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 September 30, 2007 Commission File No. 000-22054
COMMUNITY BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
South Carolina 57-0966962
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(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 a 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, 4,443,456 shares outstanding on October 31, 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 ............. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................................ 23
Item 4T. Controls and Procedures ........................................................................... 24
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................................ 25
Item 6. Exhibits........................................................................................... 25
SIGNATURES .......................................................................................................... 26
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PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2007 2006
---- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................. $ 23,034 $ 17,622
Federal funds sold ...................................................................... - 29,102
--------- ---------
Total cash and cash equivalents .................................................. 23,034 46,724
Interest bearing deposits with other banks .............................................. 253 1,926
Securities available-for-sale ........................................................... 80,619 84,783
Securities held-to-maturity (estimated fair value $1,750 for 2007
and $1,750 for 2006) ............................................................... 1,750 1,750
Other investments ....................................................................... 3,339 3,246
Loans held for sale ..................................................................... 7,502 9,235
Loans receivable ........................................................................ 456,742 409,720
Less, allowance for loan losses ..................................................... (5,877) (4,662)
--------- ---------
Net loans ........................................................................ 450,865 405,058
Premises and equipment - net ............................................................ 10,517 10,307
Accrued interest receivable ............................................................. 4,073 3,821
Net deferred income tax assets .......................................................... 1,076 1,231
Goodwill ................................................................................ 4,321 4,321
Core deposit intangible assets .......................................................... 2,407 2,591
Prepaid expenses and other assets ....................................................... 3,830 3,524
--------- ---------
Total assets ..................................................................... $ 593,586 $ 578,517
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................. $ 58,527 $ 61,693
Interest bearing .................................................................... 412,905 421,928
--------- ---------
Total deposits ................................................................... 471,432 483,621
Short-term borrowings ................................................................... 35,322 12,948
Long-term debt .......................................................................... 29,681 26,188
Accrued interest payable ................................................................ 1,411 1,578
Accrued expenses and other liabilities .................................................. 1,182 1,558
--------- ---------
Total liabilities ................................................................ 539,028 525,893
--------- ---------
Shareholders' equity
Common stock - no par value; 12,000,000 shares authorized; issued and
outstanding - 4,443,456 for 2007 and 4,441,220 for 2006 ............................. 30,433 30,603
Additional paid-in capital .............................................................. 31 -
Retained earnings ....................................................................... 24,122 22,382
Accumulated other comprehensive income (loss) ........................................... (28) (361)
--------- ---------
Total shareholders' equity ....................................................... 54,558 52,624
--------- ---------
Total liabilities and shareholders' equity ....................................... $ 593,586 $ 578,517
========= =========
See accompanying notes to unaudited consolidated financial statements.
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COMMUNITY BANKSHARES, INC.
Consolidated Statements of Income
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2007 2006 2007 2006
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest and dividend income
Loans, including fees ..................................... $ 8,972 $ 8,587 $25,757 $24,426
Interest bearing deposits with other banks ................ 5 33 51 88
Debt securities ........................................... 1,019 607 3,019 1,716
Dividends ................................................. 46 39 139 114
Federal funds sold ........................................ 82 350 342 988
------- ------- ------- -------
Total interest and dividend income ................. 10,124 9,616 29,308 27,332
------- ------- ------- -------
Interest expense
Deposits
Time deposits $100M and over .......................... 1,196 1,066 3,269 2,864
Other deposits ........................................ 2,794 2,460 8,131 6,637
------- ------- ------- -------
Total interest expense on deposits ................. 3,990 3,526 11,400 9,501
Short-term borrowings ..................................... 193 88 496 278
Long-term debt ............................................ 489 458 1,401 1,415
------- ------- ------- -------
Total interest expense ............................. 4,672 4,072 13,297 11,194
------- ------- ------- -------
Net interest income ............................................ 5,452 5,544 16,011 16,138
Provision for loan losses ...................................... 375 665 925 1,955
------- ------- ------- -------
Net interest income after provision ............................ 5,077 4,879 15,086 14,183
------- ------- ------- -------
Noninterest income
Service charges on deposit accounts ....................... 996 852 2,826 2,546
Mortgage loan brokerage income ............................ 528 963 1,927 2,787
Net securities gains ...................................... - - 2 1
Gains on sales of other investments ....................... - - 712 -
Other ..................................................... 215 143 864 618
------- ------- ------- -------
Total noninterest income ........................... 1,739 1,958 6,331 5,952
------- ------- ------- -------
Noninterest expenses
Salaries and employee benefits ............................ 2,897 2,798 8,915 8,130
Premises and equipment .................................... 582 648 1,763 1,885
Advertising ............................................... 178 153 459 326
Supplies .................................................. 106 156 341 313
Provision for warranty liabilities ........................ 572 10 716 57
Other ..................................................... 1,076 1,141 3,932 3,454
------- ------- ------- -------
Total noninterest expenses ......................... 5,411 4,906 16,126 14,165
------- ------- ------- -------
Income before income taxes ..................................... 1,405 1,931 5,291 5,970
Income tax expense ............................................. 533 730 1,944 2,195
------- ------- ------- -------
Net income ..................................................... $ 872 $ 1,201 $ 3,347 $ 3,775
======= ======= ======= =======
Per share
Net income ................................................ $ 0.20 $ 0.27 $ 0.75 $ 0.85
Net income - diluted ...................................... 0.19 0.27 0.74 0.84
Cash dividends declared ................................... 0.12 0.11 0.36 0.33
See accompanying notes to unaudited consolidated financial statements.
