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 September 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 October 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 - September 30, 2004 and December 31, 2003.................................3
Condensed Consolidated Statements of Income - Nine months ended September 30, 2004 and 2003
and Three months ended September 30, 2004 and 2003.............................................................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Nine months ended September 30, 2004 and 2003..................................................................5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 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..........................................................................................16
PART II. OTHER INFORMATION
Item 6. Exhibits ........................................................................................................17
2
REGIONAL BANKSHARES, INC.
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, December 31,
2004 2003
---- ----
(Unaudited)
Assets:
Cash and cash equivalents:
Cash and due from banks ......................................................... $ 2,453,267 $ 1,413,904
Federal funds sold .............................................................. 2,161,889 2,371,780
------------ ------------
Total cash and cash equivalents ............................................... 4,615,156 3,785,684
------------ ------------
Securities available-for-sale ................................................... 3,626,863 2,344,649
Nonmarketable equity securities ................................................. 213,953 164,853
------------ ------------
Total investment securities ................................................... 3,840,816 2,509,502
------------ ------------
Loans receivable ..................................................................... 53,464,110 48,262,788
Less allowance for loan losses ....................................................... (562,974) (482,875)
------------ ------------
Loans, net .................................................................... 52,901,136 47,779,913
------------ ------------
Premises and equipment, net .......................................................... 2,457,730 2,514,985
Accrued interest receivable .......................................................... 237,834 190,352
Other assets ......................................................................... 528,866 626,061
------------ ------------
Total assets .................................................................. $ 64,581,538 $ 57,406,497
============ ============
Liabilities:
Deposits:
Noninterest-bearing ............................................................... $ 6,910,496 $ 6,968,579
Interest-bearing .................................................................. 6,724,758 5,283,574
Savings ........................................................................... 18,348,776 14,484,317
Time deposits $100,000 and over ................................................... 5,764,461 7,559,762
Other time deposits ............................................................... 18,416,564 16,143,672
------------ ------------
Total deposits ................................................................ 56,165,055 50,439,904
------------ ------------
Note payable Bankers Bank ............................................................ 1,000,000 -
Advances from Federal Home Loan Bank ................................................. 2,250,000 2,000,000
Accrued interest payable ............................................................. 99,391 136,441
Other liabilities .................................................................... 58,157 102,256
------------ ------------
Total liabilities ............................................................. 59,572,603 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
September 30, 2004 and December 31, 2003, respectively .......................... 570,570 566,770
Capital surplus ................................................................... 5,065,971 5,031,771
Retained earnings (deficit) ....................................................... (614,856) (856,905)
Accumulated other comprehensive income (loss) ..................................... (12,750) (13,740)
------------ ------------
Total shareholders' equity .................................................... 5,008,935 4,727,896
------------ ------------
Total liabilities and shareholders' equity .................................... $ 64,581,538 $ 57,406,497
============ ============
3
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Loans, including fees ............................... $2,354,315 $1,933,737 $ 836,698 $ 681,893
Investment securities
Taxable ........................................... 60,482 51,883 23,298 15,068
Nonmarketable equity securities ................... 3,518 5,570 830 1,859
Federal funds sold ................................ 16,560 21,414 7,384 4,785
---------- ---------- ---------- ----------
Total ........................................... 2,434,875 2,012,604 868,210 703,605
---------- ---------- ---------- ----------
Interest expense:
Time deposits $100,000 and over ..................... 92,801 140,385 28,550 45,900
Other deposits ...................................... 399,694 398,426 147,610 135,037
Other interest expense .............................. 18,566 1,678 8,004 67
---------- ---------- ---------- ----------
Total ........................................... 511,061 540,489 184,164 181,004
---------- ---------- ---------- ----------
Net interest income .................................... 1,923,814 1,472,115 684,046 522,601
Provision for loan losses .............................. 100,000 96,000 45,000 44,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ......................................... 1,823,814 1,376,115 639,046 478,601
Other income:
Service charges on deposit accounts ................. 212,757 164,188 74,383 61,449
