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, 1998
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, 1998: Common Stock, $3.00 par value, 2,772,187
shares.
COMMUNITY BANKSHARES INCORPORATED
FORM 10-Q
September 30, 1998
INDEX
Page
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Part I. Financial Information
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 3
Consolidated Statements of Income for the nine months and
fiscal year to date ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 5
Management's Discussion and Analysis of the Financial
Condition and Results of Operations 6
Part II. Other Information 11
Part I. Financial Information
COMMUNITY BANKSHARES INCORPORATED
Consolidated Balance Sheets (Unaudited)
(In Thousands)
September 30, December 31,
ASSETS 1998 1997
- ------ --------- ---------
Cash and cash equivalents:
Cash and due from banks $ 13,054 $ 12,398
Federal funds sold $ 24,417 $ 14,606
--------- ---------
Total cash and cash equivalents $ 37,471 $ 27,004
--------- ---------
Securities available for sale, at fair value $ 50,449 $ 44,035
Investment securities $ 11,850 $ 13,625
--------- ---------
Total securities $ 62,299 $ 57,660
--------- ---------
Loans, net of unearned income $ 195,689 $ 177,982
Less allowance for loan losses $ 2,257 $ 1,991
--------- ---------
Net loans $ 193,432 $ 175,991
Bank premises and equipment, net $ 4,769 $ 4,824
Other real estate owned $ 868 $ 1,213
Other assets $ 4,010 $ 3,545
--------- ---------
Total assets $ 302,849 $ 270,237
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Noninterest-bearing deposits $ 46,539 $ 40,914
Interest-bearing deposits $ 218,591 $ 195,176
--------- ---------
Total deposits $ 265,130 $ 236,090
Federal Funds Purchased $ -- $ --
Securities sold under agreements to repurchase $ 2,572 $ 1,439
Other liabilities $ 1,779 $ 1,576
Guaranteed debt of Employee Stock
Ownership Trust $ -- $ 91
--------- ---------
Total liabilities $ 269,481 $ 239,196
--------- ---------
Stockholder's equity
Capital stock $ 8,262 $ 8,338
Surplus $ 5,020 $ 5,425
Retained earnings $ 19,701 $ 17,268
Unrealized gains (losses) on securities
available for sale, net of taxes $ 385 $ 101
Unearned ESOP shares $ -- $ (91)
--------- ---------
Total stockholder's equity $ 33,368 $ 31,041
--------- ---------
Total liabilities and
stockholder's equity $ 302,849 $ 270,237
========= =========
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COMMUNITY BANKSHARES INCORPORATED
Consolidated Statements of Income (Unaudited)
Fiscal year to date
Quarter ended Nine months ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Interest income:
Interest and fees on loans $ 4,895 $ 4,379 $ 14,026 $ 12,712
Interest on securities:
U.S. Treasury securities and U.S.government
agency and corporation obligations $ 781 $ 823 $ 2,332 $ 2,351
Obligations of states and political subdivisions $ 150 $ 82 $ 416 $ 298
Other securities $ 51 $ 11 $ 99 $ 85
Interest on Federal funds sold $ 246 $ 104 $ 690 $ 301
-------- -------- -------- --------
Total interest income $ 6,123 $ 5,399 $ 17,563 $ 15,747
Interest expense:
Interest on deposits $ 2,446 $ 2,174 $ 7,046 $ 6,391
Interest on Federal funds purchased $ -- $ -- $ -- $ --
Interest on Securities sold under
agreements to repurchase $ 22 $ 14 $ 52 $ 36
-------- -------- -------- --------
Total interest expense $ 2,468 $ 2,188 $ 7,098 $ 6,427
-------- -------- -------- --------
Net interest income $ 3,655 $ 3,211 $ 10,465 $ 9,320
-------- -------- -------- --------
Provision for loan losses $ 198 $ 5 $ 308 $ 30
Net interest income after provision
for loan losses $ 3,457 $ 3,206 $ 10,157 $ 9,290
-------- -------- -------- --------
Other income:
Service charges, commissions and fees $ 520 $ 293 $ 1,343 $ 963
Security gains (losses) $ 45 $ -- $ 152 $ (7)
Gain on sale of bank premises and equipment $ -- $ -- $ -- $ --
Gain on sale of other real estate $ -- $ -- $ -- $ --
Other operating income $ 250 $ 150 $ 346 $ 324
-------- -------- -------- --------