-4-
COMMUNITY BANKSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common Stock
------------ Additional Accumulated
Number of Paid-in Retained Other 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 ..................................... - - - 3,775 - 3,775
--------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $76 - - - - 136 136
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $0 - - - - (1) (1)
--------
Total other comprehensive income (loss) ........ - - - - - 135
--------
Total comprehensive income ..................... - - - - - 3,910
--------
Proceeds of sale of common stock .................... 1,000 16 - - - 16
Exercise of employee stock options .................. 36,917 396 - - - 396
Cash dividends declared, $.33 per share ............. - - - (1,463) - (1,463)
--------- ---------- ---------- ---------- ---------- --------
Balance, September 30, 2006 ......................... 4,442,220 $ 30,614 $ - $ 21,637 $ (400) $ 51,851
========= ========== ========== ========== ========== ========
Balance, January 1, 2007 ............................ 4,441,220 $ 30,603 $ - $ 22,382 $ (361) $ 52,624
--------
Comprehensive income
Net income ..................................... - - - 3,347 - 3,347
--------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $165 - - - - 334 334
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $1 - - - - (1) (1)
--------
Total other comprehensive income (loss) ........ - - - - - 333
--------
Total comprehensive income ..................... - - - - - 3,680
--------
Stock-based compensation ............................ - - 31 - - 31
Proceeds of sale of common stock .................... 500 8 - - - 8
Exercise of employee stock options .................. 43,836 429 - - - 429
Repurchases and cancellation of common stock ....... (42,100) (607) - - - (607)
Cash dividends declared, $.36 per share ............. - - - (1,607) - (1,607)
--------- ---------- ---------- ---------- ---------- --------
Balance, September 30, 2007 ......................... 4,443,456 $ 30,433 $ 31 $ 24,122 $ (28) $ 54,558
========= ========== ========== ========== ========== ========
See accompanying notes to unaudited consolidated financial statements.
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COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2007 2006
----- ----
(Dollars in thousands)
Operating activities
Net income .............................................................................. $ 3,347 $ 3,775
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses ........................................................ 925 1,955
Depreciation and amortization .................................................... 624 763
Amortization of intangibles ...................................................... 184 184
Net (accretion) or amortization of securities .................................... (23) 13
Net securities (gains) or losses ................................................. (2) (1)
Net gains on sales of other investments .......................................... (712) -
Proceeds of sales of loans held for sale ......................................... 104,076 183,989
Originations of loans held for sale .............................................. (102,343) (185,961)
Increase in accrued interest receivable .......................................... (252) (173)
Decrease in other assets ......................................................... 737 640
(Gains) losses on sale of foreclosed assets ...................................... (21) 27
(Decrease) increase in accrued interest payable .................................. (167) 416
(Decrease) increase in other liabilities ......................................... (1,129) 1,315
Provision for recourse liabilities ............................................... 716 57
Share-based compensation ......................................................... 31 -
--------- ---------
Net cash provided by operating activities .................................... 5,991 6,999
--------- ---------
Investing activities
Net decrease (increase) in interest bearing deposits with other banks ................... 1,673 (545)
Purchases of available-for-sale securities .............................................. (6,972) (8,499)
Maturities, calls and paydowns of available-for-sale securities ......................... 11,658 11,740
Purchases of other investments .......................................................... (555) -
Proceeds of sales of other investments .................................................. 1,174 203
Net increase in loans made to customers ................................................. (48,483) (3,784)
Purchases of premises and equipment ..................................................... (835) (2,569)
Proceeds of dispositions of premises and equipment ...................................... 1 -
Proceeds from sales of foreclosed assets ................................................ 757 408
--------- ---------
Net cash used by investing activities ........................................ (41,582) (3,046)
--------- ---------
Financing activities
Net (decrease) increase in deposits ..................................................... (12,189) 6,608
Net increase (decrease) in short-term borrowings ........................................ 22,374 (1,145)
Proceeds from issuing long-term debt .................................................... 7,500 -
Repayment of long-term debt ............................................................. (4,007) (6,007)
