U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE) FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2003
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________to_________
Commission File No. 000-32493
REGIONAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-1108717
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
206 South Fifth Street
Hartsville, SC 29551
(Address of principal executive
offices, including zip code)
(843) 383-4333
(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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
566,770 shares of common stock, $1.00 par value, on September 30, 2003
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
REGIONAL BANKSHARES, INC.
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2003 and December 31, 2002.................................3
Condensed Consolidated Statements of Income - Nine months ended
September 30, 2003 and 2002 and Three months ended September 30, 2003 and 2002.................................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Nine months ended September 30, 2003 and 2002..................................................................5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2003 and 2002..................6
Notes to Condensed Consolidated Financial Statements..........................................................7-10
Item 2. Management's Discussion and Analysis or Plan of Operation.....................................................11-18
Item 3. Controls and Procedures..........................................................................................18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................................................19
(a) Exhibits....................................................................................................19
(b) Reports on Form 8-K.........................................................................................19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REGIONAL BANKSHARES, INC.
Condensed Consolidated Balance Sheets
September 30, December 31,
2003 2002
---- ----
Assets: (Unaudited)
Cash and cash equivalents:
Cash and due from banks ................................................................ $ 1,129,263 $ 808,282
Federal funds sold ..................................................................... 2,037,728 3,050,991
------------ ------------
Total cash and cash equivalents ...................................................... 3,166,991 3,859,273
------------ ------------
Securities available-for-sale ............................................................ 2,403,320 2,513,281
Nonmarketable equity securities .......................................................... 164,853 137,553
------------ ------------
Total investment securities .......................................................... 2,568,173 2,650,834
------------ ------------
Loans receivable ......................................................................... 44,606,544 35,232,689
Less allowance for loan losses ........................................................... (447,296) (368,656)
------------ ------------
Loans, net ........................................................................... 44,159,248 34,864,033
------------ ------------
Accrued interest receivable .............................................................. 187,016 153,315
Premises and equipment, net .............................................................. 2,527,483 2,039,599
Other assets ............................................................................. 662,417 658,242
------------ ------------
Total assets ......................................................................... $ 53,271,328 $ 44,225,296
============ ============
Liabilities:
Deposits:
Noninterest-bearing .................................................................... $ 5,976,150 $ 4,787,870
Interest-bearing ....................................................................... 5,016,199 4,566,531
Savings ................................................................................ 13,513,084 8,077,824
Time deposits $100,000 and over ........................................................ 7,473,209 6,898,433
Other time deposits .................................................................... 15,397,262 15,048,066
------------ ------------
Total deposits ....................................................................... 47,375,904 39,378,724
Federal Home Loan Bank Advance ........................................................... 1,000,000 -
Accrued interest payable ................................................................. 148,397 209,496
Other liabilities ........................................................................ 68,060 53,242
------------ ------------
Total liabilities ........................................................................ 48,592,361 39,641,462
------------ ------------
Shareholders' Equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued ............. - -
Common stock, $1.00 par value; 10,000,000 shares authorized,
566,770 and 563,670 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively ............................... 566,770 563,670
Capital surplus ........................................................................ 5,031,771 5,003,871
Retained earnings (deficit) ............................................................ (906,263) (992,074)
Accumulated other comprehensive income (loss) .......................................... (13,311) 8,367
------------ ------------
Total shareholders' equity ........................................................... 4,678,967 4,583,834
------------ ------------
Total liabilities and shareholders' equity ........................................... $ 53,271,328 $ 44,225,296
============ ============
See notes to condensed consolidated financial statements.
