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, 2005
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.
___________ shares of common stock, $1.00 par value as of July 31, 2005
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, 2005 and December 31, 2004......................................3
Condensed Consolidated Statements of Income - Six months ended June 30, 2005 and 2004
and Three months ended June 30, 2005 and 2004..................................................................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Six months ended June 30, 2005 and 2004........................................................................5
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2005 and 2004........................6
Notes to Condensed Consolidated Financial Statements..........................................................7-11
Item 2. Management's Discussion and Analysis or Plan of Operation.....................................................12-18
Item 3. Controls and Procedures..........................................................................................18
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......................................................19
Item 4. Submission of Matters to a Vote of Security Holders..............................................................19
Item 6. Exhibits and Reports on Form 8-K.................................................................................19
(a) Exhibits....................................................................................................19
2
REGIONAL BANKSHARES, INC.
Condensed Consolidated Balance Sheets
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
June 30, December 31,
2005 2004
---- ----
(Unaudited)
Assets:
Cash and cash equivalents:
Cash and due from banks ......................................................... $ 2,996,632 $ 2,201,849
Federal funds sold .............................................................. 2,671,113 6,395,757
------------ ------------
Total cash and cash equivalents ............................................... 5,667,745 8,597,606
------------ ------------
Investment securities:
Securities available-for-sale ................................................... 7,779,986 3,555,552
Nonmarketable equity securities ................................................. 492,792 446,153
------------ ------------
Total investment securities ................................................... 8,272,778 4,001,705
------------ ------------
Loans receivable .................................................................. 56,919,221 55,052,377
Less allowance for loan losses .................................................. (635,787) (589,765)
------------ ------------
Loans receivable, net ......................................................... 56,283,434 54,462,612
------------ ------------
Accrued interest receivable ....................................................... 299,416 237,244
Premises and equipment, net ....................................................... 2,805,514 2,454,548
Other assets ...................................................................... 362,794 506,686
------------ ------------
Total assets .................................................................. $ 73,691,681 $ 70,260,401
============ ============
Liabilities:
Deposits:
Noninterest-bearing ............................................................... $ 7,913,094 $ 8,280,977
Interest-bearing .................................................................. 6,520,018 5,775,786
Savings ........................................................................... 17,898,763 18,969,783
Time deposits $100,000 and over ................................................... 6,510,270 5,776,697
Other time deposits ............................................................... 21,923,947 18,887,953
------------ ------------
Total deposits ................................................................ 60,766,092 57,691,196
------------ ------------
Note payable ......................................................................... 1,050,000 1,000,000
Advances from Federal Home Loan Bank ................................................. 6,250,000 6,250,000
Accrued interest payable ............................................................. 182,756 117,773
Other liabilities .................................................................... 123,053 107,833
------------ ------------
Total liabilities ............................................................. 68,371,901 65,166,802
------------ ------------
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,
576,304 and 572,070 shares issued and outstanding at
June 30, 2005 and December 31, 2004, respectively ............................... 576,304 572,070
Capital surplus ................................................................... 5,127,579 5,079,471