Residential mortgage origination fees ............... 68,605 83,490 31,248 31,088
Brokerage fee commissions ........................... 74,949 90,295 29,949 31,590
Credit life insurance commissions ................... 2,938 4,015 412 2,814
Other income ........................................ 53,606 49,959 17,749 16,822
---------- ---------- ---------- ----------
Total ........................................... 412,855 391,947 153,741 143,763
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits ...................... 971,984 890,563 322,836 311,050
Net occupancy expense ............................... 131,407 101,630 44,828 39,787
Furniture and fixture expense ....................... 126,153 103,187 41,563 34,700
Other operating expenses ............................ 623,754 536,474 216,682 201,082
---------- ---------- ---------- ----------
Total ........................................... 1,853,298 1,631,854 625,909 586,619
---------- ---------- ---------- ----------
Income before income taxes ............................. 383,371 136,208 166,878 35,745
Income tax expense ..................................... 141,322 50,397 61,218 13,226
---------- ---------- ---------- ----------
Net income ............................................. $ 242,049 $ 85,811 $ 105,660 $ 22,519
========== ========== ========== ==========
Earnings per share
Average shares outstanding ............................. 569,130 565,000 570,570 566,370
Basic .................................................. $ 0.43 $ 0.15 $ 0.19 $ 0.04
Diluted ................................................ $ 0.40 $ 0.15 $ 0.18 $ 0.04
4
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive Income
for the nine months ended September 30, 2004 and 2003
(Unaudited)
Accumulated
Common Stock Retained Other
------------ Capital Earnings Comprehensive
Shares Amount Surplus (Deficit) Income (Loss) Total
------ ------ ------- --------- ------------- -----
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
at $10.00 per share ..................... 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
========== ========== ========== ========== ========== ==========
Balance,
December 31, 2003 ....................... 566,770 $ 566,770 $5,031,771 $ (856,905) $ (13,740) $4,727,896
Net income
for the period .......................... 242,049 242,049
Other comprehensive income,
net of tax of $ 581 ..................... 990 990
----------
Comprehensive income ....................... 243,039
----------
Warrants exercised
at $10.00 per share ..................... 3,800 3,800 34,200 38,000
---------- ---------- ---------- ---------- ---------- ----------
Balance,
September 30, 2004 ...................... 570,570 $ 570,570 $5,065,971 $ (614,856) $ (12,750) $5,008,935
========== ========== ========== ========== ========== ==========
5
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2004 2003
---- ----
Cash flows from operating activities:
Net income ........................................................................ $ 242,049 $ 85,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................................. 147,059 104,647
Provision for loan losses ..................................................... 100,000 96,000
Accretion and premium amortization ............................................ 6,709 4,448
Deferred income tax provision ................................................. 155,445 36,888
Increase in interest receivable ............................................... (47,482) (33,701)
Decrease in interest payable .................................................. (37,050) (61,099)
Increase in other assets ...................................................... (58,830) (28,333)
Increase (decrease) in other liabilities ...................................... (44,099) 14,818
----------- -----------
Net cash provided by operating activities ................................... 463,801 219,479
----------- -----------
Cash flows from investing activities:
Purchases of securities available-for-sale ........................................ (2,005,592) (2,526,094)
Purchase of nonmarketable equity securities ....................................... (49,100) (27,300)
Maturities of securities available-for-sale ....................................... 718,239 2,597,197
Net increase in loans made to customers ........................................... (5,221,223) (9,391,214)
Purchases of premises and equipment ............................................... (89,803) (592,531)
----------- -----------
Net cash used by investing activities ....................................... (6,642,479) (9,939,942)
----------- -----------
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts ....................................... 5,247,559 7,073,208
Net increase in certificates of deposit and other time deposits ................... 477,591 923,972
Advances from Federal Home Loan Bank .............................................. 250,000 1,000,000
Exercise of stock warrants ........................................................ 38,000 31,000
Advances from Bankers Bank ........................................................ 1,000,000 -
----------- -----------
Net cash provided by financing activities ................................... 7,013,150 9,028,180
----------- -----------
Net increase (decrease) in cash and cash equivalents ................................. 829,472 (692,283)
Cash and cash equivalents, beginning ................................................. 3,785,684 3,859,273
----------- -----------
Cash and cash equivalents, ending .................................................... $ 4,615,156 $ 3,166,991
=========== ===========
Cash paid during the period for:
Income taxes ...................................................................... $ 5,043 $ 4,275
Interest .......................................................................... $ 548,111 $ 601,588
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, 2004 and for the interim periods ended September
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 September 30, 2004, other than as described below.
