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 September 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 by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
692,759 shares of common stock, $1.00 par value as of October 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 - September 30, 2005 and December 31, 2004.................................3
Condensed Consolidated Statements of Income - Nine months ended September 30, 2005 and 2004
and Three months ended September 30, 2005 and 2004.............................................................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Nine months ended September 30, 2005 and 2004..................................................................5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2005 and 2004..................6
Notes to Condensed Consolidated Financial Statements..........................................................7-11
Item 2. Management's Discussion and Analysis or Plan of Operation.....................................................12-17
Item 3. Controls and Procedures..........................................................................................17
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......................................................18
Item 6. Exhibits ........................................................................................................18
2
REGIONAL BANKSHARES, INC.
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, December 31,
2005 2004
---- ----
(Unaudited)
Assets:
Cash and cash equivalents:
Cash and due from banks ......................................................... $ 3,123,126 $ 2,201,849
Federal funds sold .............................................................. 4,867,483 6,395,757
------------ ------------
Total cash and cash equivalents ............................................... 7,990,609 8,597,606
------------ ------------
Securities available-for-sale ..................................................... 6,899,970 3,555,552
Nonmarketable equity securities ................................................... 492,792 446,153
------------ ------------
Total investment securities ................................................... 7,392,762 4,001,705
------------ ------------
Loans receivable ..................................................................... 56,205,697 55,052,377
Less allowance for loan losses ....................................................... (650,293) (589,765)
------------ ------------
Loans, net .................................................................... 55,555,404 54,462,612
------------ ------------
Premises and equipment, net .......................................................... 3,089,509 2,454,548
Accrued interest receivable .......................................................... 340,020 237,244
Other assets ......................................................................... 315,705 506,686
------------ ------------
Total assets .................................................................. $ 74,684,009 $ 70,260,401
============ ============
Liabilities:
Deposits:
Noninterest-bearing ............................................................... $ 8,337,307 $ 8,280,977
Interest-bearing .................................................................. 7,279,381 5,775,786
Savings ........................................................................... 18,962,803 18,969,783
Time deposits $100,000 and over ................................................... 7,400,468 5,776,697
Other time deposits ............................................................... 19,513,064 18,887,953
------------ ------------
Total deposits ................................................................ 61,493,023 57,691,196
------------ ------------
Note payable Bankers Bank ............................................................ 1,050,000
1,000,000
Advances from Federal Home Loan Bank ................................................. 6,250,000 6,250,000
Accrued interest payable ............................................................. 232,443 117,773
Other liabilities .................................................................... 191,476 107,833
------------ ------------
Total liabilities ............................................................. 69,216,942 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,
692,759 and 572,070 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively .......................... 692,759 572,070
Capital surplus ................................................................... 5,021,124 5,079,471
Retained earnings (deficit) ....................................................... (196,590) (535,783)
Accumulated other comprehensive income (loss) ..................................... (50,226) (22,159)
------------ ------------
Total shareholders' equity .................................................... 5,467,067 5,093,599
------------ ------------
Total liabilities and shareholders' equity .................................... $ 74,684,009 $ 70,260,401
============ ============
3
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Interest income:
Loans, including fees ............................... $3,021,222 $2,354,315 $1,052,265 $ 836,698
Investment securities
