U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X
---- QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
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 Number 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.
570,570 shares of common stock, $1.00 par value as of July 31, 2004
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 - June 30, 2004 and December 31, 2003.................................. 3
Condensed Consolidated Statements of Income - Six months ended June 30, 2004 and 2003
and Three months ended June 30, 2004 and 2003.............................................................. 4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Six months ended June 30, 2004 and 2003.................................................................... 5
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2004 and 2003.................... 6
Notes to Condensed Consolidated Financial Statements......................................................... 7-10
Item 2. Management's Discussion and Analysis or Plan of Operation.....................................................11-16
Item 3. Controls and Procedures....................................................................................... 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Small Business Issuer Purchases of Securities....................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........................................................... 18
Item 6. Exhibits and Reports on Form 8-K.............................................................................. 18
(a) Exhibits................................................................................................. 18
(b) Reports on Form 8-K...................................................................................... 18
2
REGIONAL BANKSHARES, INC.
Condensed Consolidated Balance Sheets
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
June 30, December 31,
2004 2003
---- ----
(Unaudited)
Assets:
Cash and cash equivalents:
Cash and due from banks ......................................................... $ 1,319,348 $ 1,413,904
Federal funds sold .............................................................. 450,774 2,371,780
------------ ------------
Total cash and cash equivalents ............................................... 1,770,122 3,785,684
------------ ------------
Securities available-for-sale ..................................................... 3,624,499 2,344,649
Nonmarketable equity securities ................................................... 213,953 164,853
------------ ------------
Total investment securities ................................................... 3,838,452 2,509,502
------------ ------------
Loans receivable ..................................................................... 52,855,160 48,262,788
Less allowance for loan losses ....................................................... (524,219) (482,875)
------------ ------------
Loans, net .................................................................... 52,330,941 47,779,913
------------ ------------
Accrued interest receivable .......................................................... 191,260 190,352
Premises and equipment, net .......................................................... 2,475,564 2,514,985
Other assets ......................................................................... 498,387 626,061
------------ ------------
Total assets .................................................................. $ 61,104,726 $ 57,406,497
============ ============
Liabilities:
Deposits:
Noninterest-bearing ............................................................... $ 7,513,817 $ 6,968,579
Interest-bearing .................................................................. 6,785,109 5,283,574
Savings ........................................................................... 16,304,971 14,484,317
Time deposits $100,000 and over ................................................... 6,271,493 7,559,762
Other time deposits ............................................................... 17,248,858 16,143,672
------------ ------------
Total deposits ................................................................ 54,124,248 50,439,904
------------ ------------
Advances from Federal Home Loan Bank ................................................. 2,000,000 2,000,000
Accrued interest payable ............................................................. 102,051 136,441
Other liabilities .................................................................... 17,443 102,256
------------ ------------
Total liabilities ............................................................. 56,243,742 52,678,601
------------ ------------
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,
570,570 and 566,770 shares issued and outstanding at
June 30, 2004 and December 31, 2003, respectively ............................... 570,570 566,770
Capital surplus ................................................................... 5,065,971 5,031,771
Retained earnings (deficit) ....................................................... (720,514) (856,905)
Accumulated other comprehensive income (loss) ..................................... (55,043) (13,740)
------------ ------------
Total shareholders' equity .................................................... 4,860,984 4,727,896
------------ ------------
Total liabilities and shareholders' equity .................................... $ 61,104,726 $ 57,406,497
============ ============
See notes to condensed consolidated financial statements.