In November 2003, the Emerging Issues Task Force ("EITF") reached a consensus
that certain quantitative and qualitative disclosures should be required for
debt and marketable equity securities classified as available for sale or held
to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance
sheet date but for which other-than-temporary impairment has not been
recognized. Accordingly EITF issued EITF No. 02-1, " The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
This issue addresses the meaning of other-than-temporary impairment and its
application of investments classified as either available for sale or held to
maturity under SFAS No. 115 and provides guidance determining the amount of
impairment and additional quantitative and qualitative disclosures. The guidance
for determining the amount of impairment was scheduled to be effective for
periods ending after June 15, 2004, but has been delayed indefinitely pending
implementation guidance by the FASB. The disclosure provisions of EITF No. 03-1
were effective for fiscal years ending after December 15, 2003. Adopting the
disclosure provisions of EITF No. 03-1 did not have any impact on the Company's
financial position or results of operations.
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. On October 16, 2004, the FASB delayed the effective date of this
proposal by six months and anticipates it will be effective for by the third
quarter of 2005. 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.
7
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
Nine Months Ended
September 30,
-------------
2004 2003
---- ----
Net income, as reported .......................... $ 242,049 $ 85,811
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects .... 14,458 18,394
---------- ----------
Pro forma net income ............................. $ 227,591 $ 67,417
========== ==========
Earnings per share:
Basic - as reported ........................... $ 0.43 $ 0.15
========== ==========
Basic - pro forma ............................. $ 0.40 $ 0.12
========== ==========
Diluted - as reported ......................... $ 0.41 $ 0.15
========== ==========
Diluted - pro forma ........................... $ 0.39 $ 0.12
========== ==========
Three Months Ended
September 30,
-------------
2004 2003
---- ----
Net income, as reported .......................... $ 105,660 $ 22,519
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects .... 4,819 6,131
---------- ----------
Pro forma net income ............................. $ 100,841 $ 16,388
========== ==========
Earnings per share:
Basic - as reported ........................... $ 0.19 $ 0.04
========== ==========
Basic - pro forma ............................. $ 0.18 $ 0.03
========== ==========
Diluted - as reported ......................... $ 0.18 $ 0.04
========== ==========
Diluted - pro forma ........................... $ 0.17 $ 0.03
========== ==========
8
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - 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, 2004
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $242,049 569,130 $ 0.43
========
Effect of dilutive securities
Stock options .................................................... - 14,178
-------- --------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $242,049 583,308 $ 0.40
======== ======== ========
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
======= ======= ========
9
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Earnings Per Share - continued
Three Months Ended September 30, 2004
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $105,660 570,570 $ 0.19
========
Effect of dilutive securities
Stock options .................................................... - 13,711
-------- --------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $105,660 584,281 $ 0.18
======== ======== ========
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
======= ======= ========
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 nine month periods ended September 30,
2004 and 2003:
Nine Months Ended September 30, 2004
------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period .................... $1,571 $ (581) $ 990
Plus: reclassification adjustment for gains (losses)
realized in net income ...................................................... - - -
------ ------ ------
Net unrealized gains (losses) on securities ................................. 1,571 (581) 990
------ ------ ------
Other comprehensive income ..................................................... $1,571 $ (581) $ 990
====== ====== ======
10
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 - Comprehensive Income continued
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)
======== ======== ========
Three Months Ended September 30, 2004
-------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period .................... $ 67,131 $(24,838) $ 42,293
Plus: reclassification adjustment for gains (losses)
realized in net income
-------- -------- --------
Net unrealized gains (losses) on securities ................................. 67,131 (24,838) 42,293
-------- -------- --------
Other comprehensive income ..................................................... $ 67,131 $(24,838) $ 42,293
======== ======== ========
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)
======== ======== ========
Accumulated other comprehensive income consists solely of the unrealized gain
(loss) on securities available-for-sale, net of the deferred tax effects.