Retained earnings (deficit) ....................................................... (336,187) (535,783)
Accumulated other comprehensive income (loss) ..................................... (47,916) (22,159)
------------ ------------
Total shareholders' equity .................................................... 5,319,780 5,093,599
------------ ------------
Total liabilities and shareholders' equity .................................... $ 73,691,681 $ 70,260,401
============ ============
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,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Interest income:
Loans, including fees ............................... $1,968,956 $1,517,617 $1,010,859 $ 794,495
Investment securities
Taxable ........................................... 104,857 37,184 66,009 14,906
Nonmarketable equity securities ................... 7,881 2,688 4,560 830
Federal funds sold ................................ 55,229 9,176 20,026 3,818
---------- ---------- ---------- ----------
Total ........................................... 2,136,923 1,566,665 1,101,454 814,049
---------- ---------- ---------- ----------
Interest expense:
Time deposits $100,000 and over ..................... 71,049 64,251 40,905 29,814
Other deposits ...................................... 412,671 252,085 229,139 122,254
Other interest expense .............................. 125,196 10,562 46,204 4,077
---------- ---------- ---------- ----------
Total ........................................... 608,916 326,898 316,248 156,145
---------- ---------- ---------- ----------
Net interest income .................................... 1,528,007 1,239,767 785,206 657,904
Provision for loan losses .............................. 60,000 55,000 24,000 30,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ......................................... 1,468,007 1,184,767 761,206 627,904
Other income:
Service charges on deposit accounts ................. 161,864 138,374 95,762 75,783
Residential mortgage origination fees ............... 29,014 37,358 16,131 20,226
Brokerage fee commissions ........................... 11,567 45,000 11,567 24,292
Credit life insurance commissions ................... 2,552 2,527 2,141 1,933
Other income ........................................ 43,612 35,857 19,364 18,741
---------- ---------- ---------- ----------
Total ........................................... 248,609 259,116 144,965 140,975
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits ...................... 713,606 649,148 332,479 304,561
Net occupancy expense ............................... 91,857 86,579 25,292 43,774
Furniture and fixture expense ....................... 86,627 84,590 47,097 42,657
Other operating expenses ............................ 507,708 407,071 252,090 212,064
---------- ---------- ---------- ----------
Total ........................................... 1,399,798 1,227,388 656,958 603,056
---------- ---------- ---------- ----------
Income before income taxes ............................. 316,818 216,495 249,213 165,823
Income tax expense ..................................... 117,222 80,104 92,208 61,355
---------- ---------- ---------- ----------
Net income ............................................. $ 199,596 $ 136,391 $ 157,005 $ 104,468
========== ========== ========== ==========
Earnings per share
Average shares outstanding ............................. 573,678 568,402 575,268 569,484
Net income - basic ..................................... $ 0.35 $ 0.24 $ 0.27 $ 0.18
Net income - diluted ................................... $ 0.34 $ 0.23 $ 0.27 $ 0.18
See notes to condensed consolidated financial statements.
4
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Shareholders'
Equity and Comprehensive Income
For the six months ended June 30, 2005 and 2004
(Unaudited)
Accumulated
Retained Other
Common Stock Capital Earnings Comprehensive
Shares Amount Surplus (Deficit) Income Total
------ ------ ------- --------- ------ -----
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 loss,
net of tax benefit 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
========== ========== ========== ========== ========== ==========
Balance,
December 31, 2004 ....................... 572,070 $ 572,070 $5,079,471 $ (535,783) $ (22,159) $5,093,599
Net income
for the period .......................... 199,596 199,596
Other comprehensive loss,
net of tax benefit of $15,127 ........... (25,757) (25,757)
Comprehensive
income .................................. 173,839
----------
Options exercised
at $13.00 per share .................... 3,334 3,334 40,008 43,342
Warrants exercised
at $10.00 per share ..................... 900 900 8,100 9,000
---------- ---------- ---------- ---------- ---------- ----------
Balance,
June 30, 2005 ........................... 576,304 $ 576,304 $5,127,579 $ (336,187) $ (47,916) $5,319,780
========== ========== ========== ========== ========== ==========
See notes to condensed consolidated financial statements.