Exercise of employee stock options ...................................................... 429 396
Proceeds of sale of common stock ........................................................ 8 16
Repurchases and cancellation of common stock ............................................ (607) -
Cash dividends paid ..................................................................... (1,607) (1,463)
--------- ---------
Net cash provided (used) by financing activities ............................. 11,901 (1,595)
--------- ---------
(Decrease) increase in cash and cash equivalents ............................................. (23,690) 2,358
Cash and cash equivalents, beginning of period ............................................... 46,724 51,991
--------- ---------
Cash and cash equivalents, end of period ..................................................... $ 23,034 $ 54,349
========= =========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest .............................................................. $ 13,464 $ 10,778
========= =========
Cash payments for income taxes .......................................................... $ 2,993 $ 781
========= =========
Supplemental Disclosures of Non-cash Activities
Transfers of loans receivable to foreclosed assets ...................................... $ 1,751 $ 1,120
========= =========
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 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. Such reclassifications had no effect on net income or
retained earnings for any period.
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 September 30, 2007, there were $7,480,000 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 September 30,
--------------------------
Three Months Nine Months
------------ -----------
2007 2006 2007 2006
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ................................. $ 872 $ 1,201 $ 3,347 $ 3,775
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ................................. 4,466,184 4,439,245 4,463,718 4,429,198
========== ========== ========== ==========
Net income per share, basic ............................ $ .20 $ .27 $ .75 $ .85
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ................................. $ 872 $ 1,201 $ 3,347 $ 3,775
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ................................. 4,466,184 4,439,245 4,463,718 4,429,198
Effect of dilutive stock options ....................... 80,215 78,967 48,535 71,050
---------- ---------- ---------- ----------
Total shares ............................ 4,546,399 4,518,212 4,512,253 4,500,248
========== ========== ========== ==========
Net income per share, assuming dilution ................ $ .19 $ .27 $ .74 $ .84
========== ========== ========== ==========
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 share-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. Also, compensation
cost would 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. During the first nine months of 2007,
stock-based compensation included in salaries and benefits totaled $31,000.
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 investment in the common securities, 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
-8-
Trust's sole assets. The interest rate associated with the Debentures and the
capital 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.
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 common securities of 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.
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 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
-9-
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 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.
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
assumptions made by management, actual results could differ from these judgments
-10-
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 first nine months of 2007, gross loans receivable increased
by $47,022,000, loans held for sale decreased by $1,733,000, federal funds sold
decreased by $29,102,000 and securities available-for-sale decreased by
$4,164,000. Also during the nine months ended September 30, 2007, short term
borrowings increased by $22,374,000, long-term debt increased by $3,493,000,
noninterest bearing deposits decreased by $3,166,000 and interest bearing
deposits decreased by $9,023,000.
During the third quarter of 2007, gross loans receivable increased by
$8,797,000, federal funds sold decreased by $7,987,000, and loans held for sale
decreased by $1,619,000. Interest bearing deposits decreased by $8,273,000
during the 2007 three month period and short-term borrowings increased by
$16,374,000.
During 2007 loan growth has been strong and deposits have been stable
to slightly decreasing, thereby creating pressure on the Bank's liquidity
position. This challenge has impacted many community banks. Management has
addressed this issue by selective use of brokered deposits, long and short-term
advances from the Federal Home Loan Bank, and targeted deposit product
promotions.
RESULTS OF OPERATIONS
Earnings Performance
Three Months Ended September 30, 2007 and 2006
For the quarter ended September 30, 2007, CBI recorded consolidated net
income of $872,000, compared with $1,201,000 for the comparable period of 2006.
This represents a decrease of $329,000 or 27.4%. Basic and diluted earnings per
share were $.20 and $.19, respectively, in the 2007 period, compared with $.27
for both measures for the 2006 quarter.
