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, 2006
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.
741,396 shares of common stock, $1.00 par value as of October 31, 2006
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, 2006 and December 31, 2005.................................3
Condensed Consolidated Statements of Income - Nine months ended September 30, 2006 and 2005
and Three months ended September 30, 2006 and 2005.............................................................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Nine months ended September 30, 2006 and 2005..................................................................5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2006 and 2005..................6
Notes to Condensed Consolidated Financial Statements..........................................................7-13
Item 2. Management's Discussion and Analysis or Plan of Operation.....................................................13-19
Item 3. Controls and Procedures..........................................................................................19
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......................................................20
Item 6. Exhibits ........................................................................................................20
2
REGIONAL BANKSHARES, INC.
Condensed Consolidated Balance Sheets
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
September 30, December 31,
2006 2005
---- ----
(Unaudited)
Assets:
Cash and cash equivalents:
Cash and due from banks ......................................................... $ 1,975,625 $ 2,258,817
Federal funds sold .............................................................. 3,187,113 387,955
------------ ------------
Total cash and cash equivalents ............................................... 5,162,738 2,646,772
------------ ------------
Investment securities:
Securities available-for-sale ................................................... 6,088,969 6,078,990
Nonmarketable equity securities ................................................. 507,892 447,792
------------ ------------
Total investment securities ................................................... 6,596,861 6,526,782
------------ ------------
Loans receivable .................................................................. 62,802,413 58,586,129
Less allowance for loan losses .................................................. (718,148) (681,238)
------------ ------------
Loans receivable, net ......................................................... 62,084,265 57,904,891
------------ ------------
Investment in Trust ............................................................... 93,000 -
Accrued interest receivable ....................................................... 424,358 413,002
Premises and equipment, net ....................................................... 4,300,091 3,290,720
Other assets ...................................................................... 1,755,933 322,977
------------ ------------
Total assets .................................................................. $ 80,417,246 $ 71,105,144
============ ============
Liabilities:
Deposits:
Noninterest-bearing ............................................................... $ 8,697,346 $ 9,551,816
Interest-bearing .................................................................. 7,645,154 7,519,826
Savings ........................................................................... 13,491,413 15,083,906
Time deposits $100,000 and over ................................................... 7,081,997 6,077,353
Other time deposits ............................................................... 27,387,313 20,464,994
------------ ------------
Total deposits ................................................................ 64,303,223 58,697,895
------------ ------------
Junior Subordinated Debentures ....................................................... 3,093,000 -
Fed Funds Purchased .................................................................. - 50,000
Note payable ......................................................................... - 1,050,000
Advances from Federal Home Loan Bank ................................................. 6,250,000 5,250,000
Accrued interest payable ............................................................. 314,480 268,415
Other liabilities .................................................................... 314,399 201,252
------------ ------------
Total liabilities ............................................................. 74,275,103 65,517,562
------------ ------------
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,
741,396 and 692,759 shares issued and outstanding at
September 30, 2006 and December 31, 2005, respectively .......................... 741,396 692,759
Capital surplus ................................................................... 5,083,776 5,021,124
Retained earnings (deficit) ....................................................... 363,561 (53,734)
Accumulated other comprehensive income (loss) ..................................... (46,589) (72,567)
------------ ------------
Total shareholders' equity .................................................... 6,142,144 5,587,582
------------ ------------
Total liabilities and shareholders' equity .................................... $ 80,417,246 $ 71,105,144
============ ============
See notes to condensed consolidated financial statements.
3
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2006 2005 2006 2005
---- ---- ---- ----
Interest income:
Loans, including fees ............................... $3,671,649 $3,021,222 $1,289,813 $1,052,265
Investment securities
Taxable ........................................... 164,218 167,106 58,015 62,249
Nonmarketable equity securities ................... 17,869 11,175 3,326 3,297
Federal funds sold ................................ 89,736 77,499 35,531 22,270
---------- ---------- ---------- ----------
Total ........................................... 3,943,472 3,277,002 1,386,685 1,140,081
---------- ---------- ---------- ----------
Interest expense:
Time deposits $100,000 and over ..................... 165,700 121,302 57,294 50,254
Other deposits ...................................... 1,154,356 644,121 455,053 231,451
Other interest expense .............................. 198,557 192,900 72,098 67,705
---------- ---------- ---------- ----------
Total ........................................... 1,518,613 958,323 584,445 349,410
---------- ---------- ---------- ----------
Net interest income .................................... 2,424,859 2,318,679 802,240 790,671
Provision for loan losses .............................. 111,000 84,000 39,000 24,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ......................................... 2,313,859 2,234,679 763,240 766,671
Other income:
Service charges on deposit accounts ................. 343,147 265,041 125,710 103,177
Residential mortgage origination fees ............... 27,134 46,006 8,229 16,992
Brokerage fee commissions ........................... 68,847 24,536 30,148 12,969
Credit life insurance commissions ................... 2,680 3,290 310 738
Other income ........................................ 117,506 63,267 38,683 19,654
---------- ---------- ---------- ----------
Total ........................................... 559,314 402,140 203,080 153,530
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits ...................... 1,116,490 1,070,635 386,973 357,029
Net occupancy expense ............................... 156,247 146,769 51,849 54,912
Furniture and fixture expense ....................... 145,964 139,326 51,180 52,699
Other operating expenses ............................ 791,869 741,689 282,800 233,978
---------- ---------- ---------- ----------
Total ........................................... 2,210,570 2,098,419 772,802 698,618
---------- ---------- ---------- ----------
Income before income taxes ............................. 662,603 538,400 193,518 221,583
Income tax expense ..................................... 245,308 199,207 71,746 81,986
---------- ---------- ---------- ----------
Net income ............................................. $ 417,295 $ 339,193 $ 121,772 $ 139,597
========== ========== ========== ==========
Earnings per share
Average shares outstanding ............................. 701,714 588,888 705,871 618,812
Net income - basic ..................................... $ 0.57 $ 0.47 $ 0.17 $ 0.19
Net income - diluted ................................... $ 0.57 $ 0.46 $ 0.16 $ 0.19
See notes to condensed consolidated financial statements.
