
--------- ---------
Total liabilities and
stockholder's equity $ 172,560 $ 172,691
========= =========
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Fiscal year to date
Quarter ended Six months ended
June 30, June 30,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C>
Interest income:
Interest and fees on loans $ 2,904 $ 2,798 $ 5,741 $ 5,526
Interest on securities:
U.S. Treasury securities and U.S.government
agency and corporation obligations $ 555 $ 532 $ 1,131 $ 1,048
Obligations of states and political subdivisions
Taxable securities $ 4 $ 4 $ 9 $ 9
Tax-exempt securities $ 26 $ 13 $ 51 $ 25
Other securities $ 14 $ 24 $ 29 $ 46
Interest on Federal funds sold $ 79 $ 49 $ 135 $ 123
------- ------- ------- -------
Total interest income $ 3,582 $ 3,420 $ 7,096 $ 6,777
Interest expense:
Interest on deposits $ 1,357 $ 1,313 $ 2,692 $ 2,660
Interest on Federal funds purchased $ -- $ -- $ -- $ --
Interest on Securities sold under
agreements to repurchase $ 11 $ 3 $ 19 $ 5
------- ------- ------- -------
Total interest expense $ 1,368 $ 1,316 $ 2,711 $ 2,665
------- ------- ------- -------
Net interest income $ 2,214 $ 2,104 $ 4,385 $ 4,112
------- ------- ------- -------
Provision for loan losses $ -- $ 91 $ -- $ 141
Net interest income after provision
for loan losses $ 2,214 $ 2,013 $ 4,385 $ 3,971
------- ------- ------- -------
Other income:
Service charges, commissions and fees $ 243 $ 284 $ 480 $ 550
Security gains (losses) $ (7) $ -- $ (7) $ 29
Gain on sale of bank premises and equipment $ -- $ -- $ -- $ --
Gain on sale of other real estate $ -- $ 20 $ -- $ 60
Other operating income $ 55 $ 2 $ 116 $ 7
------- ------- ------- -------
Total other income $ 291 $ 306 $ 589 $ 646
Other expenses:
Salaries and benefits $ 747 $ 667 $ 1,514 $ 1,374
Expense on premises and fixed assets, net $ 191 $ 178 $ 402 $ 387
Other operating expenses $ 462 $ 356 $ 833 $ 673
------- ------- ------- -------
Total other expenses $ 1,400 $ 1,201 $ 2,749 $ 2,434
Income before income taxes $ 1,105 $ 1,118 $ 2,225 $ 2,183
Income tax expense $ 425 $ 412 $ 836 $ 786
------- ------- ------- -------
Net income $ 680 $ 706 $ 1,389 $ 1,397
------- ------- ------- -------
Earnings per common and common equivalent
shares (based on 1,972,509; 1,966,927
1,972,509; 1,966,927 respectively) $ 0.36 $ 0.38 $ 0.74 $ 0.75
------- ------- ------- -------
Earnings per common share, assuming full
dilution( based on 1,982,163; 1,949,566 $ 0.34 $ 0.36 $ 0.70 $ 0.72
1,982,163; 1,949,566 respectively) ------- ------- ------- -------
</TABLE>
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Cash Flows from Operating Activities
Net income $ 1,389 $ 1,401
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment $ 166 $ 172
Provision for loan losses $ -- $ 141
Amortization and accretion of investment securities $ 8 $ 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 $ 32 $ (60)
Changes in operating assets and liabilities:
(Increase) Decrease in accrued interest receivable $ (33) $ (126)
(Increase) Decrease in prepaid expenses $ (208) $ (234)
(Increase) Decrease in accrued interest payable $ -- $ (31)
(Increase) Decrease in unrealized securities losses $ (4) $ (296)
(Increase) Decrease in deferred income taxes $ 7 $ (124)
Net change in other operating assets and liabilities $ (141) $ (223)
-------- --------
Net cash and cash equivalents provided
by operating activities $ 1,216 $ 625
Cash Flows from Investing Activities
Proceeds from sale of investment securities $ 467 $ 7,480
Proceeds from maturities of investment securities $ 3,947 $ 2,052
Purchase of investment securities $ (3,795) $ (9,178)
Purchase of other real estate $ (207) $ (262)
Net increase in loans $ (2,959) $ (6,599)
Proceeds from sale of bank premises and equipment $ -- $ --
Proceeds from sale of other real estate $ 744 $ 155
Capital expenditures $ (93) $ (69)
-------- --------
Net cash and cash equivalents used in
investing activities $ (1,896) $ (6,421)
Cash Flows from Financing Activities
Net increase (decease) in deposits $ (1,314) $ 1,876
Net increase (decrease) in federal funds purchased $ 446 $ --
Issuance of common stock $ -- $ 250
Dividends paid $ (380) $ (232)
-------- --------
Net cash and cash equivalents provided
by financing activities $ (1,248) $ 1,894
======== ========
Increase (decrease) in cash and cash equivalents $ (1,928) $ (3,902)
-------- --------
Cash and cash equivalents at beginning of period $ 15,337 $ 13,652
-------- --------
Cash and cash equivalents at end of period $ 13,409 $ 9,750
-------- --------
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 2,709 $ 2,691
-------- --------
Income taxes $ 641 $ 716
-------- --------
</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 six months of 1997 of $1.389 million was a
decrease of .57% over the first six months of 1996. Earnings per share for the
six months ended June 30, 1997 was $.36 compared to $.38 for the same period
last year.
