UNITED STATES 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, 2003 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)
791 Broughton Street
Orangeburg, South Carolina 29115
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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 an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: common stock, no par
or stated value, 4,321,941 shares outstanding on November 1, 2003.
COMMUNITY BANKSHARES, INC.
FORM 10-Q
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet ....................................................................... 3
Consolidated Statement of Income ................................................................. 4
Consolidated Statement of Changes in Shareholders' Equity ........................................ 5
Consolidated Statement 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 ....................................... 17
Item 4. Controls and Procedures .......................................................................... 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................................................. 18
SIGNATURES ......................................................................................................... 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
2003 2002
---- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................. $ 16,381 $ 14,738
Federal funds sold ...................................................................... 27,714 23,831
--------- ---------
Total cash and cash equivalents .................................................. 44,095 38,569
Interest bearing deposits in other banks ................................................ 1,371 511
Securities available-for-sale ........................................................... 54,329 53,066
Loans held for sale ..................................................................... 21,983 24,664
Loans ................................................................................... 323,992 306,484
Less, allowance for loan losses ..................................................... (4,030) (3,573)
--------- ---------
Net loans ........................................................................ 319,962 302,911
Premises and equipment - net ............................................................ 7,109 6,376
Accrued interest receivable ............................................................. 2,057 2,131
Intangible assets ....................................................................... 7,712 7,896
Other assets ............................................................................ 1,868 1,196
--------- ---------
Total assets ..................................................................... $ 460,486 $ 437,320
========= =========
Liabilities
Deposits
Non-interest bearing ................................................................ $ 54,462 $ 47,128
Interest bearing .................................................................... 301,071 289,934
--------- ---------
Total deposits ................................................................... 355,533 337,062
Federal funds purchased and securities
sold under agreements to repurchase ................................................. 16,161 16,302
Federal Home Loan Bank advances ......................................................... 20,140 20,210
Lines of credit payable ................................................................. 19,026 18,249
Accrued interest payable ................................................................ 766 759
Other liabilities ....................................................................... 1,888 1,021
--------- ---------
Total liabilities ................................................................ 413,514 393,603
--------- ---------
Shareholders' equity
Common stock - no par value; 12,000,000 shares authorized; issued and
outstanding - 4,318,393 for 2003 and
4,304,384 for 2002 .................................................................. 29,250 29,090
Retained earnings ....................................................................... 17,704 14,529
Accumulated other comprehensive income .................................................. 18 98
--------- ---------
Total shareholders' equity ....................................................... 46,972 43,717
--------- ---------
Total liabilities and shareholders' equity ....................................... $ 460,486 $ 437,320
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY BANKSHARES, INC.
Consolidated Statement of Income
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest and dividend income
Loans, including fees .................................... $ 5,698 $ 5,563 $ 16,789 $ 14,505
Interest bearing deposits in other banks ................. 5 8 14 18
Debt securities .......................................... 365 668 1,210 1,526
Dividends ................................................ 18 26 58 89
Federal funds sold ....................................... 69 87 218 254
-------- -------- -------- --------
Total interest and dividend income ................... 6,155 6,352 18,289 16,392
-------- -------- -------- --------
Interest expense
Time deposits $100M and over ............................. 382 496 1,221 1,410
Other deposits ........................................... 993 1,254 3,191 3,460
-------- -------- -------- --------
Total deposits ....................................... 1,375 1,750 4,412 4,870
Federal funds purchased and securities
sold under agreements to repurchase .................... 28 31 103 75
Other borrowed funds ..................................... 491 384 1,340 1,090
-------- -------- -------- --------
Total interest expense ............................... 1,894 2,165 5,855 6,035
-------- -------- -------- --------
Net interest income ........................................... 4,261 4,187 12,434 10,357
Provision for loan losses ..................................... 232 239 775 597
-------- -------- -------- --------
Net interest income after provision ........................... 4,029 3,948 11,659 9,760
-------- -------- -------- --------
Noninterest income
Service charges on deposit accounts ...................... 893 761 2,514 1,843
Securities gains (losses) ................................ - 15 (252) 119
Mortgage brokerage income ................................ 1,428 952 4,253 2,624
Other .................................................... 202 189 639 492
-------- -------- -------- --------
Total noninterest income ............................. 2,523 1,917 7,154 5,078
-------- -------- -------- --------
Noninterest expenses
Salaries and employee benefits ........................... 2,461 2,163 7,492 5,546
Premises and equipment ................................... 464 393 1,270 998
Other .................................................... 1,184 884 3,300 2,219
-------- -------- -------- --------
Total noninterest expenses ........................... 4,109 3,440 12,062 8,763
-------- -------- -------- --------
Income before income taxes .................................... 2,443 2,425 6,751 6,075
Income tax expense ............................................ 871 825 2,413 2,139
-------- -------- -------- --------
Net income .................................................... $ 1,572 $ 1,600 $ 4,338 $ 3,936
======== ======== ======== ========
Per share
Net income ............................................... $ 0.36 $ 0.37 $ 1.00 $ 1.13
Net income, assuming dilution ............................ 0.35 0.36 0.98 1.09
Cash dividends declared .................................. 0.09 0.08 0.27 0.24
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY BANKSHARES, INC.