Total other income $ 815 $ 443 $ 1,841 $ 1,280
Other expenses:
Salaries and benefits $ 1,397 $ 1,126 $ 3,943 $ 3,388
Expense on premises and fixed assets, net $ 297 $ 294 $ 849 $ 877
Other operating expenses $ 573 $ 487 $ 1,754 $ 1,823
-------- -------- -------- --------
Total other expenses $ 2,267 $ 1,907 $ 6,546 $ 6,088
Income before income taxes $ 2,005 $ 1,742 $ 5,452 $ 4,482
Income tax expense $ 630 $ 575 $ 1,737 $ 1,551
-------- -------- -------- --------
Net income $ 1,375 $ 1,167 $ 3,715 $ 2,931
-------- -------- -------- --------
Earnings per common and common equivalent
shares (based on 2,772,187; 2,777,855
2,772,187; 2,777,855 respectively) $ 0.50 $ 0.41 $ 1.34 $ 1.02
-------- -------- -------- --------
Earnings per common share, assuming full
dilution( based on 2,875,729; 2,881,397 $ 0.48 $ 0.40 $ 1.29 $ 1.00
2,875,729; 2,881,397 respectively) -------- -------- -------- --------
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Nine Months Ended Septemer 30, 1998 and 1997
1998 1997
-------- --------
Cash Flows from Operating Activities
Net income $ 3,715 $ 2,931
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment $ 357 $ 381
Provision for loan losses $ 308 $ 30
Amortization and accretion of investment securities $ (47) $ (28)
(Gain) loss on sale of bank premises and equipment $ (5) $ --
(Gain) loss on sale of other securities $ (152) $ 7
(Gain) loss on sale of other real estate $ -- $ 32
Changes in operating assets and liabilities:
(Increase) Decrease in accrued interest receivable $ (311) $ (111)
(Increase) Decrease in prepaid expenses $ 384 $ (155)
(Increase) Decrease in accrued interest payable $ (44) $ (11)
(Increase) Decrease in unrealized securities losses $ (284) $ 250
(Increase) Decrease in deferred income taxes $ 150 $ 119
Net change in other operating assets and liabilities $ 913 $ 146
-------- --------
Net cash and cash equivalents provided
by operating activities $ 4,984 $ 3,591
Cash Flows from Investing Activities
Proceeds from sale of investment securities $ 15,990 $ 7,456
Proceeds from maturities of investment securities $ 12,830 $ 8,724
Purchase of investment securities $(33,412) $(15,849)
Purchase of other real estate $ (457) $ (639)
Net increase in loans $(17,707) $(11,705)
Proceeds from sale of bank premises and equipment $ 20 $ --
Proceeds from sale of other real estate $ 802 $ 874
Capital expenditures $ (362) $ (748)
-------- --------
Net cash and cash equivalents used in
investing activities $(22,296) $(11,887)
Cash Flows from Financing Activities
Net increase (decease) in deposits $ 29,040 $ 8,507
Net increase (decrease) in federal funds purchased $ 1,133 $ --
Redemption of common stock $ (502) $ --
Issuance of common stock $ 21 $ 209
Dividends paid $ (1,238) $ (399)
-------- --------
Net cash and cash equivalents provided
by financing activities $ 28,454 $ 8,317
======== ========
Increase (decrease) in cash and cash equivalents $ 11,142 $ 21
-------- --------
Cash and cash equivalents at beginning of period $ 26,329 $ 23,001
-------- --------
Cash and cash equivalents at end of period $ 37,471 $ 23,002
-------- --------
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 7,921 $ 6,398
-------- --------
Income taxes $ 1,738 $ 1,350
-------- --------
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Community Bankshares Incorporated (the "Company") is a multi-bank holding
company organized under Virginia law which provides financial services through
its wholly-owned subsidiaries, The Community Bank and Commerce Bank of Virginia,
and County Bank of Chesterfield. All subsidiary banks are full service retail
commercial banks offering a wide range of banking services, including demand and
time deposits, as well as commercial, industrial, residential construction,
residential mortgage and consumer loans. The Company's primary trade areas are
the Petersburg, Virginia area and the Richmond, Virginia area. The Company
operates twelve branch locations in these trade areas.
