2 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, 2007 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)
102 Founders Court
Orangeburg, South Carolina 29118
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(Address of principal executive offices, zip code)
(803) 535-1060
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(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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is shell company (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, 4,485,556 shares outstanding on July 25, 2007.
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 ....................................... 23
Item 4T. Controls and Procedures .......................................................................... 23
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .............................................. 24
Item 6. Exhibits ......................................................................................... 25
SIGNATURES ......................................................................................................... 26
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2007 2006
----- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................. $ 16,879 $ 17,622
Federal funds sold ...................................................................... 7,987 29,102
--------- ---------
Total cash and cash equivalents .................................................. 24,866 46,724
Interest bearing deposits with other banks .............................................. 449 1,926
Securities available-for-sale ........................................................... 78,693 84,783
Securities held-to-maturity (estimated fair value $1,750 for 2007
and $1,750 for 2006) ............................................................... 1,750 1,750
Other investments ....................................................................... 3,114 3,246
Loans held for sale ..................................................................... 9,121 9,235
Loans receivable ........................................................................ 447,945 409,720
Less, allowance for loan losses ..................................................... (5,733) (4,662)
--------- ---------
Net loans ........................................................................ 442,212 405,058
Premises and equipment - net ............................................................ 10,379 10,307
Accrued interest receivable ............................................................. 3,537 3,821
Net deferred income tax assets .......................................................... 1,414 1,231
Goodwill ................................................................................ 4,321 4,321
Core deposit intangible assets .......................................................... 2,468 2,591
Prepaid expenses and other assets ....................................................... 3,245 3,524
--------- ---------
Total assets ..................................................................... $ 585,569 $ 578,517
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................. $ 59,067 $ 61,693
Interest bearing .................................................................... 421,178 421,928
--------- ---------
Total deposits ................................................................... 480,245 483,621
Short-term borrowings ................................................................... 18,948 12,948
Long-term debt .......................................................................... 29,683 26,188
Accrued interest payable ................................................................ 1,525 1,578
Accrued expenses and other liabilities .................................................. 1,055 1,558
--------- ---------
Total liabilities ................................................................ 531,456 525,893
--------- ---------
Shareholders' equity
Common stock - no par value; 12,000,000 shares authorized; issued and
outstanding - 4,483,556 for 2007 and 4,441,220 for 2006 ............................. 31,017 30,603
Additional paid-in capital .............................................................. 27 -
Retained earnings ....................................................................... 23,782 22,382
Accumulated other comprehensive income (loss) ........................................... (713) (361)
--------- ---------
Total shareholders' equity ....................................................... 54,113 52,624
--------- ---------
Total liabilities and shareholders' equity ....................................... $ 585,569 $ 578,517
========= =========
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
------------ ----------
2007 2006 2007 2006
----- ----- ----- ----
(Dollars in thousands, except per share)
Interest and dividend income
Loans, including fees ..................................... $ 8,628 $ 8,156 $16,785 $15,839
Interest bearing deposits with other banks ................ 13 35 46 55
Debt securities ........................................... 984 556 2,000 1,109
Dividends ................................................. 46 41 93 75
Federal funds sold ........................................ 80 315 260 638
------- ------- ------- -------
Total interest and dividend income ................. 9,751 9,103 19,184 17,716
------- ------- ------- -------
Interest expense
Deposits
Time deposits $100M and over .......................... 1,080 939 2,073 1,798
Other deposits ........................................ 2,692 2,233 5,337 4,177
------- ------- ------- -------
Total interest expense on deposits ................. 3,772 3,172 7,410 5,975
Short-term borrowings ..................................... 187 89 303 190
Long-term debt ............................................ 475 475 912 957
------- ------- ------- -------
Total interest expense ............................. 4,434 3,736 8,625 7,122
------- ------- ------- -------
Net interest income ............................................ 5,317 5,367 10,559 10,594
Provision for loan losses ...................................... 175 675 550 1,290
------- ------- ------- -------
Net interest income after provision ............................ 5,142 4,692 10,009 9,304
------- ------- ------- -------
Noninterest income
Service charges on deposit accounts ....................... 939 862 1,830 1,694
Mortgage loan brokerage income ............................ 744 987 1,399 1,824
Net securities gains ...................................... - - 2 1
Gains on sales of other investments ....................... 712 - 712 -
Other ..................................................... 372 211 649 475
------- ------- ------- -------
Total noninterest income ........................... 2,767 2,060 4,592 3,994
------- ------- ------- -------
Noninterest expenses
Salaries and employee benefits ............................ 3,084 2,753 6,018 5,332
Premises and equipment .................................... 619 613 1,181 1,237
Advertising ............................................... 138 98 281 173
