<PAGE>
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 Quarter Ended September 30, 2000 Commission File No. 0-13100
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, 2000. Common Stock, $3.00 par value, 2,736,376
shares.
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COMMUNITY BANKSHARES INCORPORATED
FORM 10-Q
September 30, 2000
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999............................... 3
Consolidated Statements of Income for the three months and nine
months ended September 30, 2000 and 1999 (Unaudited)............ 4
Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 2000 and 1999 (Unaudited)... 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (Unaudited)............ 6
Notes to Consolidated Statements (Unaudited)..................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
Item 3. Quantitative and Qualitative Disclosures Regarding
Market Risk..................................................... 11
Part II. Other Information................................................ 12
Item 1. Legal Proceedings................................................ 12
Item 2. Changes in Securities............................................ 12
Item 3. Defaults Upon Senior Securities.................................. 12
Item 4. Results of Votes of Security Holders............................. 12
Item 5. Other Information................................................ 12
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Financial Data Schedule, Exhibit 27............... 12
(b) Reports on Form 8-K.......................................... 12
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CONSOLIDATED BALANCE SHEETS
Community Bankshares Incorporated and Subsidiaries
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
(In thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
===================================================================================================================================
Cash and cash equivalents:
Cash and due from banks $ 16,394 $ 14,410
Federal funds sold 23,214 3,154
---------------------------------------------------------------------------------- -------- --------
Total cash and due from banks 39,608 17,564
---------------------------------------------------------------------------------- -------- --------
Securities available for sale, at fair value 58,512 59,715
Securities held to maturity (fair value, $5,583 - September 30, 2000;
$6,312 - December 31,1999) 5,649 6,435
Loans, net of unearned income 280,218 265,967
Less allowance for loan losses 3,181 2,773
--------------------------------------------------------------------------------- -------- --------
Net loans 277,037 263,194
--------------------------------------------------------------------------------- -------- --------
Bank premises and equipment, net 6,357 4,575
Accrued interest receivable 2,601 2,229
Other real estate owned 939 972
Other assets 3,888 4,152
--------------------------------------------------------------------------------- -------- --------
Total assets $394,591 $358,836
--------------------------------------------------------------------------------- ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
===================================================================================================================================
Deposits:
Noninterest-bearing deposits $ 58,731 $ 51,033
Interest-bearing deposits 295,499 267,394
--------------------------------------------------------------------------------- -------- --------
Total deposits 354,230 318,427
--------------------------------------------------------------------------------- -------- --------
Accrued interest payable 1,349 836
Federal funds purchased - 3,597
Other liabilities 1,095 1,583
Guaranteed ESOP debt 875 229
--------------------------------------------------------------------------------- -------- --------
Total liabilities 357,549 324,672
--------------------------------------------------------------------------------- -------- --------
STOCKHOLDERS' EQUITY
===================================================================================================================================
Common stock,par value $3 per share, authorized 20,000,000 8,209 8,140
shares, shares issued September 30, 2000 - 2,736,376;
December 31, 1999 - 2,713,258
Capital surplus 3,914 3,894
Retained earnings 27,356 24,513
Accumulated other comprehensive income (loss), net of tax (1,562) (2,154)
Unearned ESOP shares (875) (229)
--------------------------------------------------------------------------------- -------- --------
Total stockholders' equity 37,042 34,164
--------------------------------------------------------------------------------- -------- --------
Total liabilities and stockholders' equity $394,591 $358,836
--------------------------------------------------------------------------------- ======== ========
</TABLE>
The notes are an integral part of the financial statements.
