SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005 Commission File No.
000-22054
COMMUNITY BANKSHARES, INC.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0966962
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
791 Broughton Street
Orangeburg, South Carolina 29115
--------------------------------------------------------------------------------
(Address of principal executive offices, zip code)
(803) 535-1060
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 (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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, no par
or stated value, 4,404,303 shares outstanding on August 2, 2005.
COMMUNITY BANKSHARES, INC.
FORM 10-Q
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets ...................................................................................... 3
Consolidated Statements of Income ................................................................................ 4
Consolidated Statements of Changes in Shareholders' Equity ....................................................... 5
Consolidated Statements of Cash Flows ............................................................................ 6
Notes to Unaudited Consolidated Financial Statements ............................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................................................... 20
Item 4. Controls and Procedures .......................................................................................... 21
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders .............................................................. 22
Item 6. Exhibits ......................................................................................................... 22
SIGNATURES ................................................................................................................... 23
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2005 2004
----- ----
(Dollars in thousands)
Assets
Cash and due from banks ............................................................... $ 15,110 $ 14,397
Federal funds sold .................................................................... 12,601 12,571
--------- ---------
Total cash and cash equivalents ................................................ 27,711 26,968
Interest bearing deposits with other banks ............................................ 459 852
Securities available-for-sale ......................................................... 52,182 55,471
Securities held-to-maturity (estimated fair value $1,912 for 2005
and $1,907 for 2004) ............................................................. 1,925 1,925
Other investments ..................................................................... 2,890 2,642
Loans held for sale ................................................................... 15,078 15,090
Loans receivable ...................................................................... 413,875 393,649
Less, allowance for loan losses ................................................... (4,812) (4,347)
--------- ---------
Net loans ...................................................................... 409,063 389,302
Premises and equipment - net .......................................................... 7,823 7,739
Accrued interest receivable ........................................................... 2,714 2,419
Net deferred income tax assets ........................................................ 1,011 599
Goodwill .............................................................................. 4,321 4,321
Core deposit intangible assets ........................................................ 2,960 3,083
Prepaid expenses and other assets ..................................................... 1,060 1,966
--------- ---------
Total assets ................................................................... $ 529,197 $ 512,377
========= =========
Liabilities
Deposits
Noninterest bearing ............................................................... $ 64,094 $ 67,046
Interest bearing .................................................................. 369,324 356,412
--------- ---------
Total deposits ................................................................. 433,418 423,458
Short-term borrowings ................................................................. 7,868 6,662
Long-term debt ........................................................................ 33,569 30,573
Accrued interest payable .............................................................. 1,056 691
Accrued expenses and other liabilities ................................................ 1,273 966
--------- ---------
Total liabilities .............................................................. 477,184 462,350
--------- ---------
Shareholders' equity
Common stock - no par value;12,000,000 shares authorized; issued and
outstanding - 4,404,303 for 2005 and
4,390,784 for 2004 ................................................................ 30,202 30,042
Retained earnings ..................................................................... 22,106 20,075
Accumulated other comprehensive income (loss) ......................................... (295) (90)
--------- ---------
Total shareholders' equity ..................................................... 52,013 50,027
--------- ---------
Total liabilities and shareholders' equity ..................................... $ 529,197 $ 512,377
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Income
(Unaudited)
Period Ended June 30,
---------------------
Three Months Six Months
------------ ----------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest and dividend income
Loans, including fees ...................................... $ 7,124 $ 5,449 $ 13,738 $ 10,780
Interest bearing deposits with other banks ................. 11 4 19 8
Debt securities ............................................ 432 409 869 905
Dividends .................................................. 34 19 58 38
Federal funds sold ......................................... 95 47 163 105
-------- -------- -------- --------
Total interest and dividend income .................. 7,696 5,928 14,847 11,836
-------- -------- -------- --------
Interest expense
Deposits
Time deposits $100M and over ........................... 630 323 1,157 636
Other deposits ......................................... 1,361 895 2,569 1,814
-------- -------- -------- --------
Total interest expense on deposits .................. 1,991 1,218 3,726 2,450
Short-term borrowings ...................................... 44 64 87 169
Long-term debt ............................................. 468 380 906 683
-------- -------- -------- --------
Total interest expense .............................. 2,503 1,662 4,719 3,302
-------- -------- -------- --------
Net interest income ............................................. 5,193 4,266 10,128 8,534
Provision for loan losses ....................................... 585 258 1,035 491
-------- -------- -------- --------
Net interest income after provision ............................. 4,608 4,008 9,093 8,043
-------- -------- -------- --------
Noninterest income
Service charges on deposit accounts ........................ 853 822 1,615 1,667
Mortgage loan brokerage income ............................. 937 903 1,731 1,652
Net securities gains or (losses) ........................... - (1) (10) (5)
Other ...................................................... 254 207 475 463
-------- -------- -------- --------
Total noninterest income ............................ 2,044 1,931 3,811 3,777
-------- -------- -------- --------
Noninterest expenses
Salaries and employee benefits ............................. 2,334 2,225 4,612 4,336
Premises and equipment ..................................... 550 473 1,085 963
Other ...................................................... 1,341 1,077 2,647 2,208