Supplies .................................................. 110 85 235 157
Other ..................................................... 1,650 1,083 3,000 2,360
------- ------- ------- -------
Total noninterest expenses ......................... 5,601 4,632 10,715 9,259
------- ------- ------- -------
Income before income taxes ..................................... 2,308 2,120 3,886 4,039
Income tax expense ............................................. 838 747 1,411 1,465
------- ------- ------- -------
Net income ..................................................... $ 1,470 $ 1,373 $ 2,475 $ 2,574
======= ======= ======= =======
Per share
Net income ................................................ $ 0.33 $ 0.31 $ 0.56 $ 0.58
Net income - diluted ...................................... 0.32 0.30 0.55 0.57
Cash dividends declared ................................... 0.12 0.11 0.24 0.22
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common Stock Accumulated
------------ Additional Other
Number of Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
(Dollars in thousands, except per share)
Balance, January 1, 2006 ................................ 4,404,303 $ 30,202 $ - $ 19,325 $ (535) $ 48,992
---------
Comprehensive income
Net income .......................................... - - - 2,574 - 2,574
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $75 ..... - - - - (132) (132)
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $0 ..... - - - - (1) (1)
---------
Total other comprehensive income (loss) ............. - - - - - (133)
---------
Total comprehensive income .......................... - - - - - 2,441
---------
Proceeds of sale of common stock ........................ 1,000 16 - - - 16
Exercise of employee stock options ...................... 30,595 328 - - - 328
Cash dividends declared, $.22 per share ................. - - - (974) - (974)
--------- --------- --------- --------- --------- ---------
Balance, June 30, 2006 .................................. 4,435,898 $ 30,546 $ - $ 20,925 $ (668) $ 50,803
========= ========= ========= ========= ========= =========
Balance, January 1, 2007 ................................ 4,441,220 $ 30,603 $ - $ 22,382 $ (361) $ 52,624
---------
Comprehensive income
Net income .......................................... - - - 2,475 - 2,475
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $174 .... - - - - (351) (351)
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $1 ..... - - - - (1) (1)
---------
Total other comprehensive income (loss) ............. - - - - - (352)
---------
Total comprehensive income .......................... - - - - - 2,123
---------
Share-based compensation ................................ - - 27 - - 27
Proceeds of sale of common stock ........................ 500 8 - - - 8
Exercise of employee stock options ...................... 41,836 406 - - - 406
Cash dividends declared, $.24 per share ................. - - - (1,075) - (1,075)
--------- --------- --------- --------- --------- ---------
Balance, June 30, 2007 .................................. 4,483,556 $ 31,017 $ 27 $ 23,782 $ (713) $ 54,113
========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
2007 2006
----- ----
(Dollars in thousands)
Operating activities
Net income .............................................................................. $ 2,475 $ 2,574
Adjustments to reconcile net income to net
cash (used) provided by operating activities
Provision for loan losses ........................................................ 550 1,290
Depreciation and amortization .................................................... 537 624
Net amortization of securities ................................................... (15) 9
Net securities gains ............................................................. (2) (1)
Net gains on sales of other investments .......................................... (712) -
Proceeds of sales of loans held for sale ......................................... 76,040 113,356
Originations of loans held for sale .............................................. (75,926) (121,701)
Decrease (increase) in accrued interest receivable ............................... 284 (2)
Decrease (increase) in other assets .............................................. 868 (165)
Gains on sales of foreclosed assets .............................................. (48) -
(Decrease) increase in accrued interest payable .................................. (53) 336
(Decrease) increase in other liabilities ......................................... (503) 709
Share-based compensation ......................................................... 27 -
--------- ---------
Net cash provided (used) by operating activities ............................. 3,522 (2,971)
--------- ---------
Investing activities
Net decrease (increase) in interest bearing deposits with other banks ................... 1,477 (573)
Purchases of available-for-sale securities .............................................. (1,966) (6,499)
Maturities, calls and paydowns of available-for-sale securities ......................... 7,546 7,872
Proceeds of sales of other investments .................................................. 1,182 203
Purchases of other investments .......................................................... (338) -
Net increase in loans made to customers ................................................. (38,831) (8,246)
Purchases of premises and equipment ..................................................... (530) (1,379)
Proceeds from sales and other disposals of fixed assets ................................. 44 -
Proceeds from sales of foreclosed assets ................................................ 578 -
--------- ---------
Net cash used by investing activities ........................................ (30,838) (8,622)
--------- ---------
Financing activities
Net decrease in deposits ................................................................ (3,376) (4,966)
Net increase in short-term borrowings ................................................... 6,000 3,445
Proceeds from issuing long-term debt .................................................... 7,500 -
Repayment of long-term debt ............................................................. (4,005) (6,004)
Exercise of employee stock options ...................................................... 406 328
Sale of common stock .................................................................... 8 16
Cash dividends paid ..................................................................... (1,075) (974)
--------- ---------
Net cash provided (used) by financing activities ............................. 5,458 (8,155)
--------- ---------
Decrease in cash and cash equivalents ........................................................ (21,858) (19,748)
Cash and cash equivalents, beginning of period ............................................... 46,724 51,991
--------- ---------
Cash and cash equivalents, end of period ..................................................... $ 24,866 $ 32,243
========= =========
See accompanying notes to unaudited consolidated financial statements.