Compared with the third quarter of 2006, operating results for the
third quarter of 2007 reflect slightly lower net interest income, lower
provisions for loan losses, a significantly higher provision for warranty
liabilities, higher service charge income, and lower mortgage loan brokerage
income. Lower net interest income was caused by higher interest rates paid for
and higher average amounts of time deposits and short-term borrowings in the
2007 period which more than offset the effects of higher average amounts of
loans and investments. The provision for loan losses decreased as a result of
lower net charge-offs during the 2007 three month period. The higher provision
for warranty liabilities is attributable to general warranty and representation
-11-
obligations related to imperfections in loans sold during 2006 by the Bank's
mortgage loan division. The widespread and well-publicized problems in the home
mortgage markets has resulted in an unusually large number of warranty claims by
loan purchasers as well as lower volumes of loans closed during the 2007 quarter
and a reduction in income from that activity.
Summary Income Statement
------------------------
(Dollars in thousands)
For the Three Months Ended September 30, 2007 2006 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .................................... $10,124 $ 9,616 $ 508 5.3%
Interest expense ................................... 4,672 4,072 600 14.7%
------- ------- -------
Net interest income ................................ 5,452 5,544 (92) -1.7%
Provision for loan losses .......................... 375 665 (290) -43.6%
Noninterest income ................................. 1,739 1,958 (219) -11.2%
Noninterest expenses ............................... 5,411 4,906 505 10.3%
Income tax expense ................................. 533 730 (197) -27.0%
------- ------- -------
Net income ......................................... $ 872 $ 1,201 $ (329) -27.4%
======= ======= =======
Nine Months Ended September 30, 2007 and 2006
For the nine months ended September 30, 2007, CBI recorded consolidated
net income of $3,347,000, compared with $3,775,000 for the comparable period of
2006. This represents a decrease of $428,000 or 11.3%. Basic earnings per share
were $.75 in the 2007 period, compared with $.85 for the 2006 period. Diluted
earnings per share for the 2007 nine months period were $.74 compared with $.84
for the same period of 2006.
CBI's consolidated net income for the nine months ended September 30,
2007 was affected by slightly lower net interest income, lower provision for
loan losses, lower mortgage loan brokerage income, and higher salaries and
employee benefits expenses. Net interest income decreased primarily because the
rates paid for deposits and other funding sources were 46 basis points higher
than in the prior year nine month period. Mortgage loan brokerage income and the
provision for warranty liabilities were affected by the same factors discussed
above. Salaries and employee benefits expenses increased primarily because of
the addition of new loan officers in the Midlands, Florence and the mortgage
division and the addition of a new officer in the IT area. These increases
occurred over the course of 2006 and early 2007.
Summary Income Statement
------------------------
(Dollars in thousands)
For the Nine Months Ended September 30, 2007 2006 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income ..................................... $29,308 $27,332 $ 1,976 7.2%
Interest expense .................................... 13,297 11,194 2,103 18.8%
------- ------- -------
Net interest income ................................. 16,011 16,138 (127) -0.8%
Provision for loan losses ........................... 925 1,955 (1,030) -52.7%
Noninterest income .................................. 6,331 5,952 379 6.4%
Noninterest expenses ................................ 16,126 14,165 1,961 13.8%
Income tax expense .................................. 1,944 2,195 (251) -11.4%
------- ------- -------
Net income .......................................... $ 3,347 $ 3,775 $ (428) -11.3%
======= ======= =======
-12-
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.
Three Months Ended September 30, 2007 and 2006
Net interest income for the three months ended September 30, 2007 was
$5,452,000, a decrease of $92,000, or 1.7%, from the amount reported for the
third quarter of 2006. Interest income and interest expense for the 2007 quarter
were both significantly higher than during the same period of 2006. Higher
average amounts of interest earning assets, especially loans resulted in higher
amounts of interest income. Higher interest rates paid and higher average
amounts of interest-bearing liabilities outstanding were almost equally
responsible for higher interest expenses in the 2007 three month period.
The average rate earned on loans, including loans held for sale, was
7.78% and 7.95% for the third quarters of 2007 and 2006, respectively. The
primary driver for the rate decline was increased competition for new loan
business, predominantly in our Midlands region where we have had most of our
growth. In addition, in late September the Bank reduced its prime rate from
8.25% to 7.75%. Vaiable rate loans constitute approximately one third of the
Bank's portfolio. The average yield on earning assets was 7.30% for the third
quarter of 2006, compared with 7.35% for the third quarter of 2006. The average
cost of time deposits increased to 4.73% for the third quarter of 2007, compared
with 4.31% for the same period of 2006. The average cost of all interest-bearing
liabilities was 3.96% for the 2007 quarter and 3.69% 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 third quarter
narrowed to 3.34%, or 32 basis points lower than for the same period of 2006.