The following discussion provides information about the major components of
the results of operations and financial condition, liquidity and capital
resources of Community Bankshares Incorporated. This discussion and analysis
should be read in conjunction with the Consolidated Financial Statements.
Overview. Net income for the first nine months of 1998 of $3.715 million was an
increase of 26.75% over the first nine months of 1997. Earnings per share (on a
fully diluted basis) for the nine months ended September 30, 1998 was $1.34
compared to $1.29 for the same period last year.
The Company's return on average equity increased for the first nine months
of 1998 over 1997. The return on average equity was 15.48% for the nine months
ended September 30, 1998, compared to 13.52% in 1997. The return on average
assets amounted to 1.73% and 1.52% for the nine months ended September 30, 1998
and 1997.
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 12.29% to $10.465 million for the first nine
months of 1998. This increase was attributable to the growth in the Company's
loan portfolio. Total loans outstanding increased 9.91%, or $17.707 million for
the first nine months of 1998. The Company has had a consistent increase in loan
demand. It is management's belief that the increase in the lending volume is a
result of competitive pricing and, responsiveness to loan demands. The ability
to make timely loan
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decisions is an operating characteristic that often allows the Company the
opportunity to meet the needs of borrowers before their competitors. The Company
is competitive with rates and origination fees charged on loans. However, since
69.00% 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, 1998, increased
10.44% to $7.098 million as compared to $6.427 million for the same period one
year earlier. This increase was due to an increase in the volume of
interest-bearing liabilities.
Provision for Possible Loan Losses. The provision for possible loan losses was
increased, $266,000 for the first nine months of 1998. This provision is an
estimate of an amount deemed adequate to provide for potential losses in the
portfolio. The level of losses is affected by general economic trends as well as
conditions affecting individual borrowers. The allowance is also subject to
regulatory examinations and determination as to adequacy, which may take into
account such factors as the methodology used to calculate the allowance and
comparison to peer groups.
The allowance for loan losses totaled $2.257 million at September 30, 1998
or 1.15% of total loans, as compared to $1.991 or 1.19% at December 31, 1997.
Non-performing assets totaled $3.256 million at September 30, 1998 compared to
$2.913 million at December 31, 1997. The multiple of the allowance for loan
losses to non-performing assets was 0.69x at September 30, 1998 and 0.68x at
December 31, 1997. Management constantly evaluates non-performing loans relative
to their collateral value and makes appropriate reductions in the carrying value
of those loans based on that review.
The allowance for loan losses related to loans identified as impaired is
primarily based on the excess of the loan's current outstanding principal
balance over the estimated fair market value of the related collateral. For a
loan that is not collateral-dependent, the allowance is recorded at the amount
by which the outstanding principal balance exceeds the current best estimate for
the future cash flows on the loan discounted at the loan's effective interest
rate.
Loans, including impaired loans, are generally placed in non-accrual status
when they are delinquent in principal and interest payments greater than 90 days
and the loan is not well secured and in process of collection. Accruals of
interest are discontinued until it becomes certain that both principal and
interest can be repaid. The Company
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does have loans that are contractually past due greater than 90 days that are
not in non-accrual status, however, those loans are still accruing because they
are well secured and in the process of collection. A loan is well secured if
collateralized by liens on real or personal property, including securities, that
have a realizable value sufficient to discharge the debt in full or by the
guarantee of a financially responsible party.
If foreclosure of property is required, the property is generally sold at a
public auction in which the Company may participate as a bidder. If the Company
is the successful bidder, the acquired real estate property is then included in
the Company's real estate owned account until it is sold.
