UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003 Commission File No. 000-22054
COMMUNITY BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0966962
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
791 Broughton Street, Orangeburg, SC 29115
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code (803) 535-1060
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, No Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act:) Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of the last business day of the registrant's most recently
completed second fiscal quarter, June 30, 2003 was approximately $53,081,000.
As of March 12, 2004, there were 4,336,112 shares of the registrant's common
stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of
Shareholders - Part III
10-K TABLE OF CONTENTS
Part I Page
Item 1 Description of Business .............................................................. 3
Item 2 Description of Property .............................................................. 10
Item 3 Legal Proceedings .................................................................... 10
Item 4 Submission of Matters to a Vote of Security Holders .................................. 10
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Securities .................................................... 11
Item 6 Selected Financial Data .............................................................. 12
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................ 13
Item 7A Quantitative and Qualitative Disclosures about Market Risk ........................... 31
Item 8 Financial Statements and Supplementary Data .......................................... 34
Independent Auditor's Report ......................................................... 35
Consolidated Balance Sheets, December 31, 2003 and 2002 .............................. 36
Consolidated Statements of Income,
Years Ended December 31, 2003, 2002 and 2001 ...................................... 37
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 2003, 2002 and 2001 ...................................... 38
Consolidated Statements of Cash Flows,
Years Ended December 31, 2003, 2002 and 2001 ...................................... 39
Notes to Consolidated Financial Statements ........................................... 40
Quarterly Data for 2003 and 2002 ..................................................... 67
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ............................................ 67
Item 9A Controls and Procedures .............................................................. 67
Part III
Item 10 Directors and Executive Officers of the Registrant ................................... *
Item 11 Executive Compensation ............................................................... *
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ....................................................... *
Item 13 Certain Relationships and Related Transactions ....................................... *
Item 14 Principal Accountant Fees and Services ............................................... 70
Part IV
Item 15 Exhibits and Reports on Form 8-K ..................................................... 71
* Incorporated by reference to Registrant's Proxy Statement for the 2004 Annual
Meeting of Shareholders
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FORWARD-LOOKING STATEMENTS
Statements included in this report which are not historical in nature
are intended to be, and are hereby identified as `forward-looking statements'
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use the of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "projects," and similar expressions.
The Corporation's expectations, beliefs, estimates and projections are expressed
in good faith and are believed by the Corporation to have a reasonable basis,
including without limitation, management's examination of historical operating
trends, data contained in the Corporation's records and other data available
from third parties, but there can be no assurance that management's
expectations, beliefs, estimates or projections will result or be achieved or
accomplished. The Corporation cautions readers that forward-looking statements,
including without limitation, those relating to the Corporation's recent and
continuing expansion, its future business prospects, revenues, working capital,
liquidity, capital needs, interest costs, income, and adequacy of the allowance
for loan losses, are subject to risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward-looking
statements, due to several important factors herein identified, among others,
and other risks and factors identified from time to time in the Corporation's
reports filed with the Securities and Exchange Commission. The Corporation
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
PART I
Item 1. Description of Business
Form of organization
Community Bankshares, Inc. (CBI or the Corporation) is a South Carolina
corporation and a bank holding company. CBI commenced operations on July 1,
1993, upon effectiveness of the acquisition of the Orangeburg National Bank as a
wholly-owned subsidiary. In June 1996 CBI acquired all the stock of Sumter
National Bank, which is also a wholly-owned subsidiary. In July 1998 CBI
acquired all the stock of Florence National Bank, which is also a wholly-owned
subsidiary. In July 2002 CBI acquired by merger Ridgeway Bancshares, Inc., the
parent company of the Bank of Ridgeway.
Orangeburg National Bank (the Orangeburg bank) is a national bank,
chartered in 1987, operating from two offices located in Orangeburg, South
Carolina.
Sumter National Bank (the Sumter bank) is a national bank, chartered in
1996, operating from two offices located in Sumter, South Carolina.