Taxable ........................................... 167,106 60,482 62,249 23,298
Nonmarketable equity securities ................... 11,175 3,518 3,297 830
Federal funds sold ................................ 77,499 16,560 22,270 7,384
---------- ---------- ---------- ----------
Total ........................................... 3,277,002 2,434,875 1,140,081 868,210
---------- ---------- ---------- ----------
Interest expense:
Time deposits $100,000 and over ..................... 121,302 92,801 50,254 28,550
Other deposits ...................................... 644,121 399,694 231,451 147,610
Other interest expense .............................. 192,900 18,566 67,705 8,004
---------- ---------- ---------- ----------
Total ........................................... 958,323 511,061 349,410 184,164
---------- ---------- ---------- ----------
Net interest income .................................... 2,318,679 1,923,814 790,671 684,046
Provision for loan losses .............................. 84,000 100,000 24,000 45,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ......................................... 2,234,679 1,823,814 766,671 639,046
Other income:
Service charges on deposit accounts ................. 265,041 212,757 103,177 74,383
Residential mortgage origination fees ............... 46,006 68,605 16,992 31,248
Brokerage fee commissions ........................... 24,536 74,949 12,969 29,949
Credit life insurance commissions ................... 3,290 2,938 738 412
Other income ........................................ 63,267 53,606 19,654 17,749
---------- ---------- ---------- ----------
Total ........................................... 402,140 412,855 153,530 153,741
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits ...................... 1,070,635 971,984 357,029 322,836
Net occupancy expense ............................... 146,769 131,407 54,912 44,828
Furniture and fixture expense ....................... 139,326 126,153 52,699 41,563
Other operating expenses ............................ 741,689 623,754 233,978 216,682
---------- ---------- ---------- ----------
Total ........................................... 2,098,419 1,853,298 698,618 625,909
---------- ---------- ---------- ----------
Income before income taxes ............................. 538,400 383,371 221,583 166,878
Income tax expense ..................................... 199,207 141,322 81,986 61,218
---------- ---------- ---------- ----------
Net income ............................................. $ 339,193 $ 242,049 $ 139,597 $ 105,660
========== ========== ========== ==========
Earnings per share
Average shares outstanding ............................. 689,758 682,827 690,977 684,684
Basic .................................................. $ 0.49 $ 0.35 $ 0.20 $ 0.15
Diluted ................................................ $ 0.49 $ 0.35 $ 0.19 $ 0.15
4
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Shareholders'
Equity and Comprehensive Income
for the nine months ended September 30, 2005 and 2004
(Unaudited)
Accumulated
Common Stock Retained Other
------------ Capital Earnings Comprehensive
Shares Amount Surplus (Deficit) Income (Loss) Total
------ ------ ------- --------- ------------- -----
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
======= =========== =========== =========== =========== ===========
Balance,
December 31, 2004 ...................... 572,070 $ 572,070 $ 5,079,471 $ (535,783) $ (22,159) $ 5,093,599
Net income
for the period ......................... 339,193 339,193
Other comprehensive loss,
net of tax benefit of $16,484 .......... (28,067) (28,067)
Comprehensive
income ................................. 311,126
-----------
Warrants exercised
at $10.00 per share .................... 1,900 1,900 17,100 19,000
Options exercised
at $13.00 per share .................... 3,334 3,334 40,008 43,342
Stock dividend issued
at 20% ................................. 115,455 115,455 (115,455) -
------- ----------- ----------- ----------- ----------- -----------
Balance,
September 30, 2005 ..................... 692,759 $ 692,759 $ 5,021,124 $ (196,590) $ (50,226) $ 5,467,067
======= =========== =========== =========== =========== ===========
5
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2005 2004
---- ----
Cash flows from operating activities:
Net income ........................................................................ $ 339,193 $ 242,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................................. 159,757 147,059
Provision for loan losses ..................................................... 84,000 100,000
Accretion and premium amortization ............................................ 2,878 6,709
Deferred income tax provision ................................................. 189,169 155,445
Increase in interest receivable ............................................... (102,776) (47,482)
Increase (decrease) in interest payable ....................................... 114,670 (37,050)
Decrease (increase) in other assets ........................................... 18,295 (58,830)
Increase (decrease) in other liabilities ...................................... 83,643 (44,099)
Gain (loss) on sale/paydowns .................................................. 3,976 -
----------- -----------
Net cash provided by operating activities ..................................... 892,805 463,801