5
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
2005 2004
---- ----
Cash flows from operating activities:
Net income .............................................................................. $ 199,596 $ 136,391
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................................................... 96,969 86,439
Provision for possible loan losses .................................................. 60,000 55,000
Accretion and premium amortization .................................................. 2,746 4,032
Deferred income tax provision ....................................................... 115,918 92,405
Increase in interest receivable ..................................................... (62,172) (908)
Increase (decrease) in interest payable ............................................. 64,983 (34,390)
Decrease in other assets ............................................................ 43,101 59,526
Increase (decrease) in other liabilities ............................................ 15,220 (84,813)
Increase in gain on sale/paydown of securities ...................................... 2,325 3,267
----------- -----------
Net cash provided by operating activities ......................................... 538,686 316,949
----------- -----------
Cash flows from investing activities:
Purchases of securities available-for-sale .............................................. (5,150,184) (2,005,592)
Maturities of securities available-for-sale ............................................. 879,795 652,883
Purchase of nonmarketable equity securities ............................................. (46,639) (49,100)
Net increase in loans made to customers ................................................. (1,880,822) (4,606,028)
Purchases of premises and equipment ..................................................... (447,935) (47,018)
----------- -----------
Net cash used by investing activities ............................................. (6,645,785) (6,054,855)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, interest-bearing transaction
accounts and savings accounts ......................................................... (694,671) 3,867,427
Net increase (decrease) in certificates of deposit and other time deposits .............. 3,769,567 (183,083)
Advances from Note Payable Bankers Bank ................................................. 250,000 -
Repayments of Note Payable Bankers Bank ................................................. (200,000) -
Proceeds from exercise of options ....................................................... 43,342 -
Proceeds from exercise of warrants ...................................................... 9,000 38,000
----------- -----------
Net cash provided by financing activities ......................................... 3,177,238 3,722,344
----------- -----------
Net decrease in cash and cash equivalents .................................................. (2,929,861) (2,015,562)
Cash and cash equivalents, beginning ....................................................... 8,597,606 3,785,684
----------- -----------
Cash and cash equivalents, ending .......................................................... $ 5,667,745 $ 1,770,122
=========== ===========
Cash paid during the period for:
Income taxes ............................................................................ $ 7,930 $ 3,050
Interest ................................................................................ $ 543,933 $ 361,288
See notes to condensed consolidated financial statements.
6
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared in accordance with the
requirements for interim financial statements and, accordingly, they are
condensed and omit disclosures which would substantially duplicate those
contained in the most recent annual report on Form 10-KSB. The financial
statements, as of June 30, 2005 and for the interim periods ended June 30, 2005
and 2004, 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, 2004 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, 2004.
Note 2 - Recently Issued Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that affect
accounting, reporting, and disclosure of financial information by the Company:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123(R)"). Statement No.123(R) covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No. 123(R) will require companies to measure
all employee stock-based compensation awards using a fair value method and
record such expense in their financial statements. In addition, the adoption of
SFAS No. 123(R) requires additional accounting and disclosure related to the
income tax and cash flow effects resulting from share-based payment
arrangements. SFAS No. 123(R) is effective for small business issuers beginning
with the first interim or annual reporting period of a company's first fiscal
year beginning on or after December 15, 2005.
In April 2005, the Securities and Exchange Commission's Office of the Chief
Accountant and its Division of Corporation Finance released Staff Accounting
Bulletin (SAB) No.107. SAB 107 provides interpretive guidance related to the
interaction between Statement No.123 and certain SEC rules and regulations, as
well as the staff's views regarding the valuation of share-based payment
arrangements for public companies. SAB 107 also reminds public companies of the
importance of including disclosures within filings made with the SEC relating to
the accounting for share-based payment transactions, particularly during the
transition to Statement No.123. The Company is currently evaluating the impact
that the adoption of SFAS No. 123 will have on its financial position, results
of operations and cash flows. The cumulative effect of adoption, if any, will be
measured and recognized in the statement of income on the date of adoption.
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 the EITF issued EITF No. 03-1, "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 to investments classified as either available for sale or held to
maturity under SFAS No. 115 and provides guidance on quantitative and
qualitative disclosures. The disclosure requirements of EITF No. 03-1 are
effective for annual financial statements for fiscal years ending after June 15,
2004. The effective date for the measurement and recognition guidance of EITF
No. 03-1 has been delayed. The FASB staff has issued a proposed Board-directed
FASB Staff Position ("FSP"), FSP EITF 03-1-a, "Implementation Guidance for the
Application of Paragraph 16 of Issue No. 03-1." The proposed FSP would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under the measurement and recognition
requirements of EITF No. 03-1. The delay of the effective date for the
measurement and recognition requirements of EITF No. 03-1 will be superseded
concurrent with the final issuance of FSP EITF 03-1-a. Adopting the disclosure
provisions of EITF No. 03-1 did not have any 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 and earnings per share if
the fair value recognition provisions of FASB SFAS No. 123, Accounting for
Stock-Based Compensation, had been applied to the Option Plan and warrants.