Florence National Bank (the Florence bank) is a national bank,
chartered in 1998, operating from one office located in Florence, South
Carolina.
Bank of Ridgeway (the Ridgeway bank) is a South Carolina
state-chartered bank, organized in 1898, operating from one office in Ridgeway,
one office in Winnsboro, and one office in Blythewood, South Carolina.
In November 2001, CBI acquired all the common stock of Resource
Mortgage Inc., a Columbia, South Carolina based mortgage company. The mortgage
company operates as a wholly-owned subsidiary of the holding company and is now
named Community Resource Mortgage, Inc. (CRM).
Business of banking
The Orangeburg, Sumter, Florence and Ridgeway banks (hereafter referred
to as the Banks) offer a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. The Federal Deposit Insurance Corporation
insures deposits up to applicable limits. Most of the Banks' deposits are
attracted from individuals and small businesses.
The Banks offer secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial and consumer
purposes. Consumer loans include car loans, home equity improvement loans
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secured by first and second mortgages, personal expenditure loans, education
loans, and the like. Commercial loans include short-term unsecured loans, short
and intermediate term real estate mortgage loans, loans secured by listed
stocks, loans secured by equipment, inventory, accounts receivable, and the
like. The Banks do not and will not discriminate against any applicant for
credit on the basis of race, color, creed, sex, age, marital status, familial
status, handicap, or derivation of income from public assistance programs.
Other services offered by the Banks include safe deposit boxes, night
depository service, VISA and Master Card brand charge cards (through a
correspondent), tax deposits, sale of U.S. Treasury bonds, notes and bills and
other U. S. government securities (through a correspondent), twenty-four hour
automated teller service, and Internet banking services. Each of the Banks has
ATMs and they are all part of the Star and Cirrus networks.
The mortgage company provides a wide variety of one to four family
residential mortgage products in the Columbia, Sumter and Anderson, South
Carolina markets.
Competition
The market for financial institutions in our various markets is
generally highly competitive. Banks generally compete with other financial
institutions through the banking services and products offered, the pricing of
services, the level of service provided, the convenience and availability of
services, and the degree of expertise and personal concern with which services
are offered. The Banks encounter strong competition from most of the financial
institutions in their market areas.
The market area for the Orangeburg bank generally encompasses an area
extending nine miles around the city of Orangeburg. The market area for the
Sumter bank generally encompasses the county of Sumter. The market area for the
Florence bank generally encompasses the city of Florence. The market area for
the Ridgeway bank generally encompasses Fairfield County (for the Ridgeway and
Winnsboro offices) and the town of Blythewood in Richland County. In the conduct
of certain banking business, the Banks also compete with credit unions, consumer
finance companies, insurance companies, money market mutual funds, and other
financial institutions, some of which are not subject to the same degree of
regulation and restrictions imposed upon the Banks. Many of these competitors
have substantially greater resources and lending limits than the Banks and offer
certain services, such as international banking and trust services, which the
Banks do not provide. The Banks believe, however, that their relatively small
size permits them to offer more personalized services than many of their
competitors. The Banks attempt to compensate for their lower lending limits by
participating larger loans with other institutions, often with each other.
Most of the other financial institutions in the Orangeburg, Sumter,
Florence and most of the Ridgeway service areas are branch offices of large,
regional banks with offices located throughout South Carolina. At June 30, 2003,
there were five financial institutions competing with the Corporation in the
city of Orangeburg, eight financial institutions competing with the Corporation
in Sumter County, and 16 financial institutions competing with the Corporation
in the city of Florence. At June 30, 2003, the Orangeburg bank had the second
largest deposit base in the city of Orangeburg; the Sumter bank had the third
largest deposit base in Sumter County; the Florence bank had the seventh largest
deposit base in the city of Florence; and the Ridgeway bank had the largest
deposit base in Fairfield County and half the deposits in the town of
Blythewood.