4
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Shareholders' Equity
and Comprehensive Income
For the nine months ended September 30, 2006 and 2005
(Unaudited)
Accumulated
Common Stock Retained Other
------------ Capital Earnings Comprehensive
Shares Amount Surplus (Deficit) Income Total
------ ------ ------- --------- ------ -----
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
======= =========== =========== =========== =========== ===========
Balance, December 31, 2005 ................ 692,759 $ 692,759 $ 5,021,124 $ (53,734) $ (72,567) $ 5,587,582
Net income for the period ................. 417,295 417,295
Other comprehensive gain,
net of tax expense of $15,257 .......... 25,978 25,978
-----------
Comprehensive income ...................... 443,273
-----------
Warrants exercised
at $8.33 per share ..................... 13,360 13,360 97,929 111,289
Stock dividend issued at 5% ............... 35,277 35,277 (35,277) -
------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 2006 ............... 741,396 $ 741,396 $ 5,083,776 $ 363,560 $ (46,589) $ 6,142,144
======= =========== =========== =========== =========== ===========
See notes to condensed consolidated financial statements.
5
REGIONAL BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2006 2005
---- ----
Cash flows from operating activities:
Net income ............................................................................ $ 417,295 $ 339,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................................... 139,849 159,757
Provision for possible loan losses ................................................ 111,000 84,000
Accretion and premium amortization ................................................ 5,798 2,878
Deferred income tax provision ..................................................... (51,275) 189,169
Increase in interest receivable ................................................... (11,356) (102,776)
Increase in interest payable ...................................................... 46,065 114,670
(Increase) Decrease in other assets ............................................... (138,693) 18,295
Increase in other liabilities ..................................................... 113,147 83,643
Increase in gain on sale/paydown of securities .................................... 2,433 3,976
----------- -----------
Net cash provided by operating activities ....................................... 634,263 892,805
----------- -----------
Cash flows from investing activities:
Purchases of securities available-for-sale ............................................ (1,780,772) (5,150,184)
Maturities of securities available-for-sale ........................................... 1,795,552 1,754,362
Purchase of nonmarketable equity securities ........................................... (60,100) (46,639)
Net increase in loans made to customers ............................................... (4,290,374) (1,176,792)
Purchases of premises and equipment ................................................... (1,149,220) (794,718)
Investment in trust ................................................................... (93,000) -
Purchase of bank owned life insurance ................................................. (1,250,000) -
----------- -----------
Net cash used by investing activities ........................................... (6,827,914) (5,413,971)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, interest-bearing transaction
accounts and savings accounts ....................................................... (2,321,635) 1,552,945
Net increase in certificates of deposit and other time deposits ....................... 7,926,963 2,248,882
Proceeds from issuance of Junior Subordinated Debenture ............................... 3,093,000 -
Advances from Federal Home Loan Bank .................................................. 8,300,000 -
Repayments of Federal Home Loan Bank .................................................. (7,300,000) -
Decrease in Fed Funds Purchased ....................................................... (50,000) -
Advances from Note Payable Bankers Bank ............................................... - 50,000
Repayments of Note Payable Bankers Bank ............................................... (1,050,000) -
Proceeds from exercise of options ..................................................... - 43,342
Proceeds from exercise of warrants .................................................... 111,289 19,000
----------- -----------
Net cash provided by financing activities ....................................... 8,709,617 3,914,169
----------- -----------
Net increase (decrease) in cash and cash equivalents ..................................... 2,515,966 (606,997)
Cash and cash equivalents, beginning ..................................................... 2,646,772 8,597,606
----------- -----------
Cash and cash equivalents, ending ........................................................ $ 5,162,738 $ 7,990,609
=========== ===========
Cash paid during the period for:
Income taxes .......................................................................... $ 146,039 $ 11,895
Interest .............................................................................. $ 1,472,548 $ 843,653
See notes to condensed consolidated financial statements.