----------- -----------
Cash flows from investing activities:
Purchases of securities available-for-sale ........................................ (5,150,184) (2,005,592)
Purchase of nonmarketable equity securities ....................................... (46,639) (49,100)
Maturities of securities available-for-sale ....................................... 1,754,362 718,239
Net increase in loans made to customers ........................................... (1,176,792) (5,221,223)
Purchases of premises and equipment ............................................... (794,718) (89,803)
----------- -----------
Net cash used by investing activities ....................................... (5,413,971) (6,642,479)
----------- -----------
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts ....................................... 1,552,945 5,247,559
Net increase in certificates of deposit and other time deposits ................... 2,248,882 477,591
Advances from Federal Home Loan Bank .............................................. - 250,000
Exercise of stock warrants/options ................................................ 62,342 38,000
Advances from Bankers Bank ........................................................ 50,000 1,000,000
----------- -----------
Net cash provided by financing activities ................................... 3,914,169 7,013,150
----------- -----------
Net increase (decrease) in cash and cash equivalents ................................. (606,997) 829,472
Cash and cash equivalents, beginning ................................................. 8,597,606 3,785,684
----------- -----------
Cash and cash equivalents, ending .................................................... $ 7,990,609 $ 4,615,156
=========== ===========
Cash paid during the period for:
Income taxes ...................................................................... $ 11,895 $ 5,043
Interest .......................................................................... $ 843,653 $ 548,111
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, 2005 and for the interim periods ended September
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)"). SFAS123(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.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 establishes retrospective application as the
required method for reporting a change in accounting principle, unless it is
impracticable, in which case the changes should be applied to the latest
practicable date presented. SFAS No. 154 also requires that a correction of an
error be reported as a prior period adjustment by restating prior period
financial statements. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
7
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 - Recently Issued Accounting Pronouncements - continued
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
Note 3 - Stock-Based Compensation
Our stock-based employee compensation plan and stock warrants are accounted for
under the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No compensation cost is reflected in net income, as all
warrants and options granted under these plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income (loss) and earnings (loss)
per share if the fair value recognition provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, had been applied to the option
plans and warrants.
Nine Months Ended
September 30,
-------------
2005 2004
---- ----
Net income, as reported .......................... $ 339,193 $242,049
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects .... 352,437 14,458
----------- --------
Pro forma net income (loss) ...................... $ (13,244) $227,591
=========== ========
Earnings per share:
Basic - as reported ........................... $ 0.49 $ 0.35
=========== ========
Basic - pro forma ............................. $ (0.02) $ 0.33
=========== ========
Diluted - as reported ......................... $ 0.49 $ 0.35
=========== ========
Diluted - pro forma ........................... $ (0.02) $ 0.33
=========== ========
Three Months Ended
September 30,
---
2005 2004
---- ----
Net income, as reported .......................... $ 139,597 $105,660
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects .... 286,273 4,819
----------- --------
Pro forma net income (loss) ...................... $ (146,676) $100,841
=========== ========
Earnings per share:
Basic - as reported ........................... $ 0.20 $ 0.15
=========== ========
Basic - pro forma ............................. $ (0.21) $ 0.15
=========== ========
Diluted - as reported ......................... $ 0.19 $ 0.15
=========== ========
Diluted - pro forma ........................... $ (0.20) $ 0.14
=========== ========
8
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Earnings Per Share
Earnings per share is computed on the basis of the weighted average number of
common shares outstanding in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share". The treasury stock method is used to
compute the effect of stock options and warrants on the weighted average number
of shares outstanding for diluted earnings per share.
In August 2005 we declared twenty percent stock dividends on the Company's
common stock. The weighted average number of shares and all other share data
have been restated for all periods presented to reflect these stock dividends.