3
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CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Community Bankshares Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except share and per share data) 2000 1999 2000 1999
----------------------------------------------------------- ------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Interest Income
===================================================================================================================================
Interest and fees on loans $ 6,734 $ 5,608 $ 19,439 $ 15,784
Interest on securities:
U.S. government and agencies 792 865 2,421 2,587
States and political subdivisions 170 187 517 551
Other 74 35 153 102
Interest on federal funds sold 297 111 525 468
----------------------------------------------------------- -------------- ----------- ---------- ----------
Total interest income 8,067 6,806 23,055 19,492
----------------------------------------------------------- -------------- ----------- ---------- ----------
Interest Expense
===================================================================================================================================
Interest on deposits 3,802 2,666 10,172 7,777
Interest on federal funds purchased 2 4 82 4
Interest on securities sold under agreements to repurchase - 30 - 72
----------------------------------------------------------- -------------- ----------- ---------- ----------
Total interest expense 3,804 2,700 10,254 7,853
----------------------------------------------------------- -------------- ----------- ---------- ----------
Net interest income 4,263 4,106 12,801 11,639
Provision for loan losses 130 81 529 201
----------------------------------------------------------- -------------- ----------- ---------- ----------
Net interest income after provision for loan losses 4,133 4,025 12,272 11,438
----------------------------------------------------------- -------------- ----------- ---------- ----------
Noninterest Income
===================================================================================================================================
Service charges on deposit accounts and other fees 572 529 1,689 1,510
Securities gains - - 8 2
Gain on sale of other real estate - - 127 -
Other operating income 83 66 174 163
----------------------------------------------------------- -------------- ----------- ---------- ----------
Total noninterest income 655 595 1,998 1,675
----------------------------------------------------------- -------------- ----------- ---------- ----------
Noninterest Expense
===================================================================================================================================
Salaries and benefits 1,692 1,510 4,803 4,456
Occupancy and equipment expense 315 329 965 955
Other operating expense 695 638 2,064 1,983
----------------------------------------------------------- -------------- ----------- ---------- ----------
Total noninterest expense 2,702 2,477 7,832 7,394
----------------------------------------------------------- -------------- ----------- ---------- ----------
Earnings
===================================================================================================================================
Income before income taxes 2,086 2,143 6,438 5,719
Income tax expense 692 703 2,037 1,838
----------------------------------------------------------- -------------- ----------- ---------- ----------
Net Income $ 1,394 $ 1,440 $ 4,401 $ 3,881
----------------------------------------------------------- ============== =========== ========== ==========
Earnings Per Share
===================================================================================================================================
Net income per common share:
Basic $ 0.51 $ 0.53 $ 1.62 $ 1.42
Diluted $ 0.50 $ 0.51 $ 1.59 $ 1.39
Average shares outstanding:
Basic 2,730,022 2,740,032 2,730,022 2,740,032
Diluted 2,783,060 2,801,059 2,756,963 2,801,059
===================================================================================================================================
</TABLE>
The notes are an integral part of the financial statements.
4
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Community Bankshares Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Other Unearned
Common Capital Retained Comprehensive ESOP
(In thousands, except per share data) Stock Surplus Earnings Income (Loss) Shares Total
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2000
-----------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $8,140 $3,894 $24,513 $(2,154) $(229) $34,164
Comprehensive income:
Net income 4,401 4,401
Other comprehensive income, net of tax:
Unrealized holding gains on securities
available-for-sale (net of deferred
tax expense of $305) 592 592
------------------------------------------ ------- ------- -------
Comprehensive income 4,401 592 4,993
------------------------------------------ ------- ------- -------
Issuance of common stock pursuant to
stock option plans 84 101 185
Cash settlement of options (10) (10)
Common stock repurchased (15) (71) (86)
Cash dividends declared - $.57 per share (1,558) (1,558)
Leveraged ESOP stock purchase (646) (646)
------------------------------------------ ------ ------ ------- ------- ----- -------
Balance at beginning of period $8,209 $3,914 $27,356 $(1,562) $(875) $37,042
------------------------------------------ ====== ====== ======= ======= ===== =======
Nine months ended September 30, 1999
-----------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $8,286 $4,915 $20,820 $ 99 $ - $34,120
Comprehensive income:
Net income 3,881 3,881
Other comprehensive income, net of tax:
Unrealized holding gains on securities
available-for-sale (net of deferred
tax expense of $870) (1,689) (1,689)
------------------------------------------ ------- ------- -------
Comprehensive income 3,881 (1,689) 2,192
------------------------------------------ ------- ------- -------
Common stock repurchased (134) (930) (1,064)
Cash dividends declared - $.46 per share (1,257) (1,257)
------------------------------------------ ------ ------ ------- ------- ----- -------
Balance at end of period $8,152 $3,985 $23,444 $(1,590) $ - $33,991
------------------------------------------ ====== ====== ======= ======= ===== =======
</TABLE>
The notes are an integral part of the financial statements.
