SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 File number: 000-22054
COMMUNITY BANKSHARES, INC.
(Exact Name of Small Business Issuer in its Charter)
South Carolina 57-0966962
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
791 Broughton St., Orangeburg, South Carolina 29115
(Address of Principal Executive Office, Zip Code)
(803) 535-1060
(Issuer's telephone number)
Check whether the issuer (1) has filed all the reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X. No _.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,044,668 shares of common
stock outstanding as of October 30, 1998.
<PAGE>
10-QSB TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I-Financial Statements Page
<S> <C>
Item 1 Financial Statements ................................................. 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 9
Part II-Other Information
Item 6 Exhibits and Reports on Form 8-K ..................................... 19
</TABLE>
2
<PAGE>
COMMUNITY BANKSHARES, INC. - CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
September 30 December 31,
ASSETS 1998 1997
---- ----
(dollar amounts in thousands)
Cash and due from other financial institutions:
<S> <C> <C>
Non-interest bearing ........................................................... $ 7,230 $ 4,062
Federal funds sold ............................................................. 17,260 1,060
--------- ---------
Total cash and cash equivalents ............................................ 24,490 5,122
Interest bearing deposits in other banks ........................................... 2,156 1,238
Investment securities:
Securities held to maturity .................................................... 13,545 17,311
Securities available for sale .................................................. 14,427 15,141
Loans held for resale .............................................................. 804 358
Loans .............................................................................. 109,610 91,951
Less, allowance for loan losses ................................................ (1,364) (1,140)
--------- ---------
Net loans .................................................................. 108,246 90,811
--------- ---------
Premises and equipment ............................................................. 3,941 2,733
Accrued interest receivable ....................................................... 1,150 1,168
Deferred income taxes .............................................................. 360 351
Other assets ....................................................................... 651 341
--------- ---------
Total assets ............................................................... $ 169,770 $ 134,574
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ........................................................... $ 20,461 $ 17,003
Interest bearing ............................................................... 116,818 100,164
--------- ---------
Total deposits ............................................................. 137,279 117,167
Federal funds purchased and securities
sold under agreements to repurchase ............................................ 2,820 2,551
Federal Home Loan Bank advances .................................................... 9,490 1,060
Other liabilities .................................................................. 919 759
--------- ---------
Total liabilities .......................................................... 150,508 121,537
--------- ---------
Shareholders' equity:
Common stock
No par, authorized shares 12,000,000, issued and ........................... 14,626 9,156
outstanding 2,934,916 in 1998 and 2,634,676 in 1997
Retained earnings .............................................................. 4,589 3,861
Unrealized gain on securities available for sale ............................... 47 20
--------- ---------
Total shareholders' equity ................................................. 19,262 13,037
--------- ---------
Total liabilities and shareholders' equity ................................. $ 169,770 $ 134,574
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
3
<PAGE>
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENT OF CHANGES I
SHAREHOLDERS' EQUITY
for the nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Common Common Stock Retained Accumulated Total
Shares Earnings Other Stockholders'
Comprehensive Equity
Income (Loss)
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balances at Dec. 31, 1996 ....... 2,626,476 $9,064 $3,040 $- $12,104
Comprehensive income:
Net income ................. 872 872
Other comprehensive income (loss)
net of tax:
Unrealized gain (loss) on .. 5 5
securities
Cost of dividend ........... - (9) (9)
reinvestment plan
Dividends paid ............. (395) (395)
--------- ------- ------ --- -------
Balances at Sept. 30, 1997 ...... 2,626,476 $9,055 $3,517 $ 5 $12,577
========= ======= ====== === =======
Balances at Dec. 31, 1997 ....... 2,634,676 $9,156 $3,861 $20 $13,037
Comprehensive income:
Net income ................. 1,182 1,182
Other comprehensive income (loss)
net of tax:
Unrealized gain (loss) on .. 27 27
securities
Issuance of common ......... 300,240 5,470 5,470
stock
Dividends paid ............. (454) (454)
--------- ------- ------ --- -------
Balances at Sept. 30, 1998 ...... 2,934,916 $14,626 $4,589 $47 $19,262
========= ======= ====== === =======
</TABLE>
4
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COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine months ended Sept. 30, Quarter ended Sept. 30,
1998 1997 1998 1997
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
--------- --------- --------- ---------
(dollar amounts in thousands)
Interest and dividend income:
<S> <C> <C> <C> <C>
Interest and fees on loans ............................. $ 7,027 $ 5,544 $ 2,488 $ 1,998
Deposits with other financial institutions ............. 98 54 30 20
Investment securities:
Interest - U. S. Treasury and
U. S. Government Agencies .......................... 1,398 1,269 471 478
Dividends ............................................ 58 32 28 10
---------- ---------- ---------- ----------
Total investment securities ....................... 1,456 1,301 499 488
---------- ---------- ---------- ----------
Federal funds sold and securities
purchased under agreements to resell ................. 328 183 184 89
---------- ---------- ---------- ----------
Total interest and dividend income ................ 8,909 7,082 3,201 2,595
---------- ---------- ---------- ----------
Interest expense:
Deposits:
Certificates of deposit of $100,000 or ............... 909 624 301 251
more
Other ................................................ 2,771 2,338 1,008 858
---------- ---------- ---------- ----------
Total ............................................. 3,680 2,962 1,309 1,109
deposits
Federal funds purchased and securities