The Company's return on average equity decreased for the first six months
of 1997 over 1996. The return on average equity was 14.48% for the six months
ended June 30, 1997, compared to 17.36% in 1996. The return on average assets
amounted to 1.61% and 1.72% for the six months ended June 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 6.64% to $4.385 million for the first six
months of 1997. This increase was attributable to the growth in the Company's
loan portfolio. Total loans outstanding increased 2.68%, or $3.11 million for
the first six 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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<PAGE>
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
72.28% 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 six months ended June 30, 1997, increased 1.73% to
$2.711 million as compared to $2.665 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 six months of 1997 as compared to $141,000 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 $1.405 million at June 30, 1997 or
1.18% of total loans, as compared to $1.246 or 1.07% at December 31, 1996.
Non-performing assets totaled $1.282 million at June 30,1997 compared to $2.070
million at December 31, 1996. The multiple of the allowance for loan losses to
non-performing assets was 1.10x at June 30, 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
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<PAGE>
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 six months ended June 30, 1997, non-interest income
decreased $572,000 or 8.82% to $0.589 million as compared to $0.646 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, and a drop of $70,000 in total service charges and fees collected in the
first half of 1997.
Non-Interest Expense. Non-interest expense of $2.749 million for the six months
ended June 30, 1997, was an increase of $0.315 million or 12.94% over the $2.434
million for the same period last year. Salaries and employee benefits, the
largest component on non-interest expense increased 10.19% to $1.514 million for
the first six 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 $112,000 in non-recurring expenses.
Financial Condition
Total assets as of June 30, 1997 were $172.521 million, a decrease of 0.10%
from $172.691 million at December 31, 1996. Net loans outstanding for the six
months ended June 30, 1997 stood at $118.097 million, a net increase of $2.959
million or 2.57% over the $115.138 million recorded at December 31, 1996.
Deposits for the six months ended June 30, 1997 stood at $150.722 million a
decrease of $1.314 million or 0.86% over the $152.036 at December 31, 1996.
Total securities for the six months ended June 30, 1997 were $35.602
million a decrease of $0.619 million or 1.71% from the $36.221 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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<PAGE>
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.
- 9 -
<PAGE>
At June 30, 1997, the Company's ratio of total capital to risk-weighted
assets was 17.93% and its ratio of Tier 1 capital to risk-weighted assets was
16.74%. Both ratios exceeded the fully phased-in capital requirements. The
following summarizes the Company's regulatory capital and related ratios at June
30, 1997 (dollars in thousands):
Tier 1 Capital $ 19,622
Tier 2 Capital $ 1,405
Total risk-based capital $ 21,027
Total risk-weighted assets $117,242
Capital Ratios:
Tier 1 risk-based capital ratio 16.74%
Total risk-based capital ratio 17.93%
Tier 1 Capital to average total assets 11.37%
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 six months ended June 30, 1997 the Company provided cash or
liquidity from operations in the amount of $1.216 million. The Company's net
investing activities used $1.896 million in the same period. Financing
activities used an additional $1.248 million, consisting mainly of a seasonal
decrease in deposits of $1.314. For the first six months of 1997 this produced a
net decrease in liquidity of approximately $1.928 million. Cash and cash
equivalents on hand at June 30, 1997 totaled $13.409 million. Management
believes that 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 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. 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 June 30, 1997, the
accompanying financial statements would have included the financial position and
results of operations of County Bank of Chesterfield. Interest income, net
income, and net income per share for the two years ended June 30, 1997 would
have been as follows:
6/30/97 6/30/96 12/31/96
(In thousands, except earnings per share data)
Interest Income ................. $ 10,383 $ 9,764 $ 20,015
Net Income ...................... $ 1,764 $ 1,799 $ 3,886
Earnings per common
and equivalent share ......... $ .64 $ .66 $ 1.36
Earnings per common
share, assuming full
dilution ..................... $ .62 $ .64 $ 1.36
- 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
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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
- --------------------------------------------
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: August 7, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,388
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,021
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,368
<INVESTMENTS-CARRYING> 14,234
<INVESTMENTS-MARKET> 14,056
<LOANS> 119,502
<ALLOWANCE> 1,405
<TOTAL-ASSETS> 172,560
<DEPOSITS> 150,722
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,216
<LONG-TERM> 0
0
0
<COMMON> 19,622
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 172,560
<INTEREST-LOAN> 5,741
<INTEREST-INVEST> 1,355
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,096
<INTEREST-DEPOSIT> 2,692
<INTEREST-EXPENSE> 2,711
<INTEREST-INCOME-NET> 4,385
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 2,749
<INCOME-PRETAX> 2,225
<INCOME-PRE-EXTRAORDINARY> 2,225
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,389
<EPS-PRIMARY> .74
<EPS-DILUTED> .70
<YIELD-ACTUAL> .089
<LOANS-NON> 142
<LOANS-PAST> 940
<LOANS-TROUBLED> 48
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<CHARGE-OFFS> 48
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</TABLE>