11
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 September 30,
2004 compared to December 31, 2003, and the results of operations for the three
and nine months ended September 30, 2004, compared to the three and nine months
ended September 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, adequacy of our allowance for loan losses, 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," "plan,"
"intend," "project," 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, 2004, net interest income increased
$451,699 or 30.68%, to $1,923,814 as compared to $1,472,115 for the same period
in 2003. Interest income from loans, including fees, increased $420,578 or
21.74%, from the nine months ended September 30, 2003 to the comparable period
in 2004, as we continued to experience growth in our loan portfolio. Interest
expense for the nine months ended September 30, 2004 was $511,061 as compared to
$540,489 for the same period in 2003. Although interest bearing accounts such as
savings accounts and certificates of deposit increased during the nine months
ended September 30, 2004, rates being paid on these accounts were lower due to a
declining interest rate environment when compared to the same period in 2003,
resulting in a decrease in interest expense. The net interest margin realized on
earning assets increased from 4.41% for the nine months ended September 30, 2003
to 4.59% for the same period in 2004. The interest rate spread increased by 25
basis points from 4.16% at September 30, 2003 to 4.41% at September 30, 2004.
For the quarter ended September 30, 2004, net interest income totaled $684,046
an increase of $161,445 or 30.89%, when compared to the same quarter ended
September 30, 2003. Interest income totaling $836,698 was generated from loans,
including fees, during the quarter ended September 30, 2004, as compared to
$681,893 during the comparable period in 2003. Interest expense was $184,164 for
the quarter ended September 30, 2004, as compared to $181,004 for the same
period in 2003. The net interest margin realized on earning assets was 4.59% for
the quarter ended September 30, 2004, as compared to 4.36% during the same
period in 2003. The interest rate spread was 4.41% for the quarter ended
September 30, 2004, as compared to 4.13% for the quarter ended September 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 possible loan
losses at an adequate level. For the nine months ended September 30, 2004, the
provision charged to expense was $100,000 as compared to $96,000 for the nine
months ended September 30, 2003. For the quarter ended September 30, 2004, the
provision charged to expense was $45,000 as compared to $44,000 for the same
period in 2003. The allowance represents 1.05% and 1.00% of gross loans at
September 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, its capital.
12
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Noninterest Income
Noninterest income increased $20,908, or 5.33% to $412,855 for the nine months
ended September 30, 2004 as compared to the same period ended September 30,
2003. The primary source of this income was the increase in service charges on
deposit accounts of $48,569, or 29.58%, to $212,757 for the nine months ended
September 30, 2004, when compared to the same period in 2003. This increase is
attributable to an increase in deposit accounts over the two periods as well as
an increase in service charges and fees made effective May 15, 2004. In
addition, commissions generated through our brokerage services totaled $74,949
for the nine months ended September 30, 2004. Income from residential mortgage
origination fees decreased $14,885 to $68,605 when compared to the same period
in 2003. This decrease is due to the decline in mortgage refinancing.
For the quarter ended September 30, 2004, noninterest income was $153,741, an
increase of $9,978, or 6.94% over the quarter ended September 30, 2003. The
largest component of noninterest income was service charges on deposit accounts,
which totaled $74,383 for the quarter ended September 30, 2004, as compared to
$61,449 for the quarter ended September 30, 2003. This increase was due to an
overall increase in deposit accounts over the two periods as well as an increase
in service charges and fees. Income from brokerage fee commissions totaled
$29,949 for the quarter ended September 30, 2004.
Noninterest Expense
For the nine months ended September 30, 2004, noninterest expense was
$1,853,298, an increase of $221,444, or 13.57% when compared to the same period
in 2003. The largest component of noninterest expense was salaries and employee
benefits, which increased from $890,563 for the nine months ended September 30,
2003 to $971,984 for the nine months ended September 30, 2004. 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 $101,630 for the nine months ended September 30, 2003 to $131,407
for the nine months ended September 30, 2004. This increase is primarily due to
expenses associated with the new McBee Branch.