5
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CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Community Bankshares Incorporated and Subsidiaries
<TABLE>
<CAPTION>
(In thousands) Nine months ended September 30, 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
========================================================================================================================
Net Income $ 4,401 $ 3,881
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation of bank premises and equipment 357 378
Deferred income taxes (105) (424)
Provision for loan losses 529 201
Provision for losses on other real estate owned 18 -
Amortization and accretion of investment securities (79) 8
Gain on sale of securities (8) (2)
Gain on sale of other real estate (127) (1)
Changes in operating assets and liabilities:
Increase in accrued interest receivable (372) (389)
Increase (decrease) in accrued interest payable 513 (6)
Net change in other operating assets and liabilities (578) (184)
----------------------------------------------------------------------------------------- -------- --------
Net cash provided by operating activities 4,549 3,462
----------------------------------------------------------------------------------------- -------- --------
Investing Activities
========================================================================================================================
Proceeds from sale of investment securities 196 11,627
Proceeds from maturities and redemptions of investment securities 3,419 7,524
Purchase of investment securities (641) (17,985)
Net increase in loans (14,372) (49,007)
Proceeds from the sale of other real estate 1,266 331
Purchase of premises and equipment (1,699) (327)
Increase in other assets (287) -
Purchase of other real estate (1,124) (371)
----------------------------------------------------------------------------------------- -------- --------
Net cash used in investing activities (13,241) (48,208)
----------------------------------------------------------------------------------------- -------- --------
Financing Activities
========================================================================================================================
Net increase in deposits 35,803 18,954
Net increase (decrease) in federal funds purchased (3,597) 1,852
Cash dividends (1,558) (1,257)
Common stock repurchased (86) (1,064)
Net proceeds from issuance of common stock 185 -
Cash settlement of options (10) -
----------------------------------------------------------------------------------------- -------- --------
Net cash provided by financing activities 30,736 18,485
----------------------------------------------------------------------------------------- -------- --------
Increase (decrease) in cash and cash equivalents 22,044 (26,261)
Cash and cash equivalents, beginning 17,564 47,318
----------------------------------------------------------------------------------------- -------- --------
Cash and cash equivalents, ending $ 39,608 $ 21,057
----------------------------------------------------------------------------------------- ======== ========
</TABLE>
The notes are an integral part of the financial statements.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all of the disclosures and notes required by generally accepted accounting
principles. In the opinion of management, all material adjustments (which are of
a normal recurring nature) considered necessary for a fair presentation have
been made. The results for the interim period are not necessarily indicative of
the results to be expected for the entire year or any other interim period. The
information reported herein should be read in conjunction with the Notes to
Consolidated Financial Statements included in the Company's Annual Report for
the year ended December 31, 1999. Certain reclassifications have been made to
the 1999 historical financial statements to conform to the 2000 presentation.
Note 2. New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard ("FAS") 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. Under FAS 133, derivatives are
recognized on the balance sheet at fair value as an asset or liability. Changes
in the fair value of derivatives will be reported as a component of other
comprehensive income or recognized as earnings through the income statement
depending on the nature of the instrument. FAS 137 was issued in June 1999, and
deferred the effectiveness of FAS 133 to all quarters of fiscal years beginning
after June 15, 2000, with earlier adoption permitted. The Company has not
adopted FAS 133 yet and is currently evaluating FAS 133's effect on its
financial position and results of operation, but it is not expected to have a
material impact.