6
Supplemental Disclosures of Cash Flow Information
Cash payments for interest .......................................................... $8,678 $6,786
====== ======
Cash payments for income taxes ...................................................... $1,625 $ 631
====== ======
Supplemental Disclosures of Non-cash Activities
Transfers from loans receivable to foreclosed assets ................................ $1,127 $ -
====== ======
See accompanying notes to unaudited consolidated financial statements.
COMMUNITY BANKSHARES, INC.
Notes to Unaudited Consolidated Financial Statements
Accounting Principles - A summary of significant accounting policies and the
audited financial statements for 2006 are included in Community Bankshares,
Inc.'s (the "Company" or "CBI") Annual Report on Form 10-K for the year ended
December 31, 2006 filed with the Securities and Exchange Commission. Certain
amounts in the 2006 financial statements have been reclassified to conform to
the current presentation.
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 2006 Annual Report on Form 10-K.
Nonperforming Loans - As of June 30, 2007, there were $5,157,000 in nonaccrual
loans and no 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
------------ ----------
2007 2006 2007 2006
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ............................... $ 1,470 $ 1,373 $ 2,475 $ 2,574
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 4,476,229 4,434,012 4,462,464 4,424,091
========== ========== ========== ==========
Net income per share, basic ...................... $ .33 $ .31 $ .56 $ .58
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ............................... $ 1,470 $ 1,373 $ 2,475 $ 2,574
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 4,476,229 4,434,012 4,462,464 4,424,091
Effect of dilutive stock options ................... 49,123 69,624 52,981 70,690
---------- ---------- ---------- ----------
Total shares ............................ 4,525,352 4,503,636 4,515,445 4,494,781
========== ========== ========== ==========
Net income per share, assuming dilution .......... $ .32 $ .30 $ .55 $ .57
========== ========== ========== ==========
Stock Based Compensation - Effective January 1, 2006, the Company began
accounting for compensation expenses related to stock options granted to
employees and directors under the recognition and measurement principles of
Statement of Accounting Standards No. 123(R) "Share-Based Payment" ("SFAS
123(R)") using the modified prospective application method. The Company had
previously 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 until
the mandatory effective date for SFAS 123(R).
Options previously issued under the Company's plans had no intrinsic value at
the grant date and no compensation cost was recognized in accordance with APB
No. 25. Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," required 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. Under
the modified prospective application method of SFAS 123(R), the Company is
required to apply SFAS 123(R) only to new awards and to awards modified,
repurchased or cancelled after the required effective date. Compensation cost
would also be recognized for the portions of previously granted awards
outstanding which had not vested on the effective date. The Company had no such
awards outstanding as of January 1, 2006 and the Company made no awards of stock
options during 2006. During the first six months of 2007, stock-based
compensation included in salaries and benefits totaled $27,000.
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
8
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.
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. In accordance with Financial
Accounting Standards Board Interpretation 46(R), the Trust is not consolidated
in the Company's financial statements.
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.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 159 "The Fair Value Option for Financial Assets and
Financial Liabilities," ("SFAS No. 159" or the "Statement") which is effective
for fiscal years beginning after November 15, 2007. Under the provisions of SFAS
No. 159, entities may choose, but are not required, to measure many financial
instruments and certain other items at their fair values, with changes in the
fair values of those instruments reported in earnings. While most of the
Statement's provisions apply only to entities that elect the fair value option,
SFAS No. 159 also applies to all entities with trading and available-for-sale
securities, such as the Company. The Company has not determined what effect, if
any, the Statement will have on its future financial statements, other
agreements, or planned or intended changes in business practices.
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 the 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,
9
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 risks and uncertainties include, but are
not limited to:
o the Company's growth and ability to maintain growth;
o governmental monetary and fiscal policies, as well as legislative and
regulatory changes;
o the effects of interest rate changes on our level and composition of
deposits, loan demand and the value of our loan collateral and
securities;
o the effects of competition from other financial institutions operating
in the Company's market areas and elsewhere, including institutions
operating locally, regionally, nationally and internationally;
o failure of assumptions underlying the establishment of the allowance
for loan losses, including the value of collateral securing loans; and
o loss of consumer confidence and economic disruptions resulting from
terrorist activities.