3
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Loans, including fees ............................... $1,517,617 $1,251,844 $ 794,495 $ 645,166
Investment securities
Taxable ........................................... 37,184 36,815 14,906 17,193
Nonmarketable equity securities ................... 2,688 3,712 830 1,872
Federal funds sold ................................ 9,176 16,629 3,818 10,495
---------- ---------- ---------- ----------
Total ........................................... 1,566,665 1,309,000 814,049 674,726
---------- ---------- ---------- ----------
Interest expense:
Time deposits $100,000 and over ..................... 64,251 94,485 29,814 47,559
Other deposits ...................................... 252,085 263,389 122,254 136,904
Other interest expense .............................. 10,562 1,611 4,077 687
---------- ---------- ---------- ----------
Total ........................................... 326,898 359,485 156,145 185,150
---------- ---------- ---------- ----------
Net interest income .................................... 1,239,767 949,515 657,904 489,576
Provision for loan losses .............................. 55,000 52,000 30,000 25,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ......................................... 1,184,767 897,515 627,904 464,576
Other income:
Service charges on deposit accounts ................. 138,374 102,738 75,783 52,777
Residential mortgage origination fees ............... 37,358 52,401 20,226 35,221
Brokerage fee commissions ........................... 45,000 58,706 24,292 39,715
Credit life insurance commissions ................... 2,527 1,201 1,933 478
Other income ........................................ 35,857 33,137 18,741 12,165
---------- ---------- ---------- ----------
Total ........................................... 259,116 248,183 140,975 140,356
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits ...................... 649,148 579,513 304,561 317,861
Net occupancy expense ............................... 86,579 61,842 43,774 33,695
Furniture and fixture expense ....................... 84,590 68,486 42,657 40,032
Other operating expenses ............................ 407,071 335,393 212,064 175,499
---------- ---------- ---------- ----------
Total ........................................... 1,227,388 1,045,234 603,056 567,087
---------- ---------- ---------- ----------
Income before income taxes ............................. 216,495 100,464 165,823 37,845
Income tax expense ..................................... 80,104 37,172 61,355 14,003
---------- ---------- ---------- ----------
Net income ............................................. $ 136,391 $ 63,292 $ 104,468 $ 23,842
========== ========== ========== ==========
Earnings per share
Average shares outstanding ............................. 568,402 564,227 569,484 564,778
Net income - basic ..................................... $ 0.24 $ 0.11 $ 0.18 $ 0.04
Net income - diluted ................................... $ 0.23 $ 0.11 $ 0.18 $ 0.04
4
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Shareholders' Equity and
Comprehensive Income For the six months ended June 30, 2004 and 2003
(Unaudited)
Accumulated
Common Stock Retained Other
------------ Capital Earnings Comprehensive
Shares Amount Surplus (Deficit) Income Total
------ ------ ------- --------- ------ -----
Balance,
December 31, 2002 ................... 563,670 $ 563,670 $ 5,003,871 $ (992,074) $ 8,367 $ 4,583,834
Net income
for the period ...................... 63,292 63,292
Other comprehensive income,
net of tax of $3,328 ................ 5,666 5,666
-------------
Comprehensive
income .............................. 68,958
-------------
Warrants exercised
at $10.00 per share ................. 2,100 2,100 18,900 21,000
------- ---------- ------------- ------------- ------------ -------------
Balance,
June 30, 2003 ....................... 565,770 $ 565,770 $ 5,022,771 $ (928,782) $ 14,033 $ 4,673,792
======= ========== ============= ============== ============ =============
Balance,
December 31, 2003 ................... 566,770 $ 566,770 $ 5,031,771 $ (856,905) $ (13,740) $ 4,727,896
Net income
for the period ...................... 136,391 136,391
Other comprehensive income,
net of tax of $22,809 ............... (41,303) (41,303)
--------------
Comprehensive
income .............................. 95,088
-------------
Warrants exercised
at $10.00 per share ................. 3,800 3,800 34,200 38,000
------- ---------- ------------- ------------- ------------ -------------
Balance,
June 30, 2004 ....................... 570,570 $ 570,570 $ 5,065,971 $ (720,514) $ (55,043) $ 4,860,984
======= ========== ============= ============== ============= =============
5
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
2004 2003
---- ----
Cash flows from operating activities:
Net income .............................................................................. $ 136,391 $ 63,292
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................................................... 86,439 68,771
Provision for possible loan losses .................................................. 55,000 52,000
Accretion and premium amortization .................................................. 4,032 781
Deferred income tax provision ....................................................... 92,405 26,690
Increase in interest receivable ..................................................... (908) (1,128)
Increase (decrease) in interest payable ............................................. (34,390) (62,090)
Decrease (increase) in other assets ................................................. 59,526 13,792
Increase in other liabilities ....................................................... (84,813) 20,634
Increase in gain (loss) on sale/paydown of securities ............................... 3,267 174
----------- -----------