The mortgage company has offices in Anderson, Richland and Sumter
Counties of South Carolina, where it competes with hundreds of financial
institutions and mortgage originators.
Dependence on Major Customers
The Banks do not consider themselves dependent on any single customer
or small group of customers, either in the deposit or lending areas.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of CBI and the Banks.
As discussed below under the caption "Gramm-Leach-Bliley Act", Congress
has adopted extensive changes in the laws governing the financial services
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industry. Among the changes adopted are creation of the financial holding
company, a new type of bank holding company with powers that greatly exceed
those of standard holding companies, and creation of the financial subsidiary, a
subsidiary that can be used by national banks to engage in many, though not all,
of the same activities in which a financial holding company may engage. The
legislation also establishes the concept of functional regulation whereby the
various financial activities in which financial institutions engage are overseen
by the regulator with the relevant regulatory experience. Neither CBI nor any of
the Banks has yet made a decision as to how to adapt the new legislation to its
use. Accordingly, the following discussion relates to the supervisory and
regulatory provisions that apply to CBI and the Banks as they currently operate.
Regulation of Bank Holding Companies
General
As a bank holding company registered under the Bank Holding Company Act
("BHCA"), CBI is subject to the regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). Under the BHCA, CBI's activities
and those of its subsidiaries are limited to banking, managing or controlling
banks, furnishing services to or performing services for its subsidiaries or
engaging in any other activity which the Federal Reserve determines to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. The BHCA prohibits CBI from acquiring direct or indirect
control of more than 5% of the outstanding voting stock or substantially all of
the assets of any bank or from merging or consolidating with another bank
holding company without prior approval of the Federal Reserve. The BHCA also
prohibits CBI from acquiring control of any bank operating outside the State of
South Carolina unless such action is specifically authorized by the statutes of
the state where the bank to be acquired is located.
Additionally, the BHCA prohibits CBI from engaging in or from acquiring
ownership or control of more than 5% of the outstanding voting stock of any
company engaged in a non-banking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA generally does not place territorial restrictions on
the activities of such non-banking-related activities.
As discussed below under "Gramm-Leach-Bliley Act", a bank holding
company that meets certain requirements may now qualify as a financial holding
company and thereby significantly increase the variety of services it may
provide and the investments it may make.
CBI is also subject to limited regulation and supervision by the South
Carolina State Board of Financial Institutions (the "State Board"). A South
Carolina bank holding company may be required to provide the State Board with
information with respect to the financial condition, operations, management and
inter-company relationships of the holding company and its subsidiaries. The
State Board also may require such other information as is necessary to keep
itself informed about whether the provisions of South Carolina law and the
regulations and orders issued thereunder by the State Board have been complied
with, and the State Board may examine any bank holding company and its
subsidiaries. Furthermore, pursuant to applicable law and regulations, the
Company must receive approval of, or give notice to (as applicable) the State
Board prior to engaging in the acquisition of banking or non-banking
institutions or assets.
Obligations of Holding Company to its Subsidiary Banks
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policies that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of stockholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
5
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision gives depositors a preference over general and subordinated creditors
and stockholders in the event a receiver is appointed to distribute the assets
of the bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's shareholders', pro rata, and to the
extent necessary, if any such assessment is not paid by any shareholder after
three months notice, to sell the stock of such shareholder to make good the
deficiency.
Capital Adequacy Guidelines for Bank Holding Companies and Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC, have adopted risk-based and leverage capital adequacy guidelines
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance-sheet exposures, as adjusted for credit risks. The
capital guidelines and CBI's capital position are summarized in Note 19 to the
Financial Statements, contained elsewhere in this report. All four of the Banks
are considered well capitalized.
Failure to meet capital guidelines could subject the Banks to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.