6
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared in accordance with the
requirements for interim financial statements and, accordingly, they are
condensed and omit disclosures which would substantially duplicate those
contained in the most recent annual report on Form 10-KSB. The financial
statements, as of September 30, 2006 and for the interim periods ended September
30, 2006 and 2005, 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, 2005 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, 2005.
Note 2 - Recently Issued Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that could
impact the accounting, reporting, and / or disclosure of financial information
by the Company.
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment of
FASB Statements No. 133 and 140." This Statement amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This Statement resolves issues addressed in
SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets." SFAS No. 155 is effective
for all financial instruments acquired or issued after the beginning of an
entity's first fiscal year that begins after September 15, 2006. The Company
does not believe that the adoption of SFAS No. 155 will have a material impact
on its financial position, results of operations and cash flows.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," with respect to the accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial
adoption, permits a one-time reclassification of available-for-sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value; and requires separate presentation of servicing assets
and servicing liabilities subsequently measured at fair value in the statement
of financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. An entity should adopt SFAS No. 156
as of the beginning of its first fiscal year that begins after September 15,
2006. The Company does not believe the adoption of SFAS No. 156 will have a
material impact on its financial position, results of operations and cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes". FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises' financial statements
in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48
prescribes a recognition threshold and measurement attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently analyzing the
effects of FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 is effective for the Company on January 1, 2008 and
is not expected to have a significant impact on the Company's financial
statements.
7
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"), which
amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that
have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. The measurement date --
the date at which the benefit obligation and plan assets are measured -- is
required to be the company's fiscal year end. SFAS 158 is effective for
publicly-held companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal years ending
after December 15, 2008. The Company is currently analyzing the effects of SFAS
158 but does not expect its implementation will have a significant impact on the
Company's financial conditions or results of operations.
8
REGIONAL BANKSHARES, INC.
Note 2 - Recently Issued Accounting Pronouncements - continued
In September, 2006, The FASB ratified the consensuses reached by the FASB's
Emerging Issues Task Force (EITF) relating to EITF 06-4 "Accounting for the
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements". EITF 06-4 addresses employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability for future benefits in accordance with FASB Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", or Accounting Principles Board (APB) Opinion No.
12, "Omnibus Opinion--1967". EITF 06-4 is effective for fiscal years beginning
after December 15, 2006. Entities should recognize the effects of applying this
Issue through either (a) a change in accounting principle through a
cumulative-effect adjustment to retained earnings or to other components of
equity or net assets in the statement of financial position as of the beginning
of the year of adoption or (b) a change in accounting principle through
retrospective application to all prior periods. The Company does not believe the
adoption of EITF 06-4 will have a material impact on its financial position,
results of operations and cash flows.
On September 13, 2006, the SEC issued Staff Accounting Bulleting No. 108 ("SAB
108"). SAB 108 provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a potential current year misstatement. Prior to SAB 108, Companies
might evaluate the materiality of financial statement misstatements using either
the income statement or balance sheet approach, with the income statement
approach focusing on new misstatements added in the current year, and the
balance sheet approach focusing on the cumulative amount of misstatement present
in a company's balance sheet. Misstatements that would be material under one
approach could be viewed as immaterial under another approach, and not be
corrected. SAB 108 now requires that companies view financial statement
misstatements as material if they are material according to either the income
statement or balance sheet approach. The Company has analyzed SAB 108 and
determined that upon adoption it will have no impact on the reported results of
operations or financial conditions.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations and cash flows.
Note 3 - Stock-Based Compensation
On January 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123(R), Accounting for Stock-Based Compensation, to
account for compensation costs under its stock option plans. The Company
previously utilized the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (as amended) ("APB
25"). Under the intrinsic value method prescribed by APB 25, no compensation
costs were recognized for the Company's stock options because the option
exercise price in its plans equals the market price on the date of grant. Prior
to January 1, 2006, the Company only disclosed the pro forma effects on net
income and earnings per share as if the fair value recognition provisions of
SFAS 123(R) had been utilized.
On August 18, 2005, the board of directors approved accelerating the vesting of
132,000 unvested warrants. The accelerated vesting was effective as of August
18, 2005. As a result, no compensation expense has been recognized in 2006.