Net yield on earning assets (net interest income divided by average interest
earning assets) for the 2007 quarter was 3.93%, or 31 basis points lower than
for the same period of 2006.
Average amounts of interest earning assets were approximately
$31,294,000 higher in the 2007 period than in the 2006 period. Average taxable
investment securities increased by $24,969,000 and average loans increased by
$29,004,000. Average federal funds sold decreased by $21,004,000. In addition,
robust growth was noted in the average amounts of interest-bearing liabilities
as the 2007 average amount was approximately $30,206,000 more than the 2006
amount.
Over the past four quarters yields on loans have been impacted most
significantly by competition. Rates on deposits have been impacted by the Bank's
efforts to consolidate and unify product lines subsequent to the merger of the
Company's four bank subsidiaries in October 2006, efforts to reduce high cost
time deposits and overall market competition for transaction and nontransaction
deposit accounts. The net impact has been a reduction in margin of 31 basis
points from the third quarter of 2006 to the third quarter of 2007.
-13-
Average Balances, Yields and Rates
Three Months Ended September 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 with other banks ........... $ 488 $ 5 4.06% $ 1,772 $ 33 7.39%
Investment securities - taxable ...................... 80,817 1,023 5.02% 55,848 601 4.27%
Investment securities - tax exempt (2) ............... 4,566 42 3.65% 4,917 45 3.63%
Federal funds sold ................................... 6,786 82 4.79% 27,830 350 4.99%
Loans, including loans held for sale (2) (3) ......... 457,548 8,972 7.78% 428,544 8,587 7.95%
--------- ------- -------- ------
Total interest earning assets ............... 550,205 10,124 7.30% 518,911 9,616 7.35%
Cash and due from banks .............................. 18,355 15,839
Allowance for loan losses ............................ (5,140) (9,382)
Premises and equipment, net .......................... 11,897 9,699
Intangible assets .................................... 8,569 7,004
Other assets ......................................... 2,920 8,736
--------- --------
Total assets ................................ $ 586,806 $550,807
========= ========
Liabilities and shareholders' equity
Interest bearing deposits
Savings ......................................... $ 89,637 $ 639 2.83% $ 90,231 $ 674 2.96%
Interest bearing transaction accounts ........... 71,806 281 1.55% 66,453 182 1.09%
Time deposits ................................... 257,313 3,070 4.73% 245,619 2,670 4.31%
--------- ------- -------- -------
Total interest bearing deposits ............. 418,756 3,990 3.78% 402,303 3,526 3.48%
Short-term borrowings ................................ 19,955 193 3.84% 11,536 88 3.03%
Long-term debt ....................................... 29,835 489 6.50% 24,501 458 7.42%
--------- ------- -------- -------
Total interest bearing liabilities .......... 468,546 4,672 3.96% 438,340 4,072 3.69%
Noninterest bearing demand deposits .................. 60,744 54,758
Other liabilities .................................... 2,752 3,360
Shareholders' equity ................................. 54,764 54,349
--------- --------
Total liabilities and ....................... $ 586,806 $550,807
========= ========
shareholders' equity
Interest rate spread ................................. 3.34% 3.66%
Net interest income and net yield
on earning assets ............................... $ 5,452 3.93% $ 5,544 4.24%
Interest free funds supporting earning
assets .......................................... $ 81,659 $ 80,571
----------------------------------
(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 are included in the average balances and income from such
loans is recognized on a cash basis.
-14-
Nine Months Ended September 30, 2007 and 2006
Net interest income for the nine months ended September 30, 2007
decreased by $127,000, or .8% from the amount for the same period of 2006. Both
interest income and interest expense increased significantly in the 2007 period
due to higher market interest rates throughout the 2007 period and 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 19 basis points and net yield on earning
assets decreased by 16 basis points. These decreases resulted primarily from
higher rates paid on interest-bearing liabilities, which increased 46 basis
points. Rates earned on earning assets increased by 27 basis points. Average
amounts of interest earning assets, especially loans and taxable investment
securities, were higher in the 2007 period.