3
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Loans, including fees ................................ $1,933,737 $1,711,565 $ 681,893 $ 637,473
Investment securities, taxable ....................... 51,883 23,236 15,068 13,274
Nonmarketable equity securities ...................... 5,570 4,571 1,859 1,839
Federal funds sold ................................... 21,414 46,227 4,785 13,062
---------- ---------- ---------- ----------
Total .............................................. 2,012,604 1,785,599 703,605 665,648
---------- ---------- ---------- ----------
Interest expense:
Time deposits $100,000 and over ...................... 140,385 170,469 45,900 54,884
Other deposits ....................................... 398,426 406,777 135,037 144,709
Other interest expense ............................... 1,678 12,991 67 3
---------- ---------- ---------- ----------
Total .............................................. 540,489 590,237 181,004 199,596
---------- ---------- ---------- ----------
Net interest income .................................... 1,472,115 1,195,362 522,601 466,052
Provision for loan losses .............................. 96,000 100,000 44,000 40,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses .......................................... 1,376,115 1,095,362 478,601 426,052
---------- ---------- ---------- ----------
Other operating income:
Service charges on deposit accounts .................. 164,188 122,425 61,449 46,151
Residential mortgage origination fees ................ 83,490 39,772 31,088 8,067
Brokerage fee commissions ............................ 90,295 49,152 31,590 -
Credit life insurance commissions .................... 4,015 5,486 2,814 1,184
Other charges, commissions and fees .................. 49,959 35,458 16,822 14,158
---------- ---------- ---------- ----------
Total .............................................. 391,947 252,293 143,763 69,560
---------- ---------- ---------- ----------
Other operating expenses:
Salaries and employee benefits ....................... 890,563 644,539 311,050 211,709
Occupancy expense .................................... 101,630 82,148 39,787 31,517
Furniture and equipment expense ...................... 103,187 86,042 34,700 31,329
Other operating expenses ............................. 536,474 423,017 201,082 138,303
---------- ---------- ---------- ----------
Total .............................................. 1,631,854 1,235,746 586,619 412,858
---------- ---------- ---------- ----------
Income before income taxes ............................. 136,208 111,909 35,745 82,754
Income tax expense ..................................... 50,397 41,428 13,226 30,619
---------- ---------- ---------- ----------
Net income ............................................. $ 85,811 $ 70,481 $ 22,519 $ 52,135
========== ========== ========== ==========
Earnings per share
Average shares outstanding ............................. 565,000 563,670 566,370 563,670
Net income ............................................. $ 0.15 $ 0.13 $ 0.04 $ 0.09
See notes to condensed consolidated financial statements.
4
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Shareholders' Equity
and Comprehensive Income
for the nine months ended September 30, 2003 and 2002
(Unaudited)
Accumulated
Common Stock Retained Other
------------ Capital Earnings Comprehensive
Shares Amount Surplus (Deficit) Income Total
------ ------ ------- --------- ------ -----
Balance,
December 31, 2001 .......... 563,670 $594,270 $4,973,271 $(1,118,042) $2,740 $4,452,239
Net income for
the period ................. 70,481 70,481
Other
comprehensive
income, net of tax
expense of $4,635 .......... 7,891 7,891
----------
Comprehensive
Income ..................... - - - - - 78,372
------- -------- ---------- ------------ ------- ----------
Balance,
September 30, 2002 ......... 563,670 $594,270 $4,973,271 $(1,047,561) $10,631 $4,530,611
======= ======== ========== ============ ======= ==========
Balance,
December 31, 2002 .......... 563,670 $563,670 $5,003,871 $ (992,074) $ 8,367 $4,583,834
Net income for
the period ................. 85,811 85,811
Other
comprehensive
income, net of tax
benefit of $12,732 ......... (21,678) (21,678)
----------
Comprehensive
income ..................... 64,133
----------
Warrants exercised .......... 3,100 3,100 27,900 31,000
------- -------- ---------- --------- -------- ----------
Balance,
September 30, 2003 ......... 566,770 $566,770 $5,031,771 $(906,263) $(13,311) $4,678,967
======= ======== ========== ========== ========= ==========
See notes to condensed consolidated financial statements.