For the quarter ended September 30, 2004, noninterest expense increased $39,290,
or 6.69% as compared to the quarter ended September 30, 2003. The largest
category of noninterest expense, salaries and employee benefits, increased
$11,786 or 3.79% from the quarter ended September 30, 2003 to $322,836 for the
quarter ended September 30, 2004. As discussed earlier, this increase is
primarily attributable to annual pay raises and the hiring of additional staff.
Occupancy expense increased $5,041 from the quarter ended September 30, 2003 to
$44,828 for the quarter ended September 30, 2004. 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, 2004 was $141,322
as compared to $50,397 for the same period in 2003. The effective tax rate was
37.00% for the nine months ended September 30, 2004 and 2003. Income tax expense
was $61,218 for the quarter ended September 30, 2004 as compared to $13,226 for
the same quarter in 2003. The effective tax rate was 37.00% for the quarters
ended September 30, 2004 and 2003.
Net Income
The combination of the above factors resulted in net income for the nine months
ended September 30, 2004 of $242,049 as compared to net income of $85,811 for
the same period in 2003. The net income before taxes of $383,371 was before
income tax expense of $141,322 during the nine months ended September 30, 2004.
The net income before taxes for the same period in 2003 was $136,208, which was
partially offset by the income tax expense of $50,397. For the quarter ended
September 30, 2004, net income was $105,660, as compared to $22,519 for the same
period in 2003.
13
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Assets and Liabilities
During the first nine months of 2004, total assets increased $7,175,041, or
12.50%, when compared to December 31, 2003. The primary source of growth in
assets was in loans, which increased $5,201,322, or 10.78%, during the first
nine months of 2004. Investment securities increased $1,331,314 or 53.05% to
$3,840,816 at September 30, 2004. Total deposits also increased $5,725,151, or
11.35%, from $50,439,904 at December 31, 2003 to $56,165,055 at September 30,
2004. Savings accounts increased $3,864,459 or 26.68% from December 31, 2004 to
September 30, 2004. This increase is mainly attributable to an increase in Money
Market Accounts from new business. Interest-bearing transaction accounts also
increased from $5,283,574 at December 31, 2003 to $6,724,758 at September 30,
2004.
Investment Securities
Investment securities increased from $2,509,502 at December 31, 2003 to
$3,840,815 at September 30, 2004. This increase was mainly attributable to
management's effort to increase liquidity by increasing the size of the Bank's
investment portfolio. All of the Bank's marketable investment securities were
designated as available-for-sale at September 30, 2004.
Loans
We continued our trend of growth during the first nine months of 2004,
especially in the loan area. Net loans increased $5,121,223, or 10.71%, during
the period. As shown below, the main component of growth in the loan portfolio
was real estate-mortgage loans which increased 21.49%, or $6,764,510, from
December 31, 2003 to September 30, 2004. This was due to an increase in
commercial real estate loans. Balances within the major loans receivable
categories as of September 30, 2004 and December 31, 2003 are as follows:
September 30, December 31,
2004 2003
---- ----
Real estate - construction ............... $ 4,434,258 $ 3,898,644
Real estate - mortgage ................... 38,245,942 31,481,432
Commercial and industrial ................ 4,925,101 6,925,789
Consumer and other ....................... 5,858,809 5,956,923
----------- -----------
$53,464,110 $48,262,788
=========== ===========
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
September 30, December 31,
2004 2003
---- ----
Loans: Nonaccrual loans ........................................................... $ 21,827 $ 10,884
Accruing loans more than 90 days past due .......................................... $ 3,247 $ 7,874
Loans identified by the internal review mechanism:
Criticized ....................................................................... $425,090 $449,876
Classified ....................................................................... $ 16,511 $ 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.
14
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Allowance for Loan Losses
Nine months ended
September 30,
-------------
2004 2003
---- ----
Balance, January 1, .......................................................... $ 482,875 $ 368,656
Provisions for loan losses for the period .................................... 100,000 96,000
Net loans (charged-off) recovered for the period ............................. (19,901) (17,360)
------------ ------------
Balance, end of period ....................................................... $ 562,974 $ 447,296
============ ============
Gross loans outstanding, end of period ....................................... $ 53,464,110 $ 32,232,524
Allowance for loan losses to loans outstanding ............................... 1.05% 1.00%
Deposits
Total deposits increased $5,725,151, or 11.35%, from December 31, 2003 to
$56,165,055 at September 30, 2004. The largest change was an increase in savings
deposits, which increased $3,864,459 to $18,348,776 at September 30, 2004.