Payment of Dividends
CBI is a legal entity separate and distinct from the Banks. Most of the
revenues of CBI result from dividends paid to CBI by the Banks. There are
statutory and regulatory requirements applicable to the payment of dividends by
subsidiary banks as well as by CBI to its shareholders.
Each national banking association is required by federal law to obtain
the prior approval of the OCC for the payment of dividends if the total of all
dividends declared by the board of directors of such bank in any year will
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two years, less any required
transfers to surplus. In addition, national banks can only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined by regulation). South Carolina banking regulations
also restrict the amount of dividends that banks can pay shareholders. Any
dividends by a South Carolina state bank that exceed the bank's total
year-to-date earnings are subject to prior approval of the South Carolina
Commissioner of Banking and are generally payable only from undivided profits.
Payment of dividends by a state bank would also be prohibited if the effect
would be to cause the Bank's capital to fall below applicable minimum capital
requirements.
The payment of dividends by CBI and the Banks may also be affected or
limited by other factors, such as the requirements to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the Banks, could include the payment of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. The OCC has indicated that paying dividends that deplete a national
bank's capital base to an inadequate level would be an unsafe and unsound
banking practice. The Federal Reserve, the OCC and the FDIC have issued policy
statements, which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
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Certain Transactions by CBI with its Affiliates
Federal law regulates transactions among CBI and its affiliates,
including the amount of the Banks' loans to or investments in nonbank affiliates
and the amount of advances to third parties collateralized by securities of an
affiliate. Further, a bank holding company and its affiliates are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
Because Orangeburg National Bank's, Sumter National Bank's, Florence
National Bank's and the Bank of Ridgeway's deposits are insured by the Bank
Insurance Fund of the FDIC ("BIF"), the Banks are subject to semiannual
insurance assessments imposed by the FDIC. Since January 1, 1997, the
assessments imposed on all FDIC deposits for deposit insurance have an effective
rate ranging from 0 to 27 basis points per $100 of insured deposits, depending
on the institution's capital position and other supervisory factors. However,
legislation enacted in 1996 requires that both Savings Association Insurance
Fund ("SAIF") insured and BIF insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO").
The FICO assessment is adjusted quarterly to reflect changes in the assessment
bases of the respective funds based on quarterly Call Report and Thrift
Financial Report submissions.
Regulation of the Banks
Orangeburg National Bank, Sumter National Bank, and Florence National
Bank are also subject to regulation and examination by the OCC bank examiners.
The Bank of Ridgeway is subject to regulation and examination by FDIC and the
State Board. In addition, the Banks are subject to various other state and
federal laws and regulations, including state usury laws, laws relating to
fiduciaries, consumer credit laws and laws relating to branch banking. The
Banks' loan operations are subject to certain federal consumer credit laws and
regulations promulgated thereunder, including, but not limited to: the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to
provide certain information concerning their mortgage lending; the Equal Credit
Opportunity Act and the Fair Housing Act, prohibiting discrimination on the
basis of certain prohibited factors in extending credit; the Fair Credit
Reporting Act, governing the use and provision of information to credit
reporting agencies; the Bank Secrecy Act, dealing with, among other things, the
reporting of certain currency transactions; and the Fair Debt Collection Act,
governing the manner in which consumer debts may be collected by collection
agencies. The deposit operations of the Banks are subject to the Truth in
Savings Act, requiring certain disclosures about rates paid on savings accounts;
the Expedited Funds Availability Act, which deals with disclosure of the
availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's actual
performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
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A bank that is "undercapitalized" becomes subject to provisions of the
Federal Deposit Insurance Act ("FDIA") restricting payment of capital
distributions and management fees; requiring the OCC to monitor the condition of
the bank; requiring submission by the bank of a capital restoration plan;
restricting the growth of the bank's assets and requiring prior approval of
certain expansion proposals. A bank that is "significantly undercapitalized" is
also subject to restrictions on compensation paid to senior management of the
bank, and a bank that is "critically undercapitalized" is further subject to
restrictions on the activities of the bank and restrictions on payments of
subordinated debt of the bank. The purpose of these provisions is to require
banks with less than adequate capital to act quickly to restore their capital
and to have the OCC move promptly to take over banks that are unwilling or
unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 ("Riegle-Neal"), CBI and any other adequately capitalized bank holding
company located in South Carolina can acquire a bank located in any other state,
and a bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. Riegle-Neal also provides that, in any state that has not
previously elected to prohibit out-of-state banks from operating interstate
branches within its territory, adequately capitalized and managed bank holding
companies can consolidate their multistate bank operations into a single bank
subsidiary and branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if it is expressly permitted by the laws of
the host state. The authority of a bank to establish and operate branches within
a state will continue to be subject to applicable state branching laws. South
Carolina law was amended, effective July 1, 1996, to permit such interstate
branching but not de novo branching by an out-of-state bank.