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 Quarterly 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 2006 Annual Report on Form
10-K filed with the Securities and Exchange Commission.
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
10
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 a community bank 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 "Allowance for Loan Losses" and "Provision for Loan Losses" in the
Annual Report on Form 10-K for 2006 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, 2007, loans receivable increased
by $38,225,000, or 9.3%, over the amount as of December 31, 2006. The growth in
this earning asset category was funded largely by reducing the amounts of liquid
assets, most notably federal funds sold, but secondarily maturities of
marketable securities available-for-sale. Most of this growth was attributable
to new business development in the Midlands region.
The aggregate amounts of deposits and short-term and long-term
borrowings increased by only $6,119,000, or 1.17%, from the December 31, 2006
amounts. During the second quarter of 2007, the Company obtained short-term
brokered certificates of deposit totaling $7,213,000. These wholesale deposits
were used primarily to fund loan growth. The overall level of deposits decreased
by $3,376,000 or 0.7%. The level of deposits has been impacted by normal cash
flow requirements of large local government customers. Management expects that
the Company will continue to utilize this and similar sources of funding as
needed to supplement the Company's marketing efforts for deposit accounts within
its market areas. Given the current expectations for interest rates, it is
expected that the rates paid by the Company to fund asset growth will increase
in the near term.
RESULTS OF OPERATIONS
Earnings Performance
Three Months Ended June 30, 2007 and 2006
For the quarter ended June 30, 2007, CBI recorded consolidated net
income of $1,470,000, compared with $1,373,000 for the comparable period of
2006. This represents an increase of $97,000 or 7.1%. Basic earnings per share
and earnings per share, assuming dilution were $.33 and $.32, respectively, in
the 2007 period, compared with $.31 and $.30, respectively, for the 2006
quarter.
Compared with the second quarter of 2006, operating results for the
second quarter of 2007 were affected primarily by higher salaries and employee
benefits and other noninterest expenses, lower mortgage loan brokerage income,
non-recurring gains of $712,000 on the sale of other investments and a decrease
of $500,000 in the amount provided for loan losses. Market interest rates, as
well as the rates associated with the Company's interest earning assets and its
interest-bearing liabilities were generally higher in the 2007 period reflecting
the effects of Federal Reserve policies. The increase in rates paid for interest
bearing liabilities was greater than the increased yield on earning assets
resulting in a decrease in net interest margin.
11
Summary Income Statement
------------------------
(Dollars in thousands)
For the Three Months Ended June 30, 2007 2006 Dollar Change Percentage Change
----------------------------------- ---- ---- ------------- -----------------
Interest income .................................... $9,751 $9,103 $ 648 7.1%
Interest expense ................................... 4,434 3,736 698 18.7%
------ ------ ------
Net interest income ................................ 5,317 5,367 (50) -0.9%
Provision for loan losses .......................... 175 675 (500) -74.1%
Noninterest income ................................. 2,767 2,060 707 34.3%
Noninterest expenses ............................... 5,601 4,632 969 20.9%
Income tax expense ................................. 838 747 91 12.2%
------ ------ ------
Net income ......................................... $1,470 $1,373 $ 97 7.1%
====== ====== ======
Six Months Ended June 30, 2007 and 2006
CBI's consolidated net income for the six months ended June 30, 2007
was positively affected by a $740,000 reduction in the amount provided for loan
losses and gains of $712,000 on the disposition of other investments. However,
lower mortgage loan brokerage income and increases in salaries and employee
benefits, advertising, supplies and other expenses more than offset those
positive effects.
Summary Income Statement
------------------------
(Dollars in thousands)
For the Six Months Ended June 30, 2007 2006 Dollar Change Percentage Change
--------------------------------- ---- ---- ------------- -----------------
Interest income ..................................... $19,184 $17,716 $ 1,468 8.3%
Interest expense .................................... 8,625 7,122 1,503 21.1%
------- ------- -------
Net interest income ................................. 10,559 10,594 (35) -0.3%
Provision for loan losses ........................... 550 1,290 (740) -57.4%
Noninterest income .................................. 4,592 3,994 598 15.0%
Noninterest expenses ................................ 10,715 9,259 1,456 15.7%
Income tax expense .................................. 1,411 1,465 (54) -3.7%
------- ------- -------
Net income .......................................... $ 2,475 $ 2,574 $ (99) -3.8%
======= ======= =======
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.
12
Three Months Ended June 30, 2007 and 2006
Net interest income for the three months ended June 30, 2007 was
$5,317,000, a decrease of $50,000, or 0.9%, from the amount reported for the
second quarter of 2006. Interest income and interest expense for the 2007
quarter were both significantly higher than during the same period of 2006, due
to increases in the related balance sheet items and increases in interest rates
earned on, or paid for, those items. Basic earnings per share and earnings per
share, assuming dilution were $0.33and $.32, respectively, in the 2007 period,
compared with $.31 and $.30, respectively, for the 2006 quarter.