Nine Months Ended September 30,
-------------------------------
2006 2005
---- ----
Net income, as reported ........................................................ $ 417,295 $ 339,193
Stock-based employee compensation
expense included in reported net
income, net of related tax effects .......................................... - -
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects .................................. - (352,437)
-------------- -----------
Pro forma net income ........................................................... $ 417,295 $ (13,244)
============== ===========
Earnings per share:
Basic - as reported ......................................................... $ 0.57 $ 0.47
============== ===========
Basic - pro forma ........................................................... $ 0.57 $ (0.02)
============== ===========
Diluted - as reported ....................................................... $ 0.57 $ 0.46
============== ===========
Diluted - pro forma ......................................................... $ 0.57 $ (0.02)
============== ===========
9
REGIONAL BANKSHARES, INC.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Stock-Based Compensation - continued
Three Months Ended September 30,
--------------------------------
2006 2005
---- ----
Net income, as reported ....................................................... $ 121,772 $ 139,597
Stock-based employee compensation
expense included in reported net
income, net of related tax effects ......................................... - -
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ................................. - (286,273)
--------------- -----------
Pro forma net income .......................................................... $ 121,772 $ (146,676)
=============== ===========
Earnings per share:
Basic - as reported ........................................................ $ 0.17 $ 0.19
=============== ===========
Basic - pro forma .......................................................... $ 0.17 $ (0.20)
=============== ===========
Diluted - as reported ...................................................... $ 0.16 $ 0.19
=============== ===========
Diluted - pro forma ........................................................ $ 0.16 $ (0.20)
=============== ===========
On May 10, 2001, the shareholders approved the Regional Bankshares, Inc. "2001
Stock Option Plan" (the Plan). The Plan provides for grants of "Incentive Stock
Options," within the meaning of section 422 of the Internal Revenue Code and
"Non-qualified Stock Options" that do not so qualify. The Plan provides for the
issuance of up to 60,000 shares of the Company's common stock to officers and
key employees. Options may be granted for a term of up to ten years from the
effective date of grant. Options become exercisable ratably over three years
after being granted. The Board of Directors will determine the per-share
exercise price, but for incentive stock options the price will not be less than
100% of the fair value of a share of common stock on the date the option is
granted. As of September 30, 2006, the Company had 48,000 shares reserved for
issuance upon exercise of options under the Plan.
A summary of the plan and changes during reporting periods are presented below
(all share and per share data has been adjusted for stock dividends):
Nine Months Ended September 30,
-------------------------------
2006 2005
---- ----
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding at December 31 ................... 12,600 $ 10.31 18,900 $ 10.31
Granted ...................................... - -
Exercised .................................... - 4,200 10.31
Cancelled .................................... - 2,100 10.31
------ ------
Outstanding at September 30 .................. 12,600 10.31 12,600 10.31
====== ======
Three Months Ended September 30,
--------------------------------
2006 2005
---- ----
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding at June 30 ........................ 12,600 $ 10.31 18,900 $ 10.31
Granted ....................................... - -
Exercised ..................................... - 4,200 10.31
Cancelled ..................................... - 2,100 10.31
------ ------
Outstanding at September 30 ................... 12,600 10.31 12,600 10.31
====== ======
At September 30, 2006, 12,600 options were exercisable. The weighted average
remaining life and exercise price for both exercisable and non exercisable
options was 5.50 years and $10.31 per option, respectively.
10
REGIONAL BANKSHARES, INC.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Stock-Based Compensation - continued
In connection with the Company's initial public stock sale, each of the twelve
organizers received 6,000 stock warrants which gives them the right to purchase
6,000 shares of the Company's common stock at a price of $8.33 per share. The
warrants vested equally over a three-year period beginning September 15, 2000
and expire on September 15, 2010 or ninety days after the warrant holder ceases
to serve as a member of the Board of Directors. On November 18, 2004 the eleven
organizers who are still serving on the Board of Directors, were granted
additional warrants which give them the right to purchase an additional 132,000
shares of the Company's common stock at a price of $11.25 per share. The
warrants became fully vested on August 18, 2005.
A summary of the status of the Company's stock warrants and changes during the
reporting periods are presented below (all shares have been adjusted for stock
dividends):
Nine Months Ended September 30,
-------------------------------
2006 2005
------------- -------------
Outstanding at December 31 190,638 193,032
Granted - -
Exercised 14,028 1,134
Cancelled - -
------------- -------------
Outstanding at September 30 176,610 191,898
============= =============
Three Months Ended September 30,
--------------------------------
2006 2005
------------- -------------
Outstanding at June 30 181,650 193,032
Granted - -
Exercised 5,040 1,134
Cancelled - -
------------- -------------
Outstanding at September 30 176,610 191,898
============= =============
At September 30, 2006, 176,610 warrants were exercisable.
Note 4 - Earnings Per Share
A reconciliation of the numerators and denominators used to calculate basic and
diluted earnings per share are as follows:
In September 2006 we declared a five percent stock dividend 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.
