COMMUNITY BANKSHARES INC /GA/ - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended September 30, 2004

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission File Number: 33-81890

Community Bankshares, Inc.
(Exact name of registrant as specified in its charter)

Georgia		58-1415887
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

448 North Main Street,
Cornelia, Georgia		30531
(Address of principal executive offices)		(Zip Code)

(706) 778-2265
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal
year, if changed since last report)

Indicate by check mark whether the registrant has (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 þ No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No þ

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 1, 2004; 2,137,740

COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
INDEX

		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets -	3
	September 30, 2004 and December 31, 2003

	Consolidated Statements of Income	4
	and Comprehensive Income for Three
	and Nine Months Ended September 30, 2004 and 2003

	Consolidated Statements of Cash Flows -	5
	Nine Months Ended September 30, 2004 and 2003

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of	10
	Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15

Item 4.	Controls and Procedures	16

PART II. OTHER INFORMATION		16

Item 1.	Legal Proceedings	16

Item 2.	Unregistered Sale of Equity Securities and use of Proceed	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	Submission of Matters to a Vote of Security Holders	16

Item 6.	Exhibits and Reports on Form 8 - K	16

	31.1 and 31.2 - Rule 13a-15(e) and 15d-15(e) Certifications

	32 - Certification of Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 9-6 of the Sarbanes-Oxley Act of 2002.

	Signatures	17

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Dollars in thousands)

		(Unaudited)
Assets		2004		2003
Cash and due from banks	$	40,563	$	44,729
Interest-bearing deposits in banks		745		429
Federal funds sold		17,405		19,600
Securities available-for-sale		101,844		103,458
Securities held-to-maturity (fair value $22,661 and $24,352)		21,262		22,628
Restricted equity securities, at cost		1,471		1,243
Loans, net of unearned income		618,263		545,466
Less allowance for loan losses		9,199		7,561
Loans, net		609,064		537,905
Premises and equipment, net		17,799		15,239
Intangible assets, net		883		1,090
Goodwill		968		968
Other real estate		4,208		5,272
Other assets		13,961		13,624
Total assets	$	830,173	$	766,185
Liabilities, Redeemable Common Stock and Shareholders’ Equity
Liabilities: Deposits: Noninterest-bearing	$	127,028	$	111,562
Interest-bearing demand		186,261		174,070
Savings		39,707		35,157
Time, $100,000 and over		129,978		123,975
Other time		234,363		225,840
Total deposits		717,337		670,604
Other borrowings		25,884		16,153
Other liabilities		9,942		7,986
Total liabilities		753,163		694,743
Redeemable common stock held by ESOP, net of unearned ESOP shares related to ESOP debt guarantee of $682 and $974, at September 30, 2004 and December 31, 2003 respectively		15,710		15,783
Shareholders' equity Common stock, par value $1; 5,000,000 shares authorized; 2,206,830 and 2,204,330 shares issued at September 30, 2004 and December 31, 2003, respectively		2,207		2,204
Capital surplus		6,512		6,342
Retained earnings		54,233		48,069
Accumulated other comprehensive income		1,311		1,607
Less cost of 69,090 and 60,135 shares of treasury stock at September 30, 2004 and December 31, 2003, respectively		(2,963)		(2,563)
Total shareholders' equity		61,300		55,659
Total liabilities, redeemable common stock and shareholders' equity	$	830,173	$	766,185

See Notes to Consolidated Financial Statements

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COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 AND
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Dollars in thousands, except per share amounts)
(Unaudited)

	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003
Interest income: Loans, including fees	$10,457	$ 9,442	$30,168	$28,189
Taxable securities	585	575	1,732	1,822
Nontaxable securities	648	746	2,006	2,268
Interest-bearing deposits in other banks	3	1	8	6
Federal funds sold	62	49	139	186
Total interest income	11,755	10,813	34,053	32,471
Interest expense: Deposits	3,047	2,985	8,578	9,656
Other borrowings	223	198	652	592
Total interest expense	3,270	3,183	9,230	10,248
Net interest income	8,485	7,630	24,823	22,223
Provision for loan losses	579	546	2,537	1,686
Net interest income after Provision for loan losses	7,906	7,084	22,286	20,537
Other income: Service charges on deposit accounts	2,507	1,404	7,350	4,010
Other service charges, commissions and fees	599	478	1,676	1,475
Gains on sale of loans	22	93	183	180
Nonbank subsidiary income	2,215	627	5,346	2,163
Security gains, net	--	--	63	--
Other operating income	134	159	481	456
Total other income	5,477	2,761	15,099	8,284
Other expenses: Salaries and employee benefits	5,255	4,316	15,350	12,940
Equipment expense	948	822	2,636	2,483
Occupancy expense	579	497	1,674	1,476
Other operating expenses	2,985	2,348	8,661	6,805
Total other expenses	9,767	7,983	28,321	23,704
Income before income taxes	3,616	1,862	9,064	5,117
Income tax expense	1,118	437	2,676	1,061
Net income	$ 2,498	$ 1,425	$ 6,388	$ 4,056
Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale: Unrealized gains (losses) arising during the period, net of taxes	978	(1,132)	(258)	(402)
Reclassification adjustment for gains realized in net income, net of taxes	--	--	(38)	--
Total other comprehensive income (loss)	978	(1,132)	(296)	(402)
Comprehensive income	$3,476	$ 293	$ 6,092	$ 3,654
Basic earnings per common share	$ 1.17	$ .67	$ 2.99	$ 1.89
Diluted earnings per common share	$ .16	$ .66	$ 2.98	$ 1.88
Cash dividends per share of common stock	$ .08	$ .07	$ .24	$ .21

See Notes to Consolidated Financial Statements.