The average rate earned on loans, including loans held for sale, was
7.81% and 7.54% for the second quarters of 2007 and 2006, respectively. The
average yield on earning assets was 7.30% for the second quarter of 2007,
compared with 6.99% for the second quarter of 2006. The average cost of time
deposits increased to 4.68% for the second quarter of 2007, compared with 4.03%
for the same period of 2006. The average cost of all interest-bearing
liabilities was 3.89% for the 2007 quarter and 3.40% for the same period of
2006. Accordingly, the interest rate spread (interest earning assets yield minus
the rate paid for interest-bearing liabilities) for the 2007 second quarter
narrowed to 3.41%, or 18 basis points lower than for the same period of 2006,
and net yield on earning assets (net interest income divided by average interest
earning assets) for the 2007 quarter was 3.98%, or 14 basis points lower than
for the same period of 2006.
Average amounts of interest earning assets were $13,583,000 higher in
the 2007 period than in the 2006 period and the average amounts of
interest-bearing liabilities were $15,924,000 higher in the 2007 three month
period. During the second quarter of 2007, the Company was more reliant on
interest-bearing liabilities to fund earning assets than it was during the 2006
second quarter.
13
Average Balances, Yields and Rates
Three Months Ended June 30,
---------------------------
2007 2006
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates(1) Balances Expense Rates(1)
-------- ------- -------- -------- ------- --------
(Dollars in thousands)
Assets
Interest earning deposits ............................... $ 1,008 $ 13 5.17% $ 1,791 $ 35 7.84%
Investment securities - taxable ......................... 80,597 988 4.92% 56,700 553 3.91%
Investment securities - tax exempt (2) .................. 4,645 42 3.63% 4,966 44 3.55%
Federal funds sold ...................................... 6,452 80 4.97% 25,220 315 5.01%
Loans, including loans held for sale (2)(3) ............. 443,325 8,628 7.81% 433,767 8,156 7.54%
--------- --------- ---------- ---------
Total interest earning assets .................. 536,027 9,751 7.30% 522,444 9,103 6.99%
Cash and due from banks ................................. 16,984 14,438
Allowance for loan losses ............................... (6,045) (10,665)
Premises and equipment, net ............................. 8,004 9,827
Intangible assets ....................................... 5,907 7,670
Other assets ............................................ 11,967 8,724
--------- ---------
Total assets ................................... $ 572,844 $ 552,438
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Savings ............................................ $ 89,660 $ 627 2.80% $ 89,000 $ 576 2.60%
Interest bearing transaction accounts .............. 72,862 273 1.50% 73,212 179 0.98%
Time deposits ...................................... 246,329 2,872 4.68% 240,609 2,417 4.03%
--------- --------- ---------- ---------
Total interest bearing deposits ................ 408,851 3,772 3.70% 402,821 3,172 3.16%
Short-term borrowings ................................... 18,056 187 4.15% 7,718 89 4.63%
Long-term debt .......................................... 29,701 475 6.41% 30,145 475 6.32%
--------- --------- --------- --------
Total interest bearing liabilities ............. 456,608 4,434 3.89% 440,684 3,736 3.40%
Noninterest bearing demand deposits ..................... 59,693 57,052
Other liabilities ....................................... 2,307 2,493
Shareholders' equity .................................... 54,236 52,209
--------- ---------
Total liabilities and shareholders' equity ..... $ 572,844 $ 552,438
========= =========
Interest rate spread .................................... 3.41% 3.59%
Net interest income and net yield
on earning assets .................................. $ 5,317 3.98% $ 5,367 4.12%
(1) Yields and rates are annualized.
(2) Yields on tax-exempt securities and loans have not been stated on a
tax-equivalent basis.
(3) Nonaccruing loans of $5,157,000 are included in the average balances and
income from such loans is recognized on a cash basis.
14
Six Months Ended June 30, 2007 and 2006
Net interest income for the six months ended June 30, 2007 decreased by
$35,000, or 0.3% from the amount for the same period of 2006. Both interest
income and interest expense increased significantly in the 2007 period due to
higher levels of market interest rates and, to a lesser extent, to higher
amounts of interest earning assets and interest-bearing liabilities.
For the 2007 year-to-date period, the interest rate spread and net
yield on earning assets both decreased as compared with the same period of 2006.