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Common Stock
------------ Accumulated
Number of Retained Other Comprehensive
Shares Amount Earnings Income Total
------ ------ -------- ------ -----
(Dollars in thousands)
Balance, January 1, 2002 .................................. 3,299,674 $ 17,208 $ 10,346 $ (7) $ 27,547
---------
Comprehensive income:
Net income ............................................ - - 3,936 - 3,936
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income
taxes of $168 ....................................... - - - 328 328
Reclassification adjustment for losses (gains)
realized in income, net of
income taxes of $40 ................................. - - - (79) (79)
---------
Total other comprehensive income .................... - - - - 249
---------
Total comprehensive income ........................ - - - - 4,185
---------
Exercise of stock options ................................. 4,710 40 - - 40
Common stock issued in purchase of
Ridgeway Bankshares, Inc., net of
related expenses of $178 .......................... 1,000,000 11,842 - - 11,842
Cash dividends declared - $.24 per share .................. - - (873) - (873)
--------- --------- --------- --------- ---------
Balance, September 30, 2002 ............................... 4,304,384 $ 29,090 $ 13,409 $ 242 $ 42,741
========= ========= ========= ========= =========
Balance, January 1, 2003 .................................. 4,304,384 $ 29,090 $ 14,529 $ 98 $ 43,717
---------
Comprehensive income:
Net income ............................................ - - 4,338 - 4,338
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income
taxes of $136 ....................................... - - - (242) (242)
Reclassification adjustment for losses (gains)
realized in income, net of
income taxes of $90 ................................. - - - 162 162
---------
Total other comprehensive income .................... - - - - (80)
---------
Total comprehensive income ........................ - - - - 4,258
---------
Exercise of stock options ................................. 14,009 160 - - 160
Cash dividends declared - $.27 per share .................. - - (1,163) - (1,163)
--------- --------- --------- --------- ---------
Balance, September 30, 2003 ............................... 4,318,393 $ 29,250 $ 17,704 $ 18 $ 46,972
========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY BANKSHARES, INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
(Dollars in thousands)
Cash flows from operating activities
Net income .................................................................................. $ 4,338 $ 3,936
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization ........................................................ 550 427
Amortization of intangibles .......................................................... 184 62
Net amortization (accretion) of securities ........................................... 620 -
Provision for loan losses ............................................................ 775 597
Net realized gains on sales of securities available-for-sale ......................... (73) (119)
Net realized losses on other dispositions of securities available-for-sale ........... 325 -
Net loss realized on disposition of equipment ........................................ 5 -
Net gain realized on sale of other real estate ....................................... (9) -
Proceeds from sales of loans held for sale ........................................... 250,564 125,639
Originations of loans held for sale .................................................. (247,883) (130,941)
(Increase) decrease in interest receivable ........................................... 74 (522)
Net (increase) decrease in other assets .............................................. (387) 1,039
Increase (decrease) in interest payable .............................................. 7 (12)
Net increase in other liabilities .................................................... 867 428
--------- ---------
Net cash provided by operating activities ........................................ 9,957 534
--------- ---------
Cash flows from investing activities
Net (increase) decrease in interest bearing deposits in other banks ......................... (860) 1,737
Purchases of available-for-sale securities .................................................. (54,973) (71,148)
Maturities, calls and paydowns of available-for-sale securities ............................. 49,817 35,350
Proceeds from sales of available-for-sale securities ........................................ 2,895 20,543
Net increase in loans made to customers ..................................................... (18,179) (70,076)
Net cash acquired in purchase method acquisition ............................................ - 4,922
Proceeds from sales of other real estate owned .............................................. 123 -
Purchases of premises and equipment ......................................................... (1,288) (1,674)
--------- ---------
Net cash used by investing activities ............................................ (22,465) (80,346)
--------- ---------
Cash flows from financing activities
Net increase in demand, savings and time deposits ........................................... 18,471 78,692
Net (decrease) increase in short-term borrowings ............................................ (141) 5,838
Net increase under lines of credit .......................................................... 777 2,472
Repayment of Federal Home Loan Bank advances ................................................ (70) (70)
Exercise of stock options ................................................................... 160 40
Expenses related to issuance of common stock ................................................ - (178)
Cash dividends paid ......................................................................... (1,163) (873)
--------- ---------
Net cash provided by financing activities ........................................ 18,034 85,921
--------- ---------
Increase in cash and cash equivalents ............................................................ 5,526 6,109
Cash and cash equivalents, beginning of period ................................................... 38,569 25,649
--------- ---------
Cash and cash equivalents, end of period ......................................................... $ 44,095 $ 31,758
========= =========
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 is included
in Community Bankshares, Inc.'s (the "Company" or "CBI") Annual Report for the
year ended December 31, 2002 on Form 10-K filed with the Securities and Exchange
Commission. Certain amounts in the 2002 financial statements have been
reclassified to conform to the current period presentation. Such
reclassifications had no effect on previously reported shareholders' equity or
net income.
