SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
Commission File No. 2-89588
COMMUNITY BANKSHARES INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia 54-1290793
(State of Incorporation) (I.R.S. Employer Identification No.)
200 North Sycamore Street
P.O. Box 2166
Petersburg, Virginia 23804
(Address of principal executive offices)
(804) 861-2320
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of September 30, 1996: Common Stock, $3.00 par value, 1,901,080
shares.
COMMUNITY BANKSHARES INCORPORATED
FORM 10-Q
September 30, 1996
INDEX
Page
Part I. Financial Information
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 3
Consolidated Statements of Income for the three and
nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 5
Management's Discussion and Analysis of the Financial
Condition and Results of Operations 6
Part II. Other Information 12
Part I. Financial Information
COMMUNITY BANKSHARES INCORPORATED
Consolidated Balance Sheets (Unaudited)
September 30, December 31,
ASSETS 1996 1995
------------- -------------
Cash and cash equivalents:
Cash and due from banks $ 7,867,916 $ 7,608,418
Federal funds sold $ 2,508,000 $ 6,044,000
------------- -------------
Total cash and cash equivalents $ 10,375,916 $ 13,652,418
------------- -------------
Securities available for sale, at fair value $ 15,685,455 $ 10,975,301
Investment securities $ 17,795,219 $ 23,282,101
------------- -------------
Total securities $ 33,480,674 $ 34,257,402
------------- -------------
Loans, net of unearned income $ 116,896,130 $ 108,640,775
Less allowance for loan losses $ 1,251,523 $ 1,235,614
------------- -------------
Net loans $ 115,644,607 $ 107,405,161
Bank premises and equipment, net $ 2,717,962 $ 2,847,981
Accrued interest receivable $ 1,124,891 $ 982,274
Other assets $ 2,036,331 $ 1,931,882
------------- -------------
Total assets $ 165,380,381 $ 161,077,118
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Demand deposits $ 23,973,592 $ 23,532,250
Interest-bearing demand deposits $ 39,758,373 $ 40,568,447
Savings deposits $ 26,812,718 $ 24,387,463
Time Deposits, $100,000 and over $ 10,269,908 $ 10,979,834
Other time deposits $ 44,940,649 $ 44,103,097
------------- -------------
Total deposits $ 145,755,240 $ 143,571,091
------------- -------------
Accrued interest payable $ 469,660 $ 489,824
Other liabilities $ 1,023,012 $ 793,782
Guaranteed debt of Employee Stock
Ownership Trust $ 305,000 $ 330,000
------------- -------------
Total liabilities $ 147,552,912 $ 145,184,697
------------- -------------
Stockholder's equity
Capital stock $ 5,703,240 $ 5,561,925
Surplus $ 32,500 $ --
Retained earnings $ 12,602,941 $ 10,574,298
Unrealized gains (losses) on securities
available for sale, net of taxes $ (206,212) $ 86,198
------------- -------------
Total stockholder's equity $ 18,132,469 $ 16,222,421
------------- -------------
Unearned ESOP shares $ (305,000) $ (330,000)
Total liabilities and
stockholder's equity $ 165,380,381 $ 161,077,118
============= =============
- 3 -
COMMUNITY BANKSHARES INCORPORATED
Consolidated Statements of Income (Unaudited)
Quarter ended Nine months ended
September 30, September 30,
---------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Interest income:
Interest and fees on loans $ 2,923,479 $ 2,734,982 $ 8,490,475 $ 7,827,032
Interest on securities:
U.S. Treasury securities $ 31,755 $ 89,185 $ 149,488 $ 299,340
Obligations of U.S. Government
agencies and corporations $ 502,881 $ 316,519 $ 1,433,461 $ 784,831
Obligations of states and political subdivisions $ 22,497 $ 16,283 $ 51,081 $ 50,556
Other securities $ 12,600 $ 32,630 $ 64,073 $ 95,957
Interest on Federal funds sold $ 64,014 $ 126,168 $ 187,805 $ 235,388
----------- ----------- ----------- -----------
Total interest income $ 3,557,226 $ 3,315,767 $10,376,383 $ 9,293,104
Interest expense:
Interest on deposits $ 1,334,002 $ 1,355,183 $ 3,993,843 $ 3,681,825
Interest on Federal funds purchased $ - $ 461 $ 4,693 $ 16,625
----------- ----------- ----------- -----------
Total interest expense $ 1,334,002 $ 1,355,644 $ 3,998,536 $ 3,698,450
----------- ----------- ----------- -----------
Net interest income $ 2,223,224 $ 1,960,123 $ 6,377,847 $ 5,594,654
----------- ----------- ----------- -----------