Nine Months Ended September 30, 2006
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............... $ 417,295 726,401 $ 0.57
======
Effect of dilutive securities
Stock options and warrants ............................ 11,658
----------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ............................ $ 417,295 738,059 $ 0.57
=========== ======= ======
Nine Months Ended September 30, 2005
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............... $ 339,193 726,361 $ 0.47
======
Effect of dilutive securities
Stock options and warrants ............................ 12,289
--------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ............................ $ 339,193 738,650 $ 0.46
========= ======= ======
11
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Earnings Per Share - continued
Three Months Ended September 30, 2006
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ..................... $ 121,772 735,217 $ 0.17
=======
Effect of dilutive securities
Stock options and warrants .................................. 16,853
---------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions .................................. $ 121,772 752,070 $ 0.16
========== ======= =======
Three Months Ended September 30, 2005
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ..................... $ 139,597 726,756 $ 0.19
======
Effect of dilutive securities
Stock options and warrants .................................. 14,512
---------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions .................................. $ 139,597 741,268 $ 0.19
========== ======= ======
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,
2006 and 2005:
Nine Months Ended September 30, 2006
------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ...... $ 41,235 $ (15,257) $ 25,978
Plus: reclassification adjustment for gains (losses)
realized in net income ........................................... - - -
-------------- ------------- ------------
Net unrealized gains (losses) on securities ...................... 41,235 (15,257) 25,978
-------------- -------------- ------------
Other comprehensive income (loss) ................................... $ 41,235 $ (15,257) $ 25,978
============== ============== ============
12
REGIONAL BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 - Comprehensive Income - continued
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 (loss) ................................... $ (44,551) $ 16,484 $ (28,067)
============== ============= ============
Three Months Ended September 30, 2006
-------------------------------------
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ...... $ 78,230 $ (28,945) $ 49,285
Plus: reclassification adjustment for gains (losses)
realized in net income ........................................... - - -
-------------- ------------- ------------
Net unrealized gains (losses) on securities ...................... 78,230 (28,945) 49,285
-------------- -------------- ------------
Other comprehensive income (loss) ................................... $ 78,230 $ (28,945) $ 49,285
============== ============== ============
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 (loss) ................................... $ (3,666) $ 1,356 $ (2,310)
=============== ============= =============
Accumulated other comprehensive income consists solely of the unrealized gain
(loss) on securities available-for-sale, net of the deferred tax effects.
Note 6 - Junior Subordinated Debentures
On April 18, 2006, the Company sponsored the creation of a Connecticut statutory
trust, Regional Statutory Trust I (the "Trust"), and is the sole owner of the
common securities issued by the Trust. On April 20, 2006, the Trust issued
$3,000,000 in floating rate trust preferred securities. The proceeds of this
issuance, and the amount of the Company's investment in the common securities,
were used to acquire $3,093,000 principal amount of the Company's floating rate
junior subordinated debt securities due 2036 ("Debentures"), which securities,
and the accrued interest thereon, now constitute the Trust's sole assets. The
interest rate associated with the debt securities, and the distribution rate on
the common securities of the Trust, is adjustable quarterly at 3 month LIBOR
plus 177 basis points. The Company may defer interest payments on the Debentures
for up to twenty consecutive quarters, but not beyond the stated maturity date
of the Debentures. In the event that such interest payments are deferred by the
Company, the Trust may defer distributions on the trust preferred securities and
the common securities. In such an event, the Company would be restricted in its
ability to pay dividends on its common stock and perform under other obligations
that are not senior to the junior subordinated Debentures.
The Debentures are redeemable at par at the option of the Company, in whole or
in part, on any interest payment date on or after September 15, 2011. Prior to
that date, the Debentures are redeemable at par plus a premium of up to 3.14% of
par upon the occurrence of certain events that would have a negative tax effect
on the Trust or that would cause it to be required to be registered as an
investment company under the Investment Company Act of 1940 or that would cause
trust preferred securities not to be eligible to be treated as Tier 1 capital by
the Federal Reserve Board. Upon repayment or redemption of the Debentures, the
Trust will use the proceeds of the transaction to redeem an equivalent amount of
trust preferred securities and common securities. The Trust's obligations under
the trust preferred securities are unconditionally guaranteed by the Company.
13
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following is a discussion of our financial condition as of September 30,
2006 compared to December 31, 2005, and the results of operations for the three
and nine months ended September 30, 2006, compared to the three and nine months
ended September 30, 2005. This discussion 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,
2005.
Forward Looking Statements
This report contains "forward-looking statements" within the meaning of the
securities laws. All statements that are not historical facts are
"forward-looking statements." You can identify these forward-looking statements
through our use of words such as "may," "will," "expect," "anticipate,"
"believe," "intend," "estimate," "project," "continue," or other similar words.
Forward-looking statements include, but are not limited to, statements regarding
our future business prospects, revenues, working capital, liquidity, capital
needs, interest costs, income, business operations and proposed services.
These forward-looking statements are based on current expectations, estimates
and projections about our industry, management's beliefs, and assumptions made
by management. Such information includes, without limitation, discussions as to
estimates, expectations, beliefs, plans, strategies, and objectives concerning
our future financial and operating performance. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions that are difficult to predict, particularly in light of the fact
that we are a relatively new company with a limited operating history.