A reconciliation of the numerators and denominators used to calculate basic and
diluted earnings per share are as follows:
Nine Months Ended September 30, 2005
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $339,193 689,758 $0.49
=====
Effect of dilutive securities
Stock options and warrants ....................................... - 5,918
-------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $339,193 695,676 $0.49
======== ======= =====
Nine Months Ended September 30, 2004
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $242,049 682,827 $ 0.35
========
Effect of dilutive securities
Stock options .................................................... - 16,762
-------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $242,049 699,589 $ 0.35
======== ======= ========
9
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Earnings Per Share - continued
Three Months Ended September 30, 2005
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $139,597 690,977 $ 0.20
========
Effect of dilutive securities
Stock options and warrants ....................................... - 30,083
-------- --------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $139,597 721,060 $ 0.19
======== ======== ========
Three Months Ended September 30, 2004
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders .......................... $105,660 684,684 $ 0.15
========
Effect of dilutive securities
Stock options and warrants ....................................... - 16,454
-------- --------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ....................................... $105,660 701,138 $ 0.15
======== ======== ========
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,
2005 and 2004:
Nine Months Ended September 30, 2005
------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................... $(44,551) $ 16,484 $(28,067)
Plus: reclassification adjustment for gains (losses)
realized in net income ..................................................... - - -
-------- -------- --------
Net unrealized gains (losses) on securities ................................ (44,551) 16,484 (28,067)
-------- -------- --------
Other comprehensive income .................................................... $(44,551) $ 16,484 $(28,067)
======== ======== ========
10
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 - Comprehensive Income continued
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
====== ====== ======
Three Months Ended September 30, 2005
-------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................... $(3,666) $ 1,356 $(2,310)
Plus: reclassification adjustment for gains (losses)
realized in net income
------- ------- -------
Net unrealized gains (losses) on securities ................................ (3,666) 1,356 (2,310)
------- ------- -------
Other comprehensive income .................................................... $(3,666) $ 1,356 $(2,310)
======= ======= =======
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
======== ======== ========
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.
FORWARD LOOKING STATEMENTS
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.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following is a discussion of our financial condition as of September 30,
2005 compared to December 31, 2004, and the results of operations for the three
and nine months ended September 30, 2005, compared to the three and nine months
ended September 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.
Results of Operations
Net Interest Income
For the nine months ended September 30, 2005, net interest income increased
$394,865, or 20.53%, to $2,318,679 as compared to $1,923,814 for the same period
in 2004. Interest income from loans, including fees, increased $666,907 or
28.33%, from the nine months ended September 30, 2004 to the comparable period
in 2005, as we continued to experience growth in our loan portfolio and as
interest rates continued to increase. Interest expense for the nine months ended
September 30, 2005 was $958,323 as compared to $511,061 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 are intended 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 nine months ended September 30, 2004 to
4.74% for the same period in 2005. The interest rate spread increased slightly
from 4.41% at September 30, 2004 to 4.44% at September 30, 2005.
For the quarter ended September 30, 2005, net interest income totaled $790,671
an increase of $106,625, or 15.59%, when compared to the same quarter ended
September 30, 2004. Interest income totaling $1,052,265 was generated from
loans, including fees, during the quarter ended September 30, 2005, as compared
to $836,698 during the comparable period in 2004. Interest expense was $349,410
for the quarter ended September 30, 2005, as compared to $184,164 for the same
period in 2004. The net interest margin realized on earning assets was 4.76% for
the quarter ended September 30, 2005, as compared to 4.59% during the same
period in 2004. The interest rate spread was 4.42% for the quarter ended
September 30, 2005, as compared to 4.41% for the quarter ended September 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 possible loan
losses at an adequate level. For the nine months ended September 30, 2005, the
provision charged to expense was $84,000 as compared to $100,000 for the nine
months ended September 30, 2004. For the quarter ended September 30, 2005, the
provision charged to expense was $24,000 as compared to $45,000 for the same
period in 2004. The allowance represents 1.16% and 1.05% of gross loans at
September 30, 2005 and 2004, 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 decreased $10,715, or 2.60% to $402,140 for the nine months
ended September 30, 2005 as compared to the same period ended September 30,
2004. The primary source of this income was service charges on deposit accounts
of $265,041 for the nine months ended September 30, 2005. In addition,
commissions generated through our brokerage services totaled $24,536 for the
nine months ended September 30, 2005. Income from residential mortgage
origination fees decreased $22,599 to $46,006 when compared to the same period
in 2004. This decrease is due to the decline in mortgage refinancing.
For the quarter ended September 30, 2005, noninterest income was $153,530, a
decrease of $211, or 0.14% from the quarter ended September 30, 2004. The
largest component of noninterest income was service charges on deposit accounts,
which totaled $103,177 for the quarter ended September 30, 2005, as compared to
$74,383 for the quarter ended September 30, 2004. This increase was primarily
attributable to the introduction of Bounce Protection on September 1, 2005.
Income from brokerage fee commissions totaled $12,969 for the quarter ended
September 30, 2005 as compared to $29,949 for the 2004 quarter.