Provision for loan losses $ 99,000 $ 77,000 $ 240,000 $ 246,000
Net interest income after provision
for loan losses $ 2,124,224 $ 1,883,123 $ 6,137,847 $ 5,348,654
----------- ----------- ----------- -----------
Other income:
Service charges, commissions and fees $ 267,719 $ 234,284 $ 774,736 $ 764,599
Security gains (losses) $ (2,102) $ (2,630) $ 27,132 $ (9,418)
Gain on sale of bank premises and equipment $ - $ - $ - $ 15,132
Gain on sale of other real estate $ - $ - $ 60,140 $ -
Other operating income $ 10,718 $ 18,555 $ 17,690 $ 45,622
----------- ----------- ----------- -----------
Total other income $ 276,335 $ 250,209 $ 879,698 $ 815,935
Other expenses:
Salaries and benefits $ 717,688 $ 678,601 $ 2,091,923 $ 1,962,846
Net occupancy expenses $ 90,076 $ 92,347 $ 290,102 $ 273,281
Furniture and equipment expenses $ 98,130 $ 82,483 $ 285,368 $ 246,957
Other operating expenses $ 251,877 $ 271,007 $ 925,323 $ 952,188
----------- ----------- ----------- -----------
Total other expenses $ 1,157,771 $ 1,124,438 $ 3,592,716 $ 3,435,272
Income before income taxes $ 1,242,788 $ 1,008,894 $ 3,424,829 $ 2,729,317
Income tax expense $ 416,118 $ 379,975 $ 1,201,477 $ 990,362
----------- ----------- ----------- -----------
Net income $ 826,670 $ 628,919 $ 2,223,352 $ 1,738,955
----------- ----------- ----------- -----------
Earnings per common and common equivalent
shares (based on 1,992,446; 1,967,261
1,939,101; 1,939,101 respectively) $0.41 $0.32 $1.13 $0.90
Earnings per common share, assuming full ----- ----- ----- -----
dilution( based on 1,992,446; 1,967,261 $0.41 $0.32 $1.13 $0.90
1,992,446; 1,939,101 respectively) ----- ----- ----- -----
- 4 -
COMMUNITY BANKSHARES INCORPORATED
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1996 and 1995
1996 1995
------------ ------------
Cash Flows from Operating Activities
Net income $ 2,298,456 $ 1,738,955
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment $ 261,344 $ 225,221
Provision for loan losses $ 240,000 $ 246,000
Amortization and accretion of investment securities $ 6,764 $ 10,019
Gain on sale of bank premises and equipment $ -- $ (15,132)
Gain on sale of other securities $ (1,228) $ --
Gain on sale of other real estate $ (60,140) $ --
Changes in operating assets and liabilities:
Decrease in accrued interest receivable $ (142,617) $ (211,597)
Increase in prepaid expenses $ (25,158) $ 37,583
Decrease in accrued interest payable $ (20,164) $ 74,331
Net change in other operating assets and liabilities $ (147,416) $ (408,779)
------------ ------------
Net cash and cash equivalents provided
by operating activities $ 2,409,841 $ 1,696,601
Cash Flows from Investing Activities
Proceeds from sale of investment securities $ 5,805,936 $ --
Proceeds from maturities of investment securities $ 3,893,145 $ 8,684,642
Purchase of investment securities $ (9,375,654) $(14,776,171)
Purchase of other real estate $ (750,201) $ --
Net increase in loans $ (8,046,946) $ (6,511,327)
Proceeds from sale of bank premises and equipment $ -- $ 71,610
Proceeds from sale of other real estate $ 510,396 $ 17,742
Capital expenditures $ (131,009) $ (341,751)
------------ ------------
Net cash and cash equivalents used in
investing activities $ (8,094,333) $(12,855,255)
Cash Flows from Financing Activities
Net increase in deposits $ 2,453,107 $ 16,155,876
Net increase (decrease) in federal funds purchased $ -- $ (793,000)
Issuance of common stock $ 186,883 $ 1,113,308
Dividends paid $ (232,000) $ (201,250)
------------ ------------
Net cash and cash equivalents provided
by financing activities $ 2,407,990 $ 16,274,934
------------ ------------
Increase (decrease) in cash and cash equivalents $ (3,276,502) $ 5,116,280
Cash and cash equivalents at beginning of period $ 13,652,418 $ 9,708,716
------------ ------------
Cash and cash equivalents at end of period $ 10,375,916 $ 14,824,996
------------ ------------
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 3,978,372 $ 3,772,781
------------ ------------
Income taxes $ 955,449 $ 883,536
------------ ------------
- 5 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On December 12, 1995, the Board of Directors unanimously voted to enter
into an Agreement and Plan for Reorganization (the plan) with Commerce Bank of