5
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
Cash flows from operating activities:
Net income ......................................................................... $ 85,811 $ 70,481
Adjustments to reconcile net income to net cash provided
By operating activities:
Depreciation and amortization .................................................... 104,647 92,519
Provision for loan losses ........................................................ 96,000 100,000
Accretion and premium amortization ............................................... 4,448 (677)
Deferred income tax provision .................................................... 36,888 41,428
Increase in interest receivable .................................................. (33,701) (36,578)
Decrease in interest payable ..................................................... (61,099) (50,497)
Increase in other assets ......................................................... (28,333) (21,805)
Increase in other liabilities .................................................... 14,818 40,058
----------- -----------
Net cash provided by operating activities ...................................... 219,479 234,929
----------- -----------
Cash flows from investing activities:
Purchases of securities available-for-sale ......................................... (2,526,094) (2,000,000)
Purchase of nonmarketable equity securities ........................................ (27,300) -
Maturities of securities available-for-sale ........................................ 2,597,197 350,000
Net increase in loans made to customers ............................................ (9,391,214) (6,380,334)
Purchases of premises and equipment ................................................ (592,531) (42,565)
----------- -----------
Net cash used by investing activities ............................................ (9,939,942) (8,072,899)
----------- -----------
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing transaction
accounts and savings accounts ..................................................... 7,073,208 2,190,073
Net increase in certificates of deposit and other time deposits .................... 923,972 7,154,575
Advances from Federal Home Loan Bank ............................................... 1,000,000 -
Repayments of Federal Home Loan Bank advances ...................................... - (1,750,000)
Exercise of stock warrants ......................................................... 31,000 -
----------- -----------
Net cash provided by financing activities ........................................ 9,028,180 7,594,648
----------- -----------
Net decrease in cash and cash equivalents ............................................ (692,283) (243,322)
Cash and cash equivalents, beginning ................................................. 3,859,273 4,195,960
----------- -----------
Cash and cash equivalents, ending .................................................... $ 3,166,991 $ 3,952,638
=========== ===========
Cash paid during the period for:
Income taxes ........................................................................ $ 4,275 $ -
Interest ............................................................................ $ 601,588 $ 640,734
See notes to condensed consolidated financial statements.
6
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared in accordance with the
requirements for interim financial statements and, accordingly, they are
condensed and omit disclosures, which would substantially duplicate those
contained in the most recent annual report on Form 10-KSB. The financial
statements, as of September 30, 2003 and for the interim periods ended September
30, 2003 and 2002, are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The financial information as of December 31, 2002 has
been derived from the audited financial statements as of that date. For further
information, refer to the financial statements and the notes included in
Regional Bancshares, Inc.'s Annual Report on Form 10-KSB for the year ended
December 31, 2002.
Note 2 - Stock-Based Compensation
Our stock-based employee compensation plan and stock warrants are accounted for
under the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No compensation cost is reflected in net income, as all
warrants and options granted under these plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income (loss) and earnings (loss)
per share if the fair value recognition provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, had been applied to the Option
Plans.
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
Net income, as reported .......................... $ 85,811 $ 70,481
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects .... 18,394 64,309
--------- ----------
Pro forma net income ............................. $ 67,417 $ 6,172
========= ==========
Earnings per share:
Basic - as reported ........................... $ 0.15 $ 0.13
========= ==========
Basic - pro forma ............................. $ 0.12 $ 0.01
========= ==========
Diluted - as reported ......................... $ 0.15 $ 0.12
========= ==========
Diluted - pro forma ........................... $ 0.12 $ 0.01
========= ==========
Three Months Ended
September 30,
-------------
2003 2002
---- ----
Net income, as reported .......................... $ 22,519 $ 52,135
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects .... 6,131 5,938
---------- ----------
Pro forma net income ............................. $ 16,388 $ 46,197
========== ==========
Earnings per share:
Basic - as reported ........................... $ 0.04 $ 0.09
========== ==========
Basic - pro forma ............................. $ 0.03 $ 0.08
========== ==========
Diluted - as reported ......................... $ 0.04 $ 0.09
========== ==========
Diluted - pro forma ........................... $ 0.03 $ 0.08
========== ==========
7
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Earnings Per Share
A reconciliation of the numerators and denominators used to calculate basic and
diluted earnings per share are as follows:
Nine Months Ended September 30, 2003
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............................ $85,811 565,000 $0.15
=====
Effect of dilutive securities
Stock options ...................................................... - 17,359
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $85,811 582,359 $0.15
======= ======= =====
Nine Months Ended September 30, 2002