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COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Dollars in thousands)
(Unaudited)

	2004	2003
OPERATING ACTIVITIES Net income	$ 6,388	$ 4,056
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization	2,304	2,330
Provision for loan losses	2,537	1,686
Deferred income taxes	(682)	(513)
Net realized gains on securities available-for-sale	(63)	- --
Net losses on sale of other real estate	3	49
(Increase) decrease in interest receivable	(336)	272
Increase (decrease) in interest payable	345	(985)
Increase in taxes payable	274	586
Increase in accounts Receivable of nonbank subsidiary	(651)	(142)
(Increase) decrease in work in Process of nonbank subsidiary	(6)	319
Increase (decrease) in accruals and payables of nonbank subsidiary	870	(668)
Net other operating activities	2,915	55
Net cash provided by operating activities	$ 13,898	$ 7,044
INVESTING ACTIVITIES Purchases of securities available-for-sale	(21,536)	(25,311)
Proceeds from sales of securities available-for-sale	9,850	--
Proceeds from maturities of securities available-for-sale	12,642	19,717
Proceeds from maturities of securities held-to-maturity	1,366	4,006
Net (increase) decrease in Federal funds sold	2,195	(15,950)
Net (increase) decrease in interest-bearing deposits in banks	(316)	8
Net increase in loans	(76,788)	(32,936)
Purchase of premises and equipment	(4,588)	(826)
Proceeds from sales of other real estate	3,560	3,254
Net cash used in investing activities	$ (73,615)	$ (48,038)
FINANCING ACTIVITIES Net increase in deposits	46,733	33,677
Net increase in other borrowings	10,175	75
Repayment of other borrowings	(444)	(440)
Proceeds from exercise of options	--	30
Purchase of treasury stock	(400)	(1,134)
Dividends paid	(513)	(451)
Net cash provided by financing activities	$55,551	$31,757
Net decrease in cash and due from banks	$(4,166)	(9,236)
Cash and due from banks at beginning of the period	44,729	44,966
Cash and due from banks at end of the period	$40,563	$35,730
SUPPLEMENTAL DISCLOSURES Cash paid for: Interest	$8,885	$11,233
Income taxes	$3,084	$1,988
NONCASH TRANSACTIONS Principal balances on loans Transferred to other real estate	$3,092	$5,644

See Notes to Consolidated Financial Statements.

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COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The consolidated financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The results of operations for the three and nine month periods ending September 30, 2004 are not necessarily indicative of the results to be expected for the full year.

NOTE 2. STOCK COMPENSATION PLAN

The Company has a stock-based employee compensation plan. The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying stock on the date of grant.

During the third quarter of 2004, 2,500 options were granted at a strike price of 45.06, but have not yet vested. In addition, there were no options granted during the three and nine months ended September 30, 2003. Therefore, there would be no proforma effect on net income or earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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NOTE 3. EARNINGS PER COMMON SHARE

The following is a reconciliation of net income (the numerator) and weighted-average shares outstanding (the denominator) used in determining basic and diluted earnings per common share (EPS).

Three Months Ended September 30, 2004
( Dollars and shares in Thousands,
except per share amounts)

	Net Income (Numerator)		Weighted-Average Shares (Denominator)		Per Share Amount

Basic EPS		$2,498		2,139		$1.17
Effect of Dilutive Securities Stock options		–		6		(.01)

Diluted EPS		$2,498		2,145		$1.06



	Three Months Ended September 30, 2003 (Dollars and shares in Thousands, except per share amounts)

	Net Income (Numerator)		Weighted-Average Shares (Denominator)		Per Share Amount


Basic EPS		$1,425		2,142		$0.67
Effect of Dilutive Securities Stock options		–		7		(.01)

Diluted EPS		$1,425		2,149		$0.66

Table of Contents

Nine Months Ended September 30, 2004
(Dollars and shares in Thousands, except per share amounts)

	Net Income (Numerator)		Weighted-Average Shares (Denominator)		Per Share Amount


Basic EPS		$6,388		2,139		$2.99
Effect of Dilutive Securities Stock options		–		4		(.01)

Diluted EPS		$6,388		2,143		$2.98

Nine Months Ended September 30, 2003
(Dollars and shares in Thousands, except per share amounts)

	Net Income (Numerator)		Weighted-Average Shares (Denominator)		Per Share Amount


Basic EPS		$4,056		2,151		$1.89
Effect of Dilutive Securities Stock options		–		4		(.01)

Diluted EPS		$4,056	</