Management Opinion - In the opinion of management, the accompanying unaudited
consolidated financial statements of Community Bankshares, Inc. reflect all
adjustments necessary for a fair presentation of the results of the periods
presented. Such adjustments were of a normal, 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 Annual Report for the year ended December 31, 2002 on Form 10-K
filed with the Securities and Exchange Commission.
Supplemental Statement of Cash Flows Information - Supplemental information for
the consolidated statement of cash flows is as follows:
(Unaudited)
Nine Months Ended September 30,
2003 2002
---- ----
(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information
Cash payments for interest ............................................................ $ 5,849 $ 6,047
======= =======
Cash payments for income taxes ........................................................ $ 2,120 $ 2,260
======= =======
Non-Cash Investing Activities
Transfers of loans receivable to other real estate .................................... $ 353 $ -
======= =======
Common stock issued in purchase of Ridgeway Bankshares, Inc. .......................... $ - $12,020
======= =======
Nonperforming Loans - As of September 30, 2003, there were $2,214,000 in
nonaccrual loans and $770,000 in 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
------------ -----------
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ............................... $ 1,572 $ 1,600 $ 4,338 $ 3,936
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 4,315,482 4,309,094 4,309,673 3,487,790
========== ========== ========== ==========
Net income per share, basic ...................... $ .36 $ .37 $ 1.00 $ 1.13
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ............................... $ 1,572 $ 1,600 $ 4,338 $ 3,936
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 4,315,482 4,309,094 4,309,673 3,487,790
Effect of dilutive stock options ................... 113,966 111,593 113,966 111,593
---------- ---------- ---------- ----------
Total shares ............................ 4,429,448 4,420,687 4,423,639 3,599,383
========== ========== ========== ==========
Net income per share, assuming dilution .......... $ .35 $ .36 $ .98 $ 1.09
========== ========== ========== ==========
Stock-Based Compensation - The Company has elected to continue using the
methodology of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," to account for compensation expenses
related to stock-based compensation. Options issued under the Company's plans
have no intrinsic value at the grant date and no compensation cost is recognized
for them in accordance with APB No. 25. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," requires
entities to provide proforma disclosures of net income, and earnings per share,
as if the fair value based method accounting promulgated by that standard had
been applied. While the Company has adopted the disclosure provisions of SFAS
No. 123, as amended, there are no current intentions to adopt the fair value
recognition provisions of that Statement.
Options issued by the Company generally vest immediately, but no options were
issued during the 2003 or 2002 nine-month periods. Consequently, no compensation
costs as computed under the SFAS No. 123 fair-value method were incurred in
either 2003 or 2002, and no such costs have been carried forward from prior
years. Therefore, the proforma disclosures otherwise required by SFAS No. 123
are not applicable in the 2003 and 2002 periods.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as "forward looking statements"
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions. Community
Bankshares, Inc.'s ("CBI" or "the Company") expectations, beliefs and
projections are expressed in good faith and are believed by CBI to have a
reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in CBI's records and other data
available from third parties, but there can be no assurance that management's
beliefs, expectations or projections will result or be achieved or accomplished.
CBI cautions readers that forward looking statements, including without
limitation, those relating to CBI's recent and continuing expansion, its future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, income, and allowance for loan losses are subject to certain
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 CBI's reports filed with the Securities and Exchange
Commission.
CRITICAL ACCOUNTING POLICIES
CBI has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of CBI's financial statements. The significant
accounting policies of CBI are described in detail in the notes to CBI's audited
consolidated financial statements included in CBI's Annual Report on Form 10-K.
Certain accounting policies involve significant judgments and estimates
by management, which have a material impact on the carrying value of certain
assets and liabilities. Management considers such accounting policies to be
critical accounting policies. The judgments and estimates used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ from these judgments
and estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of operations of CBI.
CBI is a holding company for four community banks and a mortgage
company and, as a financial institution, believes the allowance for loan losses
is a critical accounting policy that requires the most significant judgments and
estimates used in preparation of its consolidated financial statements. Refer to
the sections "Allowance for Loan Losses" and "Provision for Loan Losses" in the
Annual Report on Form 10-K for 2002 for a detailed description of CBI's
estimation process and methodology related to the allowance for loan losses.