Noninterest Expense
For the nine months ended September 30, 2005, noninterest expense was
$2,098,419, an increase of $245,121, or 13.23% when compared to the same period
in 2004. The largest component of noninterest expense was salaries and employee
benefits, which increased from $971,984 for the nine months ended September 30,
2004 to $1,070,635 for the nine months ended September 30, 2005. 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. Occupancy expense also increased
from $131,407 for the nine months ended September 30, 2004 to $146,769 for the
nine months ended September 30, 2005. 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 nine months ended September 30, 2005 included $41,651 associated
with the proposed bank.
For the quarter ended September 30, 2005, noninterest expense increased $72,709,
or 11.62% as compared to the quarter ended September 30, 2004. The largest
category of noninterest expense, salaries and employee benefits, increased
$34,193, or 10.59%, from the quarter ended September 30, 2004 to $357,029 for
the quarter ended September 30, 2005. As discussed earlier, this increase is
primarily attributable to annual pay raises and the hiring of additional staff.
Occupancy expense increased $10,084 for the quarter ended September 30, 2004 to
$54,912 for the quarter ended September 30, 2005.
Income Taxes
The income tax expense for the nine months ended September 30, 2005 was $199,207
as compared to $141,322 for the same period in 2004. The effective tax rate was
37.00% for the nine months ended September 30, 2005 and 2004. Income tax expense
was $81,986 for the quarter ended September 30, 2005 as compared to $61,218 for
the same quarter in 2004. The effective tax rate was 37.00% for the quarters
ended September 30, 2005 and 2004.
Net Income
The combination of the above factors resulted in net income for the nine months
ended September 30, 2005 of $339,193 as compared to net income of $242,049 for
the same period in 2004. The net income before taxes of $538,400 was before
income tax expense of $199,207 during the nine months ended September 30, 2005.
The net income before taxes for the same period in 2004 was $383,371, which was
partially offset by the income tax expense of $141,322. For the quarter ended
September 30, 2005, net income was $139,597, as compared to $105,660 for the
same period in 2004.
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 2005, total assets increased $4,423,608, or
6.30%, when compared to December 31, 2004. The primary source of growth in
assets was securities available for sale, which increased $3,344,418, or 94.06%,
during the first nine months of 2005. Loans increased $1,153,320 or 2.09% to
$56,205,697 at September 30, 2005. Total deposits also increased $3,801,827, or
6.59%, from $57,691,196 at December 31, 2004 to $61,493,023 at September 30,
2005. Interest-bearing transaction accounts also increased from $5,775,786 at
December 31, 2004 to $7,279,381 at September 30, 2005.
Investment Securities
Investment securities increased from $4,001,705 at December 31, 2004 to
$7,392,762 at September 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 as well as 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, 2005.
At September 30, 2005, the Company had unrealized losses of $50,226 on available
for sale securities. The Company currently has the ability and the intent to
hold these securities until maturity at which time their full face value is
expected to be realized. Accordingly, management believes these unrealized
losses are temporary.
Loans
We continued our trend of growth during the first nine months of 2005. Net loans
increased $1,092,792, or 2.01%, during the period. As shown below, the main
component of growth in the loan portfolio was real estate-construction loans
which increased 23.04%, or $1,187,037, from December 31, 2004 to September 30,
2005. Balances within the major loans receivable categories as of September 30,
2005 and December 31, 2004 are as follows:
September 30, December 31,
2005 2004
---- ----
Real estate - construction ............... $ 6,339,336 $ 5,152,299
Real estate - mortgage ................... 38,704,886 38,976,263
Commercial and industrial ................ 5,455,457 4,941,323
Consumer and other ....................... 5,706,018 5,982,492
----------- -----------
$56,205,697 $55,052,377
=========== ===========
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
September 30, December 31,
2005 2004
---- ----
Loans: Nonaccrual loans ............................................ $ 2,198 $ 23,847
Accruing loans more than 90 days past due ........................... $ 14,810 $ 2,157
Loans identified by the internal review mechanism:
Criticized ........................................................ $509,437 $578,868
Classified ........................................................ $ 9,140 $ 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
Nine months ended
September 30,
-------------
2005 2004
---- ----
Balance, January 1, ............................ $ 589,765 $ 482,875
Provision for loan losses for the period ....... 84,000 100,000
Net loans (charged-off) recovered for the period (23,472) (19,901)
----------- -----------
Balance, end of period ......................... $ 650,293 $ 562,974
=========== ===========
Gross loans outstanding, end of period ......... $56,205,697 $53,464,110
Allowance for loan losses to loans outstanding . 1.16% 1.05%
Deposits
Total deposits increased $3,801,827, or 6.59%, from December 31, 2004 to
$61,493,023 at September 30, 2005. The largest change was an increase in time
deposits $100,000 and over, which increased $1,623,771 to $7,400,468 at
September 30, 2005. Expressed in percentages, interest-bearing deposits
increased 7.58% and noninterest bearing deposits decreased 0.68%.