7
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Community Bankshares Incorporated (the "Company" and "Community Bankshares") is
a multi-bank holding company organized under Virginia law, which provides
financial services through its wholly-owned subsidiaries, Commerce Bank
(formerly known as The Community Bank), Commerce Bank of Virginia and County
Bank of Chesterfield. All three 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 Cities of Petersburg and Richmond, and Chesterfield, Henrico, Hanover and
Goochland counties. The Company operates thirteen branch locations in these
Virginia trade areas.
The following discussion provides information about the major components of the
financial condition, results of operations, asset quality, liquidity, and
capital resources of Community Bankshares Incorporated. The discussion and
analysis should be read in conjunction with the Consolidated Financial
Statements.
FINANCIAL CONDITION
Total assets as of September 30, 2000 were $394.6 million, an increase of 10.0%
from $358.8 million at December 31, 1999. Total loans, net of unearned income
as of September 30, 2000 stood at $280.2 million, an increase of $14.3 million
or 5.4% over the $266.0 million recorded at December 31, 1999.
Total securities available for sale for at September 30, 2000 were $58.5
million, essentially unchanged from the $59.7 million at year-end 1999. Federal
funds sold increased to $23.2 million at quarter-end.
Total deposits as of September 30, 2000 stood at $354.2 million, an increase of
$35.8 million or 11.2% over the $318.4 million at December 31, 1999. This
increase occurred mainly in shorter-term interest-bearing deposits. Total
interest-bearing deposits were $295.5 million at September 30, 2000 compared to
$267.4 million at year-end 1999, an increase of $28.1 million or 10.5%.
Noninterest-bearing deposits increased 15.1% or $7.7 million from the 1999
year-end level of $51.0 million.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2000 totaled $1.4 million,
down $46 thousand compared to the same 1999 period. Earnings per share for the
September 2000 quarter was $0.50, on a diluted basis, or $.01 lower than the
$0.51 recorded for the same period last year.
Net interest income, the difference between the interest earned and interest
paid, is the largest component of the Company's earnings and changes in it have
the greatest impact on net income. Variations in the volume and mix of assets
and liabilities and their relative
8
<PAGE>
sensitivity to interest rate movements determine changes in net interest income.
Net interest income for the third quarter of 2000 increased 3.8% to $4.3 million
compared to $4.1 million for the third quarter of 1999. Continued growth in the
Company's loan portfolio was the primary factor contributing to this increase.
Total loans, net of unearned income grew $14.3 million to $280.2 million
compared to December 31,1999.
Total interest expense for the quarter ended September 30, 2000, increased to
$3.8 million, up $1.1 million over the same period one year earlier. This
increase was due primarily to an increase in the volume of interest-bearing
liabilities, principally certificates of deposit maturing in less than two
years. Total interest-bearing deposits increased $28.1 million or 10.5%. Also
showing increases were noninterest-bearing deposits, up 15.1% or $7.7 million
over year-end 1999 levels.
For the three months ended September 30, 2000, noninterest income increased $60
thousand or 10.1% to $655 thousand compared to the same period a year earlier.
The increase arose primarily from higher service charges on deposit accounts, up
8.1% or $43 thousand.
Noninterest expense of $2.7 million reported for the quarter ended September 30,
2000, was an increase of $225 thousand or 9.1% over the same period last year.
Salaries and employee benefits, the largest component of noninterest expense,
increased 12.1% to $1.7 million for the third quarter of 2000, primarily due to
slightly higher staffing levels and higher benefit cost compared to the same
1999 period.
Net income for the nine months ended September 30, 2000 totaled $4.4 million, an
increase of 13.4% over the nine months ended September 30, 1999. Earnings per
share for the first nine months of the year was $1.59 on a diluted basis, or
14.4% higher than the $1.39 recorded for the same period last year.
The return on average equity and return on average assets was 16.52% and 1.55%,
respectively for the nine months ended September 30, 2000.
Net interest income for the first nine months of 2000 increased $1.2 million to
$12.8 million or 10.0% higher than the comparable September 30, 1999 period.
Continued growth in the Company's loan portfolio in excess of deposit growth was
the primary factor contributing to this increase. Total interest expense for the
nine months ended September 30, 2000, increased 30.6% to $10.3 million, higher
by $2.4 million compared to the same period one year earlier.