Six Months Ended June 30,
-------------------------
2005 2004
---- ----
Net income, as reported ........................................................ $ 199,596 $ 136,391
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects .................................. (66,164) (10,820)
-------------- -----------
Pro forma net income ........................................................... $ 133,432 $ 125,571
============== ===========
Earnings per share:
Basic - as reported ......................................................... $ 0.35 $ 0.24
============== ===========
Basic - pro forma ........................................................... $ 0.23 $ 0.22
============== ===========
Diluted - as reported ....................................................... $ 0.34 $ 0.23
============== ===========
Diluted - pro forma ......................................................... $ 0.23 $ 0.22
============== ===========
8
REGIONAL BANKSHARES, INC.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Stock-Based Compensation - continued
Three Months Ended June 30,
---------------------------
2005 2004
---- ----
Net income, as reported ....................................................... $ 157,005 $ 104,468
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ................................. (30,672) (5,410)
--------------- -----------
Pro forma net income .......................................................... $ 126,333 $ 99,058
=============== ===========
Earnings per share:
Basic - as reported ........................................................ $ 0.27 $ 0.18
=============== ===========
Basic - pro forma .......................................................... $ 0.22 $ 0.17
=============== ===========
Diluted - as reported ...................................................... $ 0.27 $ 0.18
=============== ===========
Diluted - pro forma ........................................................ $ 0.22 $ 0.17
=============== ===========
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, 2005
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $199,596 573,678 $0.35
=====
Effect of dilutive securities
Stock options and warrants ....................................... 13,737
-------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $199,596 587,415 $0.34
======== ======== =====
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
======== ======== =====
9
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Earnings Per Share - continued
Three Months Ended June 30, 2005
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $157,005 575,268 $0.27
=====
Effect of dilutive securities
Stock options and warrants ....................................... 9,598
-------- --------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $157,003 584,866 $0.27
======== ======== =====
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
======== ======== =====
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, 2005
and 2004:
Six Months Ended June 30, 2005
------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................ $(40,884) $ 15,127 $(25,757)
Plus: reclassification adjustment for gains (losses)
realized in net income ..................................................... - - -
-------- -------- --------
Net unrealized gains (losses) on securities ................................ (40,884) 15,127 (25,757)
-------- -------- --------
Other comprehensive income (loss) ............................................. $(40,884) $ 15,127 $(25,757)
======== ======== ========
10
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 - Comprehensive Income - continued
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 (loss) ............................................. $(64,112) $ 22,809 $(41,303)
======== ======== ========
Three Months Ended June 30, 2005
--------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period .................... $11,881 $(4,396) $ 7,485
Plus: reclassification adjustment for gains (losses)
realized in net income ......................................................... - - -
------- ------- -------
Net unrealized gains (losses) on securities .................................... 11,881 (4,396) 7,485
------- ------- -------
Other comprehensive income (loss) ................................................. $11,881 $(4,396) $ 7,485
======= ======= =======
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 (loss) ............................................. $(86,010) $ 30,911 $(55,099)
======== ======== ========
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 June 30, 2005
compared to December 31, 2004, and the results of operations for the three and
six months ended June 30, 2005, compared to the three and six months ended June
30, 2004. 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, 2004. 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, 2005, net interest income increased $288,240,
or 23.25%, to $1,528,007 as compared to $1,239,767 for the same period in 2004.
Interest income from loans, including fees, increased $451,339, or 29.74%, from
the six months ended June 30, 2004 to the comparable period in 2005, as we
continued to experience growth in our loan portfolio. Interest expense for the
six months ended June 30, 2005 was $608,916 as compared to $326,898 for the same
period in 2004. The increase in interest expense was due to rising interest
rates, a change in the bank's deposit mix to include more certificates of
deposit, as well as term borrowings obtained by the bank. The increase in
certificates of deposit and term borrowings were to protect the bank from
interest rate risk in a rising rate environment. The net interest margin
realized on earning assets increased from 4.59% for the six months ended June
30, 2004 to 4.68% for the same period in 2005. The interest rate spread
decreased slightly from 4.41% at June 30, 2004 to 4.40% at June 30, 2005.