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............................ $70,481 563,670 $0.13
=====
Effect of dilutive securities
Stock options ...................................................... - 17,705
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $70,481 581,375 $0.12
======= ======= =====
Three Months Ended September 30, 2003
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............................ $22,519 566,320 $0.04
=====
Effect of dilutive securities
Stock options ...................................................... - 16,888
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $22,519 583,208 $0.04
======= ======= =====
8
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Earnings Per Share - (continued)
Three Months Ended September 30, 2002
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............................ $52,135 563,670 $0.09
=====
Effect of dilutive securities
Stock options ...................................................... - 17,772
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $52,135 581,442 $0.09
======= ======= =====
Note 4 - Comprehensive Income
Comprehensive income includes net income and other comprehensive income, which
is defined as nonowner related transactions in equity. The following table sets
forth the amounts of other comprehensive income included in equity along with
the related tax effect for the three and nine month periods ended September 30,
2003 and 2002:
Nine Months Ended September 30, 2003
------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................... $(34,410) $ 12,732 $(21,678)
Plus: reclassification adjustment for gains (losses)
realized in net income ..................................................... - - -
-------- -------- --------
Net unrealized gains (losses) on securities ................................ (34,410) 12,732 (21,678)
-------- -------- --------
Other comprehensive income .................................................... $(34,410) $ 12,732 $(21,678)
======== ======== ========
Nine Months Ended September 30, 2002
------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period .................... $12,526 $(4,635) $ 7,891
Plus: reclassification adjustment for gains (losses)
realized in net income ...................................................... - - -
------- ------- -------
Net unrealized gains (losses) on securities ................................. 12,526 (4,635) 7,891
------- ------- -------
Other comprehensive income ..................................................... $12,526 $(4,635) $ 7,891
======= ======= =======
9
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Comprehensive Income (continued)
Three Months Ended September 30, 2003
-------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................... $(43,404) $ 16,060 $(27,344)
Plus: reclassification adjustment for gains (losses)
realized in net income ..................................................... - - -
-------- -------- --------
Net unrealized gains (losses) on securities ................................ (43,404) 16,060 (27,344)
-------- -------- --------
Other comprehensive income .................................................... $(43,404) $ 16,060 $(27,344)
======== ======== ========
Three Months Ended September 30, 2002
-------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period .................... $ 5,428 $(2,222) $ 3,206
Plus: reclassification adjustment for gains (losses)
realized in net income ...................................................... - - -
------- ------- -------
Net unrealized gains (losses) on securities ................................. 5,428 (2,222) 3,206
------- ------- -------
Other comprehensive income ..................................................... $ 5,428 $(2,222) $ 3,206
======= ======= =======
Accumulated other comprehensive income consists solely of the unrealized gain
(loss) on securities available-for-sale, net of the deferred tax effects.
10
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following is a discussion of the Company's financial condition as of
September 30, 2003 compared to December 31, 2002, and the results of operations
for the three and nine months ended September 30, 2003 compared to the three and
nine months ended September 30, 2002. These comments should be read in
conjunction with our condensed financial statements and accompanying footnotes
appearing in this report and in conjunction with the financial statements and
related notes and disclosures in our Annual Report on Form 10-KSB for the year
ended December 31, 2002. This report contains "forward-looking statements"
relating to, without limitation, future economic performance, plans and
objectives of management for future operations, and projections of revenues and
other financial items that are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. The words "expect," "estimate," "anticipate" and
"believe," as well as similar expressions, are intended to identify
forward-looking statements. Our actual results may differ materially from the
results discussed in the forward-looking statements, and our operating
performance each quarter is subject to various risks and uncertainties that are
discussed in detail in our filings with the Securities and Exchange Commission.
Results of Operations
Net Interest Income
For the nine months ended September 30, 2003, net interest income increased
$276,753, or 23.15%, to $1,472,115 as compared to $1,195,362 for the same period
in 2002. Interest income from loans, including fees, increased $222,172 or
12.98%, from the nine months ended September 30, 2002 to the comparable period
in 2003, as we continued to experience growth in our loan portfolio. Interest
expense for the nine months ended September 30, 2003 was $540,489 as compared to
$590,237 for the same period in 2002. Although interest bearing accounts such as
savings accounts and certificates of deposit increased during the nine months
ended September 30, 2003, rates being paid on these accounts were lower due to a
declining interest rate environment when compared to the same period in 2002,
resulting in a decrease in interest expense. The net interest margin realized on
earning assets decreased from 4.70% for the nine months ended September 30, 2002
to 4.41% for the same period in 2003. The interest rate spread increased by 28
basis points from 3.88% at September 30, 2002 to 4.16% at September 30, 2003.