Noninterest income for the nine months ended September 30, 2000, increased 19.3%
to $2.0 million compared to $1.7 million for the same period a year earlier.
Noninterest expense totaled $7.8 million for the nine months ended September 30,
2000, an increase of $438 thousand or 5.9% over the previous year.
9
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ASSET QUALITY
The allowance for loan losses represents management's estimate of an amount
adequate to absorb potential future losses inherent in the loan portfolio. In
assessing the adequacy of the allowance, management relies predominately on its
ongoing review of the lending process and the risk characteristics of the
portfolio in the aggregate. Among other factors, management considers the
Company's loan loss experience, the amount of past-due loans, current and
anticipated economic conditions, and the estimated current values of collateral
securing loans in assessing the level of the allowance for loan losses.
The allowance for loan losses totaled $3.2 million at September 30, 2000 or
1.14% of total loans, net of unearned income compared to $2.8 million or 1.04%
at December 31, 1999. The provision for loan losses was $130 thousand for the
third quarter of 2000 reflecting management's desire to maintain the allowance
for loan losses at a sufficient level to absorb any potential future loan losses
inherent in the growing loan portfolio. Net charge-offs were $15 thousand for
the quarter ended September 30, 2000 or 0.02% of average loans on an annualized
basis. For the nine months ended September 30, 2000, net charge-offs were $121
thousand or 0.06% of average loans on an annualized basis.
Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more
past due, and other real estate owned, were $2.8 million at quarter-end
September, 2000, lower by $1.2 million compared to year-end 1999. Nonaccrual
loans totaled $483 thousand, a decrease of $1.5 million since December 31, 1999.
Loans past due 90 days or more totaled $1.3 million at September 30, 2000, up
$477 thousand over year-end 1999, and other real estate owned increased $80
thousand to $1.1 million. Management does not expect to incur any material
losses related to nonperforming assets.
LIQUIDITY
In determining the Company's liquidity requirements, both sides of the balance
sheet are managed to ensure that adequate funding sources are available to
support loan growth, deposit withdrawals or any unanticipated need for funds.
Securities available for sale that mature within one year, or have a weighted
average life of one year are sources of liquidity. Anticipated mortgage-backed
securities paydowns and maturing loans also generate cashflows to meet liquidity
requirements. Wholesale funding sources are also used to supply liquidity such
as federal funds purchased and large denomination certificates of deposit. The
Company considers its sources of liquidity to be adequate to meet its
anticipated needs.
CAPITAL RESOURCES
Community Bankshares capital position provides the necessary assurance required
to support anticipated asset growth and to absorb potential losses.
10
<PAGE>
The Company's Tier I capital position capital was $38.6 million at September 30,
2000, or 12.67% of risk-weighted assets. Total risk-based capital was $41.8
million or 13.72% of risk-weighted assets.
Tier I capital consists primarily of common stockholders' equity, while total
risk-based capital includes the allowance for loan losses. Risk weighted assets
are determined by assigning various levels of risk to different categories of
assets and off-balance sheet activities. Under current risk-based capital
standards, all banks are required to have Tier I capital of at least 4% and
total capital of 8%.
FORWARD-LOOKING STATEMENTS
Certain statements in this report may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the Company believes that its expectations with respect to certain
forward-looking statements are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the Company will
not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information provided in the
December 31, 1999 Form 10-K.
11
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Part II. OTHER INFORMATION
Item: 1 Legal proceedings
There are no material legal proceedings to which the Registrant or
any of its subsidiaries are involved in other than legal proceedings
occurring in the ordinary course of business, which are deemed
immaterial.
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
(a) Exhibits - Financial Data Schedule, Exhibit 27
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
COMMUNITY BANKSHARES INCORPORATED
/s/Nathan S. Jones, 3rd
-----------------------
Nathan S. Jones, 3rd
President and Chief Executive Officer
/s/Ray A. Fleming
-----------------
Ray A. Fleming
Senior Vice President and Chief Financial Officer
Date: November 14, 2000
12