RESULTS OF OPERATIONS
Earnings Performance
Three Months Ended September 30, 2003 and 2002
For the quarter ended September 30, 2003, CBI earned consolidated net
income of $1,572,000, compared with $1,600,000 for the comparable period of
2002, a decrease of $28,000, or 1.8%. Basic earnings per share was $.36 in the
2003 quarter compared with $.37 for the 2002 quarter. Diluted earnings per share
was $.35 for the 2003 quarter compared with $.36 for the 2002 quarter. With the
exception that the results of operations for both the 2003 and 2002 third
quarters include the effects of the acquisition of Ridgeway Bankshares, Inc. on
July 1, 2002, the changes in the items comprising net income, which are
discussed below, resulted from essentially the same factors discussed below
regarding the results of operations for the nine months ended September 30,
2003.
9
Summary Income Statement (Dollars in thousands)
-----------------------------------------------
Dollar Percentage
For the Three Months Ended September 30, 2003 2002 Change Change
---- ---- ------ ------
Interest income .................................... $6,155 $6,352 $ (197) -3.1%
Interest expense ................................... 1,894 2,165 (271) -12.5%
------ ------ ------
Net interest income ................................ 4,261 4,187 74 1.8%
Provision for loan losses .......................... 232 239 (7) -2.9%
Noninterest income ................................. 2,523 1,917 606 31.6%
Noninterest expense ................................ 4,109 3,440 669 19.4%
Income tax expense ................................. 871 825 46 5.6%
------ ------ ------
Net income ......................... $1,572 $1,600 $ (28) -1.8%
====== ====== ======
Nine Months Ended September 30, 2003 and 2002
CBI's consolidated net income for the nine months ended September 30,
2003 was $4,388,000 in 2003, up 10.2% from $3,936,000 for the comparable 2002
period. However, basic earnings per share for the 2003 period was $1.00, down
from $1.13 per basic share in 2002. Diluted earnings per share was $.98, down
from the $1.09 amount for 2002. The decreases in both earnings per share
measures were attributable primarily to the dilutive effects of the issuance of
1,000,000 additional shares of CBI common stock on July 1, 2002, in connection
with the acquisition of Ridgeway Bancshares, Inc. ("Ridgeway"). For the nine
months ended September 30, 2003, the annualized return on average total assets
(ROA) was 1.29% compared with 1.46% for the comparable period in 2002. The
annualized return on average shareholders' equity (ROE) for the 2003 nine month
period was 12.63% compared with 15.83% for the 2002 nine month period. The
declines in both ROA and ROE are also primarily attributable to the Ridgeway
acquisition because earnings have not yet increased in proportion to the volume
of acquired assets and equity due to amortization of the related core deposit
intangible asset, systems conversion, training and other related factors.
Summary Income Statement (Dollars in thousands)
-----------------------------------------------
Dollar Percentage
For the Nine Months Ended September 30, 2003 2002 Change Change
--------------------------------------- ---- ---- ------ ------
Interest income ..................................... $18,289 $16,392 $ 1,897 11.6%
Interest expense .................................... 5,855 6,035 (180) -3.0%
------- ------- -------
Net interest income ................................. 12,434 10,357 2,077 20.1%
Provision for loan losses ........................... 775 597 178 29.8%
Noninterest income .................................. 7,154 5,078 2,076 40.9%
Noninterest expense ................................. 12,062 8,763 3,299 37.6%
Income tax expense .................................. 2,413 2,139 274 12.8%
------- ------- -------
Net income .......................... $ 4,338 $ 3,936 $ 402 10.2%
======= ======= =======
CBI's net interest margin for the nine month 2003 period as compared
with the 2002 period was negatively influenced by the decline in interest rates
to historically low levels. During the twelve-month period ended September 30,
2003, the Federal Reserve Bank's Open Market Committee lowered key target
interest rates on two occasions, resulting in total reductions of 75 basis
points. Consequently, the prime rate, a key determinant of rates charged to the
banking subsidiaries' most credit-worthy customers, as well as a factor
considered in all loan-pricing decisions, was similarly reduced. As of September
30, 2003, approximately $133,527,000, or 41.2%, of the loan portfolio were
variable rate loans directly indexed to movements in the prime rate. Similarly,
in response to the Federal Reserve's rate reductions, other market rates of
interest have declined. Securities issuers have taken advantage of these
circumstances by redeeming securities that were issued with call provisions, and
reissuing new securities at lower rates. CBI's banking subsidiaries have
responded to the lower interest rates earned by reducing the rates offered for
deposits. The reductions in rates paid on deposits have been generally in line
with the lower interest rates being offered by CBI's competitors for deposit
products in CBI's market areas. However, CBI's ability to influence its net
interest margin by continuing to reduce the interest rates offered for deposits
is expected to be limited since the average rate paid for interest bearing
deposits during the 2003 nine-month period was just 1.97%.