Expressed in percentages, interest-bearing deposits increased 13.30% and
noninterest bearing deposits decreased 0.83%.
Balances within the major deposit categories as of September 30, 2004 and
December 31, 2003 are as follows:
September 30, December 31,
2004 2003
---- ----
Noninterest-bearing demand deposits ................................... $ 6,910,496 $ 6,968,579
Interest-bearing demand deposits ...................................... 6,724,758 5,283,574
Savings deposits ...................................................... 18,348,776 14,484,317
Time deposits $100,000 and over ....................................... 5,764,461 7,559,762
Other time deposits ................................................... 18,416,564 16,143,672
----------- -----------
$56,165,055 $50,439,904
=========== ===========
Note Payable
On September 30, 2004 the Company executed a note with The Bankers Bank to
borrow $1,000,000. The principal balance is payable annually, based on a ten
year amortization beginning January 1, 2007. The interest rate on the note
payable is variable and set equal to the Wall Street Journal Prime, currently
4.75%. Interest is paid quarterly beginning January 1, 2005. All principal and
interest is due on September 30, 2016. The note is secured by 560,270 shares of
the common stock of Hartsville Community Bank, currently held by Regional
Bankshares, Inc. Proceeds from the note were used to provide capital to the
Bank.
Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank to us were $2,250,000 as of September
30, 2004. Of this amount, the following have scheduled maturities greater than
one year:
Maturing on Interest Rate Principal
----------- ------------- ---------
03/14/04 2.62% $750,000
09/14/06 2.91% $750,000
09/14/07 3.28% $750,000
15
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
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 89.98% at September 30, 2004
and 92.03% at December 31, 2003.
Securities available-for-sale, which totaled $3,626,863 at September 30, 2004,
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, 2004, 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 $4,208,154 at September 30, 2004. As of September 30, 2004, we had
$2,250,000 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,
2004, we had issued commitments to extend credit of $7,029,245 and standby
letters of credit of $20,000 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, 2004 is not necessarily expected to be funded.
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,
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 .......... $ 50,968 $ 196,208 $1,814,271 $2,061,447 $4,967,798 $7,029,245
Standby letters of
credit .................... 20,000 20,000 20,000
---------- ---------- ---------- ---------- ---------- ----------
Totals .................. $ 50,968 $ 216,208 $1,814,271 $2,801,447 $4,967,798 $7,049,245
========== ========== ========== ========== ========== ==========
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.
16
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
$5,008,935 at September 30, 2004. The increase is due primarily to the net
income for the period of $242,049. There was also an increase of $3,800 and
$34,200 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 includes of common shareholders'
equity, excluding the unrealized gain (loss) on available-for-sale securities,
minus certain intangible assets. Tier 2 capital includes 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, 2004 as well as the ratios to be considered
"well capitalized."
The following table summarizes the Bank's risk-based capital at September 30,
2004:
Shareholders' equity ....................................... $ 5,938,237
Less: intangibles
-----------
Tier 1 capital ........................................... 5,938,237
Plus: allowance for loan losses (1) ...................... 562,974
-----------
Total capital ............................................ $ 6,501,211
===========
Risk-weighted assets ..................................... $55,836,188
===========
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ................. 10.64%
Total capital (to risk-weighted assets) .................. 11.64%
Tier 1 capital (to total average assets) ................. 10.01%
(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 such controls and
procedures, as of the end of the period covered by this quarterly report, were
effective.
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
17
REGIONAL BANKSHARES, INC.
Part II - Other Information
Item 6. Exhibits
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.
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: November 10, 2004 By: /s/ CURTIS A. TYNER
-----------------------------------
Curtis A. Tyner, President,
Chief Executive Officer and
Chief Financial Officer
19
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.
20