Interest rate spread decreased by 11 basis points and net yield on earning
assets decreased by eight basis points. These decreases resulted primarily from
higher rates paid on interest-bearing liabilities, which increased slightly more
than rates earned on earning assets. In particular, the Company's costs of
funding increased primarily due to higher rates paid on larger amounts of
certificates of deposit and increased amounts of short-term borrowings while
earnings on assets increased due to a shift from holding highly liquid but
low-yielding federal funds sold to higher-yielding taxable investment securities
and loans. The Company's average loans outstanding for the 2007 six month period
is not much changed from the 2006 six-month average due to the sale of
$8,162,000 of loans during the fourth quarter of 2006.
15
Average Balances, Yields and Rates
Six Months Ended June 30,
-------------------------
2007 2006
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates(1) Balances Expense Rates(1)
-------- ------- -------- -------- ------- --------
(Dollars in thousands)
Assets
Interest earning deposits ............................... $ 1,773 $ 46 5.23% $ 1,665 $ 55 6.66%
Investment securities - taxable ......................... 82,648 2,008 4.90% 57,281 1,093 3.85%
Investment securities - tax exempt (2) .................. 4,697 85 3.65% 5,193 91 3.53%
Federal funds sold ...................................... 10,282 260 5.10% 27,394 638 4.70%
Loans, including loans held for sale (2)(3) ............. 433,533 16,785 7.81% 431,948 15,839 7.39%
-------- --------- --------- --------
Total interest earning assets .................. 532,933 19,184 7.26% 523,481 17,716 6.82%
Cash and due from banks ................................. 17,156 15,332
Allowance for loan losses ............................... (5,458) (11,002)
Premises and equipment, net ............................. 8,694 10,135
Intangible assets ....................................... 6,849 7,096
Other assets ............................................ 9,745 8,353
--------- ---------
Total assets ................................... $ 569,919 $ 553,395
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Savings ............................................ $ 92,886 $ 1,299 2.82% $ 87,270 $ 1,027 2.37%
Interest bearing transaction accounts .............. 74,945 532 1.43% 73,557 398 1.09%
Time deposits ...................................... 243,963 5,579 4.61% 238,367 4,550 3.85%
-------- --------- --------- --------
Total interest bearing deposits ................ 411,794 7,410 3.63% 399,194 5,975 3.02%
Short-term borrowings ................................... 14,958 303 4.08% 8,990 190 4.26%
Long-term debt .......................................... 27,998 912 6.57% 31,421 957 6.14%
-------- --------- --------- --------
Total interest bearing liabilities ............. 454,750 8,625 3.82% 439,605 7,122 3.27%
Noninterest bearing demand deposits ..................... 59,382 60,102
Other liabilities ....................................... 2,065 2,731
Shareholders' equity .................................... 53,722 50,957
--------- ---------
Total liabilities and shareholders' equity ..... $ 569,919 $ 553,395
========= =========
Interest rate spread .................................... 3.44% 3.55%
Net interest income and net yield
on earning assets .................................. $ 10,559 4.00% $ 10,594 4.08%
(1) Yields and rates are annualized.
(2) Yields on tax-exempt securities and loans have not been stated on a
tax-equivalent basis.
(3) Nonaccruing loans of $5,157,000 are included in the average balances and
income from such loans is recognized on a cash basis.
Provision and Allowance for Loan Losses
The provision for loan losses for the 2007 three month period was
$175,000, a decrease of $500,000, or 74.1%, from $675,000 for the same period of
2006. The provision for loan losses decreased to $550,000 for the 2007 six month
16
period from $1,290,000 for the 2006 six month period, a decrease of $740,000 or
57.4%.
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, 2007 2006 June 30, 2006
------------- ---- -------------
(Dollars in thousands)
Allowance at beginning of period .................................. $ 4,662 $ 11,641 $ 11,641
Provision for loan losses ......................................... 550 2,950 1,290
Net (charge-offs) or recoveries ................................... 521 (9,929) (3,060)
--------- --------- ---------
Allowance at end of period ........................................ $ 5,733 $ 4,662 $ 9,871
========= ========= =========
Allowance as a percentage of loans outstanding .................... 1.28% 1.14% 2.35%
Loans at end of period ............................................ $ 447,945 $ 409,720 $ 419,170
========= ========= =========
Following is a summary of non-performing loans as of June 30, 2007 and
December 31, 2006:
June 30, December 31,
2007 2006
---- ----
(Dollars in thousands)
Non-performing loans
Nonaccrual loans ................................. $ 5,157 $4,714
Past due 90 days or more and still accruing ...... - 232
--------- ------
Total .............................. $ 5,157 $4,946
========= ======
Nonperforming loans as a percentage of:
Loans outstanding ................................ 1.15% 1.21%
Allowance for loan losses ........................ 89.95% 106.09%
The following table shows quarterly changes in nonperforming and
potential problem loans since December 31, 2005.