-------- -------- -------- --------
Total noninterest expenses .......................... 4,225 3,775 8,344 7,507
-------- -------- -------- --------
Income before income taxes ...................................... 2,427 2,164 4,560 4,313
Income tax expense .............................................. 876 769 1,649 1,533
-------- -------- -------- --------
Net income ...................................................... $ 1,551 $ 1,395 $ 2,911 $ 2,780
======== ======== ======== ========
Per share
Net income ................................................. $ 0.35 $ 0.32 $ 0.66 $ 0.64
Net income - diluted ....................................... 0.35 0.31 0.65 0.62
Cash dividends declared .................................... 0.10 0.10 0.20 0.20
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common Stock
------------ Accumulated
Number of Retained Other Comprehensive
Shares Amount Earnings Income (Loss) Total
------ ------ -------- ------------- -----
(Dollars in thousands, except per share)
Balance, January 1, 2004 .................................. 4,331,460 $ 29,402 $ 18,610 $ 58 $ 48,070
---------
Comprehensive income:
Net income ............................................ - - 2,780 - 2,780
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income
taxes of $330 ....................................... - - - (584) (584)
Reclassification adjustment for losses (gains)
realized in income, net of
income taxes of $2 .................................. - - - 3 3
---------
Total other comprehensive income .................. - - - - (581)
---------
Total comprehensive income ...................... - - - - 2,199
---------
Exercise of employee stock options ........................ 27,777 323 - - 323
Cash dividends declared, $.20 per share ................... - - (869) - (869)
--------- --------- --------- --------- ---------
Balance, June 30, 2004 .................................... 4,359,237 $ 29,725 $ 20,521 $ (523) $ 49,723
========= ========= ========= ========= =========
Balance, January 1, 2005 .................................. 4,390,784 $ 30,042 $ 20,075 $ (90) $ 50,027
---------
Comprehensive income:
Net income ............................................ - - 2,911 - 2,911
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income
taxes of $118 ....................................... - - - (212) (212)
Reclassification adjustment for losses (gains)
realized in income, net of
income taxes of $3 .................................. - - - 7 7
---------
Total other comprehensive income (loss) ........... - - - - (205)
---------
Total comprehensive income ...................... - - - - 2,706
---------
Exercise of employee stock options ........................ 12,744 146 - - 146
Sale of common stock ...................................... 775 14 - - 14
Cash dividends declared, $.20 per share ................... - - (880) - (880)
--------- --------- --------- --------- ---------
Balance, June 30, 2005 .................................... 4,404,303 $ 30,202 $ 22,106 $ (295) $ 52,013
========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2005 2004
---- ----
(Dollars in thousands)
Operating activities
Net income ................................................................................ $ 2,911 $ 2,780
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses .......................................................... 1,035 491
Depreciation and amortization ...................................................... 581 566
Net amortization of securities ..................................................... 50 113
Net losses on sales of securities .................................................. 10 5
Proceeds of sales of loans held for sale ........................................... 96,500 90,620
Originations of loans held for sale ................................................ (96,488) (94,039)
(Increase) decrease in accrued interest receivable ................................. (295) 34
Decrease (increase) in other assets ................................................ 409 (631)
Gains on sales of other real estate ................................................ (24) (9)
Increase in accrued interest payable ............................................... 365 117
Increase in other liabilities ...................................................... 307 5
-------- --------
Net cash provided by operating activities ...................................... 5,361 52
-------- --------
Investing activities
Net decrease in interest bearing deposits with other banks ................................ 393 159
Purchases of available-for-sale securities ................................................ (5,745) (18,771)
Maturities, calls and paydowns of available-for-sale securities ........................... 4,242 20,054
Proceeds of sales of available-for-sale securities ........................................ 4,412 8,926
Net purchases of other investments ........................................................ (248) (2)
Net increase in loans made to customers ................................................... (20,796) (23,078)
Purchases of premises and equipment ....................................................... (542) (386)
Proceeds from sales of other real estate .................................................. 224 59
-------- --------
Net cash used by investing activities .......................................... (18,060) (13,039)
-------- --------
Financing activities
Net increase in deposits .................................................................. 9,960 2,063
Net increase (decrease) in short-term borrowings .......................................... 1,206 (9,476)
Proceeds from issuing long-term debt ...................................................... 3,000 10,507
Repayment of long-term debt ............................................................... (4) -
Exercise of employee stock options ........................................................ 146 323
Sale of common stock ...................................................................... 14 -
Cash dividends paid ....................................................................... (880) (869)
-------- --------
Net cash provided by financing activities ...................................... 13,442 2,548
-------- --------
Increase (decrease) in cash and cash equivalents ............................................... 743 (10,439)
Cash and cash equivalents, beginning of period ................................................. 26,968 41,875
-------- --------
Cash and cash equivalents, end of period ....................................................... $ 27,711 $ 31,436
======== ========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest ................................................................ $ 4,354 $ 3,185
======== ========
Cash payments for income taxes ............................................................ $ 1,690 $ 1,624
======== ========
Supplemental Disclosures of Non-cash Activities
Transfers of loans receivable to other real estate ........................................ $ - $ 87
======== ========
Transfer to net deferred income tax assets from prepaid current income taxes .............. $ 297 $ -
======== ========
See accompanying notes to unaudited consolidated financial statements.
6
COMMUNITY BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements
Accounting Principles - A summary of significant accounting policies and the
audited financial statements for 2004 are included in Community Bankshares,
Inc.'s (the "Company" or "CBI") Annual Report on Form 10-K for the year ended
December 31, 2004.
Management Opinion - The interim 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 2004 Annual Report on Form 10-K.
Nonperforming Loans - As of June 30, 2005, there were $5,259,000 in nonaccrual
loans and $343,000 of loans 90 or more days past due and still accruing
interest.