The Riegle-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger customers. These advantages
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region. As a result, the Banks do not generally
attempt to compete for the banking relationships of large corporations, but
concentrate their efforts on small to medium-sized businesses and on
individuals. CBI believes its Banks have competed effectively in this market
segment by offering quality, personal service.
Legislative Proposals
Legislation which could significantly affect the business of banking is
introduced in Congress from time to time. CBI cannot predict the future course
of such legislative proposals or their impact on CBI should they be adopted.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act, which makes it easier for affiliations
between banks, securities firms and insurance companies to take place, became
effective in March 2000. The Act removes Depression-era barriers that had
separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information.
Under provisions of the legislation and regulations adopted by the
appropriate regulators, banks, securities firms and insurance companies are able
to structure new affiliations through a holding company structure or through a
financial subsidiary. The legislation creates a new type of bank holding company
called a "financial holding company" which has powers much more extensive than
those of standard holding companies. These expanded powers include authority to
engage in "financial activities," which are activities that are (1) financial in
nature; (2) incidental to activities that are financial in nature; or (3)
complementary to a financial activity and that do not impose a safety and
soundness risk. Significantly, the permitted financial activities for financial
holding companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
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a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.
The Act and the regulations adopted pursuant to the Act create new
opportunities for CBI to offer expanded services to customers in the future,
though CBI has not yet determined what the nature of the expanded services might
be or when CBI might find it feasible to offer them. The Act has increased
competition from larger financial institutions that are currently more capable
than CBI of taking advantage of the opportunity to provide a broader range of
services. However, CBI continues to believe that its commitment to providing
high quality, personalized service to customers will permit it to remain
competitive in its market area.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of CBI are subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on CBI cannot be predicted.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act was signed into law on July 30, 2002, and
mandated extensive reforms and requirements for public companies. The SEC has
adopted extensive new regulations pursuant to the requirements of the
Sarbanes-Oxley Act. The Sarbanes-Oxley Act and the SEC's new regulations have
increased the Corporation's cost of doing business, particularly its fees for
internal and external audit services and legal services, and the law and
regulations are expected to continue to do so. However, the Corporation does not
believe that it will be affected by Sarbanes-Oxley and the new SEC regulations
in ways that are materially different or more onerous than those of other public
companies of similar size and in similar businesses.
Employees
At December 31, 2003 the Corporation employed 190 full time equivalent
employees. Management believes that its employee relations are excellent.
9
Further Information
Further information about the business of the Corporation and the Banks
is set forth in this Form 10-K under Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Item 2. Description of Property
The Orangeburg bank owns land located at 1820 Columbia Road NE, in
Orangeburg, South Carolina, where the Orangeburg bank maintains its main office.
The Bank operates from a one-story building of approximately 7,000 square feet.
The Orangeburg bank also owns a building, which was previously a branch of the
bank, at the corner of Broughton and Glover Streets in Orangeburg. The
Orangeburg bank currently rents this facility to the Corporation for office
space. In June 1999, the Bank moved into a branch facility located adjacent to
the old building. This branch office is approximately 6,500 square feet.