sold under agreements to repurchase .................. 76 118 27 57
Federal Home Loan Bank advances ........................ 258 55 130 18
---------- ---------- ---------- ----------
Total interest expense ............................ 4,014 3,135 1,466 1,184
---------- ---------- ---------- ----------
Net interest income ........................................ 4,895 3,947 1,735 1,411
Provision for loan losses .................................. 324 258 136 81
---------- ---------- ---------- ----------
Net interest income after provision for loan losses......... 4,571 3,689 1,599 1,330
---------- ---------- ---------- ----------
Non-interest income:
Service charges on deposit accounts .................... 572 399 196 146
Other .................................................. 213 160 98 50
---------- ---------- ---------- ----------
Total non-interest income ......................... 785 559 294 196
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits ......................... 2,022 1,738 711 605
Premises and equipment ................................. 480 384 204 135
Other .................................................. 1,071 826 456 283
---------- ---------- ---------- ----------
Total non-interest expense ........................ 3,573 2,948 1,371 1,023
---------- ---------- ---------- ----------
Net income before taxes .................................... 1,783 1,300 522 503
Provision for income taxes ................................. 601 428 187 178
---------- ---------- ---------- ----------
Net income ................................................. $ 1,182 $ 872 $ 335 $ 325
========== ========== ========== ==========
Basic earnings per common share:
Weighted average shares outstanding .................... 2,844,521 2,626,476 2,803,798 2,626,476
========== ========== ========== ==========
Net income per common share ............................ $ 0.42 $ 0.33 $ 0.12 $ 0.12
========== ========== ========== ==========
Diluted earnings per common share:
Weighted average shares outstanding .................... 2,902,226 2,670,299 2,882,541 2,670,299
========== ========== ========== ==========
Net income per common share ............................ $ 0.41 $ 0.33 $ 0.12 $ 0.12
========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
5
<PAGE>
COMMUNITY BANKSHARES, INC. - CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
UNAUDITED UNAUDITED
--------- ---------
(dollar amounts in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net income ........................................................................... $ 1,182 $ 872
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation ................................................................. 268 227
Provision for loan losses .................................................... 324 258
Accretion of discounts and
amortization of premiums -
investment securities - net ................................................ (11) (86)
Changes in assets and liabilities:
Proceeds of sale of loans held for resale .................................... 7,253 3,614
Origination of loans held for resale ......................................... (7,700) (3,420)
(Increase) decrease in interest receivable ................................... 18 (286)
(Increase) decrease in other assets .......................................... (192) 131
Increase in other liabilities ................................................ 160 101
-------- --------
Net cash provided by operating activities .................................... 1,302 1,411
-------- --------
Cash flows from investing activities:
Net increase in interest bearing deposits .................................... (918) (910)
Proceeds from maturities of
investment securities - held to maturity ................................... 17,677 5,036
Purchases of investment securities - held to maturity ........................ (14,125) (7,381)
Proceeds from maturities of
investment securities - available for sale ................................. 14,946 3,724
Purchases of investment securities - avail. for sale ......................... (13,979) (6,741)
Net (increase) in loans to customers ......................................... (17,759) (17,924)
Purchase of premises and equipment ........................................... (1,412) (163)
Net (increase) in other real estate .......................................... (191) -
-------- --------
Net cash (used) in investing activities .................................... (15,761) (24,359)
-------- --------
Cash flows from financing activities:
Net increase in demand, savings, and time deposits ........................... 20,112 24,973
Net increase in federal funds purchased and
securities sold under agreements to repurchase ............................. 269 6,216
Increase (decrease) in Federal Home Loan Bank ................................ 8,430 (70)
Sale of common stock ......................................................... 5,470 -
Cost of stock sale ........................................................... - (9)
Dividends paid in cash ....................................................... (454) (395)
-------- --------
Net cash provided by financing activities .................................. 33,827 30,715
-------- --------
Net increase in cash and due from other
financial institutions ....................................................... 19,368 7,767
Cash and due from other financial institutions -
beginning of period .......................................................... 5,122 6,649
-------- --------
Cash and due from other financial institutions -
end of period ................................................................ $ 24,490 $ 14,416
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
6
<PAGE>
Summary of Significant Accounting Principles
A summary of significant accounting policies is included in the 1997
Annual Report of Community Bankshares, Inc. to the Shareholders, which also
contains the Company's audited financial statements for 1997.
Principles of Consolidation
The consolidated financial statements include the accounts of
Community Bankshares, Inc. (CBI), the parent company, and Orangeburg National
Bank, Sumter National Bank, and Florence National Bank, its wholly-owned
subsidiaries. The consolidated financial statements also include the pre-opening
activities for Florence National Bank. All significant intercompany items have
been eliminated in the consolidated statements.
Management Opinion
The financial statements in this report are unaudited. In the opinion
of management, all the adjustments necessary to present a fair statement of the
results for the interim period have been made. Such adjustments are of a normal
and recurring nature.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for an entire year. These interim
financial statements should be read in conjunction with the annual financial
statements and notes thereto contained in the 1997 Annual Report.