-15-
Average Balances, Yields and Rates
Nine Months Ended September 30,
-------------------------------
2007 2006
---- ----
Interest Interest
Average Income / Yields / Average Income / Yields /
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest bearing deposits with other banks ............ $ 1,340 $ 51 5.09% $ 1,701 $ 88 6.92%
Investment securities - taxable ....................... 82,031 3,031 4.94% 56,798 1,694 3.99%
Investment securities - tax exempt (2) ................ 4,653 127 3.65% 5,100 136 3.57%
Federal funds sold .................................... 9,104 342 5.02% 27,541 988 4.80%
Loans, including loans held for sale (2) (3) .......... 441,626 25,757 7.80% 430,801 24,426 7.58%
-------- ------- -------- -------
Total interest earning assets ................ 538,754 29,308 7.27% 521,941 27,332 7.00%
Cash and due from banks ............................... 17,560 15,503
Allowance for loan losses ............................. (5,351) (10,456)
Premises and equipment, net ........................... 10,384 9,988
Intangible assets ..................................... 6,818 7,065
Other assets .......................................... 7,804 8,482
-------- --------
Total assets ................................. $575,969 $552,523
======== ========
Liabilities and shareholders' equity
Interest bearing deposits
Savings .......................................... $ 91,791 $ 1,938 2.82% $ 88,268 $ 1,701 2.58%
Interest bearing transaction accounts ............ 73,887 813 1.47% 71,163 580 1.09%
Time deposits .................................... 248,462 8,649 4.65% 240,811 7,220 4.01%
-------- ------- -------- -------
Total interest bearing deposits .............. 414,140 11,400 3.68% 400,242 9,501 3.17%
Short-term borrowings ................................. 16,642 496 3.98% 9,848 278 3.77%
Long-term debt ........................................ 28,617 1,401 6.55% 29,089 1,415 6.50%
-------- ------- -------- -------
Total interest bearing liabilities ........... 459,399 13,297 3.87% 439,179 11,194 3.41%
Noninterest bearing demand deposits ................... 59,841 58,301
Other liabilities ..................................... 2,297 2,943
Shareholders' equity .................................. 54,073 52,100
-------- -------
Total liabilities and shareholders' equity.... $575,610 $552,523
======== ========
Interest rate spread .................................. 3.40% 3.59%
Net interest income and net yield
on earning assets ................................ $16,011 3.97% $16,138 4.13%
(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 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
$375,000, a decrease of $290,000, or 43.6%, from $665,000 for the same period of
2006. The provision for loan losses decreased to $925,000 for the 2007 nine
month period from $1,955,000 for the 2006 nine month period, a decrease of
16
$1,030,000 or 52.7%. Although the provisions for loan losses were lower for each
of the 2007 periods, charge-offs and higher levels of nonperforming and
potential problem loans continue to affect the Company's allowance and provision
for loan losses. 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 recoveries during the nine months ended September 30, 2007 were
$290,000, compared with net charge-offs of $4,542,000 for the same period of
2006. The coverage ratio (allowance for loan losses divided by nonperforming
loans) was .79x as of September 30, 2007 and .94x as of December 31, 2006.
The activity in the allowance for loan losses is summarized in the
following table:
Nine Months Nine Months
EndedEnded Year Ended
September 30, December 31, September 30,
2007 2006 2006
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period .................................. $ 4,662 $ 11,641 $ 11,641
Provision for loan losses ......................................... 925 2,950 1,955
Net recoveries or (charge-offs) ................................... 290 (9,929) (4,542)
--------- --------- ---------
Allowance at end of period ........................................ $ 5,877 $ 4,662 $ 9,054
========= ========= =========
Allowance as a percentage of loans outstanding .................... 1.29% 1.14% 2.20%
Loans at end of period ............................................ $ 456,742 $ 409,720 $ 412,106
========= ========= =========
Following is a summary of nonperforming loans as of September 30, 2007
and December 31, 2006:
September 30, December 31,
2007 2006
---- ----
(Dollars in thousands)
Non-performing loans
Nonaccrual loans ................................................................ $ 7,480 $4,714
Past due 90 days or more and still accruing ..................................... - 232
--------- ------
Total ...................................................... $ 7,480 $4,946
========= ======
Nonperforming loans as a percentage of:
Loans outstanding ............................................................... 1.64% 1.21%
Allowance for loan losses ....................................................... 127.28% 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%
Net change ................... 2,323 - 2,323 1,332
-------- -------- -------- --------
September 30, 2007 ........... $ 7,480 $ - $ 7,480 1.64% $ 15,965 3.50%
======== ======== ======== ========
During the third quarter of 2007, non-performing loans increased by
$2,323,000 and potential problem loans increased by $1,332,000. The most
significant component of the increase in non-performing assets was the addition
of a single $1.6 million credit from our Florence region. This is a real estate
secured loan, which management estimates has a low potential for loss.