Therefore, actual results may differ materially from those expressed or
forecasted in such forward-looking statements. The risks and uncertainties
include, but are not limited to:
o Our growth and our ability to maintain growth;
o Governmental monetary and fiscal policies, as well as legislative
and regulatory changes;
o The effect of interest rate changes on our level and composition
of deposits, loan demand and the value of our loan collateral and
securities;
o The effects of competition from other financial institutions
operating in our market area and elsewhere, including
institutions operating locally, regionally, nationally and
internationally, together with competitors that offer banking
products and services by mail, telephone and computer and/or the
Internet;
o Repayment of loans by our borrowers;
o Failure of assumptions underlying the establishment of our
allowance for loan losses, including the value of collateral
securing loans; and
o Loss of consumer confidence and economic disruptions resulting
from terrorist activities.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties, and assumptions, the forward-looking
events discussed in this report might not occur.
14
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Results of Operations
Net Interest Income
For the nine months ended September 30, 2006, net interest income increased
$106,180, or 4.58%, to $2,424,859 as compared to $2,318,679 for the same period
in 2005. Interest income from loans, including fees, increased $650,427, or
21.53%, from the nine months ended September 30, 2005 to the comparable period
in 2006, as we continued to experience growth in our loan portfolio and as a
result of rising rates. Interest expense for the nine months ended September 30,
2006 was $1,518,613 as compared to $958,323 for the same period in 2005. The
increase in interest expense was due to rising interest rates and a change in
the bank's deposit mix to include more certificates of deposit. The net interest
margin realized on earning assets was decreased from 4.74% for the nine months
ended September 30, 2005 to 4.68% for the same period in 2006. The interest rate
spread decreased from 4.44% at September 30, 2005 to 4.29% at September 30,
2006.
For the quarter ended September 30, 2006, net interest income totaled $802,240,
an increase of $11,569, or 1.46%, when compared to the same quarter ended
September 30, 2005. Interest income from loans, including fees, totaled
$1,289,813 during the quarter ended September 30, 2006, as compared to
$1,052,265 during the comparable period in 2005. These increases in interest
income 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 $512,347 for the quarter
ended September 30, 2006, as compared to $281,705 for the same period in 2005.
The net interest margin realized on earning assets was 4.41% for the quarter
ended September 30, 2006, as compared to 4.76% during the same period in 2005.
The interest rate spread was 4.01% for the quarter ended September 30, 2006, as
compared to 4.42% for the quarter ended September 30, 2005.
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
nine months ended September 30, 2006, the provision charged to expense was
$111,000, as compared to $84,000 in the same period a year earlier. For the
quarter ended September 30, 2006, the provision charged to expense was $39,000,
as compared to $24,000 for the same period in 2005. The allowance represented
1.14% and 1.16% of gross loans at September 30, 2006 and 2005, 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.
15
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Noninterest Income
Noninterest income during the nine months ended September 30, 2006 was $559,314,
an increase of $157,174 from $402,140 during the comparable period in 2005.
Service charges totaled $343,147 for the nine months ended September 30, 2006 as
compared to $265,041 in the same period in 2005. This increase is a result of
the introduction of our Bounce Protection product in September 2005. Residential
mortgage origination fees decreased $18,872 as compared to the nine months ended
September 30, 2005. This decrease is attributable to a continued decline in
residential refinancing activity. Brokerage fee commissions increased from
$44,311 for the nine months ended September 30, 2005 to $68,847 for the nine
months ended September 30, 2006. The increase is attributable to a change in
personnel in the brokerage area.
For the quarter ended September 30, 2006, noninterest income was $203,080, an
increase of $49,550, or 32.27% from the same period ended September 30, 2005.
The largest component of noninterest income was service charges on deposit
accounts, which totaled $125,710 for the quarter ended September 30, 2006, as
compared to $103,177 for the quarter ended September 30, 2005. Residential
mortgage origination fees were $8,229 for the quarter ended September 30, 2006
as compared with $16,992 for the 2005 quarter. This decline from the previous
year is due to a decline in residential refinancing. Income from brokerage fee
commissions totaled $30,148 for the quarter ended September 30, 2006, an
increase from $12,969 for the quarter ended September 30, 2005.
Noninterest Expense
Total noninterest expense for the nine months ended September 30, 2006 was
$2,210,570, which was 5.34% higher than the $2,098,419 for the nine months ended
September 30, 2005. The largest category, salaries and employee benefits,
increased from $1,070,635 for the nine months ended September 30, 2005 to
$1,116,490 for the nine months ended September 30, 2006. 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 $146,769 to $156,247 for the nine months ended September 30,
2006. There was also an increase of $6,638 in furniture and fixtures expense
when compared to the previous year.