Net cash provided by operating activities ......................................... 316,949 182,916
----------- -----------
Cash flows from investing activities:
Purchases of securities available-for-sale .............................................. (2,005,592) (2,026,094)
Maturities of securities available-for-sale ............................................. 652,883 2,506,635
Purchase of nonmarketable equity securities ............................................. (49,100) (27,300)
Net increase in loans made to customers ................................................. (4,606,028) (6,129,957)
Purchases of premises and equipment ..................................................... (47,018) (568,096)
----------- -----------
Net cash used by investing activities ............................................. (6,054,855) (6,244,812)
----------- -----------
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing transaction
accounts and savings accounts ......................................................... 3,867,427 3,892,998
Net increase (decrease) in certificates of deposit and other time deposits .............. (183,083) 3,048,081
Repayments of Federal Home Loan Bank advances ........................................... - -
Proceeds from exercise of warrants ...................................................... 38,000 21,000
----------- -----------
Net cash provided by financing activities ......................................... 3,722,344 6,962,079
----------- -----------
Net increase (decrease) in cash and cash equivalents ....................................... (2,015,562) 900,183
Cash and cash equivalents, beginning ....................................................... 3,785,684 3,859,273
----------- -----------
Cash and cash equivalents, ending .......................................................... $ 1,770,122 $ 4,759,456
=========== ===========
Cash paid during the period for:
Income taxes ............................................................................ $ 3,050 $ 2,850
Interest ................................................................................ $ 361,288 $ 421,575
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 June 30, 2004 and for the interim periods ended June 30, 2004
and 2003, 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, 2003 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 Bankshares, Inc.'s Annual Report on Form 10-KSB for the year ended
December 31, 2003.
Note 2 - Recently Issued Accounting Pronouncements
No recent authoritative pronouncements that affect accounting, reporting, and
disclosure of financial information by us have occurred during the quarter
ending June 30, 2004, other than the exposure draft described below.
In March 2004, the FASB issued an exposure draft on "Share-Based Payment". The
proposed Statement addresses the accounting for transactions in which an
enterprise receives employee services in exchange for a) equity instruments of
the enterprise or b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. This proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require instead
that such transactions be accounted for using a fair-value-based method. This
Statement, if approved, will be effective for awards that are granted, modified,
or settled in fiscal years beginning after a) December 15, 2004 for public
entities and nonpublic entities that used the fair-value-based method of
accounting under the original provisions of Statement 123 for recognition or pro
forma disclosure purposes and b) December 15, 2005 for all other nonpublic
entities. Earlier application is encouraged provided that financial statements
for those earlier years have not yet been issued. Retrospective application of
this Statement is not permitted. The adoption of this Statement, if approved,
could have an impact on the Company's financial position or results of
operations.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
Note 3 - 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.
Six Months Ended June 30,
-------------------------
2004 2003
---- ----
Net income, as reported ......................................................... $ 136,391 $ 63,292
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ................................... (10,820) (12,263)
-------------- ----------
Pro forma net income ............................................................ $ 125,571 $ 51,029
============== ==========
Earnings per share:
Basic - as reported .......................................................... $ 0.24 $ 0.11
============== ==========
Basic - pro forma ............................................................ $ 0.22 $ 0.09
============== ==========
Diluted - as reported ........................................................ $ 0.23 $ 0.11
============== ==========
Diluted - pro forma .......................................................... $ 0.22 $ 0.09
============== ==========
7
REGIONAL BANKSHARES, INC.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Stock-Based Compensation - continued
Three Months Ended June 30,
---------------------------
2004 2003
---- ----
Net income, as reported ......................................................... $ 104,468 $ 23,842
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ................................... (5,410) (6,131)
-------------- ----------
Pro forma net income ............................................................ $ 99,058 $ 17,711
============== ==========
Earnings per share:
Basic - as reported .......................................................... $ 0.18 $ 0.04
============== ==========
Basic - pro forma ............................................................ $ 0.17 $ 0.03
============== ==========
Diluted - as reported ........................................................ $ 0.18 $ 0.04
============== ==========