Subsequent to the end of the quarter, the loan was brought current. The major
components of the increase in potential problem loans were two large, secured,
performing commercial credits with technical weaknesses.
Management will continue to monitor the levels of nonperforming 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
nonperforming 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 is adequate to
provide for losses that may be inherent in the loan portfolio.
Noninterest Income
Noninterest income for the 2007 third quarter decreased $219,000, or
11.2%, from the $1,958,000 reported for the same 2006 period. Mortgage loan
brokerage income for the 2007 third quarter decreased by $435,000, or 45.2%,
from the $963,000 recorded in the 2006 period. This decrease was attributable to
lower volumes of loan originations resulting from a slowdown in demand for
residential mortgage loans and overall mortgage industry conditions.
18
For the nine months ended September 30, 2007, noninterest income was
$379,000, or 6.4% more than for the first nine months of 2006 primarily because
the Company recognized a gain of $712,000 on the sale of other investments
during the 2007 second quarter.. Mortgage loan brokerage income decreased
$860,000, or 30.9%, for the 2007 nine month period, as discussed above.
Noninterest Expenses
Noninterest expenses for the third quarter of 2007 were $505,000, or
10.3%, higher than the amounts reported for the same period of 2006. The Company
provided $572,000 during the third quarter of 2007 related to estimated losses
on warranty liabilities on prior sales of mortgage loans. The Company provided
$10,000 for such liabilities in the 2006 third quarter.
Noninterest expenses for the first nine months of 2007 were $1,961,000,
or 13.8%, more than for the same period of 2006. Salaries and employee benefits
expenses increased primarily because of the addition of new loan officers in the
Midlands, Florence and the mortgage division and the addition of a new officer
in the IT area. These increases occurred over the course of 2006 and early 2007.
Also, during the 2007 nine month period, the Company provided $716,000
for its warranty obligations with respect to loans sold by the mortgage
division, an increase of $659,000 from the 2006 amount and an increase of
$500,000 over the budget amount for 2007. The reason for the increase over
budget was management's identification during the third quarter of 2007 of
approximately $1.1 million in loans, 12 accounts, originated by the mortgage
division, mostly during 2006, as to which there was a significant possibility
that investors might question the original representations and warranties and
sufficient reason might exist for repurchase. These loans were primarily
originated by the wholesale area of the mortgage division. After review,
management estimated the potential loss associated with these loans at
approximately $500,000 and during the quarter this amount was provided.
During the summer of 2006 management of the Bank reorganized the
wholesale operation of the mortgage division and severely limited originations
of non-conventional mortgage loan originations. Management believes these
actions significantly reduce the possibility of future substantial loss
provisions related to warranty obligations.
Despite adverse local and macroeconmic events in the mortgage arena,
the division continues to generate an earnings stream from originating
traditional one to four family residential mortgage loans, albeit at a lower
overall volume. Further, during 2007 the division has generated a net increase
of more than $15 million in real estate secured equity lines and lot loans for
the Bank's portfolio.
Income Taxes
Income tax expense was $197,000 less in the 2007 third quarter than for
the 2006 period. Income tax expense for the 2007 nine month period was $251,000
less than for the same period of 2006. Both decreases are attributable to lower
amounts of income before income taxes in the 2007 periods.
19
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 lending activities. Those sources are supplemented by
long-term borrowings from the Federal Home Loan Bank of Atlanta and the proceeds
of issuing 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 the Bank also maintain various federal funds lines of credit
with correspondent banks and are able to borrow from the Federal Home Loan Bank
of Atlanta ("FHLB") and the Federal Reserve Bank's discount window.
Total deposits as of September 30, 2007 were $471,432,000, a decrease
of $12,189,000, or 2.5%, from the amount as of December 31, 2006. During the
nine months ended September 30, 2007, time deposits increased by $11,104,000,
with approximately 95% of that growth taking the form of time deposits issued in
denominations of $100,000 or more. Approximately $5,006,000 of brokered deposits
matured and were paid out during the third quarter of 2007 and were replaced by
a short-term advance of $5,000,000 from the Federal Home Loan Bank of Atlanta.