10
Throughout both the 2003 and 2002 periods, the historically low
interest rate environment produced some significant positive effects on earnings
because of the robust demand for both purchase-money residential mortgage loans
and refinancing of existing residential mortgage loans. Such lending is
conducted by CBI's banking subsidiaries and the mortgage brokerage subsidiary.
The banks more often lend for their own portfolios and realize interest income
over the lives of the loans, while the mortgage brokerage subsidiary generally
originates loans for sale in the secondary market to realize origination fees
and gains on such sales. The amount of income realized in the mortgage brokerage
subsidiary is therefore influenced primarily by the number of loans that the
company originates and sells. Changes in the market rates of interest affect the
demand for home mortgage originations; therefore, the resulting amount of income
from this activity can increase or decrease materially. If home mortgage
interest rates rise significantly from recent historically low levels, income
from mortgage originations will likely be reduced.
Net Interest Income
Net interest income is the amount of interest income earned on interest
earning assets (loans, securities, interest bearing deposits in 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 CBI'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 these assets.
Interest income decreased by $197,000, or 3.1%, in the 2003 third
quarter compared with the same 2002 quarter. This occurred primarily as a result
of lower amounts of interest income derived from investment securities and
federal funds sold. As redemptions of securities occurred, as discussed above,
the banks reinvested those proceeds generally into similar, but lower yielding,
securities. However, those negative factors were partially offset by the
positive effects of increasing the average amount of the higher-yielding loan
portfolio in the 2003 period. Interest expense declined significantly in the
2003 quarter compared with the 2002 quarter. Decreases in market interest rates
for deposit products and other borrowings have allowed CBI's subsidiaries to
decrease significantly the rates offered for deposits and accepted for other
borrowed funds.
During the 2003 nine month period, interest income increased
$1,897,000, or 11.6%. Total average interest earning assets for 2003 nine months
period increased $85,518,000 or 25.4% over the same 2002 period. The July, 2002
Ridgeway acquisition accounted for about $54,697,000 or 64.0% of the increase.
The Ridgeway acquisition accounts for the majority of the increases in the
volumes of the individual earning assets categories. While the average yield on
interest earning assets declined by 72 basis points (a basis point is .01%),
interest income nevertheless increased because the effect of the higher volume
of interest earning assets more than offset the effect of the reduced yields.
Interest expense decreased $180,000, or 3.0% for the 2003 nine month
period. Total average interest bearing liabilities for 2003 increased
$67,115,000 or 23.6% over 2002. The Ridgeway acquisition contributed $44,730,000
or 66.6% of the increase. That acquisition also accounts for the majority of the
increases in the volumes of individual categories of interest bearing
liabilities. The decrease in interest expense occurred because the savings from
the 61 basis point decrease in rates paid slightly exceeded the additional cost
associated with the increased volume of interest bearing liabilities.
For the nine month period of 2003, net interest income was $12,434,000,
an increase of $2,077,000 or 20.1% over the 2002 period. Volume increases in
interest earning assets, primarily resulting from the Ridgeway acquisition,
account for 91% of this increase. The average interest rate spread (annualized
average yield on interest earning assets less the average rate paid on interest
bearing liabilities) declined only 11 basis points because the reduction in the
average yield on interest earning assets was largely compensated for by the
lower rates paid for interest bearing sources of funds. The net yield on
interest earning assets (annualized net interest income divided by average
interest earning assets) was 3.92%, a decrease of 19 basis points from the 2002
figure. The net yield was positively influenced by an $18,403,000 increase in
the average amount of interest free funds supporting earning assets (total
average interest earning assets less total average interest bearing liabilities)
derived primarily from the Ridgeway acquisition. Such interest free funds are
comprised primarily of non-interest bearing deposits and equity capital.
11
Community Bankshares, Inc.