The Corporation's Sumter bank has fee simple title to land and a
one-story 6,500 square foot building located at 683 Bultman Drive, in Sumter,
South Carolina, where the Sumter bank maintains its main office. The Sumter bank
opened a branch bank on West Liberty Street in Sumter in February 2002. The
branch is a one-story building of approximately 3,600 square feet. The land,
approximately one acre, is leased under a non-cancellable operating lease for an
initial term of twenty years. The lease terms provide for four five-year renewal
options after the initial term. The Sumter bank is responsible for property
taxes and improvements.
The Florence bank leases approximately 1.7 acres of land located at
2009 Hoffmeyer Road in Florence, South Carolina. This land is the site of the
main office for the Florence bank. The lease is for an initial term of ten years
and provides for two ten year renewals and a final two year renewal. The
Florence bank is responsible for property taxes and improvements. The
Corporation constructed a one-story building for the Florence bank of
approximately 7,500 share feet on the leased site.
The Ridgeway bank's main office is located in a two story building on a
quarter acre site owned by the Bank at 100 S. Palmer St. in Ridgeway. The bank
also owns a 1,590 square foot one story branch office on a .9 acre site at 115
McNulty St. in Blythewood, SC. The bank also owns a 1,900 square foot one story
branch office on a one acre site at 610 West Moultrie St. in Winnsboro, SC.
The mortgage company operates from leased offices located at 508
Hampton Street, Suite 201, Columbia, SC, 304 West Westmark, Sumter, SC, and 2406
North Main Street, Anderson, SC. The Columbia office is leased under the terms
of a five year lease. At the end of that period, the lease will automatically
renew on a month-to-month basis. The other offices are rented under
month-to-month rental agreements.
Information about future lease payments is included in Note 7 to the
consolidated financial statements contained elsewhere in this report.
The Corporation has acquired approximately three acres of land in the
northeast area of the City of Orangeburg and will soon begin the construction of
a corporate headquarters and operations center building on that property. It is
anticipated that the new building will be completed in early 2005.
Item 3. Legal Proceedings
The Company, the Banks and the Mortgage Company are from time to time
subject to legal proceedings in the ordinary course of their business. No
proceedings were pending at December 31, 2003, that management believes are
likely to have a material adverse effect on the Company or its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the security holders during the
fourth quarter of 2003.
10
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Securities
The Corporation's shares of Common Stock are traded on the American
Stock Exchange (the AMEX) under the ticker symbol SCB.
The following table summarizes the range of high and low prices for the
Corporation's Common Stock as reported on the American Stock Exchange for each
quarterly period over the last two years.
Quarter Ended High Low
------------- ----- ---
March 31, 2002 $ 14.75 $ 12.75
June 30, 2002 $ 17.75 $ 14.35
September 30, 2002 $ 17.50 $ 15.00
December 31, 2002 $ 16.75 $ 14.60
March 31, 2003 $ 17.09 $ 14.50
June 30, 2003 $ 16.45 $ 15.00
September 30, 2003 $ 18.85 $ 15.91
December 31, 2003 $ 19.40 $ 18.10
During 2003, the Corporation had stock sales volume of 416,600 shares
compared with 268,400 shares the prior year.
There were 2,104 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 2003 compared with 2,087 the prior year.
During 2003, The Corporation authorized and paid quarterly cash
dividends totaling 36 cents per share. The total cost of these dividends was
$1,554,000 or 27.6% of after tax profits. During 2002, the Corporation
authorized and paid quarterly cash dividends totaling 32 cents per share. The
total cost of these dividends was $1,218,000 or 22.6% of after tax profits. The
dividend policy of the Corporation is subject to the discretion of the Board of
Directors and depends upon a number of factors, including earnings, financial
condition, cash needs and general business conditions, as well as applicable
regulatory considerations. Subject to ongoing review of these circumstances, the
Board expects to maintain a reasonable, safe, and sound dividend payment policy.