For the quarter ended September 30, 2003, net interest income totaled $522,601,
an increase of $56,549 or 12.13%, when compared to the same quarter ended
September 30, 2002. Interest income totaling $681,893 was generated from loans,
including fees, during the quarter ended September 30, 2003, as compared to
$637,473 during the comparable period in 2002. Interest expense was $181,004 for
the quarter ended September 30, 2003, as compared to $199,596 for the same
period in 2002. The net interest margin realized on earning assets was 4.36% for
the quarter ended September 30, 2003, as compared to 4.90% during the same
period in 2002. The interest rate spread was 4.13% for the quarter ended
September 30, 2003, as compared to 4.58% for the quarter ended September 30,
2002.
Provision and Allowance for Loan Losses
The provision for loan losses is the charge to operating earnings that
management believes is necessary to maintain the allowance for possible loan
losses at an adequate level. For the nine months ended September 30, 2003, the
provision charged to expense was $96,000 as compared to $100,000 for the nine
months ended September 30, 2002. For the quarter ended September 30, 2003, the
provision charged to expense was $44,000 as compared to $40,000 for the same
period in 2002. There are risks inherent in making all loans, including risks
with respect to the period of time over which loans may be repaid, risks
resulting from changes in economic and industry conditions, risks inherent in
dealing with individual borrowers, and, in the case of a collateralized loan,
risks resulting from uncertainties about the future value of the collateral. We
maintain an allowance for loan losses based on, among other things, historical
experience, an evaluation of economic conditions, and regular reviews of
delinquencies and loan portfolio quality. Our judgment about the adequacy of the
allowance is based upon a number of assumptions about future events, which we
believe to be reasonable, but which may not prove to be accurate. Thus, there is
a risk that charge-offs in future periods could exceed the allowance for loan
losses or that substantial additional increases in the allowance for loan losses
could be required. Additions to the allowance for loan losses would result in a
decrease of our net income and, possibly, its capital.
11
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation -- continued
Noninterest Income
Noninterest income increased $139,654, or 55.35% to $391,947 for the nine months
ended September 30, 2003 as compared to the same period ended September 30,
2002. The primary source of this income was the increase in service charges on
deposit accounts of $41,763, or 34.11%, to $164,188 for the nine months ended
September 30, 2003, when compared to the same period in 2002. This increase is
attributable to an increase in deposit accounts over the two periods. In
addition, commissions generated through our brokerage services totaled $90,295
for the nine months ended September 30, 2003. We began the investment and
brokerage services department in the fourth quarter of 2001. Income from
residential mortgage origination fees increased $43,718 to $83,490 for the nine
months ended September 30, 2003 as compared to the same period in 2002 as the
number of home refinancings increased.
For the quarter ended September 30, 2003, noninterest income was $143,763, an
increase of $74,203, or 106.67% over the quarter ended September 30, 2002. The
largest component of noninterest income was service charges on deposit accounts,
which totaled $61,449 for the quarter ended September 30, 2003, as compared to
$46,151 for the quarter ended September 30, 2002. This increase was due to an
overall increase in deposit accounts over the two periods. Income from brokerage
fee commissions totaled $31,590 for the quarter ended September 30, 2003.
Residential mortgage origination fees increased $23,021 or 285.37% to $31,088
for the quarter ended September 30, 2003 as compared to the same period in 2002.
Noninterest Expense
For the nine months ended September 30, 2003, noninterest expense was
$1,631,854, an increase of $396,108, or 32.05% when compared to the same period
in 2002. The largest increase was in salaries and employee benefits, which
increased from $644,539 for the nine months ended September 30, 2002 to $890,563
for the nine months ended September 30, 2003. The increase is attributable to
annual pay raises and the hiring of additional staff to meet the needs
associated with the growth of the bank, including personnel to staff our new
McBee Branch which officially opened May 28, 2003. Occupancy expense also
increased from $82,148 for the nine months ended September 30, 2002 to $101,630
for the nine months ended September 30, 2003. This increase is primarily due to
expenses associated with the new McBee Branch.
For the quarter ended September 30, 2003, noninterest expense increased
$173,761, or 42.09% as compared to the quarter ended September 30, 2002. The
largest category of noninterest expense, salaries and employee benefits,
increased $99,341 from the quarter ended September 30, 2002 to $311,050 for the
quarter ended September 30, 2003. As discussed earlier, this increase is
primarily attributable to annual pay raises and the hiring of additional staff.