Average Balances, Yields and Rates
Nine Months Ended September 30,
2003 2002
-------------------------------- ---------------------------------
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates
-------- ------- ----- -------- ------- -----
(Dollars in thousands)
Assets
Interest earning deposits ............................... $ 903 $ 14 2.07% $ 1,388 $ 18 1.73%
Investment securities - taxable ......................... 43,105 1,023 3.16% 43,507 1,504 4.61%
Investment securities - tax exempt ...................... 9,068 245 3.60% 3,290 111 4.50%
Federal funds sold ...................................... 26,754 218 1.09% 19,672 254 1.72%
Loans, including loans held for sale .................... 341,761 16,789 6.55% 268,216 14,505 7.21%
--------- --------- --------- ---------
Total interest earning assets ................. 421,591 18,289 5.78% 336,073 16,392 6.50%
Cash and due from banks ................................. 13,621 13,569
Allowance for loan losses ............................... (3,800) (3,085)
Premises and equipment .................................. 6,863 5,830
Intangible assets ....................................... 7,803 3,172
Other assets ............................................ 3,165 3,374
--------- ---------
Total assets .................................. $ 449,243 $ 358,933
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ............. $ 68,791 $ 586 1.14% $ 52,748 $ 668 1.69%
Savings ........................................... 43,194 147 0.45% 41,270 230 0.74%
Time deposits ..................................... 186,540 3,679 2.63% 155,153 3,972 3.41%
--------- --------- --------- ---------
Total interest bearing deposits ............... 298,525 4,412 1.97% 249,171 4,870 2.61%
Federal funds purchased and securities
sold under agreements to repurchase ............... 15,990 103 0.86% 6,127 75 1.63%
Lines of credit payable ................................. 16,712 500 3.99% 8,895 249 3.73%
Federal Home Loan Bank advances ......................... 20,349 840 5.50% 20,268 841 5.53%
--------- --------- --------- ---------
Total interest bearing liabilities ............ 351,576 5,855 2.22% 284,461 6,035 2.83%
Noninterest bearing demand deposits ..................... 49,930 38,640
Other liabilities ....................................... 1,955 2,680
Shareholders' equity .................................... 45,782 33,152
--------- ---------
Total liabilities and shareholders' equity .............. $ 449,243 $ 358,933
========= =========
Interest rate spread .................................... 3.56% 3.67%
Net interest income and net yield
on earning assets ................................. $ 12,434 3.92% $ 10,357 4.11%
Yields and rates are annualized.
Rate/volume amount has been allocated to "Rate" and "Volume" amounts on a
prorata basis.
12
Provision and Allowance for Loan Losses
The provision for loan losses for the third quarter of 2003 was
relatively static at $232,000 as compared with $239,000 for the 2002 quarter.
Since the Ridgeway acquisition occurred at the beginning of the third quarter of
2002, the quarters are more comparable than the pre-acquisition first half of
2002. During the 2003 third quarter, net loan charge-offs were $125,000 and the
allowance for loan losses as a percentage of loans outstanding (excluding loans
held for sale) grew slightly to 1.24% as compared with 1.23% at the end of the
second quarter of 2003. Total non-performing loans (non-accrual and accruing
past due 90 days and over) increased $136,000 during the third quarter of 2003.
The provision for loan losses for the nine month 2003 period was
$775,000, an increase of $178,000 or 29.8% over the comparable period of 2002.
Net charge-offs in the 2003 period were $318,000, compared with $374,000 in the
2002 period. The allowance for loan losses stood at 1.24% of loans outstanding
(excluding loans held for sale) compared with 1.17% at the end of 2002.
Non-performing loans totaled $2,984,000 as of the end of the 2003 period
compared with $2,536,000 as of the end of 2002, an increase of $448,000 or
17.7%. Of the amount of non-accrual loans, $1,463,000 or 66.1% was secured by
commercial real estate, and $343,000 or 15.5% was secured by residential real
estate. The coverage ratio (allowance for loan losses divided by non-performing
loans) was 1.35 as of the end of the 2003 third quarter and was 1.41 at the end
of 2002.
Based on current levels of non-performing and other potential problem
loans identified through the loan review process, including an evaluation of any
available collateral, management believes that loan charge-offs in 2003 will be
somewhat less than the amount experienced in 2002 as such loans progress through
the collection, foreclosure, and repossession process. Management believes that
the allowance for loan losses, as of September 30, 2003, is adequate to absorb
the inherent losses that remain in the loan portfolio. Management will continue
to closely monitor the levels of non-performing and potential problem loans and
address the weaknesses in these credits to enhance the amount of ultimate
collection or recovery of these assets. Management considers the levels and
trends in non-performing and past due loans in determining how the provision and
allowance for loan losses is estimated and adjusted.
The activity in the allowance for loan losses is summarized in the
following table:
September 30, 2003 December 31, 2002 September 30, 2002
------------------ ----------------- ------------------
(Dollars in thousands)
Allowance at beginning of period ........................... $ 3,573 $ 2,830 $ 2,830
Provision for loan losses .................................. 775 1,033 597
Allowance of purchased company ............................. - 444 444
Net charge-offs ............................................ (318) (734) (374)
--------- --------- ---------
Allowance at end of period ................................. $ 4,030 $ 3,573 $ 3,497
========= ========= =========
Allowance as a percentage
of loans outstanding ..................................... 1.24% 1.17% 1.17%
Loans at end of period ..................................... $ 323,992 $ 306,484 $ 300,051
========= ========= =========
Following is a summary of non-performing loans as of September 30, 2003
and December 31, 2002. There were no restructured loans during any of the
periods listed below.