Diluted - pro forma .......................................................... $ 0.17 $ 0.03
============== ==========
Note 4 - Earnings Per Share
A reconciliation of the numerators and denominators used to calculate basic and
diluted earnings per share are as follows:
Six Months Ended June 30, 2004
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $136,391 568,402 $ 0.24
========
Effect of dilutive securities
Stock options and warrants ....................................... - 14,668
-------- ------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $136,391 583,070 $ 0.23
======== ======= ========
Six Months Ended June 30, 2003
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............................ $63,292 564,227 $ 0.11
========
Effect of dilutive securities
Stock options and warrants ......................................... - 17,599
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $63,292 581,826 $ 0.11
======= ======= ========
8
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Earnings Per Share - continued
Three Months Ended June 30, 2004
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $104,468 569,484 $ 0.18
========
Effect of dilutive securities
Stock options and warrants ....................................... - 14,384
-------- ------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $104,468 583,868 $ 0.18
======== ======= ========
Three Months Ended June 30, 2003
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............................ $23,842 564,778 $ 0.04
========
Effect of dilutive securities
Stock options and warrants ......................................... - 17,428
------- ------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $23,842 582,206 $ 0.04
======= ======= ========
Note 5 - 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 six month periods ended June 30, 2004
and 2003:
Six Months Ended June 30, 2004
------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................ $(64,112) $ 22,809 $(41,303)
Plus: reclassification adjustment for gains (losses)
realized in net income ..................................................... - - -
-------- -------- --------
Net unrealized gains (losses) on securities ................................ (64,112) 22,809 (41,303)
-------- -------- --------
Other comprehensive income .................................................... $(64,112) $ 22,809 $(41,303)
======== ======== ========
9
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 - Comprehensive Income - continued
Six Months Ended June 30, 2003
------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period .................... $ 8,994 $(3,328) $ 5,666
Plus: reclassification adjustment for gains (losses)
realized in net income ......................................................... - - -
------- ------- -------
Net unrealized gains (losses) on securities .................................... 8,994 (3,328) 5,666
------- ------- -------
Other comprehensive income ........................................................ $ 8,994 $(3,328) $ 5,666
======= ======= =======
Three Months Ended June 30, 2004
--------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................ $(86,010) $ 30,911 $(55,099)
Plus: reclassification adjustment for gains (losses)
realized in net income ..................................................... - - -
-------- -------- --------
Net unrealized gains (losses) on securities ................................ (86,010) 30,911 (55,099)
-------- -------- --------
Other comprehensive income .................................................... $(86,010) $ 30,911 $(55,099)
======== ======== ========
Three Months Ended June 30, 2003
--------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period .................... $15,345 $(5,678) $ 9,667
Plus: reclassification adjustment for gains (losses)
realized in net income ......................................................... - - -
------- ------- -------
Net unrealized gains (losses) on securities .................................... 15,345 (5,678) 9,667
------- ------- -------
Other comprehensive income ........................................................ $15,345 $(5,678) $ 9,667
======= ======= =======
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 our financial condition as of June 30, 2004
compared to December 31, 2003, and the results of operations for the three and
six months ended June 30, 2004, compared to the three and six months ended June
30, 2003. These comments should be read in conjunction with our condensed
financial statements and accompanying notes 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, 2003. 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 our management, as well as assumptions made by and information
currently available to our 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 six months ended June 30, 2004, net interest income increased $290,252,
or 30.57%, to $1,239,767 as compared to $949,515 for the same period in 2003.
Interest income from loans, including fees, increased $265,773, or 21.23%, from
the six months ended June 30, 2003 to the comparable period in 2004, as we
continued to experience growth in our loan portfolio. Interest expense for the
six months ended June 30, 2004 was $326,898 as compared to $359,485 for the same
period in 2003. Although interest bearing accounts such as savings accounts and
certificates of deposit increased for the six months ended June 30, 2004, rates
being paid on these accounts were lower due to a declining interest rate
environment when compared to the same period ended June 30, 2003, resulting in a
decrease in interest expense. The net interest margin realized on earning assets
increased from 4.01% for the six months ended June 30, 2003 to 4.59% for the
same period in 2004. The interest rate spread increased by 24 basis points from
4.17% at June 30, 2003 to 4.41% at June 30, 2004.