Earnings Per Share - Basic earnings per share is computed by dividing net income
applicable to common shares by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing applicable net
income by the weighted average number of shares outstanding and any dilutive
potential common shares and dilutive stock options. It is assumed that all
dilutive stock options are exercised at the beginning of each period and that
the proceeds are used to purchase shares of the Company's common stock at the
average market price during the period. Net income per share and net income per
share, assuming dilution, were computed as follows:
7
(Unaudited)
Period Ended June 30,
---------------------
Three Months Six Months
------------ ----------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ................................... $ 1,551 $ 1,395 $ 2,911 $ 2,780
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ............................... 4,404,045 4,348,905 4,399,089 4,341,325
========== ========== ========== ==========
Net income per share, basic .......................... $ .35 $ .32 $ .66 $ .64
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ................................... $ 1,551 $ 1,395 $ 2,911 $ 2,780
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ............................... 4,404,045 4,348,905 4,399,089 4,341,325
Effect of dilutive stock options ....................... 100,142 112,304 101,360 124,051
---------- ---------- ---------- ----------
Total shares ................................ 4,504,187 4,461,209 4,500,449 4,465,376
========== ========== ========== ==========
Net income per share, assuming dilution .............. $ .35 $ .31 $ .65 $ .62
========== ========== ========== ==========
Stock Based Compensation - On April 14, 2005, the Securities and Exchange
Commission adopted a rule amending the compliance date for the adoption of
Statement of Accounting Standards No. 123(R) until the first interim or annual
reporting period of the registrant's first fiscal year beginning on or after
June 15, 2005. The Company has elected to continue using the methodology of
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees," to account for compensation expenses related to
stock-based compensation. Options issued under the Company's plans have no
intrinsic value at the grant date and no compensation cost is recognized in
accordance with APB No. 25. Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," requires entities
to provide pro forma disclosures of net income, and earnings per share, as if
the fair value based method of accounting promulgated by that standard had been
applied. The Company has adopted and intends to continue using the disclosure
provisions of SFAS No. 123, as amended, until the required adoption of the
provisions of SFAS 123(R) on January 1, 2006. Had compensation cost for the
Company's stock option plan been determined based on the fair value as of the
grant dates for awards under the plans consistent with the method prescribed by
SFAS No. 123, the Company's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below:
8
(Unaudited)
Period Ended June 30,
---------------------
Three Months Six Months
------------ ----------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income, as reported .................................... $ 1,551 $ 1,395 $ 2,911 $ 2,780
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of any related tax effects ........................ 49 214 132 428
--------- --------- --------- ---------
Pro forma net income ....................................... $ 1,502 $ 1,181 $ 2,779 $ 2,352
========= ========= ========= =========
Net income per share, basic
As reported ........................................... $ 0.35 $ 0.32 $ 0.66 $ 0.64
Pro forma ............................................. 0.34 0.27 0.63 0.55
Net income per share, assuming dilution
As reported ........................................... $ 0.35 $ 0.31 $ 0.65 $ 0.62
Pro forma ............................................. 0.33 0.26 0.62 0.53
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(R), which requires that the costs resulting from all share based payment
transactions be recognized in the financial statements. SFAS 123 (R) replaces
SFAS 123 and supersedes APB No. 25, as well as several other related
pronouncements. As originally issued, SFAS 123 (R) is effective as of the
beginning of the first interim or annual period beginning after June 30, 2005.
The Company originally stated in its Form 10-K filed for the period as of and
ending December 31, 2004 that it would adopt the provisions of SFAS 123 (R) as
required. The Securities and Exchange Commission ("SEC") issued, effective April
21, 2005, an "Amendment to Rule 4-01(a) of Regulation S-X Regarding the
Effective Date for Statement of Financial Accounting Standards No. 123 (Revised
2004), Share Based Payment." This amendment changes the required SFAS 123 (R)
compliance date for registrants that are not small business issuers to the
beginning of the first interim or annual reporting period of the registrant's
first fiscal year beginning on or after June 15, 2005. Early adoption is
permitted. For CBI, this amendment has the effect of delaying the required
implementation of the provisions of SFAS 123 (R) until the first quarter of
2006. CBI now intends to adopt the provisions of SFAS 123 (R) as of January 1,
2006.
Variable Interest Entity - On March 8, 2004, CBI sponsored the creation of a
Variable Interest Entity ("VIE"), SCB Capital Trust I (the "Trust"), and is the
sole owner of the common securities issued by the Trust. On March 10, 2004, the
Trust issued $10,000,000 in floating rate capital securities. The proceeds of
this issuance, and the amount of CBI's capital investment, were used to acquire
$10,310,000 principal amount of CBI's floating rate junior subordinated
deferrable interest debt securities ("Debentures") due April 7, 2034, which
securities, and the accrued interest thereon, now constitute the Trust's sole
assets. The interest rate associated with the debt securities, and the
distribution rate on the common securities of the Trust, was established
initially at 3.91% and is adjustable quarterly at 3 month LIBOR plus 280 basis
points. The index rate (LIBOR) may not be lower than 1.11%. CBI may defer
interest payments on the Debentures for up to twenty consecutive quarters, but
not beyond the stated maturity date of the Debentures. In the event that such
interest payments are deferred by CBI, the Trust may defer distributions on the
common securities. In such an event, CBI would be restricted in its ability to
pay dividends on its common stock and to perform under other obligations that
are not senior to the junior subordinated Debentures.
9
The Debentures are redeemable at par at the option of CBI, in whole or
in part, on any interest payment date on or after April 7, 2009. Prior to that
date, the Debentures are redeemable at 105% of par upon the occurrence of
certain events that would have a negative effect on the Trust or that would
cause it to be required to be registered as an investment company under the
Investment Company Act of 1940 or that would cause trust preferred securities
not to be eligible to be treated as Tier 1 capital by the Federal Reserve Board.
Upon repayment or redemption of the Debentures, the Trust will use the proceeds
of the transaction to redeem an equivalent amount of trust preferred securities
and trust common securities. The Trust's obligations under the trust preferred
securities are unconditionally guaranteed by CBI.
The Company's investment in the Trust is carried at cost in other
assets and the debentures are included in long-term debt in the consolidated
balance sheet.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Statements included in this report 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. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "projects," and similar expressions.
The Company's expectations, beliefs, estimates and projections are expressed in
good faith and are believed by the Company to have a reasonable basis, including
without limitation, management's examination of historical operating trends,
data contained in the Company's records and other data available from third
parties, but there can be no assurance that management's expectations, beliefs,
estimates or projections will result or be achieved or accomplished. The Company
cautions readers that forward-looking statements, including without limitation,
those relating to the Company's recent and continuing expansion, its future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, income, and adequacy of the allowance for loan losses, are
subject to 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 Company's reports filed with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
References to our Website Address
References to our website address throughout this Quartertly Report on
Form 10-Q and in any documents incorporated into this Form 10-Q by reference are
for informational purposes only, or to fulfill specific disclosure requirements
of the Securities and Exchange Commission's rules or the American Stock Exchange
listing standards. These references are not intended to, and do not, incorporate
the contents of our website by reference into this Form 10-Q or the accompanying
materials.