Changes in Comprehensive Income Components
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Disclosure as
required by the Statement is as follows:
Nine Months Ended September 30, 1997 and 1998
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Unrealized gains (losses) on securities:
<S> <C> <C> <C>
Unrealized holding gains (losses) arising ............................... $ 7,575 $ (2,575) $ 5,000
during period
Less: reclassification adjustment for gains (losses)
Realized in net income
------- -------- -------
Net unrealized gains (losses) ........................................... 7,575 (2,575) 5,000
------- -------- -------
Other comprehensive income, Sept. 30, 1997 .............................. $ 7,575 $ (2,575) $ 5,000
======= ======== =======
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during ........................ $40,909 $(13,909) $27,000
period
Less: reclassification adjustment for gains (losses)
realized in net income
------- -------- -------
Net unrealized gains (losses) ........................................... 40,909 (13,909) 27,000
------- -------- -------
Other comprehensive income, Sept. 30, 1998 .............................. $40,909 $(13,909) $27,000
======= ======== =======
</TABLE>
7
<PAGE>
COMMUNITY BANKSHARES, INC. - AVERAGE BALANCE SHEETS, YIELDS AND RATES
<TABLE>
<CAPTION>
Nine months ended September 30, 1998 1997
(unaudited) Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Assets Balance Expense Rates Balance Expense Rates
------- ------- ----- ------- ------- -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits ............... $ 2,360 $ 98 5.54% $ 1,251 $ 54 5.76%
Investment securities taxable ........... 29,950 1,447 6.44% 27,612 1,288 6.22%
Investment securities--tax exempt ....... 294 9 6.18% 411 13 6.39%
Federal funds sold ...................... 7,837 328 5.58% 4,543 183 5.37%
Loans receivable ........................ 99,995 7,027 9.37% 78,252 5,544 9.45%
-------- ------ ---- -------- ------ ----
Total interest earning assets ........... 140,436 8,909 8.46% 112,069 7,082 8.43%
Cash and due from banks ................. 6,257 4,929
Allowance for loan losses ............... (1,238) (978)
Premises and equipment .................. 3,425 2,831
Other assets ............................ 1,679 1,543
-------- --------
Total assets ................................ $150,559 $120,394
======== ========
Liabilities and Shareholders' Equity
Interest bearing deposits
Savings ................................. $ 20,356 $ 537 3.52% $ 19,267 $ 495 3.43%
Interest bearing transaction accounts ... 13,617 192 1.88% 11,623 164 1.88%
Time deposits ........................... 71,821 2,951 5.48% 56,849 2,303 5.40%
-------- ------ ---- -------- ------ ----
Total interest bearing deposits ......... 105,794 3,680 4.64% 87,739 2,962 4.50%
Short term borrowing .................... 2,467 76 4.11% 3,969 118 3.96%
FHLB advances ........................... 6,043 258 5.69% 1,114 55 6.58%
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities ...... 114,304 4,014 4.68% 92,822 3,135 4.50%
Noninterest bearing demand deposits ..... 18,697 14,500
Other liabilities ....................... 882 797
Shareholders' equity .................... 16,676 12,275
-------- --------
Total liabilities and shareholders' equity .. $150,559 $120,394
======== ========
Interest rate spread .................... 3.78% 3.92%
Net interest income and net yield on earning assets $4,895 4.65% $3,947 4.70%
====== ==== ====== ====
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as `forward looking statements'
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. The Corporation cautions readers that forward
looking statements, including without limitation, those relating to the
Corporation's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Corporation's reports filed with the Securities and Exchange
Commission.
Corporate Form
Community Bankshares, Inc. (CBI) is a bank holding company organized
under the laws of South Carolina. It presently conducts business through its
three banking subsidiaries. On July 1, 1993, Orangeburg National Bank (the
Orangeburg bank) became a wholly owned subsidiary of CBI. On June 10, 1996,
Sumter National Bank (the Sumter bank) became a wholly owned subsidiary of CBI.
(It also commenced banking operations on that date.) On July 6, 1998, Florence
National Bank (the Florence bank) became a wholly owned subsidiary of CBI. (It
also commenced banking operations on that date.) Accordingly, the financial
statements for the quarter and period ended September 30, 1998, are for the
consolidated operations of the holding company and the three banks. All
significant intercompany transactions have been eliminated.
Florence National Bank
Community Bankshares, Inc. entered into an agreement with six local
business people in the Florence, South Carolina community to sponsor the
formation of a new national bank to be owned by CBI. CBI has assisted in and
advanced the funds for plans for the new bank. The bank opened for business on
Monday, July 6, 1998.
From March to July 1998 CBI sold to the public 300,000 shares of its
common stock. This public sale raised $4.6 million. The company also raised
additional capital through the sale of restricted shares to the organizers of
the Florence bank. In total, the company raised $5.4 million, of which $4.5
million was used to capitalize the new bank.
Year 2000 Readiness Disclosure
The change in date from 1999 to 2000 poses potential problems for many
computer systems around the world. Certain of the Corporation's systems may be
affected by this so-called millennium bug. CBI is investigating the extent to
which its systems are affected and communicating with all of its computer
vendors concerning timely completion of remedies for those systems that require
modification. The Corporation is also communicating with third parties on which
it relies to assess their progress in evaluating their systems and implementing
any corrective measures and has formed a committee to coordinate its Year 2000
activities. The Corporation has been taking and will continue to pursue
reasonably necessary steps to protect its operations and assets.