As of September 30, 2007, the Bank had obtained short-term borrowings, federal
funds purchased, from a correspondent bank in the amount of $10,180,000. As of
September 30, 2007 the loan to deposit ratio, excluding loans held for sale, was
96.9%, compared with 84.7% at December 31, 2006 and 87.5% at September 30, 2006.
The 2007 decline in deposits was primarily the result of an effort to
reduce high cost time deposits and the cash flow requirements of local
government customers. Management anticipates that year end property tax
collections will result in some increase in government deposits over current
levels. Management has addressed the Bank's liquidity requirements by selective
use of brokered deposits, long and short-term advances from the Federal Home
Loan Bank, federal funds purchased, and targeted deposit products. In addition,
during the fourth quarter of 2007, management is considering the sale of
approximately $16 million in assets from the loan portfolio, representing
approximately 60 real estate secured loans. If completed, this sale is expected
to have a positive impact on liquidity, reduce the potential problem loan totals
by approximately $8 million, and have only a nominal impact on earnings.
Management believes CBI's and the Bank's liquidity sources are adequate
to meet their current and projected operating needs.
CAPITAL RESOURCES
CBI and the Bank 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.
20
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 its
former 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.
The September 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:
September 30, 2007
------------------
Tier 1 Total Capital Leverage
------ ------------- --------
Community Bankshares, Inc. .................... 12.85% 14.11% 10.03%
Community Resource Bank, N.A. ................. 11.39% 12.64% 8.91%
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 requirements to be considered "well capitalized." In the opinion of
management, the current and projected capital positions of CBI and the bank are
adequate.
During the third quarter of 2007 the Board of Directors approved a
stock repurchase program that authorizes the Company to buy up to 500,000 shares
of its common stock. During the quarter, the plan repurchased 42,100 shares at a
total cost of $607,000. Shares purchased under the program are cancelled and
become authorized but unissued. Management anticipates that the judicious use of
this program will have a positive impact on earnings per share and will not have
a material adverse effect on capital.
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.
21
Variable Interest Entity
As discussed under "Capital Resources" and in the notes to unaudited
consolidated financial statements under "Variable Interest Entity," as of
September 30, 2007, 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
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 are used
for on-balance-sheet instruments.
The following table sets forth the contractual amounts of commitments
which represent credit risk:
September 30, 2007
------------------
(Dollars in
thousands)
Loan commitments .......................................... $71,683
Standby letters of credit ................................. 2,095
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
obtained 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.
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 in the second quarter of 2007 and the office is expected
to open for business early in 2008. Approximately $643,000 of the estimated
$830,000 construction cost has been expended through early November 2007.
Derivative Financial Instruments
In April, 2003, the Financial Accounting Standards Board issued
Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and
22
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 the
Bank's accounting for such commitments. The Bank 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 the Bank
issues its commitments and the time that the loans close and are sold, the Bank
is subject to variability in the selling prices related to those commitments due
to changes in market rates of interest. However, the Bank 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. The Bank generally enters
into such forward sales contracts at the same time that rate lock commitments
are issued. These arrangements effectively insulate the Bank 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 September 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.
September 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 .................................. $13,341 $ 37
Forward sales contracts with investors
of mortgage loans to be held for sale ............................................ 13,341 37
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.
23
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 September 30, 2007, CBI is positioned so
that net interest income would increase $192,000 and net income would increase
$120,000 in the next twelve months if interest rates declined 100 basis points.
Conversely, net interest income would decline $8,000 and net income would
decline $5,000 in the next twelve months if interest rates increased 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 September 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.
24
PART II--OTHER INFORMATION
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
On July 30, 2007, the Board of Directors authorized the repurchase of
up to 500,000 shares of the Company's common stock. The program expires on July
30, 2008.
ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) Total number (b) Average price (c) Total number (d) Maximum number
of shares purchased paid per share of shares of shares that may
purchased as part yet be purchased
of publicly under the plans or
announced plans or programs
programs
8/1/07 - 8/31/07 42,100 $14.41 42,100 457,900
9/1/07 - 9/30/07 - $ - - 457,900
------ ------ ------ -------
Total 42,100 $14.41 42,100 457,900
Item 6. Exhibits
3-2 Amended Bylaws (incorporated by reference to Form 8-K filed
August 28, 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: November 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)
EXHIBIT INDEX
3-2 Amended Bylaws (incorporated by reference to Form 8-K filed August 28,
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
26