10
Critical Accounting Policies
CBI has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of CBI's financial statements. The significant
accounting policies of CBI are described in detail in the notes to CBI's audited
consolidated financial statements included in CBI's Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and estimates
by management, which have a material impact on the carrying value of certain
assets and liabilities. Management considers such accounting policies to be
critical accounting policies. The judgments and estimates used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ from these judgments
and estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of operations of CBI.
CBI is a holding company for four community banks and a mortgage
company and, as a financial institution, believes the allowance for loan losses
is a critical accounting policy that requires the most significant judgments and
estimates used in preparation of its consolidated financial statements. Refer to
the sections "The Application of Critical Accounting Policies," "Allowance for
Loan Losses" and "Provision for Loan Losses" in the Annual Report on Form 10-K
for 2004 for a detailed description of CBI's estimation process and methodology
related to the allowance for loan losses.
CHANGES IN FINANCIAL CONDITION
During the six months ended June 30, 2005, loans increased by
$20,226,000, or 5.1%, over the amount as of December 31, 2004. This increase was
funded primarily by increases in interest bearing deposits totaling $12,912,000
and additional short-term and long-term borrowings totaling $4,202,000.
RESULTS OF OPERATIONS
Earnings Performance
Three Months Ended June 30, 2005 and 2004
For the quarter ended June 30, 2005, CBI earned consolidated net income
of $1,551,000, compared with $1,395,000 for the comparable period of 2004. This
represents an increase of $156,000 or 11.2%. Basic earnings per share were $.35
in the 2005 period, compared with $.32 for the 2004 quarter. Diluted earnings
per share were $.35 for the 2005 period and $.31 for the 2004 period.
Operating results for the second quarter of 2005 were positively
affected primarily by an increase in net interest income caused by strong loan
growth and increasing yields. Deposit growth was significantly less than loan
growth during the 2005 second quarter. The Company uses a combination of
short-term and long-term debt to fund the difference between loan growth and
deposit growth. The Company's normal liquidity, comprised of deposit
11
liabilities, short-term and long-term debt issuances and proceeds from sales of
loans originated for sale, continues to be sufficient to fund demand for new
loans.
Increases in the provision for loan losses and noninterest expenses
partially offset the gains made in net interest income and noninterest income.
The provision for loan losses continues to be affected by several loans which
have not performed as agreed and by the significant growth in the Company's loan
portfolio. During the second quarter of 2005, net charge-offs were $495,000
compared with net charge-offs of $178,000 during the same period of 2004. Growth
in the amount of potential problem loans was also a factor contributing to the
increased provision for loan losses.
Noninterest expenses increased in part because of changes in the
corporate management structure designed to enhance controls and risk management
activities particularly in the lending function, and to meet the increased
corporate governance responsibilities placed on public companies by the
Sarbanes-Oxley Act of 2002. In addition, in January of 2005, the Florence
National Bank subsidiary opened a branch office, contributing further to
increased noninterest expenses in the 2005 periods.
Summary Income Statement
------------------------
(Dollars in thousands)
Dollar Percentage
For the Three Months Ended June 30, 2005 2004 Change Change
----------------------------------- ---- ---- ------ ------
Interest income .................................... $7,696 $5,928 $1,768 29.8%
Interest expense ................................... 2,503 1,662 841 50.6%
------ ------ ------
Net interest income ................................ 5,193 4,266 927 21.7%
Provision for loan losses .......................... 585 258 327 126.7%
Noninterest income ................................. 2,044 1,931 113 5.9%
Noninterest expenses ............................... 4,225 3,775 450 11.9%
Income tax expense ................................. 876 769 107 13.9%
------ ------ ------
Net income ......................................... $1,551 $1,395 $ 156 11.2%
====== ====== ======
Six Months Ended June 30, 2005 and 2004
CBI's consolidated net income for the six months ended June 30, 2005
was positively affected by increased levels of net interest income, primarily
related to increased loan volumes and yields. A significant proportion of the
banking subsidiaries' loan portfolios are made up of variable rate loans, which
have repriced favorably several times during 2005. The prime rate, which is the
index to which most of those variable rate loans are related, has increased four
times and 100 basis points during 2005, and nine times and 225 basis points
since June 30, 2004. The provision for loan losses and noninterest expenses
negatively affected results for the 2005 year-to-date period for the same
reasons discussed above for the second quarter.
12
Summary Income Statement
------------------------
(Dollars in thousands)
Dollar Percentage
For the Six Months Ended June 30, 2005 2004 Change Change
--------------------------------- ---- ---- ------ ------
Interest income ..................................... $14,847 $11,836 $ 3,011 25.4%
Interest expense .................................... 4,719 3,302 1,417 42.9%
------- ------- -----
Net interest income ................................. 10,128 8,534 1,594 18.7%
Provision for loan losses ........................... 1,035 491 544 110.8%
Noninterest income .................................. 3,811 3,777 34 0.9%
Noninterest expenses ................................ 8,344 7,507 837 11.1%
Income tax expense .................................. 1,649 1,533 116 7.6%
------- ------- -----
Net income .......................................... $ 2,911 $ 2,780 $ 131 4.7%
======= ======= =====
Net Interest Income
Net interest income is the amount of interest income earned on interest
earning assets (primarily loans, securities, interest bearing deposits with
other banks, and federal funds sold), less the interest expense incurred on
interest bearing liabilities (interest bearing deposits and other borrowings),
and is the principal source of the Company's earnings. Net interest income is
affected by the level of interest rates, volume and mix of interest earning
assets and interest bearing liabilities and the relative funding of those
assets.