Management estimates that the costs of Year 2000 compliance will
approximate $200,000 and will be funded with internally generated resources. The
majority of these costs have already been expended and the remaining items
relate primarily to the Corporation's testing plans. Most of the Corporation's
local and wide area network computer and communications equipment is relatively
new. For this reason, the overall financial impact of the Year 2000 problem is
fairly limited.
9
<PAGE>
The Corporation has been devoting significant time and energy to
management of the Year 2000 problem. It formed a Year 2000 steering committee
comprised of senior officers from each of the three banks and the holding
company to oversee the process. The boards of directors of the Corporation and
its subsidiaries receive regular detailed progress reports on the Year 2000
project. The national bank regulators, which supervise the three banking
subsidiaries, have devoted a substantial amount of their time and supervisory
attention to the Year 2000 problems and related issues.
The Corporation has concentrated its internal efforts toward making
its own mission critical systems fully Year 2000 compliant as quickly as
practical. Management expects its efforts to be successful and, consequently,
has no immediate plans to implement any major changes in the information
technology systems prior to January 2000.
The Corporation is currently substantially complete in testing its
core information system, Banker 2. Test results have been successful. Management
expects to be substantially complete with testing of mission critical systems by
the end of 1998. Management expects to engage its outside auditor during the
first quarter of 1999 to evaluate the reasonableness and validity of its testing
program.
Nevertheless, the Corporation's ability to avoid experiencing
difficulty as a result of the Year 2000 problem could be adversely affected by
the availability of skilled personnel, the success of vendors, customers and
providers of services in dealing with their own Year 2000 problems and by the
difficulty of identifying all the possible causes of the Year 2000 problem and
interrelationships between various mission critical systems.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Synopsis
The 1998 third quarter statement of operations reflects substantial
expenses related to commencement of operations by CBI's new subsidiary, Florence
National Bank. Consolidated net income has been reduced by $161,000 as a result
of the first three months of operations by the Florence bank, and by $49,000 as
a result of expenses paid during 1998 by CBI directly associated with the start
up of the new bank.
Management views this reduction in earnings as the expected result of
a major investment in a new marketplace. In many ways, the current situation in
Florence parallels the 1996-1997 initial operating periods for the Sumter bank.
Management of CBI is, nonetheless, pleased with the Florence bank's
steady progress. At September 30, 1998, after approximately three months of
operation, the Florence bank had a loan portfolio of $2.3 million, deposits of
$6.5 million, and total assets of $10.9 million.
Net Income
For the nine months ended September 30, 1998, CBI earned a
consolidated profit of $1,182,000, compared to $872,000 for the comparable
period of 1997, an increase of 35.5% or $310,000. Diluted earnings per share
were $.42 in the 1998 period, compared to $.33 for the 1997 period..
For the nine months ended September 30, 1998, Orangeburg National Bank
reported a profit of $1,236,000, compared to $1,028,000 for the comparable
period of 1997, an increase of 20.2% or $208,000.
For the nine months ended September 30, 1998, Sumter National Bank
reported a profit of $105,000, compared to a loss of $169,000 for the comparable
period of 1997, an improvement of $274,000.
For the nine months ended September 30, 1998, Florence National Bank
reported a net after tax loss of $161,000. The Florence bank began operations on
July 6, 1998.
10
<PAGE>
As noted above, consolidated net income for the nine months ended
September 30, 1998, increased from the prior year by 35.5% or $310,000. The
major components of this increase are discussed below. Net interest income
before provision for loan losses for the nine months ended September 30, 1998,
increased to $4,895,000, compared to $3,947,000 for the same period in 1997, an
increase of 24% or $948,000. For the 1998 period, the provision for loan losses
was $324,000, compared to $258,000 for the 1997 period, an increase of 25.6% or
$66,000. Non-interest income for the 1998 period increased to $785,000 from
$559,000 for the 1997 period, a 40.4% or $226,000 increase. Non-interest expense
increased to $3,573,000 from $2,948,000, a 21.2% or $625,000 increase.
Results for the first nine months of 1998 include results of the start
up of initial operations for Florence National Bank for the last three months of
the period. Accordingly, many of the dollar and percentage comparisons and
changes between periods discussed in this report are unusually large.
Profitability
One of the best ways to review earnings is through the ROA (return on
average assets) and the ROE (return on average equity). Return on assets is the
income for the period divided by the average assets for the period, annualized.
Return on equity is the income for the period divided by the average equity for
the period, annualized. Based on operating results for the nine months ended
September 30, 1998 and 1997, the following table is presented.
Nine months ended Sept. 30,
1998 1997
(dollarsinthousands)
Average assets $150,559 $120,394
ROA 1.05% 0.97%
Average equity $16,676 $12,275
ROE 9.45% 9.47%
Net income $1,182 $872
Average equity and average assets were substantially greater in 1998
than they were in 1997 as the result of the sale of stock to capitalize the
Florence bank and the deposit taking activities of the Florence bank, as well as
continued strong asset growth in Sumter and Orangeburg.