For the quarter ended June 30, 2005, net interest income totaled $785,206, an
increase of $127,302, or 19.35%, when compared to the same quarter ended June
30, 2004. Interest income totaling $1,010,859 was generated from loans,
including fees, during the quarter ended June 30, 2005, as compared to $794,495
during the comparable period in 2004. These changes also resulted from growth in
the amount of earning assets as well as supporting liabilities coupled with the
effects of a higher interest rate environment. Interest expense on deposit
accounts was $316,247 for the quarter ended June 30, 2005, as compared to
$152,068 for the same period in 2004. The net interest margin realized on
earning assets was 4.71% for the quarter ended June 30, 2005, as compared to
4.73% during the same period in 2004. The interest rate spread was 4.43% for the
quarter ended June 30, 2005, as compared to 4.55% for the quarter ended June 30,
2004.
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, 2005, the provision charged to expense was $60,000, as
compared to $55,000 in the same period a year earlier. For the quarter ended
June 30, 2005, the provision charged to expense was $24,000, as compared to
$30,000 for the same period in 2004. The allowance represented 1.12% and 0.99%
of gross loans at June 30, 2005 and 2004, respectively. Management continues to
fund the allowance for loan losses at a level believed to be adequate to match
the growth in the loan portfolio. 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.
12
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, 2005 was $248,609, a
decrease of $10,507 from $259,116 during the comparable period in 2004. Service
charges totaled $161,864 for the six months ended June 30, 2005 as compared to
$138,374 in the same period in 2004. Residential mortgage origination fees
decreased $8,344 as compared to the six months ended June 30, 2004. This
decrease is attributable to a decline in consumer refinancing activity.
Brokerage fee commissions declined from $45,000 for the six months ended June
30, 2004 to $11,567 for the six months ended June 30, 2005. The decline is
attributable to a transition in brokerage personnel.
For the quarter ended June 30, 2005, noninterest income was $144,965, an
increase of $3,990, or 2.83% from the same period ended June 30, 2004. The
largest component of noninterest income was service charges on deposit accounts,
which totaled $95,762 for the quarter ended June 30, 2005, as compared to
$75,783 for the quarter ended June 30, 2004. Residential mortgage origination
fees were $16,131 for the quarter ended June 30, 2005 as compared with $20,226
for the 2004 quarter. This decline from the previous year is due to a decline in
residential refinancing. Income from brokerage fee commissions totaled $11,567
for the quarter ended June 30, 2005, a decrease from $24,292 for the quarter
ended June 30, 2004. This is mainly due to changes in brokerage personnel.
Noninterest Expense
Total noninterest expense for the six months ended June 30, 2005 was $1,399,798,
which was 14.05% higher than the $1,227,388 for the six months ended June 30,
2004. The largest category, salaries and employee benefits, increased from
$649,148 for the six months ended June 30, 2004 to $713,606 for the six months
ended June 30, 2005. 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 $86,579 to $91,857 for the six
months ended June 30, 2005. There was also an increase of $2,037 in furniture
and fixtures expense when compared to the previous year. The Company began the
process of forming a new community bank in Bluffton, South Carolina during the
fall of 2004. However, during the second quarter of 2005, the Company decided to
discontinue those efforts. The local organizers in Bluffton reimbursed the
Company for the majority of the expenses incurred during the process. However,
noninterest expense for the six months ended June 20, 2005 included $41,651
associated with the proposed bank.
For the quarter ended June 30, 2005, noninterest expense increased $53,902, or
8.94% as compared to the same period ended June 30, 2004. The largest category,
salaries and employee benefits, increased from $304,561 for the quarter ended
June 30, 2004 to $332,479 for the quarter ended June 30, 2005.
Income Taxes
The income tax expense for the six months ended June 30, 2005 was $117,222, an
increase of $37,118 or 46.34% as compared to the same period ended June 30,
2004. This is the result of an increase in income before taxes. The effective
tax rate was 37% for the six months ended June 30, 2005 and 2004. The effective
tax rate was 37% the quarters ended June 30, 2005 and 2004.