September 30, 2003 December 31, 2002
------------------ -----------------
(Dollars in thousands)
Nonperforming loans
Past due 90 days or more and still accruing .................................... $ 770 $1,740
Nonaccrual loans ............................................................... 2,214 796
------ ------
Total ............................................................ $2,984 $2,536
====== ======
Nonperforming loans as a percentage
of loans outstanding ........................................................... 0.92% 0.83%
13
Noninterest Income
Non-interest income for the 2003 quarter increased $606,000, or 31.6%,
over the 2002 quarter. The majority of the increase was attributable to mortgage
brokerage income which increased $476,000, or 50.0%. Service charges on deposit
accounts were up $132,000. There were no sales of securities in the 2003
quarter; however, sales of available-for-sale securities resulted in realized
net gains of $15,000 in 2002.
Non-interest income for the 2003 nine month period increased
$2,076,000, or 40.9%, over 2002. Most of the increase was attributable to the
$1,629,000 or 62.1% increase in mortgage brokerage income. Most of this increase
was generated by origination fees and gains on sales realized in the mortgage
brokerage subsidiary. The historically low interest rate environment resulted in
a frenetic pace of home mortgage loan activity during the 2003 period. However,
management does not expect this pace to continue indefinitely. Service charges
on deposit accounts were up $671,000 or 36.4% due to the July, 2002 Ridgeway
acquisition and to increased numbers of accounts and chargeable activity. Net
losses on the sales and dispositions of securities were $252,000 in the 2003
period, compared with net gains of $119,000 in the 2003 period. Included in the
2003 net securities losses is a $322,000 second quarter write-off of unamortized
premiums recorded on securities purchased in the Ridgeway acquisition. Many of
those securities were called for early redemption by the issuers. Management
believes that future amortization of the remaining Ridgeway acquisition premiums
will not have a significant effect on earnings because very few of the remaining
securities are subject to early redemption. Other noninterest income increased
$147,000, or 29.9%, primarily due to the Ridgeway acquisition.
Noninterest Expenses
Noninterest expenses increased $669,000, or 19.4%, for the third
quarter of 2003 compared with the 2002 quarter. Salaries and employee benefits
were up $298,000, or 13.8%, with approximately half of this increase
attributable to the mortgage brokerage subsidiary's primarily commission-based
compensation system. Commissions paid increased because of the higher volume of
home mortgage loan originations and sales. Premises and equipment expenses
increased $71,000, or 18.1%, primarily due to higher technology costs and
relocation and expansion of the mortgage brokerage subsidiary's headquarters
office in Columbia, South Carolina. Other noninterest expenses were up $300,000,
or 33.9%, mainly due to increased costs of computer software and maintenance,
implementation and promotion of imaging technology for customer statements and
other uses, and higher costs of professional services and other expenses related
to corporate governance and other required compliance with the Sarbanes-Oxley
Act and its related regulations.
During the first nine months of 2003, noninterest expenses increased
$3,299,000, or 37.6%, as compared with the same 2002 period. Salaries and
employee benefits were up $1,946,000, or 35.1%, with approximately $667,000 of
this increase due to the July, 2002 Ridgeway acquisition, and $726,000 due to
the mortgage brokerage subsidiary's largely commission-based compensation system
and the higher volume of home mortgage originations and sales. Premises and
equipment expenses were up $272,000, or 27.3%, due to the Ridgeway acquisition,
higher technology costs, and the new headquarters office of the mortgage
brokerage subsidiary. Other expenses were up $1,081,000, or 48.7%, due to the
Ridgeway acquisition, increased costs of computer software and maintenance,
implementation and promotion of imaging technology, and professional services
and corporate governance.
Income Tax Expense
Income tax expense increased $46,000 and $274,000 due to higher taxable
income for the third quarter and nine months ended September 30, 2003,
respectively. For the third quarter of 2003, the approximately 36% estimated
effective tax rate was higher than the 34% rate estimated for the same period of
2002. The lower rate applied in 2002 was due to previously anticipated tax
attributes of the Ridgeway acquisition. The average income tax rates applied to
income before income taxes during 2003 and 2002 were approximately 36% and 35%,
respectively.
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
14
source of funds for credit activities, along with long-term borrowings from the
Federal Home Loan Bank of Atlanta. 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 fluctuations 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 at September 30, 2003 were $355,533,000, an increase of
$18,471,000 or 5.5% over the amount at December 31, 2002. As of September 30,
2003, the loan to deposit ratio was 91.1%, compared with 90.9% at December 31,
2002.
Management believes CBI and its subsidiaries' liquidity sources are
adequate to meet their current and projected operating needs.