Net interest income
Net interest income, the major component of CBI's income, is the
amount by which interest and fees on interest earning assets exceed the interest
paid on interest bearing deposits and other interest bearing funds. During the
first nine months of 1998, net interest income after provision for loan losses
increased to $4,571,000 from $3,689,000, a 23.9% or $882,000 increase over the
comparable period of 1997. This improvement was primarily the result of an
increase in the volume of earning assets at each bank.
11
<PAGE>
Interest Income
Elsewhere in this report is a table comparing the average balances,
yields, and rates for the interest rate sensitive segments of the company's
balance sheet for the period ended September 30, 1998 and 1997. A discussion of
that table follows.
Total interest income for the nine months ended September 30, 1998,
was $8,909,000 compared with $7,082,000 for the same period in 1997, a 25.8% or
$1,827,000 increase. The yield on earning assets for the 1998 period was 8.46%,
up from 8.43% for the 1997 period. Total average interest earning assets for the
nine months ended September 30, 1998, were $140,436,000, up from $112,069,000
for the same period in 1997, an increase of 25.3% or $28,367,000.
The loan portfolio earned $7,027,000 for the nine months ended
September 30, 1998, up from $5,544,000 for the same period of 1997, a 26.7% or
$1,483,000 increase. The 1998 yield decreased to 9.37% from 9.45% for the 1997
period. The average size of the loan portfolio was $99,995,000 for the 1998
period, up from $78,252,000 for the same period of 1997, an increase of 27.8% or
$21,743,000. During most of these periods, the prime rate remained constant at
8.5%. On October 1, 1998, the banks reduced their prime rates to 8.25%, several
weeks later their rate was reduced to 8%.
The taxable investment portfolio earned $1,447,000 for the nine months
ended September 30, 1998, up from $1,288,000 for the 1997 period, a 12.3% or
$159,000 increase. The yield increased to 6.44% in the 1998 period from 6.22% in
the 1997 period. The average size of the portfolio increased to $29,950,000 in
the 1998 period from $27,612,000 in the 1997 period, an increase of 8.5% or
$2,338,000.
The tax exempt investment portfolio continues to be a relatively small
part of the portfolio and it earned $9,000 for the nine months ended September
30, 1998, down from $13,000 for the comparable period in 1997. The yield on the
portfolio was 6.18% (on a fully taxable equivalent basis), down from the prior
year's 6.39%. The average size of the portfolio decreased to $294,000 for the
1998 period from $411,000 in the 1997 period, a decrease of 28.5% or $117,000.
Interest bearing deposits in other banks contributed $98,000 for the
nine months ended September 30, 1998, compared to $54,000 during the prior year,
an increase of 81.5% or $44,000. The yield on these deposits decreased to 5.54%
for the 1998 period from 5.76% in the 1997 period. CBI averaged $2,360,000 in
interest bearing balances in the 1998 period compared to $1,251,000 in the 1997
period, an increase of 88.6% or $1,103,000.
Federal funds sold earned $328,000 for the nine months ended September
30, 1998, compared to $183,000 the prior year, an increase of 79.2% or $145,000.
Yields increased to 5.58% for the period ended September 30, 1998, from 5.37%
for the 1997 period. For the 1998 period, CBI increased its average volume in
federal funds sold to $7,837,000 from $4,543,000 for the 1997 period, a 72.5% or
$3,294,000 increase.
Interest expense
Interest expense increased for the nine months ended September 30,
1998, to $4,014,000 from the prior year's $3,135,000, a 28% or $879,000
increase. The volume of interest bearing liabilities increased to $114,304,000
for the period ended September 30, 1998, from $92,822,000 for the 1997 period, a
23.1% or $21,482,000 increase. The average rate CBI paid for interest bearing
liabilities during the 1998 period was 4.68%, up from 4.50% for the 1997 period.
The cost of savings accounts increased to $537,000 for the nine months
ended September 30, 1998 from $495,000 in the 1997 period, an 8.5% or $42,000
increase. Average savings deposit balances increased to $20,356,000 for the
period ended September 30, 1998, from $19,267,000 for the 1997 period, an
increase of 5.6% or $1,089,000. The average rate paid on these funds increased
to 3.52% from 3.43%.
12
<PAGE>
Interest bearing transaction accounts cost $192,000 for the nine
months ended September 30, 1998, up from the prior year's $164,000, an increase
of 17% or $28,000. The volume of these deposits increased to $13,617,000 for the
period ended September 30, 1998, from $11,623,000 for the 1997 period, a 17.1%
or $1,994,000 increase. The average rate paid on these funds for the period
ended September 30, 1998, was 1.88%, unchanged from the 1997 period.
Time deposits cost $2,951,000 for the nine months ended September 30,
1998, up from $2,303,000 in the 1997 period, an increase of 28.1% or $648,000.
The volume increased to $71,821,000 for the period ended September 30, 1998,
from $56,849,000 for the 1997 period, a 26.3% or $14,972,000 increase. The
average rate paid on these funds increased to 5.48% for the 1998 period, from
5.40% for the 1997 period.