For the quarter ended June 30, 2004, net interest income totaled $657,904, an
increase of $168,328, or 34.38%, when compared to the same quarter ended June
30, 2003. Interest income totaling $794,495 was generated from loans, including
fees, during the quarter ended June 30, 2004, as compared to $645,166 during the
comparable period in 2003. These changes also resulted from growth in the amount
of earning assets as well as supporting liabilities coupled with the effects of
a lower interest rate environment. Interest expense on deposit accounts was
$152,068 for the quarter ended June 30, 2004, as compared to $184,463 for the
same period in 2003. The net interest margin realized on earning assets was
4.73% for the quarter ended June 30, 2004, as compared to 3.82% during the same
period in 2003. The interest rate spread was 4.55% for the quarter ended June
30, 2004, as compared to 4.00% for the quarter ended June 30, 2003.
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 loan losses at an
adequate level to reflect the losses inherent in the loan portfolio. For the six
months ended June 30, 2004, the provision charged to expense was $55,000, as
compared to $52,000 in the same period a year earlier. Management continues to
fund the allowance for loan losses at a level believed to be adequate to match
the growth in the loan portfolio. For the quarter ended June 30, 2004, the
provision charged to expense was $30,000, as compared to $25,000 for the same
period in 2003. The allowance represents 0.99% and 1.01% of gross loans at June
30, 2004 and 2003, respectively. 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, our capital.
11
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Noninterest Income
Noninterest income during the six months ended June 30, 2004 was $259,116, an
increase of $10,933 from $248,183 during the comparable period in 2003. The
increase is primarily a result of increased service charges which totaled
$138,374 for the six months ended June 30, 2004 as compared to $102,738 in the
same period in 2003. Residential mortgage origination fees decreased $15,043 as
compared to the six months ended June 30, 2003. This decrease is attributable to
a decline in consumer refinancing activity. Brokerage fee commissions declined
from $58,706 for the six months ended June 30, 2003 to $45,000 for the six
months ended June 30, 2004. The decline is attributable to changes in the
investment market due to a low interest rate environment.
For the quarter ended June 30, 2004, noninterest income was $140,975, an
increase of $619, or 0.44% from the same period ended June 30, 2003. The largest
component of noninterest income was service charges on deposit accounts, which
totaled $75,783 for the quarter ended June 30, 2004, as compared to $52,777 for
the quarter ended June 30, 2003. Residential mortgage origination fees were
$20,226 for the quarter ended June 30, 2004, as compared to $35,221 for the same
quarter of 2003. This decline from the previous year is due to a decline in
residential refinancing. Income from brokerage fee commissions totaled $24,292
for the quarter ended June 30, 2004, a decrease from $39,715 for the quarter
ended June 30, 2003. This is mainly due to changes in the investment market due
to a low interest rate environment.
Noninterest Expense
Total noninterest expense for the six months ended June 30, 2004 was $1,227,388,
which was 17.42% higher than the $1,045,234 amount for the six months ended June
30, 2003. The largest category, salaries and employee benefits, increased from
$579,513 for the six months ended June 30, 2003 to $649,148 for the six months
ended June 30, 2004. The increase is attributable to normal pay increases and
the hiring of additional staff to meet the needs associated with the growth of
the Bank. Net occupancy expense increased from $61,842 to $86,579 for the six
months ended June 30, 2004. There was also an increase of $16,204 in furniture
and fixtures expense when compared to the previous year. Both the increase in
net occupancy expense and furniture and fixtures expense are due to the addition
of an Operations center in April 2003 and the opening of our McBee branch in May
2003.
For the quarter ended June 30, 2004, noninterest expense increased $35,969, or
6.34% as compared to the same period ended June 30, 2003. The largest category,
salaries and employee benefits, decreased from $317,861 for the quarter ended
June 30, 2003 to $304,561 for the quarter ended June 30, 2004.
Income Taxes
The income tax expense for the six months ended June 30, 2004 was $80,104, an
increase of $42,932or 115.49% as compared to the same period ended June 30,
2003. This is the result of an increase in income before taxes. The effective
tax rate was 37.00% for the six months ended June 30, 2004 and 2003. The
effective tax rate was 37.00% the quarters ended June 30, 2004 and 2003.