Occupancy expense increased $62,779 from the quarter ended September 30, 2002 to
$201,082 for the quarter ended September 30, 2003. This increase is primarily
due to expenses associated with the McBee Branch.
Income Taxes
The income tax expense for the nine months ended September 30, 2003 was $50,397
as compared to $41,428 for the same period in 2002. The effective tax rate was
37.00% and 37.02% for the nine months ended September 30, 2003 and 2002,
respectively. Income tax expense was $13,226 for the quarter ended September 30,
2003 as compared to $30,619 for the same quarter in 2003. The effective tax rate
was 37.00% for the quarters ended September 30, 2003 and 2002.
Net Income
The combination of the above factors resulted in net income for the nine months
ended September 30, 2003 of $85,811 as compared to net income of $70,481 for the
same period in 2002. The net income before taxes of $136,208 was before income
tax expense of $50,397 during the nine months ended September 30, 2003. The net
income before taxes for the same period in 2002 was $111,909, which was
partially offset by the income tax expense of $41,428. For the quarter ended
September 30, 2003, net income was $22,519, as compared to $52,135 for the same
period in 2002.
12
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation -- continued
Assets and Liabilities
During the first nine months of 2003, total assets increased $9,046,032, or
20.45%, when compared to December 31, 2002. The primary source of growth in
assets was in loans, which increased $9,373,855, or 26.61%, during the first
nine months of 2003. Of the $9,373,855 increase in loans, $2,090,158 is
attributable to loans originated at the new McBee Branch. Investment securities
decreased $82,661 or 3.12% to $2,568,173 at September 30, 2003. Total deposits
also increased $7,997,180, or 20.31%, from $39,378,724 at December 31, 2002 to
$47,375,904 at September 30, 2003. Of the $7,997,180 increase in deposits,
$5,312,665 is attributable to new deposit accounts opened at the new McBee
Branch. Advances from the Federal Home Loan Bank totaling $1,000,000 were
obtained during the first nine months to help fund our loan growth.
Investment Securities
Investment securities decreased from $2,650,834 at December 31, 2002 to
$2,568,173 at September 30, 2003. The decrease is mainly due to the paydowns on
our mortgage backed securities. All of the Bank's marketable investment
securities were designated as available-for-sale at September 30, 2003.
Loans
We continued our trend of growth during the first nine months of 2003,
especially in the loan area. Net loans increased $9,295,215, or 26.66%, during
the period. As shown below, the main component of growth in the loan portfolio
was real estate-mortgage loans which increased 33.88%, or $7,216,828, from
December 31, 2002 to September 30, 2003. Balances within the major loans
receivable categories as of September 30, 2003 and December 31, 2002 are as
follows:
September 30, December 31,
2003 2002
---- ----
Real estate - construction ............... $ 4,014,112 $ 4,320,960
Real estate - mortgage ................... 28,518,843 21,302,015
Commercial and industrial ................ 5,859,201 3,474,108
Consumer and other ....................... 6,214,388 6,135,606
----------- -----------
$44,606,544 $35,232,689
=========== ===========
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REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation -- continued
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
September 30, December 31,
2003 2002
---- ----
Loans: Nonaccrual loans ............................................................ $ 13,392 $ 24,118
Accruing loans more than 90 days past due .......................................... $ 4,403 $ -
Loans identified by the internal review mechanism:
Criticized ...................................................................... $453,418 $ 17,549
Classified ...................................................................... $ 21,083 $ 8,264
Criticized loans have potential weaknesses that deserve close attention and
could, if uncorrected, result in deterioration of the prospects for repayment or
the Bank's credit position at a future date. Classified loans are inadequately
protected by the sound worth and paying capacity of the borrower or any
collateral and there is a distinct possibility or probability that the Bank will
sustain a loss if the deficiencies are not corrected.
The increase in criticized loans from December 31, 2002 to September 30, 2003 is
attributable to one loan with a balance of $399,000 that was added due to the
death of one of the guarantors. While we have reserved for this loan as an other
asset especially mentioned, we believe that we remain well secured.