Short term borrowing consists of federal funds purchased and
securities sold under agreements to repurchase. This is a relatively small and
volatile part of the balance sheet. It cost $76,000 for the nine months ended
September 30, 1998, down from $118,000 for the 1997 period, a 35.6% or $42,000
increase. The volume of these funds decreased to $2,467,000 in the 1998 period
from $3,969,000 in the 1997 period, a decrease of 37.8% or $1,502,000. The
average rate paid on these funds was 4.11% for the 1998 period and 3.96% for the
1997 period.
Borrowings from the Federal Home Loan Bank cost $258,000 for the nine
months ended September 30, 1998, compared to $55,000 for the 1997 period, a 369%
or $203,000 increase. The advances averaged $6,043,000 during the 1998 period,
compared to $1,114,000 for the prior year period, a 442% or $4,929,000 increase.
All these balances were attributable to Orangeburg National Bank. The
substantial increase in the balance was related to the bank's effort to take
advantage of relatively low cost long-term funding available through the FHLB.
The average rate paid on these funds decreased to 5.69% from 6.58%.
Results for the nine months ended September 30, 1998 include results
of operations for Florence National Bank for the final three months of the
period. Accordingly, many of the dollar and percentage comparisons and changes
between periods discussed in the non-interest income and non-interest expense
sections are unusually large.
Non-Interest Income
Non-interest income for the nine months ended September 30, 1998 grew
to $785,000 from $559,000 in the 1997 period, a 40.4% or $226,0000 increase.
Most of the increase was attributable to increased volumes of returned check
fees in Orangeburg and Sumter.
Non-Interest Expense
For the nine months ended September 30, 1998 non-interest expenses
increased to $3,573,000 from $2,948,000 for the 1997 period, a 21.2% or $625,000
increase. Of this increase, approximately $233,000 or 37% was directly
attributable to the first three months of operation of the new bank in Florence.
For the 1998 period personnel costs were $2,022,000 compared to
$1,738,000 for the 1997 period, a 16.3% or $284,000 increase.
For the 1998 period premises and equipment expense were $480,000
compared to $384,000 for the 1997 period, an increase of 25% or $96,000.
For the 1998 period other costs were $1,071,000 compared to $826,000
for the 1997 period, an increase of 29.7% or $245,000.
13
<PAGE>
Income Taxes
CBI provided $601,000 for federal and state income taxes during the
nine months ended September 30, 1998, compared to $428,000 for the same period
in 1997, a 40.4% or $173,000 increase.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
Net Income
For the quarter ended September 30, 1998, CBI earned a consolidated
profit of $335,000, compared to $325,000 for the comparable period of 1997, an
increase of 3.1% or $10,000. Diluted earnings per share were $.12 in the 1998
and 1997 periods. This minimal increase in earnings reflects the impact of the
first quarter of operation of the company's new bank in Florence, which resulted
in an after tax loss of $161,000.
As noted above, consolidated net income for the quarter ended
September 30, 1998, increased from the prior year by 3.1% or $10,000. The major
components of this increase are discussed below. Net interest income before
provision for loan losses for the quarter ended September 30, 1998, increased to
$1,735,000, compared to $1,411,000 for the same period in 1997, an increase of
23% or $324,000. For the same period, the provision for loan losses was
$136,000, compared to $81,000 for the 1997 period, an increase of 67.9% or
$55,000. Non-interest income for the 1998 period increased to $294,000 from
$196,000 for the 1997 period, a 50% or $98,000 increase. Non-interest expense
increased to $1,371,000 from $1,023,000, a 34% or $348,000 increase.
Results for the third quarter of 1998 include results of operation for
Florence National Bank for the entire quarter, the first full quarter of
operation for the Florence bank. Florence National Bank's net after tax loss for
the quarter ended September 30, 1998, was $161,000. Accordingly, many of the
dollar and percentage comparisons and changes between quarters discussed in this
report are unusually large.
Net interest income
Net interest income, the major component of CBI's income, is the
amount by which interest and fees on interest earning assets exceeds the
interest paid on interest bearing deposits and other interest bearing funds.
During the quarter ended September 30, 1998, net interest income after provision
for loan losses increased to $1,599,000 from $1,330,000, a 20.2% or $269,000
increase over the comparable period of 1997. This improvement was the result of
an increase in the volume of earning assets.
Interest Income
Total interest income for the third quarter 1998 was $3,201,000
compared with $2,595,000 for the same period in 1997, a 23.4% or $606,000
increase.
The loan portfolio earned $2,488,000 for the third quarter in 1998, up
from $1,998,000 for the same period of 1997, a 24.5% or $490,000 increase.
The investment portfolio earned $499,000 for the third quarter in
1998, up from $488,000 for the 1997 period, a 2.2% or $11,000 increase.
Interest bearing deposits in other banks contributed $30,000 for the
third quarter 1998, compared to $20,000 during the prior year, an increase of
50% or $10,000.
14
<PAGE>
Federal funds sold earned $184,000 the third quarter of 1998 compared
to $89,000 the prior year, an increase of 106.7% or $95,000.
Interest expense
Interest expense increased for the third quarter of 1998 to $1,466,000
from the prior year's $1,184,000, a 23.8% or $282,000 increase.
Results for the quarter ended September 30, 1998 include results of
operations for Florence National Bank for the entire period, however, the
quarter ended September 30, 1998 was the first full quarter of operation for the
Sumter bank. Accordingly, many of the dollar and percentage comparisons and
changes between periods discussed in the non-interest income and non-interest
expense sections are unusually large.