Interest income increased by $1,768,000, or 29.8%, in the 2005 second
quarter compared with the same 2004 period. Interest and fees on loans increased
to $7,124,000 for the 2005 quarter from $5,449,000 for the same period of 2004,
primarily due to higher levels of commercial, consumer and mortgage lending
activity and the higher interest rate environment in the 2005 period. Amounts of
interest earned on other categories of interest earning assets also increased
due to increases in the average yields earned on those assets resulting from
increasing market rates of interest during the 2005 period.
Interest expense for the second quarter of 2005 increased to $2,503,000
from $1,662,000 for the 2004 period as a result of larger average amounts of
time deposits and higher interest rates paid in the 2005 period. Interest
expense associated with long-term debt increased in the 2005 three month period
to $468,000 from $380,000 for the same period of 2004 primarily due to
contractual changes in the variable interest rates paid for such borrowings.
Interest income for the six months ended June 30, 2005 increased by
$3,011,000, or 25.4% from the same period of 2004, due to increases in interest
rates and a 19.7% increase in the average amount of loans outstanding. Interest
and fee income on loans for the 2005 six month period was $13,738,000, an
increase of $2,958,000 or 27.4% over the same period of 2004. Interest income
from other earning assets categories during the 2005 six-month period were
slightly higher than in the same period of 2004 primarily due to a 170 basis
point increase in the rate earned on federal funds sold.
Interest expense for the 2005 six month period was $1,417,000 higher
than in the same 2004 period due to higher rates paid for deposits and
significantly higher average amounts of interest bearing time deposits in the
2005 period. Higher deposit rates primarily are attributable to the higher
interest rate environment in 2005. Average short-term borrowings decreased, and
long-term debt increased, for the 2005 period, primarily as a result of the
Company's issuance of $10,000,000 of long-term subordinated debentures in March
2004.
13
During the first quarter of 2004, CBI sponsored the creation of a Trust
that issued $10,000,000 in trust preferred securities. The Trust invested the
proceeds of this issuance and $310,000 of capital provided by CBI into
$10,310,000 of junior subordinated debentures due in 2034 ("Debentures") issued
by CBI. Interest payments on the Debentures are due quarterly at a variable
interest rate. CBI used the proceeds of the Debentures to repay certain
pre-existing debt obligations, to enhance the capital position of two of the
subsidiary banks, to provide an additional funding mechanism for its mortgage
loan brokerage activities, and for other general corporate purposes. Under
current regulatory guidelines, the trust preferred securities issued by the
Trust are includible in the Company's Tier 1 capital for risk-based capital
purposes.
Average Balances, Yields and Rates
Six Months Ended June 30,
-------------------------
2005 2004
---- ----
Interest Interest
Average Income / Yields / Average Income / Yields /
Balances Expense Rates * Balances Expense Rates *
-------- ------- ------- -------- ------- -------
(Dollars in thousands)
Assets
Interest earning deposits ........................... $ 665 $ 19 5.71% $ 1,057 $ 8 1.51%
Investment securities - taxable ..................... 51,264 817 3.19% 52,270 779 2.98%
Investment securities - tax exempt .................. 6,535 110 3.37% 9,811 164 3.34%
Federal funds sold .................................. 12,336 163 2.64% 22,353 105 0.94%
Loans, including loans held for sale ................ 420,422 13,738 6.54% 351,261 10,780 6.14%
--------- ------- --------- -------
Total interest earning assets .............. 491,222 14,847 6.04% 436,752 11,836 5.42%
Cash and due from banks ............................. 15,897 16,277
Allowance for loan losses ........................... (4,890) (4,237)
Premises and equipment, net ......................... 7,820 7,080
Intangible assets ................................... 7,341 7,588
Other assets ........................................ 4,185 3,936
--------- ---------
Total assets ............................... $ 521,575 $ 467,396
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Savings ........................................ $ 88,899 $ 627 1.41% $ 78,473 $ 371 0.95%
Interest bearing transaction accounts .......... 61,724 192 0.62% 55,822 114 0.41%
Time deposits .................................. 213,048 2,907 2.73% 182,816 1,965 2.15%
--------- ------- ---------- -------
Total interest bearing deposits ............ 363,671 3,726 2.05% 317,111 2,450 1.55%
Short-term borrowings ............................... 8,390 87 2.07% 13,262 169 2.55%
Long-term debt ...................................... 32,329 906 5.60% 26,608 683 5.13%
--------- ------- ---------- -------
Total interest bearing liabilities ......... 404,390 4,719 2.33% 356,981 3,302 1.85%
Noninterest bearing demand deposits ................. 64,266 59,542
Other liabilities ................................... 1,955 1,710
Shareholders' equity ................................ 50,964 49,163
--------- ---------
Total liabilities and
shareholders' equity ................... $ 521,575 $ 467,396
========= =========
Interest rate spread ................................ 3.71% 3.57%
Net interest income and net yield
on earning assets .............................. $10,128 4.12% $ 8,534 3.91%
* Yields and rates are annualized.
14
Provision and Allowance for Loan Losses
The provision for loan losses for the 2005 three month period was
$585,000, an increase of $327,000, or 126.7%, from $258,000 for the same period
of 2004. The provision for loan losses increased to $1,035,000 for the 2005 six
month period from $491,000 for the 2004 six month period, an increase of
$544,000 or 110.8%. Ongoing developments associated with a few large problem
loans continue to affect the Company's allowance and provision for loan losses
negatively. Management continues to use new information about these loans to
refine its estimates of the loans' ultimate collectibility and the adequacy of
its loan loss allowance.
Net charge-offs during the six months ended June 30, 2005 were
$570,000, compared with $412,000 for the same period of 2004. The allowance for
loan losses as of June 30, 2005 was 1.16% of loans outstanding, compared with
1.10% as of December 31, 2004 and 1.21% as of June 30, 2004. Non-performing
loans totaled $5,602,000 as of June 30, 2005, compared with $5,078,000 as of
December 31, 2004, an increase of $524,000 or 10.3%. The coverage ratio
(allowance for loan losses divided by non-performing loans) was .86x as of both
June 30, 2005 and December 31, 2004.