17
90 Days or
More Past Due Total Percentage Percentage
Nonaccrual and Still Nonperforming of Total Potential of Total
Loans Accruing Loans Loans Problem Loans Loans
----- -------- ----- ----- ------------- -----
(Dollars in thousands)
December 31, 2005 ............ 11,651 729 12,380 2.99% 29,313 7.08%
Net change ................... 3,128 949 4,077 (2,767)
-------- -------- ------- --------
March 31, 2006 ............... 14,779 1,678 16,457 3.94% 26,546 6.36%
Net change ................... (3,628) (1,476) (5,104) (3,461)
-------- -------- ------- --------
June 30, 2006 ................ 11,151 202 11,353 2.71% 23,085 5.51%
Net change ................... (2,483) 175 (2,308) (219)
-------- -------- ------- --------
September 30, 2006 ........... 8,668 377 9,045 2.19% 22,866 5.55%
Net change ................... (3,954) (145) (4,099) (7,475)
-------- -------- ------- --------
December 31, 2006 ............ 4,714 232 4,946 1.21% 15,391 3.76%
Net change ................... 1,612 (65) 1,547 (1,143)
-------- -------- ------- --------
March 31, 2007 ............... 6,326 167 6,493 1.53% 14,248 3.36%
Net change ................... (1,169) (167) (1,336) 385
-------- -------- ------- --------
June 30, 2007 ................ $ 5,157 $ - $ 5,157 1.15% $ 14,633 3.27%
======== ======== ======== ========
During the second quarter of 2007, nonperforming loans decreased by
$1,336,000 while potential problem loans increased by $385,000. The major
component of the improvement in nonperforming loans was the transfer of a single
$750,000 commercial credit to other real estate owned. The Company anticipates
an auction of that property, which includes real and personal business property,
during the third quarter. At June 30, 2007 other real estate owned totaled
$1,176,000, compared to $108,000 for the comparable period in 2006.
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 Company's allowance for loan losses at June 30, 2007
is adequate to provide for losses that may be inherent in the loan portfolio.
18
Noninterest Income
Noninterest income for the 2007 second quarter increased $707,000, or
34.3%, over the $2,060,000 reported for the same 2006 period. The Company
realized a one-time $712,000 gain on the sale of other investments during the
2007 period, primarily from the sale of surplus stock of a correspondent bank
which resulted from the merger of the Company's four bank subsidiaries into one
bank late in 2006. Mortgage loan brokerage income was significantly lower during
the 2007 period due to lower volumes of loan originations, consistent with the
overall slowing of the real estate market.
For the six months ended June 30, 2007, noninterest income increased
$598,000, or 15.0%, over noninterest income for the first six months of 2006.
Again, this increase was the result of the one-time gain from the sale of other
investments. Mortgage loan brokerage income for the first six months of 2007
decreased $425,000 compared with the same period of 2006, consistent with the
overall slowing of the real estate market.
Noninterest Expenses
Noninterest expenses for the second quarter of 2007 were $969,000, or
20.9%, higher than the amounts reported for the same period of 2006. Salaries
and employee benefits expenses were $331,000, or 12.0%, higher in the 2007
period, due to the hiring of several new loan officers and additions to
executive management. Increases in certain other expense categories, such as
advertising and supplies, are primarily the after-effects of the consolidation
of the Company's former four-bank structure late in 2006.
Noninterest expenses for the first six months of 2007 were $1,456,000,
or 15.7%, more than for the same period of 2006. Salaries and employee benefits
for the 2007 six month period were $686,000, or 12.9%, more than for the same
period of 2006. This expense increased due to new hires noted above and normal
periodic wage and salary adjustments. Other factors contributing to the
increased non interest expenses were consulting costs related to preparation of
a strategic plan, recourse provision associated with secondary market loans and
a $240,000 deposit related fraud loss.
Income Taxes
Income tax expense was $91,000 higher in the 2007 second quarter than
for the 2006 period, as a result of higher taxable income before taxes. Income
tax expense for the 2007 six month period was $54,000 less than for the same
period of 2006 due to lower net income before taxes.
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 market 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
19
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.
Total deposits as of June 30, 2007 were $480,245,000, a decrease of
$3,376,000, or 0.7%, from the amount as of December 31, 2006. During the first
six months of 2007, there was a notable movement of funds from noninterest
bearing demand deposit, interest-bearing transaction and savings accounts into
time deposit accounts. The Company purchased $7,213,000 of short-term brokered
certificates of deposit during the 2007 second quarter to supplement deposits
obtained from the local markets. Short-term borrowings, particularly repurchase
agreement accounts, increased significantly during the first six months of 2007,
primarily due to attractive rates paid for such funds. As of June 30, 2007 the
loan to deposit ratio, excluding loans held for sale, was 93.3%, compared with
84.7% at December 31, 2006 and 91.3% at June 30, 2006.