The current source of dividends to be paid by the Corporation is the
dividends received from its banking subsidiaries. Accordingly, the laws and
regulations that govern the payment of dividends by national banking
associations and state chartered banks may restrict the Corporation's ability to
pay dividends. National banks may pay dividends only out of present and past
earnings and state banks may only pay out of current earnings without regulatory
approval. Both are subject to numerous limitations designed to ensure that the
Banks have adequate capital to operate safely and soundly (See Item 1.
Description of Business - Supervision and Regulation - Payment of Dividends). At
December 31, 2003 the Banks could pay up to $9,902,000 in dividends without
special approval of their regulators.
The information required by Item 201(d) of Regulation S-K is set forth
in Item 12 of this Form 10-K.
The Corporation did not purchase any shares of its common stock during
the fourth quarter of 2003.
11
Item 6. Selected Financial Data
The following is a summary of the consolidated financial position and
results of operations of the Corporation for the years ended December 31, 1999
through December 31, 2003.
Community Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except per share data)
Years Ended December 31,
------------------------
Five Year
Compound
2003 2002 (1) 2001 (2) 2000 1999 Growth Rate
---- -------- -------- ---- ---- -----------
INCOME STATEMENT DATA
Net interest income ...................... $ 16,708 $ 14,625 $ 10,940 $ 10,228 $ 8,430 19.82%
Provision for loan losses ................ 1,119 1,033 650 688 612 18.25%
Noninterest income ....................... 9,125 7,194 3,584 1,966 1,479 53.96%
Noninterest expense ...................... 15,932 12,465 7,810 6,552 6,066 25.55%
Net income ............................... 5,635 5,401 3,908 3,147 2,182 29.17%
PER COMMON SHARE (3)
Net income - basic ....................... $ 1.31 $ 1.42 $ 1.21 $ 0.99 $ 0.68 20.30%
Net income - diluted ..................... 1.27 1.38 1.20 0.98 0.68 20.02%
Cash dividends ........................... 0.36 0.32 0.28 0.22 0.19 19.14%
Book value ............................... 11.10 10.16 8.35 7.24 6.35 12.54%
BALANCE SHEET DATA (YEAR END)
Total assets ............................. $466,580 $437,320 $318,617 $273,323 $228,030 20.68%
Loans held for resale .................... 8,411 24,664 10,265 343 269 63.40%
Loans, net ............................... 327,900 302,911 237,340 192,996 155,422 22.88%
Deposits ................................. 378,704 337,062 255,433 218,811 184,364 20.73%
Shareholders' equity ..................... 48,070 43,717 27,547 23,139 20,245 19.58%(4)
FINANCIAL RATIOS
Return on average assets ................. 1.25% 1.43% 1.36% 1.26% 1.06%
Return on average equity ................. 12.17% 15.10% 15.58% 14.67% 11.12%
Net interest margin ...................... 3.95% 4.14% 4.00% 4.34% 4.37%
OPERATIONS DATA
Banks' branch offices .................... 8 8 4 4 4
Mortgage loan offices .................... 3 3 3 - -
Employees (full-time equivalent) ......... 190 175 126 84 85
(1) July, 2002 - Ridgeway Bancshares, Inc. acquired.
(2) November, 2001 - Community Resource Mortgage, Inc. acquired
(3) Per share amounts have been retroactively adjusted to reflect a five
percent stock dividend issued in 2000.
(4) Includes growth from proceeds of issuances of stock
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
INTRODUCTION
The discussion and data presented below analyze major factors and
trends regarding the financial condition and results of operations of Community
Bankshares Inc. and its subsidiaries for the three year period ended December
31, 2003. This information should be reviewed in conjunction with the
consolidated financial statements and related notes contained elsewhere in this
report.