Net Income
The combination of the above factors resulted in net income for the six months
ended June 30, 2005 of $199,596 as compared to a net income of $136,391 for the
same period in 2004. For the quarter ended June 30, 2005, net income was
$157,003, as compared to net income of $104,468 for the same period in 2004.
13
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 2005, total assets increased $3,431,280, or
4.88%, when compared to December 31, 2004. Loans increased $1,866,844, or 3.39%,
during the first six months of 2005. Total deposits increased $3,074,896, or
5.33%, from $57,691,196 at December 31, 2004 to $60,766,092 at June 30, 2005.
Other time deposits increased $3,035,994, or 16.07%, during the first six months
of 2005. Savings deposits decreased $1,071,020 during the first six months of
2005.
Investment Securities
Investment securities increased from $3,555,552 at December 31, 2004 to
$7,779,986 at June 30, 2005. The increase is due to the purchase of short-term
securities in an effort to further improve the Bank's yield on earning assets.
All of the Bank's marketable investment securities were designated as
available-for-sale at June 30, 2005.
Loans
We continued our trend of loan growth during the first six months of 2005. The
increase in loans was attributable to the normal growth of the Bank. Net loans
increased $1,820,822, or 3.34%, during the period. As shown below, the main
component of growth in the loan portfolio was real estate - mortgage loans which
increased 2.16%, or $843,163, from December 31, 2004 to June 30, 2005. Balances
within the major loans receivable categories as of June 30, 2005 and December
31, 2004 are as follows:
June 30, December 31,
2005 2004
---- ----
Real estate - construction ............... $ 5,620,150 $ 5,152,299
Real estate - mortgage ................... 39,819,426 38,976,263
Commercial and industrial ................ 5,661,071 4,941,323
Consumer and other ....................... 5,818,574 5,982,492
----------- -----------
$56,919,221 $55,052,377
=========== ===========
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
June 30, December 31,
2005 2004
---- ----
Loans: Nonaccrual loans .............................. $ 7,907 $ 23,847
Accruing loans more than 90 days past due ............ $ 1,534 $ 2,157
Loans identified by the internal review mechanism:
Criticized ......................................... $553,026 $578,868
Classified ......................................... $ 9,762 $ 30,160
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
Activity in the Allowance for Loan Losses is as follows:
Six Months Ended June 30,
-------------------------
2005 2004
---- ----
Balance, January 1, .......................................................... $ 589,765 $ 482,875
Provisions for loan losses for the period .................................... 60,000 55,000
Net loans (charged-off) recovered for the period ............................. (13,978) (13,656)
------------ ------------
Balance, end of period ....................................................... $ 635,787 $ 524,219
============ ============
Gross loans outstanding, end of period ....................................... $ 56,919,221 $ 52,855,160
Allowance for loan losses to loans outstanding ............................... 1.12% 0.99%
Deposits
During the first six months of 2005, total deposits increased by $3,074,896, or
5.33% from December 31, 2004. This increase was due to the normal growth of the
Bank. The largest increase was in other time deposits, which increased
$3,035,994, or 16.07% from December 31, 2004. The increase was attributable to
the opening of new accounts during the period. Expressed in percentages,
noninterest bearing deposits decreased 4.44% and interest bearing deposits
increased 6.97%.
Balances within the major deposit categories as of June 30, 2005 and December
31, 2004 are as follows:
June 30, December 31,
2005 2004
---- ----
Noninterest-bearing demand deposits ................................... $ 7,913,094 $ 8,280,977
Interest-bearing demand deposits ...................................... 6,520,018 5,775,786
Savings deposits ...................................................... 17,898,763 18,969,783
Time deposits $100,000 and over ....................................... 6,510,270 5,776,697
Other time deposits ................................................... 21,923,947 18,887,953
----------- -----------
$60,766,092 $57,691,196
=========== ===========
Note Payable
During 2004, the Company executed a note with The Bankers Bank to borrow
$1,000,000 for purposes of providing additional capital to the Bank. The note is
secured by the stock owned by the Company in the Bank and matures September 30,
2016. In March 2005, the Company executed a line of credit with The Bankers Bank
to borrow up to $500,000 to cover expenses associated with the proposed bank.