For the quarter ended September 30, 2006, noninterest expense increased $74,184,
or 10.62% as compared to the same period ended September 30, 2005. The largest
category, salaries and employee benefits, increased from $357,029 for the
quarter ended September 30, 2005 to $386,973 for the quarter ended September 30,
2006.
Income Taxes
The income tax expense for the nine months ended September 30, 2006 was
$245,308, an increase of $46,101 or 23.14% as compared to the same period ended
September 30, 2005. This is the result of an increase in income before taxes.
The effective tax rate was 37% for the nine months ended September 30, 2006 and
2005 and the quarters ended September 30, 2006 and 2005.
Net Income
The combination of the above factors resulted in net income for the nine months
ended September 30, 2006 of $417,295 as compared to net income of $339,193 for
the same period in 2005. For the quarter ended September 30, 2006, net income
was $121,772, as compared to net income of $139,597 for the same period in 2005.
16
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Financial Condition
Assets and Liabilities
During the first nine months of 2006, total assets increased $9,312,102 or
13.10%, when compared to December 31, 2005. Loans increased $4,216,284, or
7.20%, during the first nine months of 2006. Total deposits increased
$5,605,328, or 9.55%, from $58,697,895 at December 31, 2005 to $64,303,223 at
September 30, 2006. Other time deposits increased $6,922,319, or 33.83%, during
the first nine months of 2006. Savings deposits decreased $1,592,493 during the
first nine months of 2006. On April 18, 2006, the Company sponsored the creation
of a Connecticut statutory trust, Regional Statutory Trust I (the "Trust"), and
is the sole owner of the common securities issued by the Trust. On April 20,
2006, the Trust issued $3,000,000 in floating rate trust preferred securities.
The proceeds of this issuance, and the amount of the Company's investment in the
common securities, were used to acquire $3,093,000 principal amount of the
Company's floating rate junior subordinated debt securities due 2036
("Debentures"), which securities, and the accrued interest thereon, now
constitute the Trust's sole assets. Most of the proceeds of the Debentures were
used to increase the capital of the Bank.
Investment Securities
Investment securities increased slightly from $6,078,990 at December 31, 2005 to
$6,088,969 at September 30, 2006. All of the Bank's marketable investment
securities were designated as available-for-sale at September 30, 2006.
Loans
We continued our trend of loan growth during the first nine months of 2006. The
increase in loans was attributable to the Bank's marketing efforts as well as
growth in the Bank's market areas. Net loans increased $4,179,374, or 7.22%,
during the period. As shown below, the main component of growth in the loan
portfolio was real estate - construction loans which increased 56.10%, or
$4,888,553, from December 31, 2005 to September 30, 2006. Balances within the
major loans receivable categories as of September 30, 2006 and December 31, 2005
are as follows:
September 30, December 31,
2006 2005
-------------- --------------
Real estate - construction .......... $ 13,602,453 $ 8,713,900
Real estate - mortgage .............. 37,823,320 38,120,003
Commercial and industrial ........... 5,476,592 6,051,194
Consumer and other .................. 5,900,048 5,701,032
-------------- --------------
$ 62,802,413 $ 58,586,129
============== ==============
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
September 30, December 31,
2006 2005
-------------- --------------
Loans: Nonaccrual loans ........................................................ $ 306,146 $ 7,758
Accruing loans more than 90 days past due ...................................... $ 5,463 $ 520
Loans identified by the internal review mechanism:
Criticized ................................................................... $ 843,112 $ 368,357
Classified ................................................................... $ 350 $ 8,989
Criticized loans have potential weaknesses that deserve close attention and
could, if uncorrected, result in deterioration of the prospects for repayment or
the Bank's credit position at a future date. Classified loans are inadequately
protected by the sound worth and paying capacity of the borrower or any
collateral and there is a distinct possibility or probability that the Bank will
sustain a loss if the deficiencies are not corrected. The increase in Nonaccrual
loans was mainly due to a few loans associated with one customer experiencing
financial difficulty. The increase in criticized loans was mostly attributable
to a few real estate loans that demonstrated periods of being past due.
17
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:
Nine Months Ended
September 30,
-------------
2006 2005
---- ----
Balance, January 1, ......................................................... $ 681,238 $ 589,765
Provisions for loan losses for the period ................................... 111,000 84,000
Net loans (charged-off) recovered for the period ............................ (74,090) (23,472)
------------ -----------
Balance, end of period ...................................................... $ 718,148 $ 650,293
=========== ===========
Gross loans outstanding, end of period ...................................... $62,802,413 $56,205,697
Allowance for loan losses to loans outstanding .............................. 1.14% 1.16%
Deposits
During the first nine months of 2006, total deposits increased by $5,605,328, or
9.56% from December 31, 2005. This increase was due to the normal growth of the
Bank. The largest increase was in other time deposits, which increased
$6,922,319, or 33.83% from December 31, 2005. The increase was attributable to
the opening of new accounts during the period as well as current customers
moving funds from noninterest bearing and savings accounts into higher yielding
time deposits. Expressed in percentages, noninterest bearing deposits decreased
8.95% and interest bearing deposits increased 13.14%.