Net Income
The combination of the above factors resulted in net income for the six months
ended June 30, 2004 of $136,391 as compared to a net income of $63,292 for the
same period in 2003. The net income before taxes of $216,495 was partially
offset by the income tax expense of $80,104 during the six months ended June 30,
2004. The net income before taxes for the same period in 2003 was $100,464,
which was partially offset by the income tax expense of $37,172. For the quarter
ended June 30, 2004, net income was $104,468, as compared to net income of
$23,842 for the same period in 2003.
12
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Financial Condition
Assets and Liabilities
During the first six months of 2004, total assets increased $3,698,229, or
6.44%, when compared to December 31, 2003. The primary source of growth in
assets was in loans, which increased $4,592,372, or 9.52%, during the first six
months of 2004. Total deposits also increased $3,684,344, or 7.30%, from
$50,439,904 at December 31, 2003 to $54,243,742 at June 30, 2004. Other time
deposits increased $1,105,186, or 6.84%, during the first six months of 2004.
Savings deposits increased $1,820,654 during the first six months of 2004.
Investment Securities
Investment securities increased from $2,509,502 at December 31, 2003 to
$3,838,452 at June 30, 2004. All of the Bank's marketable investment securities
were designated as available-for-sale at June 30, 2004.
Loans
We continued our trend of loan growth during the first six months of 2004. The
increase in loans was attributable to the normal growth of the Bank. Net loans
increased $4,551,028, or 9.52%, during the period. As shown below, the main
component of growth in the loan portfolio was real estate - mortgage loans which
increased 23.42%, or $7,373,409, from December 31, 2003 to June 30, 2004.
Balances within the major loans receivable categories as of June 30, 2004 and
December 31, 2003 are as follows:
June 30, December 31,
2004 2003
---- ----
Real estate - construction ............... $ 3,200,537 $ 3,898,644
Real estate - mortgage ................... 38,854,841 31,481,432
Commercial and industrial ................ 5,001,465 6,925,789
Consumer and other ....................... 5,798,317 5,956,923
----------- -----------
$52,855,160 $48,262,788
=========== ===========
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
June 30, December 31,
2004 2003
---- ----
Loans: Nonaccrual loans ................................ $ 6,647 $ 10,884
Accruing loans more than 90 days past due .............. $ 2,075 $ 7,874
Loans identified by the internal review mechanism:
Criticized ........................................... $356,948 $449,876
Classified ........................................... $ 7,983 $ 17,009
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.
13
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Allowance for Loan Losses
Activity in the Allowance for Loan Losses is as follows:
Six Months Ended June 30,
-------------------------
2004 2003
---- ----
Balance, January 1, .......................................................... $ 482,875 $ 368,656
Provisions for loan losses for the period .................................... 55,000 52,000
Net loans (charged-off) recovered for the period ............................. (13,656) (1,683)
------------ ------------
Balance, end of period ....................................................... $ 524,219 $ 418,973
============ ============
Gross loans outstanding, end of period ....................................... $ 52,855,160 $ 41,360,963
Allowance for loan losses to loans outstanding ............................... 0.99% 1.01%
Deposits
During the first six months of 2004, total deposits increased by $3,684,344, or
7.30% from December 31, 2003. This increase was due to the normal growth of the
Bank. The largest increase was in savings deposits, which increased $1,820,654,
or 12.57% from December 31, 2003. The increase was attributable to the opening
of new accounts during the period. Expressed in percentages, noninterest bearing
deposits increased 7.82% and interest bearing deposits increased 7.22%.
Balances within the major deposit categories as of June 30, 2004 and December
31, 2003 are as follows:
June 30, December 31,
2004 2003
---- ----
Noninterest-bearing demand deposits ................................... $ 7,513,817 $ 6,968,579
Interest-bearing demand deposits ...................................... 6,785,109 5,283,574
Savings deposits ...................................................... 16,304,971 14,484,317
Time deposits $100,000 and over ....................................... 6,271,493 7,559,762
Other time deposits ................................................... 17,248,858 16,143,672
----------- -----------
$54,124,248 $50,439,904
=========== ===========
Liquidity
We meet our liquidity needs through scheduled maturities of loans and
investments and through pricing policies to attract interest-bearing deposit
accounts. The level of liquidity is measured by the loan-to-total borrowed funds
(which includes deposits) ratio, which was at 94.18% at June 30, 2004 and 92.03%
at December 31, 2003.