Allowance for Loan Losses
Activity in the Allowance for Loan Losses is as follows:
September 30,
-------------
2003 2002
---- ----
Balance, January 1, ............................ $ 368,656 $ 268,446
Provision for loan losses for the period ....... 96,000 100,000
Net loans (charged-off) recovered for the period (17,360) (21,717)
------------ ------------
Balance, end of period ......................... $ 447,296 $ 346,729
============ ============
Gross loans outstanding, end of period ......... $ 44,606,544 $ 33,232,524
Allowance for loan losses to loans outstanding . 1.00% 1.04%
14
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation -- continued
Deposits
Total deposits increased $7,997,180, or 20.31%, from December 31, 2002 to
$47,375,904 at September 30, 2003. The largest change was an increase in savings
deposits, which increased $5,435,260 to $13,513,084 at September 30, 2003. Of
the $5,435,260 increase in savings deposits, $3,954,708 is attributable to
accounts opened at the new McBee Branch. Expressed in percentages,
interest-bearing deposits increased 19.68% and noninterest bearing deposits
increased 24.82%.
Balances within the major deposit categories as of September 30, 2003 and
December 31, 2002 are as follows:
September 30, December 31,
2003 2002
---- ----
Noninterest-bearing demand deposits .......... $ 5,976,150 $ 4,787,870
Interest-bearing demand deposits ............. 5,016,199 4,566,531
Savings deposits ............................. 13,513,084 8,077,824
Time deposits $100,000 and over .............. 7,473,209 6,898,433
Other time deposits .......................... 15,397,262 15,048,066
----------- -----------
$47,375,904 $39,378,724
=========== ===========
Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank to us were $1,000,000 as of September
30, 2003. These advances have a variable interest rate of 1.16% and mature on
September 9, 2005.
Liquidity
Liquidity needs are met by the Bank through scheduled maturities of loans and
investments on the asset side and through pricing policies on the liability side
for interest-bearing deposit accounts. The level of liquidity is measured by the
loan-to-total borrowed funds ratio, which was at 92.21% at September 30, 2003
and 89.61% at December 31, 2002.
Securities available-for-sale, which totaled $2,403,320 at September 30, 2003,
serve as a ready source of liquidity. The Bank also has lines of credit
available with correspondent banks to purchase federal funds for periods from
one to seven days. At September 30, 2003, unused lines of credit totaled
$2,650,000. We also have a line of credit to borrow funds from the Federal Home
Loan Bank up to 10% of the Bank's total assets, which gave us the ability to
borrow up to $5,327,000 at September 30, 2003. As of September 30, 2003, we had
$1,000,000 in borrowings on this line.
Off-Balance Sheet Risk
Through the operations of our Bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At September 30,
2003, we had issued commitments to extend credit of $5,375,850 and standby
letters of credit of $25,000 through various types of commercial lending
arrangements. We evaluate each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by us upon
extension of credit, is based on our credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate. Historically, many
of these commitments expire unused and the total amount committed as of
September 30, 2003 is not necessarily expected to be funded.
15
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation -- continued
Off-Balance Sheet Risk - continued
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at September 30,
2003:
After One After Three
Within Through Through Greater
One Three Twelve Within Than
Month Months Months One Year One Year Total
----------- ----------- ----------- ---------- ----------- -----------
Unused commitments
to extend credit ..................... $ - $ 68,582 $ 1,350,104 $1,418,686 $ 3,957,164 $ 5,375,850
Standby letters of
credit ............................... - - 25,000 25,000 - 25,000
----------- ----------- ----------- ---------- ----------- -----------
Totals ............................. $ - $ 68,582 $ 1,375,104 $1,443,686 $ 3,957,164 $ 5,400,850
=========== =========== =========== ========== =========== ===========
Critical Accounting Policies
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Our significant accounting policies are described
in the notes to the consolidated financial statements at December 31, 2002 as
filed in our annual report on Form 10-KSB. Certain accounting policies involve
significant judgments and assumptions by us which have a material impact on the
carrying value of certain assets and liabilities. We consider these accounting
policies to be critical accounting policies. The judgments and assumptions we
use are based on historical experience and other factors, which we believe to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions we make, actual results could differ from these judgments and
estimates which could have a material impact on our carrying values of assets
and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in preparation of our
consolidated financial statements. Refer to the portions of our 2002 Annual
Report on Form 10-KSB and this Form 10-QSB that addresses our allowance for loan
losses for a description of our processes and methodology for determining our
allowance for loan losses.