Balances within the major deposit categories as of September 30, 2006 and
December 31, 2005 are as follows:
September 30, December 31,
2006 2005
-------------- --------------
Noninterest-bearing demand deposits .......................................... $ 8,697,346 $ 9,551,816
Interest-bearing demand deposits ............................................. 7,645,154 7,519,826
Savings deposits ............................................................. 13,491,413 15,083,906
Time deposits $100,000 and over .............................................. 7,081,997 6,077,353
Other time deposits .......................................................... 27,387,313 20,464,994
-------------- --------------
$ 64,303,223 $ 58,697,895
============== ==============
Junior Subordinated Debentures
On April 18, 2006, the Company sponsored the creation of a Connecticut statutory
trust, Regional Statutory Trust I (the "Trust"), and is the sole owner of the
common securities issued by the Trust. On April 20, 2006, the Trust issued
$3,000,000 in floating rate trust preferred securities. The proceeds of this
issuance, and the amount of the Company's investment in the common securities,
were used to acquire $3,093,000 principal amount of the Company's floating rate
junior subordinated debt securities due 2036 ("Debentures"), which securities,
and the accrued interest thereon, now constitute the Trust's sole assets. The
interest rate associated with the debt securities is adjustable quarterly at 3
month LIBOR plus 177 basis points.
Liquidity
We meet our liquidity needs through scheduled maturities of loans and
investments and through pricing policies designed to attract interest-bearing
deposit accounts. The level of liquidity is measured by the loans-to-total
borrowed funds (which includes deposits) ratio, which was 89.01% at September
30, 2006 and 90.07% at December 31, 2005.
Securities available-for-sale, which totaled $6,088,969 at September 30, 2006,
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 September 30, 2006, unused lines of credit totaled $4,500,000. 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 $8,042,000
as of September 30, 2006. As of September 30, 2006, we have $6,250,000 in
borrowings against this line.
18
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. In addition to
commitments to extend credit, the Company also issues standby letters of credit
which are assurances to a third party that it will not suffer a loss if the
customer fails to meet a contractual obligation to the third party. At September
30, 2006, the Bank had issued commitments to extend credit of $8,415,615 and
$45,000 in standby letters of credit. Approximately $7,171,396 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,
2006.
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 ............ $ 994 $ 120,440 $2,192,265 $2,313,699 $6,101,916 $8,415,615
Standby letters of credit ...................... - 35,000 10,000 45,000 - 45,000
---------- ---------- ---------- ---------- ---------- ----------
Total ..................................... $ 994 $ 155,440 $2,202,265 $2,358,699 $6,101,916 $8,460,615
========== ========== ========== ========== ========== ==========
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, and 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, 2005 as
filed on our annual report on Form 10-KSB. Certain accounting policies involve
significant judgments and assumptions 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 the carrying values of our
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 2005 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.
19
REGIONAL BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Capital Resources
Total shareholders' equity increased from $5,587,582 at December 31, 2005 to
$6,142,144 at September 30, 2006. The increase is due to net income for the
period of $417,295, a negative change in the fair value of securities
available-for-sale of $25,978, and the exercise of warrants for $111,289.
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 Company's Tier 1 capital
consists of the same components as the Bank's plus the amount of the preferred
securities issued by Regional Statutory Trust I subject to certain limitations.
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
September 30, 2006 as well as the ratios to be considered "well capitalized."
The Company also exceeded all of its regulatory capital requirements at
September 30, 2006.
The following table summarizes the Bank's risk-based capital at September 30,
2006:
Shareholders' equity ..................................... $ 9,096,873
Less: intangibles ...................................... -
------------
Tier 1 capital ......................................... 9,096,873
Plus: allowance for loan losses (1) .................... 718,148
-------------
Total capital .......................................... $ 9,815,020
=============
Risk-weighted assets ................................... $ 70,872,048
=============
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ............... 12.84%
Total capital (to risk-weighted assets) ................ 13.85%
Tier 1 capital (to total average assets) ............... 11.94%
(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.
20
REGIONAL BANKSHARES, INC.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On July 7, 2006 the Company issued 4,800 shares of the Company's common stock to
a director upon the exercise of stock warrants for an aggregate price of
$39,984. Issuance of the shares was not registered under the Securities Act of
1933 in reliance on the exemption provided by Section 4(2) thereof because no
public offering was involved.
Item 6. 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.
21
REGIONAL BANKSHARES, INC.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: November 10, 2006 /s/ CURTIS A. TYNER
------------------ ---------------------------------
Curtis A. Tyner, President,
Chief Executive Officer and Chief
Financial Officer
22
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.
23