Securities available-for-sale, which totaled $3,624,499 at June 30, 2004, serve
as a ready source of liquidity. We also have lines of credit available with
correspondent banks to purchase federal funds for periods from one to seven
days. At June 30, 2004, unused lines of credit totaled $2,750,000. We also have
a line of credit to borrow funds from the Federal Home Loan Bank of Atlanta up
to 10% of the Bank's total assets, which gave us the ability to borrow up to
$6,110,000 as of June 30, 2004. As of June 30, 2004, we have $2,000,000 in
borrowings against this line.
14
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Off-Balance Sheet Risk
Through its operations, the Bank has made contractual commitments to extend
credit in the ordinary course of its business activities. These commitments are
legally binding agreements to lend money to the Bank's customers at
predetermined interest rates for a specified period of time. At June 30, 2004,
the Bank had issued commitments to extend credit of $6,603,055 and $45,000 in
standby letters of credit. Approximately $5,608,969 of these commitments to
extend credit had variable rates.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at June 30, 2004.
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 .......... $ 15,000 $ 219,172 $ 687,448 $ 921,620 $5,681,435 $6,603,055
Standby letters of
credit .................... 25,000 - 20,000 45,000 - 45,000
---------- ---------- ---------- ---------- ---------- ----------
Total ................... $ 40,000 $ 219,172 $ 707,448 $ 966,620 $5,681,435 $6,648,055
========== ========== ========== ========== ========== ==========
Based on historical experience, many of the commitments will expire unfunded.
Accordingly, the amounts shown in the table above do not necessarily reflect the
Bank's need for funds in the periods shown.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on its credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate.
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, 2003 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 2003 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.
15
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Capital Resources
Total shareholders' equity increased from $4,727,896 at December 31, 2003 to
$4,860,984 at June 30, 2004. The increase is due to net income for the period of
$136,391, a negative change in the fair value of securities available-for-sale
of $41,303, and the exercise of warrants of $38,000.
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 points above
the minimum. The Bank exceeded its minimum regulatory capital ratios as of June
30, 2004 as well as the ratios to be considered "well capitalized." Because it
has assets of less than $150 million, the Company's capital adequacy is measured
by the Bank's capital adequacy.
The following table summarizes the Bank's risk-based capital at June 30, 2004:
Shareholders' equity ....................................... $ 4,916,027
Less: intangibles ........................................ -
-----------
Tier 1 capital ........................................... 4,916,027
Plus: allowance for loan losses (1) ...................... 524,219
-----------
Total capital ............................................ $ 5,440,246
===========
Risk-weighted assets ..................................... $54,574,389
===========
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ................. 9.01%
Total capital (to risk-weighted assets) .................. 9.97%
Tier 1 capital (to total average assets) ................. 8.29%
(1) Limited to 1.25% of risk-weighted assets
16
REGIONAL BANKSHARES, INC.
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).
17
REGIONAL BANKSHARES, INC.
Part II - Other Information
Item 2. Changes in Securities and Small Business Issuer Purchases of Securities
On June 14, 2004, the Company issued 1,300 shares of its common stock to a
director for $13,000 upon the exercise of warrants. Issuance of the shares was
exempt from registration under Section 4(2) of the Securities Act of 1933
because no public offering was involved.
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 2004, we held our annual meeting of shareholders for the purpose of
electing three directors to each serve a three-year term.
The three nominees for directors each received the number of affirmative votes
of shareholders required for such nominee's election as follows:
Votes For Votes Withheld
Francine P. Bachman 356,533 200
T. James Bell, Jr., MD 356,533 200
Peter C. Coggeshall, Jr. 356,533 200
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.
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.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K during the
quarter ended June 30, 2004.
18
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: August 12, 2004 /s/ CURTIS A. TYNER
--------------- -------------------------------------------
Curtis A. Tyner, President,
Chief Executive Officer and Chief Financial
Officer
19
EXHIBIT INDEX
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.
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.
20