Management believes CBI's liquidity sources are adequate to meet its
current and projected operating needs.
CAPITAL RESOURCES
CBI and its bank subsidiary 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, 2007 risk-based capital ratios for CBI and the bank are
presented in the following table, compared with the "well capitalized" and
minimum ratios under the regulatory definitions and guidelines:
June 30, 2007
-------------
Tier 1 Total Capital Leverage
------ ------------- --------
Community Bankshares, Inc. .................. 13.06% 14.31% 10.26%
Community Resource Bank ..................... 11.44% 12.69% 8.95%
Minimum "well capitalized" requirement ...... 6.00% 10.00% 6.00%
Minimum requirement ......................... 4.00% 8.00% 5.00%
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 the bank are
adequate.
20
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.
Variable Interest Entity
As discussed under "Capital Resources" and in the notes to unaudited
consolidated financial statements under "Variable Interest Entity," as of June
30, 2007, CBI held an equity interest in, and guarantees the liabilities of, a
non-consolidated variable interest entity, SCB Capital Trust I.
Commitments
CBI is party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its 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, 2007
-------------
(Dollars in
thousands)
Loan commitments .............. $ 61,545
Standby letters of credit ..... 2,542
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.
21
The Company entered into a contract for the construction of a new
branch office to be located on Clemson Road in the northeast Columbia, SC area.
Construction was begun during the second quarter of 2007 and the office is
expected to open for business around the beginning of 2008. Estimated
construction costs total $830,000.
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
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, 2007, 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, 2007
-------------
Estimated
Fair Value
Notional Asset
Amount (Liability)
------ -----------
(Dollars in thousands)
Rate lock commitments to potential borrowers
to originate mortgage loans to be
held for sale ....................................... $9,877 $ 4
Forward sales contracts with investors
of mortgage loans to be held for sale ............... 9,877 (4)
22
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, 2007, CBI is positioned so that net
interest income would decrease $100,000 and net income would decrease $64,000 in
the next twelve months if interest rates rose 100 basis points. Conversely, net
interest income would increase $100,000 and net income would increase $64,000 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, 2007 there was no significant change from the interest
rate sensitivity analysis for the various changes in interest rates calculated
as of December 31, 2006. 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 2006 Annual Report
on Form 10-K.
Item 4T. 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.
23
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On Monday, May 15, 2007, the shareholders of Community Bankshares, Inc.
held their regular annual meeting. At the meeting, two matters were submitted to
a vote with results as follows:
1. Election of four 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
Samuel L. Erwin 3,190,743 54,117 1,224,307
Anna O. Dantzler 3,177,916 66,944 1,224,307
Richard L. Haveksot. 3,170,888 73,972 1,224,307
Samuel F. Reid, Jr. 3,167,329 77,531 1,224,307
Two Year Term
Charles P. Thompson, Jr 3,189,352 55,508 1,224,307
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 2007 annual meeting: Thomas B. Edmunds - 2008; Martha Rose C.
Carson - 2008; J. M. Guthrie - 2008; Wm. Reynolds Williams - 2008; Charles E.
Fienning - 2008; E. J. Ayers, Jr. - 2009; Alvis J. Bynum - 2009; and J. V.
Nicholson, Jr. - 2009.
2. Approval of the Community Bankshares, Inc. 2007 Equity Plan
SHARES VOTED
-------------------------------------------------------------------------------
AGAINST OR BROKER
FOR AUTHORITY WITHHELD NON-VOTES
--- ------------------ ---------
2,080,782 162,342 1,224,307
At a meeting on July 30, 2007, the Board of Directors of Community
Bankshares, Inc. adopted two amendments to the 2007 Equity Plan. Section 5.4(c)
of the 2007 Equity Plan, which provides for cashless exercise of options issued
under the 2007 Plan, was amended to clarify that cashless exercise would only be
allowed if specifically permitted by the Board of Directors in its discretion. A
new Section 5.7 to the plan was adopted, which provides that, during the
lifetime of the employee, an option shall be exercisable only by the employee,
and no option is assignable or transferable by an employee except by will or by
the laws of descent and distribution.
The Board had the authority under Section 12.2(a) of the 2007 Equity
Plan to adopt the foregoing amendments to the plan without shareholder approval.
Furthermore, no awards had been granted under the 2007 Plan prior to the
amendments, so no consent of any participant to these amendments was required
under Section 12.2 of the 2007 Plan.
24
Item 6. Exhibits
Exhibits 10 Community Bankshares, Inc. 2007 Equity Plan (as amended July
30, 2007)
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
25
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 13, 2007
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)
26
EXHIBIT INDEX
Exhibits 10 Community Bankshares, Inc. 2007 Equity Plan (as amended July
30, 2007)
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
27