The activity in the allowance for loan losses is summarized in the
following table:
Six Months Year Ended Six Months
Ended December 31, Ended
June 30, 2005 2004 June 30, 2004
------------- ---- -------------
(Dollars in thousands)
Allowance at beginning of period ................................. $ 4,347 $ 4,206 $ 4,206
Provision for loan losses ........................................ 1,035 5,102 491
Net charge-offs .................................................. (570) (4,961) (412)
--------- --------- ---------
Allowance at end of period ....................................... $ 4,812 $ 4,347 $ 4,285
========= ========= =========
Allowance as a percentage of loans outstanding ................... 1.16% 1.10% 1.21%
Loans at end of period ........................................... $ 413,875 $ 393,649 $ 354,772
========= ========= =========
Following is a summary of non-performing loans as of June 30, 2005 and
December 31, 2004:
December 31,
June 30, 2005 2004
------------- ----
(Dollars in thousands)
Non-performing loans
Nonaccrual loans ................................... $5,259 $4,941
Past due 90 days or more and still accruing ........ 343 137
------ ------
Total .............................. $5,602 $5,078
====== ======
Nonperforming loans as a percentage
of loans outstanding ............................... 1.35% 1.29%
Included in nonaccrual loans as of June 30, 2005, is one loan
relationship totaling $2,444,000, or 46.5% of nonaccrual loans. This
relationship originated in 2004 to finance the borrower's purchase of a
15
business. The business did not perform as expected and the borrower subsequently
discovered problems with information supporting an appraisal of the business.
Because of deterioration of the borrower's financial condition, proceeds from
the sale of the business are expected to be the primary source of repayment.
During the fourth quarter of 2004, a partial charge-off of $1,001,000 was
recorded. The borrower is cooperating with management to maximize ultimate
collection by actively pursuing sale of the business as an operating concern. If
the business cannot be sold for a sufficient price within a reasonable period of
time, further write-downs might be necessary which could decrease net income.
Approximately $367,000 of the allowance for loan losses is allocated to this
credit as of June 30, 2005.
Risk taking is inherent in the granting of credit. To control the
amounts and types of risks incurred, and to minimize losses, management has
established loan policies and practices. On an ongoing basis, management seeks
to better manage risk and improve internal control systems. As part of this
continuous process, management hired a Chief Credit Officer for the Corporation
in the second quarter of 2005. This officer has specific loan approval authority
over major loan relationships and also assists the subsidiary banks and mortgage
company in other areas of loan operations and administration. Also, during the
second quarter of 2005, management changed its outside independent loan review
provider.
The new loan review firm is in the process of conducting a
comprehensive review of the major credits in the Corporation's loan portfolio.
Based on that review, which was substantially completed in early August, the
Corporation had identified $17 to $18 million in loans, approximately 4%, of the
loan portfolio, as potential problem loans where information about credit
attributes of borrowers had caused management to have more than normal concern
about the ability of the borrowers to comply with original repayment terms. The
amount identified does not represent management's estimate of the potential
losses since a large portion of these loans are secured by real estate and other
collateral or could be repaid under different terms. This is an increase of
approximately $12 to $13 million over the amount identified as of December 31,
2004 by the previous loan review process.
Management will continue to monitor the levels of non-performing loans
and address the weaknesses in these credits to enhance the ultimate collection
or recovery of these assets. Management considers the levels and trends in
non-performing assets and potential problem loans in determining how the
provision and allowance for loan losses is estimated and adjusted. In the
opinion of management, the Corporation's allowance for loan losses at June 30,
2005 is adequate to provide for losses that may be inherent in the loan
portfolio.
Noninterest Income
Noninterest income for the 2005 second quarter increased $113,000, or
5.9%, over the $1,931,000 reported for the same 2004 period. Mortgage loan
brokerage income for the 2005 quarter increased by $34,000, or 3.8%, over the
16
$903,000 in the 2004 period. Service charge income totaled $853,000 in the 2005
quarter, an increase of $31,000, or 3.8%.
For the six months ended June 30, 2005, noninterest income was $34,000,
or .9% more than for the first six months of 2004. Mortgage loan brokerage
income increased $79,000, but this was offset partially by a $52,000 decrease in
service charge income.
Noninterest Expenses
Noninterest expenses for the second quarter of 2005 were $450,000, or
11.9%, higher than the amounts reported for the same period of 2004. Salaries
and employee benefits expenses were $109,000, or 4.9%, higher in the 2005
period, due to increased activity in mortgage lending and additions made to the
Company's executive managment. Expenses related to premises and equipment
increased by $77,000 in the 2005 period, primarily due to the opening of a new
branch office of Florence National Bank during the first quarter of 2005.
Noninterest expense for the first six months of 2005 was $837,000, or
11.1%, more than for the same period of 2004. Salaries and employee benefits for
the 2005 six month period were $276,000, or 6.4%, more than for the same period
of 2004. This expense increased due to higher levels of mortgage loan brokerage
activity in the 2005 period, additions made to the Company's executive
management, and normal periodic wage and salary adjustments. Expenses associated
with premises and equipment were $122,000, or 12.7%, higher in the 2005 period,
primarily due to the opening of a new branch office of Florence National Bank
during the first quarter of 2005. Other expenses were $439,000, or 19.9%, higher
in the 2005 period due in part to expenses related to complying with the
provisions of Sarbanes-Oxley Act Section 404 and the new Florence office.
Income Taxes
Income tax expense was $107,000 more in the 2005 second quarter than
for the 2004 period, as a result of higher net income before taxes. Income tax
expense for the 2005 six month period was $116,000 more than for the same period
of 2004.