Virginia to combine their businesses. Commerce Bank of Virginia is a Virginia
state bank with its principal office located in Richmond, Virginia. The
combination of the two companies was consummated through a Share Exchange under
Virginia law. Under the terms of the Plan, Commerce Bank of Virginia became a
wholly-owned subsidiary of Community Bankshares Incorporated. For each share
owned, the shareholders of Commerce Bank of Virginia received 1.4044 share of
stock of Community Bankshares Incorporated. The transaction was 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 Commerce Bank of Virginia
voted to approve the Agreement at their Annual Meetings on June 18, 1996.
All necessary legal and regulatory approvals for the plan were received and
the transaction was consummated on July 1, 1996. Therefore, the accompanying
financial statements have been restated to include the financial position and
results of operations of Commerce Bank of Virginia
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.
- 6 -
Overview. Net income for the first nine months of 1996 of $2,223,352 was an
increase of 27.86% over the first nine months of 1995. Earnings per share for
the nine months ended September 30, 1996 was $1.13 compared to $.90 for the same
period last year.
The Company's return on average equity has increased for the first nine
months of 1996 over 1995. The return on average equity was 17.20% for the nine
months ended September 30, 1996, compared to15.99% in 1995. The return on
average assets amounted to 1.82% and 1.55% for the nine months ended September
30, 1996 and 1995.
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 14.00% to $6.378 million for the first nine
months of 1996. This increase was attributable to the growth in the Company's
loan portfolio. Total loans outstanding increased 7.60%, or $8.255 million for
the first nine months of 1996. The Company has had a consistent increase in loan
demand. It is management's belief that the increase in the lending volume is a
result of competitive pricing and, responsiveness to loan demands. The ability
to make timely loan decisions is an operating characteristic that often 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 70.83% of the entire loan portfolio may be repriced in
one year or less, the Company has the ability to respond quickly to market
changes in rate structures.
Interest expense for the nine months ended September 30, 1996, increased
8.11% to $3.999 million as compared to $3.698 million for the same period one
year earlier. This increase was due to an increase in the volume of
interest-bearing liabilities.
- 7 -
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $240,000 for the first nine month of 1996 as compared to $246,000 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 $1.252 million at September 30, 1996
or 1.07% of total loans, as compared to $1.236 or 1.14% at September 30, 1995.
Non-performing assets totaled $2.175 million at September 30,1996 compared to
$1.570 million at December 31, 1995. The multiple of the allowance for loan
losses to non-performing assets was .58x at September 30, 1996 and 1.27x at
December 31, 1995. Management constantly evaluates non-performing loans relative
to their collateral value and makes appropriate reductions in the carrying value
of those loans based on that review.
The allowance for loan losses related to loans identified as impaired is
primarily based on the excess of the loan's current outstanding principal
balance over the estimated fair market value of the related collateral. For a
loan that is not collateral-dependent, the allowance is recorded at the amount
by which the outstanding principal balance exceeds the current best estimate for
the future cash flows on the loan discounted at the loan's effective interest
rate.
Loans, including impaired loans, are generally placed in non-accrual status
when they are delinquent in principal and interest payments greater than 90 days
and the loan is not well secured and in process of collection. Accruals of
interest are discontinued until it becomes certain that both principal and
interest can be repaid. The Company does have loans that are contractually past
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.