Non-Interest Income
Non-interest income for the third quarter 1998 grew to $294,000 from
$196,000 in the third quarter of 1997, a 50% or $98,0000 increase.
Non-Interest Expense
For the third quarter of 1998 non-interest expenses increased to
$1,371,000 from $1,023,000 for the third quarter of 1997, a 34% or $348,000
increase.
Income Taxes
CBI provided $187,000 for federal and state income taxes during the
third quarter of 1998, compared to $178,000 for the same period in 1997, a 5% or
$9,000 increase.
CHANGES IN FINANCIAL POSITION
Investment portfolio
The investment portfolio is comprised of a held to maturity and an
available for sale portion. CBI and its three banks usually purchase short term
issues of U. S Treasury and U. S. Government agency securities for investment
purposes. At September 30, 1998, the held to maturity portfolio totaled
$13,545,000 compared to $17,311,000 at December 31, 1997, a decrease of 21.7% or
$3,766,000. At September 30, 1998, the available for sale portfolio totaled
$14,427,000 compared to $15,141,000 at December 31, 1997, a decrease of 4.7% or
$714,000. The following chart summarizes the investment portfolios at September
30, 1998, and December 31, 1997.
15
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
U. S. Government and federal agencies ....... $13,293 $13,348 $12,513 $12,588
Tax exempt securities ....................... 252 254 227 227
Other equity securities ..................... - - 1,612 1,612
------- ------- ------- -------
Total ....................................... $13,545 $13,602 $14,352 $14,427
======= ======= ======= =======
Unrealized gain or (loss) ................... $ 57 $ 75
======= =======
December 31, 1997
Held to maturity Available for sale
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
(dollars in thousands)
U. S. Government and federal agencies ....... $16,906 $16,923 $14,413 $14,444
Tax exempt securities ....................... 405 408 - -
Other equity securities ..................... - - 697 697
------- ------- ------- -------
Total ....................................... $17,311 $17,331 $15,110 $15,141
======= ======= ======= =======
Unrealized gain or (loss) ................... $ 20 $ 31
======= =======
</TABLE>
Loan portfolio
The loan portfolio is primarily consumer and small business oriented.
At September 30, 1998, the loan portfolio was $109,610,000, compared to
$91,951,000 at December 31, 1997, a 19.2% or $17,659,000 increase. The following
chart summarizes the loan portfolio at September 30, 1998, and December 31,
1997.
Sept. 30, 1998 Dec. 31, 1997
(dollars in thousands)
Real estate .......................... $ 63,184 $ 53,297
Commercial ........................... 28,305 22,306
Loans to individuals ................. 18,121 16,348
-------- -------
Total ................................ $109,610 $91,951
======== =======
Past Due and Non-Performing Assets and the Allowance for Loan Losses
CBI closely monitors past due loans and loans that are in non-accrual
status and other real estate owned. Below is a summary of past due and
non-performing assets at September 30, 1998 and December 31, 1997.
16
<PAGE>
Sept. 30, 1998 Dec. 31, 1997
(dollars in thousands)
Accruing loans past due 90 days or more ..... $ 76 $ -
Non-accrual loans ........................... $ 40 $ 81
Impaired loans (included in nonaccrual) ..... $ 40 $ 81
Other real estate owned ..................... $274 $132
Management considers the past due and non-accrual amounts in September
1998 to be reasonable and manageable in the normal course of business.
CBI had no restructured loans during any of the above listed periods.
CBI's activity with its allowance for loan losses reserve is
summarized below.
Sept. 30, 1998 Dec. 31, 1997
(dollars in thousands)
Allowance at beginning of period ................ $1,140 $ 876
Provision expense ............................... 323 359
Net charge offs ................................. (99) (95)
------ ------
Allowance at end of period ...................... $1,364 $1,140
====== ======
Allowance as a percent of outstanding loans ..... 1.24% 1.24%
In reviewing the adequacy of the allowance for loan losses at the end
of each period, management considers historical loan loss experience, current
economic condition, loans outstanding, trends in non-performing and delinquent
loans, and the quality of collateral securing problem loans. After charging off
all known losses, management considers the allowance adequate to provide for
estimated future losses inherent in the loan portfolio at September 30, 1998.
However, changes in general economic conditions and changes in the economic
conditions of specific borrowers may cause management's belief to be erroneous.
Premises and Equipment
At September 30, 1998, premises and equipment totaled $3,941,000
compared to $2,733,000 at December 31, 1997, for an increase of 44.2% or
$1,208,000. The major components of this change were the building and equipment
for the new Florence bank, which were $711,000 and $513,000, respectively. The
site for the new bank is held under a long term lease.
Deposits
Deposits were $137,279,000 at September 30, 1998, compared to
$117,167,000 at December 31, 1997, an increase of 17.2% or $20,112,000.
Time deposits greater than $100,000 were $22,710,000 at September 30,
1998, compared to $21,428,000 at December 31, 1997, an increase of 6% or
$1,282,000.