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 CBI's service areas. Individual and commercial deposits are the primary
source of funds for credit activities, along with long-term borrowings from the
Federal Home Loan Bank of Atlanta and the proceeds of issuing $10,000,000 of
subordinated debentures. Cash and amounts due from banks and federal funds sold
are CBI's primary sources of asset liquidity. These funds provide a cushion
against short-term fluctuation in cash flow from both loans and deposits.
Securities available-for-sale are CBI's principal source of secondary asset
liquidity. However, the availability of this source is limited by pledging
commitments for public deposits and securities sold under agreements to
repurchase, and is influenced by market conditions. CBI and its subsidiaries
also maintain various federal funds lines of credit with correspondent banks and
are able to borrow from the Federal Home Loan Bank of Atlanta and the Federal
Reserve Bank's discount window.
Total deposits as of June 30, 2005 were $433,418,000, an increase of
$9,960,000, or 2.4%, over the amount as of December 31, 2004. During the six
months ended June 30, 2005, there was a notable movement of funds from interest
bearing transaction accounts into savings and certificate of deposit accounts.
As of June 30, 2005 the loan to deposit ratio was 95.5%, compared with 93.0% at
December 31, 2004 and 93.2% at June 30, 2004.
Management believes CBI and its subsidiaries' liquidity sources are
adequate to meet their current and projected operating needs.
17
CAPITAL RESOURCES
CBI and its banking subsidiaries are subject to regulatory risk-based
capital adequacy standards. Under these standards, bank holding companies and
banks are required to maintain certain minimum ratios of capital to
risk-weighted assets and average total assets. Under the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991, federal bank
regulatory authorities are required to implement prescribed "prompt corrective
actions" upon the deterioration of the capital position of a bank. If the
capital position of an affected institution were to fall below a certain level,
increasingly stringent regulatory corrective actions would be mandated.
The June 30, 2005 risk-based capital ratios for CBI and its banking
subsidiaries are presented in the following table, compared with the "well
capitalized" and minimum ratios under the regulatory definitions and guidelines:
June 30, 2005
-------------
Tier 1 Total Capital Leverage
------ ------------- --------
Community Bankshares, Inc. .................. 13.65% 14.84% 10.83%
Orangeburg National Bank .................... 12.12% 13.29% 9.10%
Sumter National Bank ........................ 9.86% 10.93% 8.39%
Florence National Bank ...................... 9.94% 11.01% 8.79%
Bank of Ridgeway ............................ 12.92% 13.97% 8.79%
Minimum "well capitalized" requirement ...... 6.00% 10.00% 6.00%
Minimum requirement ......................... 4.00% 8.00% 4.00%
As shown in the table above, each of the capital ratios exceeds the
regulatory requirement to be considered "well capitalized." In the opinion of
management, the current and projected capital positions of CBI and its banking
subsidiaries are adequate. The Company's issuance of $10,000,000 of subordinated
debentures during the first quarter of 2004 is includible in Tier 1 and Total
Capital for regulatory risk-based capital purposes.
OFF-BALANCE-SHEET ARRANGEMENTS
In the normal course of business, CBI engages in transactions that, in
accordance with generally accepted accounting principles, are not recorded in
the financial statements (generally commitments to extend credit) or are
recorded in amounts that differ from their notional amounts (generally
derivatives). These transactions involve elements of credit, interest rate and
liquidity risk of varying degrees. Such transactions are used by CBI for general
corporate purposes.
Variable Interest Entity
As discussed under "Results of Operations - Net Interest Income" and in
the notes to unaudited consolidated financial statements under "Variable
Interest Entity," as of June 30, 2005, CBI held an equity interest in, and
guarantees the liabilities of, a non-consolidated variable interest entity.
Commitments
CBI's banking and mortgage brokerage subsidiaries are parties to credit
related financial instruments with off-balance-sheet risk in the normal course
18
of business to meet the financing needs of their customers. These financial
instruments include commitments to extend credit and standby letters of credit.
Such commitments involve varying degrees of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. Exposure to
credit loss is represented by the contractual, or notional, amounts of these
commitments. The same credit policies are used in making commitments as for
on-balance-sheet instruments.
The following table sets forth the contractual amounts of commitments which
represent credit risk:
June 30, 2005
-------------
(Dollars in
thousands)
Loan commitments .......................................... $53,748
Standby letters of credit ................................. 3,011
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being fully drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if deemed necessary by management upon extension of credit, is based
on management's credit evaluation of the counter-party. Collateral held varies
but may include personal residences, accounts receivable, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support private borrowing arrangements. All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Generally, collateral supporting those commitments is
held if deemed necessary. Since many of the standby letters of credit are
expected to expire without being drawn upon, the total letter of credit amounts
do not necessarily represent future cash requirements.
On March 22, 2005, CBI entered into a contract for the construction of
an approximately 16,000 square foot two-story brick office building to house its
corporate headquarters and operations center. The contract price for this
project is $1,476,000. Through August 2, 2005, $341,000 has been expended for
this project. Management expects completion of the building in the fourth
quarter of 2005 and the Company will relocate at that time.
On June 30, 2005, CBI reached an agreement with Jack Henry &
Associates, Inc. to obtain licensing rights for a new core management
information software system, known as Silverlake, to be used by each of its
subsidiaries. The cost of this core system conversion will be approximately
$1,000,000. The agreement also requires CBI to pay various support and
maintenance costs throughout the license period. CBI estimates that during the
next five years these costs will range from approximately $200,000 to $300,000
per year. However, the exact amounts will be determined by future events, such
as asset growth, and cannot be exactly determined at this time. Management
expects to begin implementing the new software during the second quarter of
2006, with all subsidiaries converted shortly thereafter.