- 8 -
Non-Interest Income. For the nine months ended September 30, 1996, non-interest
income increased $63,763 or 7.81% to $879,698 as compared to $815,935 one year
earlier. The increase was primarily due to a one time gain on the sale of other
real estate owned in the amount of $60,140.
Non-Interest Expense. Non-interest expense of $3.593 million for the nine months
ended September 30, 1996, was an increase of $157,444 or 4.58% over the $3.435
million for the same period last year. Salaries and employee benefits, the
largest component on non-interest expense increased 6.58% to $2.092 million for
the first nine months of 1996.
Financial Condition
Total assets as of September 30, 1996 were $165.380 million, an increase of
2.67% from $161.077 million at December 31, 1995. Net loan volume for the nine
months ended September 30, 1996 stood at $115.645 million, an increase of $8.239
million or 7.67% over the $107.405 million recorded at December 31, 1995.
Deposits for the nine months ended September 30, 1996 stood at $145.755
million an increase of $2.184 million or 1.52% over the $143.571 at December 31,
1995.
Total securities for the nine months ended September 30, 1996 were $33.481
million a decrease of $776,728 or 2.27% from the $34.257 million at December 31,
1995. The securities portfolio is maintained to manage excess funds in order to
provide diversification and liquidity in the overall asset management policy.
The maturity of securities purchased are based on the needs of the Company and
current yields and other market conditions.
Securities are classified as held-to-maturity when management has the
positive intent and the Company has the ability at the time of purchase to hold
them until maturity. These securities are carried at cost, adjusted for
amortization of premium and accretion of discount. Securities to be held for
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.
- 9 -
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.
At September 30, 1996, the Company's ratio of total capital to
risk-weighted assets was 16.70% and its ratio of Tier 1 capital to risk-weighted
assets was 15.63%. Both ratios exceeded the fully phased-in capital
requirements. The following summarizes the Company's regulatory capital and
related ratios at September 30, 1996 (dollars in thousands):
Tier 1 Capital $ 18.338
Tier 2 Capital $ 1.251
Total risk-based capital $ 19.589
Total risk-weighted assets $117.307
Capital Ratios:
Tier 1 risk-based capital ratio 15.63%
Total risk-based capital ratio 16.70%
Tier 1 Capital to average total assets 11.05%
- 10 -
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. As a result of the Company's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Company maintains overall
liquidity sufficient to satisfy its depositors' requirements and to meet its
customer's credit needs.
For the nine months ended September 30, 1996 the Company provided cash or
liquidity from operations in the amount of $2.410 million. This increase in
funds in addition to $2.408 million in net cash provided by an increase in
deposits and other financing activities provided a total of $4.818 million
available for investing during the first nine months of 1996. The Company's
investing activities used $8.094 million in the same period, composed mainly of
an increase in loans of $8.047 million, which produced a net decrease in
liquidity of approximately $3.277 million. Cash and cash equivalents on hand at
September 30, 1996 totaled $10.376 million. With 70.83% of the loan portfolio
repricing or maturing in the next twelve months, the Company has enough asset
liquidity to meet the needs of maturing deposits.
- 11 -
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
(a) Approved the Agreement and Plan of Reorganization, dated
December 12, 1995, between CBI and Commerce Bank of Virginia
("CBOV") and a related plan of Share Exchange (collectively,
the "Reorganization Agreement"), providing for a Share
Exchange between COB and CBI (the "Reorganization") upon the
terms and conditions herein, including among other things
that each issued and outstanding share of CBOV Stock will be
exchanged for 1.4044 shares of CBI Common Stock, with cash
being aid in lieu of issuing fractional shares.
(b) Amended Article 8 of the Articles of Incorporation to permit
an increase in the size of the Board of Directors by more
than two in a twelve month period, if the increase is in
connection with a merger or share exchange to which CBI or a
wholly owned subsidiary of CBI is a party, provided the 85%
vote requirement of Article 9 does not apply to such merger
or share exchange.
5 Other information None
6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - Form 8-K was filed on July 15, 1996, to
disclose the results of the Share Exchange as mentioned
above, which was effective on July 1, 1996.
- 12 -
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: November 8, 1996