Non-Interest Income. For the nine months ended September 30, 1998, non-interest
income increased $561,000 or 43.83% to $1.841 million as compared to $1.280
million one year earlier. The increase was primarily due to an increase in
securities gains income and increased service charge income.
Non-Interest Expense. Non-interest expense of $6.546 million for the nine months
ended September 30, 1998, was an increase of $458,000 or 7.52% over the $6.088
million for the same period last year. Salaries and employee benefits, the
largest component on non-interest expense increased 16.38% to $3.943 million for
the first nine months of 1998
Financial Condition
Total assets as of September 30, 1998 were $302.849 million, an increase of
12.07% from $270.237 million at December 31, 1997. Net loans outstanding for the
nine months ended September 30, 1998 stood at $193.432 million, a net increase
of $17.441 million or 9.91% over the $175.991 million recorded at December 31,
1997.
Deposits for the nine months ended September 30, 1998 stood at $265.130
million an increase of $29.040 million or 12.30% over the $236.090 at December
31, 1997.
Total securities for the nine months ended September 30, 1998 were $62.299
million an increase of $4.639 million or 8.05% from the $57.660 million at
December 31, 1997. The securities portfolio is maintained to manage excess funds
in order to provide diversification and liquidity in the overall asset
management policy. The maturity of securities purchased are based on the needs
of the Company and current yields and other market conditions. Securities are
classified as held-to-maturity when
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management has the positive intent and the Company has the ability at the time
of purchase to hold them until maturity. These securities are carried at cost,
adjusted for amortization of premium and accretion of discount. Securities to be
held for indefinite periods of time and not intended to be held-to-maturity or
on a long-term basis are classified as available-for-sale and accounted for at
fair market value on an aggregate basis. Unrealized gains or losses are reported
as increases or decreases in stockholder's equity, net of the related tax
effect.
Capital Resources
Capital resources represent funds, earned or obtained, over which financial
institutions can exercise greater or longer control in comparison with deposits
or borrowed funds. The adequacy of the Company's capital is reviewed by
management on an ongoing basis with reference to the size, composition, and
quality of the Company's resources and consistency with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
will assure an adequate level of capital to support anticipated asset growth and
absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, has adopted capital guidelines to
supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the guidelines categorize
assets and off-balance sheet items into four risk-weighted categories. The
minimum ratio of qualifying total capital to risk-assets is 8.0% of which 4.0%
must be Tier 1 capital, consisting of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items.
At September 30, 1998, the Company's ratio of total capital to
risk-weighted assets was 16.87% and its ratio of Tier 1 capital to risk-weighted
assets was 15.79%. Both ratios exceeded the fully phased-in capital
requirements. The following summarizes the Company's regulatory capital and
related ratios at September 30, 1998 (dollars in thousands):
Tier 1 Capital $ 32,983
Tier 2 Capital $ 2,257
Total risk-based capital $ 35,240
Total risk-weighted assets $ 208,806
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Capital Ratios:
Tier 1 risk-based capital ratio 15.79%
Total risk-based capital ratio 16.87%
Tier 1 Capital to average total assets 11.61%
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, 1998 the Company provided cash or
liquidity from operations in the amount of $4.984 million. The Company's net
investing activities used $22.296 million in the same period. Financing
activities provided an additional $28.454 million, consisting mainly of an
increase in deposits of $29.040. For the first nine months of 1998 this produced
a net increase in liquidity of approximately $11.142 million. Cash and cash
equivalents on hand at September 30, 1998 totaled $37.471 million. Management
believes that the Company has enough asset liquidity to meet the needs of
maturing deposits.
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Part II. Other Information
Item: 1 Legal proceedings: None
2 Changes in securities: None
3 Defaults upon senior securities: None
4 Results of votes of security holders: None
5 Other information: None
6 Exhibits and Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
COMMUNITY BANKSHARES INCORPORATED
s/Nathan S. Jones, 3rd
- --------------------------------------------
Nathan S. Jones, 3rd
President and Chief Executive Officer
s/Thomas H. Caffrey, Jr.
- --------------------------------------------
Thomas H. Caffrey, Jr.
Senior Vice President and Chief Financial Officer
Date: November 10, 1998
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