Derivative Financial Instruments
In April, 2003, the Financial Accounting Standards Board issued
Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." Among other requirements, this Statement provides that loan
commitment contracts entered into or modified after June 30, 2003 that relate to
the origination of mortgage loans that will be held for sale shall be accounted
19
for as derivative instruments by the issuer of the loan commitment. In March,
2004, the SEC issued its Staff Accounting Bulletin No 105 "Application of
Accounting Principles to Loan Commitments," which resulted in no changes in
CBI's accounting for such commitments. CBI issues mortgage loan rate lock
commitments to potential borrowers to facilitate its origination of home
mortgage loans that are intended to be sold. Between the time that CBI issues
its commitments and the time that the loans close and are sold, CBI is subject
to variability in the selling prices related to those commitments due to changes
in market rates of interest. However, CBI offsets this variability through the
use of so-called "forward sales contracts" to investors in the secondary market.
Under these arrangements, an investor agrees to purchase the closed loans at a
predetermined price. CBI generally enters into such forward sales contracts at
the same time that rate lock commitments are issued. These arrangements
effectively insulate CBI from the effects of changes in interest rates during
the time the commitments are outstanding, but the arrangements do not qualify as
fair value hedges. These derivative financial instruments are carried in the
balance sheet at estimated fair value and changes in the estimated fair values
of these derivatives are recorded in the statement of income in net gains or
losses on loans held for sale.
Derivative financial instruments are written in amounts referred to as
notional amounts. Notional amounts only provide the basis for calculating
payments between counterparties and do not represent amounts to be exchanged
between parties or a measure of financial risk. The following table includes the
notional principal amounts of rate lock commitments and forward sales contracts
as of June 30, 2005, and the estimated fair values of those financial
instruments included in other assets and liabilities in the balance sheet as of
that date.
June 30, 2005
-------------
Estimated
Fair Value
Nominal Asset
Amount (Liability)
------ -----------
(Dollars in thousands)
Rate lock commitments to potential borrowers
to originate mortgage loans to be
held for sale ..................................... $27,722 $ 48
Forward sales contracts with investors
of mortgage loans to be held for sale ............. 27,722 (48)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. CBI's market risk arises principally from interest rate risk inherent
in its lending, deposit and borrowing activities. Management actively monitors
and manages its interest rate risk exposure. Although CBI manages other risks,
such as credit quality and liquidity risk in the normal course of business,
management considers interest rate risk to be its most significant market risk
and this risk could potentially have the largest material effect on CBI's
financial condition and results of operations. Other types of market risks such
as foreign currency exchange risk and commodity price risk do not arise in the
normal course of community banking activities.
CBI's Asset/Liability Committee uses a simulation model to assist in
achieving consistent growth in net interest income while managing interest rate
risk. According to the model, as of June 30, 2005, CBI is positioned so that net
interest income would increase $214,000 and net income would increase $129,000
20
in the next twelve months if interest rates rose 100 basis points. Conversely,
net interest income would decline $214,000 and net income would decline $129,000
in the next twelve months if interest rates declined 100 basis points.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates and loan prepayment, and should not be relied upon as indicative of actual
results. Further, the computations do not contemplate any actions CBI and its
customers could undertake in response to changes in interest rates.
As of June 30, 2005 there was no significant change from the interest
rate sensitivity analysis for the various changes in interest rates calculated
as of December 31, 2004. The foregoing disclosures related to the market risk of
CBI should be read in connection with Management's Discussion and Analysis of
Financial Position and Results of Operations included in the 2004 Annual Report
on Form 10-K.
Item 4. Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that such controls and
procedures, as of the end of the period covered by this quarterly report, were
effective.
There has been no change in the Company's internal control over
financial reporting during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
21
PART II--OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 21, 2005, the Company sold 775 shares of its common stock to
Samuel L. Erwin, Chief Executive Officer of the Company, at a price of $18.02
per share, an aggregate of $13,965.50. Sale of these shares to Mr. Erwin was not
registered under the Securities Act of 1933 in reliance on the exemption
provided under Section 4(2) of the Act because no public offering was involved.
Item 4. Submission of Matters to a Vote of Security Holders
On Monday, May 16, 2005, the shareholders of Community Bankshares, Inc.
held their regular annual meeting. At the meeting, one matter was submitted to a
vote with results as follows:
1. Election of five directors to hold office for three-year terms, and one
director to hold office for a two-year term:
SHARES VOTED
------------
AGAINST OR BROKER
DIRECTORS FOR AUTHORITY WITHHELD NON-VOTES
--------- --- ------------------ ---------
Three-Year Terms
Thomas B. Edmunds ............. 3,042,804 12,062 0
Martha Rose C. Carson ......... 3,017,483 37,383 0
J. M. Guthrie ................. 3,009,219 45,647 0
Wm. Reynolds Williams ......... 3,019,590 35,276 0
Charles E. Fienning ........... 3,043,230 11,636 0
Two-Year Term
Samuel L. Erwin ............... 3,045,600 9,266 0
The following directors continue to serve until the expiration of their
terms at the annual meetings to be held in the years indicated and were not
voted on at the 2005 annual meeting: E. J. Ayers, Jr., - 2006; Alvis J. Bynum -
2006; J. Otto Warren, Jr. - 2006 and J. V. Nicholson, Jr. - 2006; Anna O.
Dantzler - 2007; Richard L Havekost - 2007 and Samuel F. Reid, Jr. - 2007.
Item 6. Exhibits
Exhibits 31-1 Rule 13a-14(a)/15d-14(a) Certification of principal
executive officer
31-2 Rule 13a-14(a)/15d-14(a) Certification of principal
financial officer
32 Certifications Pursuant to 18 U.S.C. Section 1350
22
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, thereunto duly authorized.
DATED: August 11, 2005
COMMUNITY BANKSHARES, INC.
By: s/ Samuel L. Erwin
--------------------------------------------
Samuel L. Erwin
Chief Executive Officer
By: s/ William W. Traynham
---------------------------------------------
William W. Traynham
President and Chief Financial Officer
(Principal Accounting Officer)
23
EXHIBIT INDEX
31-1 Rule 13a-14(a)/15d-14(a) Certification of principal executive
officer
31-2 Rule 13a-14(a)/15d-14(a) Certification of principal financial
officer
32 Certifications Pursuant to 18 U.S.C. Section 1350
24