Balances within the major deposit categories as of September 30, 2005 and
December 31, 2004 are as follows:
September 30, December 31,
2005 2004
---- ----
Noninterest-bearing demand deposits ....... $ 8,337,307 $ 8,280,977
Interest-bearing demand deposits .......... 7,279,381 5,775,786
Savings deposits .......................... 18,962,803 18,969,783
Time deposits $100,000 and over ........... 7,400,468 5,776,697
Other time deposits ....................... 19,513,064 18,887,953
----------- -----------
$61,493,023 $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.
Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank to us were $6,250,000 as of September
30, 2005. Of this amount, the following have scheduled maturities greater than
one year:
Maturing on Interest Rate Principal
----------- ------------- ---------
09/14/07 3.28% $750,000
12/08/06 3.34% $500,000
12/10/07 3.59% $500,000
12/10/09 2.56% $1,000,000
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 81.70% at September 30, 2005
and 84.77% at December 31, 2004.
Securities available-for-sale, which totaled $6,899,970 at September 30, 2005,
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, 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 $7,468,401 at September 30, 2005. As of September 30, 2005, we had
$6,250,000 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,
2005, we had issued commitments to extend credit of $11,462,923 and standby
letters of credit of $45,000 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, 2005 is not necessarily expected to be funded. Approximately
$10,516,904 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 September 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 ................ $ - $ 977,584 $ 1,524,747 $ 2,502,231 $ 8,960,692 $11,462,923
Standby letters of credit .......... 35,000 10,000 45,000 45,000
------- ----------- ----------- ----------- ----------- -----------
Totals ........................ $ - $ 1,012,584 $ 1,534,747 $ 2,547,331 $ 8,960,692 $11,507,923
======= =========== =========== =========== =========== ===========
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 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 2004 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 $5,093,599 at December 31, 2004 to
$5,467,067 at September 30, 2005. The increase is attributable to the net income
for the period of $339,193, a negative change in the fair value of securities
available-for-sale of $28,067, the exercise of options for $43,342 and the
exercise of warrants for $19,000.
The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance sheet exposures, adjusted for
risk-weights ranging from 0% to 100%. Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital includes common shareholders' equity,
excluding the unrealized gain (loss) on available-for-sale securities, minus
certain intangible assets. Tier 2 capital includes 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 banks 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, 2005 and the Bank exceeded the ratios to be
considered "well capitalized."
The following table summarizes the Bank's risk-based capital at September 30,
2005:
Shareholders' equity ....................................... $ 6,452,159
-----------
Less: intangibles
Tier 1 capital ........................................... 6,452,159
Plus: allowance for loan losses (1) ...................... 650,293
-----------
Total capital ............................................ $ 7,102,452
===========
Risk-weighted assets ..................................... $72,018,096
===========
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ................. 10.59%
Total capital (to risk-weighted assets) .................. 11.65%
Tier 1 capital (to total average assets) ................. 8.96
(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. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2005, the Registrant issued shares
of common stock to the following classes of persons upon the exercise of 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.
Date Issued Class of Purchasers #of Shares Issued Aggregate Exercise Price
----------- ------------------- ----------------- ------------------------
8/18/05 Directors 1,000 $10,000
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 11, 2005 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