17
<PAGE>
Liquidity
Liquidity is the ability to meet current and future obligations
through liquidation or maturity of existing assets or the acquisition of
additional liabilities. Adequate liquidity is necessary to meet the requirements
of customers for loans and deposit withdrawals in a timely and economical
manner. The most manageable sources of liquidity are composed of liabilities,
with the primary focus of liquidity management being the ability to attract
deposits within the Orangeburg National Bank, Sumter National Bank, and Florence
National Bank service areas. Core deposits (total deposits less certificates of
deposit of $100,000 or more) provide a relatively stable funding base.
Certificates of deposit of $100,000 or more are generally more sensitive to
changes in rates, so they must be monitored carefully. Asset liquidity is
provided by several sources, including amounts due from banks, federal funds
sold, and investments available for sale.
CBI and its banks maintain an available-for-sale investment and a held
to maturity investment portfolio. While all these investment securities are
purchased with the intent to be held to maturity, such securities are marketable
and occasional sales may occur prior to maturity as part of the process of
asset/liability and liquidity management. Such sales will generally be from the
available for sale portfolio. Management deliberately maintains a short-term
maturity schedule for its investments so that there is a continuing stream of
maturing investments. CBI intends to maintain a short-term investment portfolio
in order to continue to be able to supply liquidity to its loan portfolio and
for customer withdrawals.
CBI has substantially more liabilities (mostly deposits, which may be
withdrawn) which mature in the next 12 months than it has assets maturing in the
same period. However, based on its historical experience, and that of similar
financial institutions, CBI believes that it is unlikely that so many deposits
would be withdrawn, without being replaced by other deposits, that CBI would be
unable to meet its liquidity needs with the proceeds of maturing assets.
CBI through its banking subsidiaries also maintains federal funds
lines of credit with correspondent banks, and is able to borrow from the Federal
Home Loan Bank and from the Federal Reserve's discount window.
CBI through its banking subsidiaries has a demonstrated ability to
attract deposits from its markets. Deposits have grown from $30 million in 1989
to over $137 million in 1998. This base of deposits is the major source of
operating liquidity.
CBI's long term liquidity needs are expected to be primarily affected
by the maturing of long term certificates of deposit. At September 30, 1998, CBI
had approximately $9.1 million and $0 in certificates of deposit maturing in one
to five years and over five years, respectively. CBI's assets maturing or
repricing in the same periods were $56.4 million and $28.9 million,
respectively. CBI expects to be able to manage its current balance sheet
structure without experiencing any unusual liquidity problems.
In the opinion of management, CBI's current and projected liquidity
position is adequate.
Capital resources
As summarized in the table below, CBI maintained a strong capital
position.
Sept. 30, 1998 Dec. 31, 1997
Tier 1 capital to average total assets ...... 12.91% 9.60%
Tier 1 capital to risk weighted assets ...... 16.98% 14.10%
Total capital to risk weighted assets ....... 18.18% 15.30%
The increase in capital ratios is the anticipated effect of the stock sale
conducted earlier in the year and increasing earnings in Orangeburg and Sumter.
18
<PAGE>
In the opinion of management, the Company's current and projected
capital positions are adequate.
Shareholders' equity
At September 30, 1998 the common stock account totaled $14,626,000,
compared to $9,156,000 at December 31, 1997. This $5,470,000 increase was the
result of stock sales conducted during the first and second quarters of 1998.
The stock sale was primarily designed to generate capital needed to start
Florence National Bank.
Part II--Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit No.(from Description
item 601 of S-B)
(27) Financial Data Schedule
b) Reports on Form 8-K. None.
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DATED: November 10, 1998
COMMUNITY BANKSHARES, INC.
By: s/ Hugo S. Sims, Jr.,
Hugo S. Sims, Jr.,
Chief Executive Officer
By: s/ William W. Traynham
William W. Traynham
President and Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at September 30, 1998, (unaudited) and the
Consolidated Statement of Income for the nine months ended September 30, 1998
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,230
<INT-BEARING-DEPOSITS> 2,156
<FED-FUNDS-SOLD> 7,230
<TRADING-ASSETS> 804
<INVESTMENTS-HELD-FOR-SALE> 14,427
<INVESTMENTS-CARRYING> 13,545
<INVESTMENTS-MARKET> 13,602
<LOANS> 109,610
<ALLOWANCE> 1,364
<TOTAL-ASSETS> 169,770
<DEPOSITS> 137,279
<SHORT-TERM> 2,820
<LIABILITIES-OTHER> 919
<LONG-TERM> 9,490
0
0
<COMMON> 14,626
<OTHER-SE> 4,636
<TOTAL-LIABILITIES-AND-EQUITY> 169,770
<INTEREST-LOAN> 7,027
<INTEREST-INVEST> 1,456
<INTEREST-OTHER> 426
<INTEREST-TOTAL> 8,909
<INTEREST-DEPOSIT> 3,680
<INTEREST-EXPENSE> 4,014
<INTEREST-INCOME-NET> 4,895
<LOAN-LOSSES> 324
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,573
<INCOME-PRETAX> 1,783
<INCOME-PRE-EXTRAORDINARY> 1,783
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,182
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 4.65
<LOANS-NON> 40
<LOANS-PAST> 76
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 116
<ALLOWANCE-OPEN> 1,140
<CHARGE-OFFS> 111
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 1,364
<ALLOWANCE-DOMESTIC> 1,364
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