CAPITAL RESOURCES
CBI and its banking subsidiaries are subject to regulatory risk-based
capital adequacy standards. Under these standards, bank holding companies and
banks are required to maintain certain minimum ratios of capital to
risk-weighted assets and average total assets. Under the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), 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 certain
levels, increasingly stringent regulatory corrective actions are mandated.
The September 30, 2003 risk based capital ratios for CBI and its
banking subsidiaries are presented in the following table, compared with the
"well capitalized" and minimum ratios under the regulatory definitions and
guidelines:
September 30, 2003
------------------
Tier 1 Total Capital Leverage
------ ------------- --------
Community Bankshares, Inc. ........................................... 11.83% 12.99% 8.63%
Orangeburg National Bank ............................................. 12.53% 13.79% 9.27%
Sumter National Bank ................................................. 8.99% 10.21% 7.35%
Florence National Bank ............................................... 9.74% 10.90% 8.78%
Bank of Ridgeway ..................................................... 14.18% 15.13% 7.92%
Minimum "well capitalized" requirement ............................... 6.00% 10.00% 5.00%
Minimum requirement .................................................. 4.00% 8.00% 4.00%
As shown in the table above, each of the capital ratios exceed the
regulatory requirement for being considered "well capitalized." In the opinion
of management, the CBI and the banking subsidiaries' current and projected
capital positions are adequate.
OFF-BALANCE-SHEET ACTIVITIES
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. As of September 30, 2003, CBI had no interests in
non-consolidated special purpose entities (SPE's).
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 for
on-balance-sheet instruments.
15
The following table sets forth the contractual amounts of commitments which
represent credit risk:
September 30, 2003
------------------
(Dollars in
thousands)
Loan commitments .......................................... $37,174
Standby letters of credit ................................. 4,093
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 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.
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. 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 are designated 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. Because
CBI has effectively matched its forward sales contracts to investors and rate
lock commitments to potential borrowers, no net gains or losses due to changes
in market interest rates have been recorded in the statement of income.
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, 2003, and the estimated fair values of those financial
instruments included in other assets and liabilities in the balance sheet as of
that date.
16
September 30, 2003
------------------
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 ..................................... $26,031 $ 195
Forward sales contracts with investors
of mortgage loans to be held for sale ............. 26,031 (195)
ACCOUNTING AND REPORTING CHANGES
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative contracts embedded in other contracts and loan commitments that
relate to the origination of mortgage loans held for sale, and for hedging
activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have a material effect on the financial condition or operating results of
CBI.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or as an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is generally effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material effect on the
financial condition or operating results of CBI.
In January, 2003, the FASB issued its Interpretation No. 46 ("FIN No.
46"), "Consolidation of Variable Interest Entities, an interpretation of ARB No.
51," to address consolidation by business enterprises of variable interest
entities ("VIEs") to which the usual consolidation criteria described in ARB No.
51, "Consolidated Financial Statements" do not apply because the VIEs have no
ownership interest or otherwise are not subject to control through ownership
voting interests. FIN No. 46 applies to VIEs created after January 1, 2003, and
to VIEs in which an enterprise acquires an interest after that date. It applies
to the Company as of the beginning of the first interim period beginning after
June 15, 2003, and to VIEs in which the Company holds a variable interest that
it acquired prior to February 1, 2003. CBI currently holds no interests in VIEs.
The adoption of FIN No. 46 as of July 1, 2003 had no effect on CBI's financial
position or results of operations.
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 September 30, 2003, CBI is positioned so
that net interest income would increase $375,000 and net income would increase
$273,000 in the next twelve months if interest rates rose 100 basis points.
Conversely, net interest income would decline $375,000 and net income would
decline $273,000 in the next twelve months if interest rates declined 100 basis
points. In the current interest rate environment, it is unlikely that there will
17
be any large rate decreases in the immediate future. 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, its customers and the issuers
of its investment securities could undertake in response to changes in interest
rates.
As of September 30, 2003, there was no significant change from the
interest rate sensitivity analysis for the various changes in interest rates
calculated as of December 31, 2002. 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 2002
Annual Report on Form 10-K.
Item 4. Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that the effectiveness
of such controls and procedures, as of the end of the period covered by this
quarterly report, was adequate.
No disclosure is required under 17 C.F.R. Section 229.308(c).
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits 31. Rule 13a-14(a)/15d-14(a) Certifications
32. Section 1350 Certifications
b) Reports on Form 8-K. Form 8-K filed August 7, 2003, pursuant to Item 12 of
that Form.
Form 8-K filed August 21, 2003, pursuant to
Item 9 of that Form.
18
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 11, 2003
COMMUNITY BANKSHARES, INC.
By: s/ E. J. Ayers, Jr.,
------------------------------------------
E. J. Ayers, Jr.,
Chief Executive Officer
By: s/ William W. Traynham
------------------------------------------
William W. Traynham
President and Chief Financial Officer
(Principal Accounting Officer)
19