Recently Issued Accounting Standards
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure", an amendment of FASB Statement No.
123, "Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and Accounting Pronouncement Board ("APB")
Opinion No. 28, "Interim Financial Reporting", to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of APB
Opinion No. 25. The provisions of SFAS No. 148 are effective for annual
financial statements for fiscal years ending after December 15, 2003, and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. We have adopted the disclosure provisions of
SFAS No. 148, which had no impact on our financial condition or operating
results.
In April 2003, the FASB issued 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
instruments 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 impact on our financial condition or operating results.
16
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation -- continued
Recently Issued Accounting Standards - continued
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 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 impact on our
financial condition or operating results.
In June 2003, the American Institute of Certified Public Accountants (AICPA)
issued an exposure draft of a proposed Statement of Position (SOP), "Allowance
for Credit Losses." The proposed SOP addresses the recognition and measurement
by creditors of the allowance for credit losses related to all loans, as that
term is defined in SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." The proposed SOP provides that the allowance for credit losses reported
on a creditor's balance sheet should consist only of (1) a component for
individual loan impairment recognized and measured pursuant to FASB Statement
No. 114 and (2) one or more components of collective loan impairment recognized
pursuant to FASB Statement No. 5, "Accounting for Contingencies", and measured
in accordance with the guidance in the proposed SOP. The provisions of the
proposed SOP would be effective for financial statements for fiscal years
beginning after December 15, 2003, with earlier application permitted. The
effect of initially applying the provisions of the proposed SOP would be
reported as a change in accounting estimate. Comments on the exposure draft were
due by September 19, 2003. We have not determined the effect on our financial
condition or operating results related to the adoption of this proposed SOP, but
such effect would most likely be material.
Capital Resources
Total shareholders' equity increased from $4,583,834 at December 31, 2002 to
$4,678,967 at September 30, 2003. The increase is due primarily to the net
income for the period of $85,811. There was also an increase of $3,100 and
$27,900 respectively in capital stock and capital surplus from warrants being
exercised.
The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance sheet exposures, adjusted for
risk-weights ranging from 0% to 100%. Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital consists of common shareholders'
equity, excluding the unrealized gain (loss) on available-for-sale securities,
minus certain intangible assets. Tier 2 capital consists of the general reserve
for loan losses subject to certain limitations. An institution's qualifying
capital base for purposes of its risk-based capital ratio consists of the sum of
its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for
Tier 1 and 8% for total risk-based capital.
Banks and bank holding companies are also required to maintain capital at a
minimum level based on total assets, which is known as the leverage ratio. The
minimum requirement for the leverage ratio is 3%; however all but the highest
rated institutions are required to maintain ratios 100 to 200 basis point above
the minimum. Both the Company and the Bank exceeded their minimum regulatory
capital ratios as of September 30, 2003 as well as the ratios to be considered
"well capitalized."
17
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation -- continued
Capital Resources - continued
The following table summarizes the Company's risk-based capital at September 30,
2003:
Shareholders' equity ........................................ $4,647,354
Less: intangibles .......................................... -
----------
Tier 1 capital ............................................. 4,647,354
----------
Plus: allowance for loan losses (1) ........................ 447,296
----------
Total capital .............................................. $5,094,651
==========
Risk-weighted assets
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ................. 10.04%
Total capital (to risk-weighted assets) .................. 11.00%
Tier 1 capital (to total average assets) ................. 8.82%
(1) limited to 1.25% of risk-weighted assets
Item 3. 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 228.308(c).
18
REGIONAL BANKSHARES, INC.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31 - Certification of Principal Executive Officer and Principal
Financial Officer required by Rule 13a-14(a) or Rule 15d - 14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
Exhibit 32 - Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter
ended September 30, 2003.
19
REGIONAL BANKSHARES, INC.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: November 12, 2003 By:/s/ CURTIS A. TYNER
-------------------------------------
Curtis A. Tyner
President, Chief Executive Officer
and Chief Financial Officer
20
REGIONAL BANKSHARES, INC.
Exhibit Index
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. This exhibit is not "filed" for purposes of Section 18
of the Securities Exchange Act of 1934 but is instead
furnished as provided by applicable rules of the Securities
and Exchange Commission.
21