The note is also secured by the stock owned by the Company in the Bank. The
Company currently has $50,000 drawn on the line and it will mature March 18,
2006.
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 83.62% at June 30, 2005 and 84.77%
at December 31, 2004.
Securities available-for-sale, which totaled $7,779,986 at June 30, 2005, 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, 2005, unused lines of credit totaled $3,750,000. 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 $7,369,000 as
of June 30, 2005. As of June 30, 2005, we have $6,250,000 in borrowings against
this line.
15
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, 2005,
the Bank had issued commitments to extend credit of $14,571,537 and $60,000 in
standby letters of credit. Approximately $13,728,299 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, 2005.
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 ........... $ 426 $ 35,518 $ 3,948,622 $3,984,566 $ 10,586,971 $ 14,571,537
Standby letters of
credit ..................... 25,000 35,000 - 60,000 - 60,000
----------- ----------- ----------- ---------- ------------- -------------
Total .................... $ 25,426 $ 70,518 $ 3,948,622 $4,044,566 $ 10,586,971 $ 14,631,537
=========== =========== =========== ========== ============= =============
Based on historical experience, many of the commitments will expire not fully
funded. 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, 2004 as
filed on 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 2004 Annual
Report on Form 10-KSB and this Form 10-QSB that address 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 $5,093,599 at December 31, 2004 to
$5,319,780 at June 30, 2005. The increase is due to net income for the period of
$199,596, a negative change in the fair value of securities available-for-sale
of $25,757, the exercise of options for $43,342, and the exercise of warrants
for $9,000.
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. The Bank's Tier 1 capital consists of common
shareholders' equity, excluding the unrealized gain (loss) on available-for-sale
securities, minus certain intangible assets. The Bank's 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, 2005 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, 2005:
Shareholders' equity ....................................... $6,301,705
Less: intangibles ........................................ -
----------
Tier 1 capital ........................................... 6,301,705
Plus: allowance for loan losses (1) ...................... 635,787
----------
Total capital ............................................ $6,937,492
==========
Risk-weighted assets ..................................... $6,937,492
==========
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ................. 10.17%
Total capital (to risk-weighted assets) .................. 11.20%
Tier 1 capital (to total average assets) ................. 8.78%
(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 2. Changes in Securities and Use of Proceeds
During the quarter ended June 30, 2005, the Registrant issued shares of common
stock to the following classes of persons upon the exercise of options issued
pursuant to the Registrant's 2001 Stock Option Plan and upon the exercise of
warrants. The securities were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 because the issuance did
not involve a public offering.
Aggregate
Class of # of Shares Exercise
Date Issued Purchasers Issued Price
----------- ---------- ------ -----
4/11/05 Employees 3,334 $43,342
6/03/05 Directors 900 $ 9,000
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2005 Annual Meeting of Shareholders on May 12, 2005. At the
meeting, four directors were elected to each serve a three year term with voting
results as follows:
Name Votes For Votes Withheld Broker Non-Votes
- ---- --------- -------------- ----------------
Franklin Hines 366,237 100 -
J. Richard Jones, Jr. 366,337 - -
Woodward H. Morgan, III 366,337 - -
Gosnold G. Segars 366,137 200 -
The following director terms continued after the meeting:
Francine P. Bachman (2007), Thomas James Bell, Jr. (2007),
Peter C. Coggeshall, Jr. (2007), Randolph G. Rogers (2006),
Howard W. Tucker (2006), Curtis A. Tyner, Sr. (2006), Patricia
M. West (2006).
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: August 11, 2005 /s/ CURTIS A. TYNER
---------------- ---------------------------------------------
Curtis A. Tyner, President,
Chief Executive Officer and Chief Financial
Officer
19
REGIONAL BANKSHARES, INC.
Exhibit Index
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.
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