Business of the Corporation
Community Bankshares Inc. is a bank holding company. CBI owns four
banking subsidiaries: Orangeburg National Bank, Sumter National Bank, Florence
National Bank, and the Bank of Ridgeway (acquired in July 2002), and a mortgage
company subsidiary, Community Resource Mortgage, Inc. (acquired in November
2001). CBI provides item and data processing and other technical services for
its subsidiaries. The consolidated financial report for 2003 represents the
operations of the holding company, its banks and the mortgage company on a
consolidated basis. Condensed parent-only financial statements are presented in
the notes to the consolidated financial statements.
Orangeburg National Bank is a national banking association and
commenced operations in November 1987. It operates two offices in Orangeburg,
South Carolina. Sumter National Bank is a national banking association and
commenced operations in June 1996. It operates two offices in Sumter, South
Carolina. Florence National Bank is a national banking association and commenced
operations in July 1998. It operates one office in Florence, South Carolina. The
Bank of Ridgeway is a state chartered bank and operates from three offices,
located in Ridgeway, Winnsboro and Blythewood, SC. The banks provide a variety
of commercial banking services in their respective communities. Their primary
customer markets are consumers and small to medium sized businesses.
Community Resource Mortgage, Inc. is a South Carolina corporation that
commenced business in 1996, and was acquired by the Corporation in 2001. It is a
mortgage brokerage company that provides a variety of one to four family
residential mortgage products, primarily for resale in the secondary market,
from offices in Columbia, Sumter and Anderson, South Carolina.
EARNINGS PERFORMANCE
2003 compared with 2002
Net income for 2003 was substantially influenced by four major factors:
o interest rates were stable at historically low levels which put pressure on
net interest margin but also resulted in extremely heavy volumes of initial
financing and refinancing of residential real estate loans (refinancing
activity diminished significantly in the fourth quarter) and continuing
"call" activity by issuers of investment securities;
o the Corporation recorded twelve months of operations for Bank of Ridgeway,
which was acquired in July of 2002;
o the Sumter bank opened an additional branch office; and
o there were significant increases in noninterest income and expenses,
primarily due to increased fee income in CRM and the recognition of the
results of operations of the Ridgeway bank for a full year in 2003 compared
with only half of a year in 2002.
For the year ended December 31, 2003, the Corporation recorded net
income of $5,635,000, an increase of $234,000, or 4.3%, over net income of
$5,401,000 for 2002. Net income per share for 2003 was $1.31 compared with $1.42
for 2002. Diluted net income per share was $1.27 for 2003 and $1.38 for 2002.
Return on average assets was 1.25% for 2003 compared with 1.43% for 2002. Return
on average shareholders' equity was 12.17% for 2003 compared with 15.10% for
2002. Per share income amounts were affected negatively in 2003 by the
anticipated dilutive effect of the inclusion for the entire year of the one
million shares issued to acquire the Ridgeway bank. Such shares impacted the
2002 calculation of average shares outstanding for only one-half of the year.
Similarly, the 2003 return statistics include the Ridgeway bank's average assets
and average equity amounts for the full year in 2003, but only one-half year of
such amounts were included in 2002.
Net interest income increased significantly for 2003 despite a 19 basis
point (one basis point equals one one-hundredth of one percent) decrease in the
net interest margin. Increased volumes of loans and significantly reduced rates
paid for interest bearing deposit liabilities offset, to a large extent, the
13
effects of a 70 basis point reduction in the earning assets yield. CBI's
short-term borrowings costs increased, however, due to the funding needs of CRM.
Average short-term borrowings for 2003 were $10,314,000 more than the average
amount for 2002 and the rate paid in 2003 was slightly higher than in 2002.
Interest expense related to this funding source increased by $272,000 in 2003.
The average rate paid for interest bearing deposits in 2003 decreased by 62
basis points from the 2002 rate and 2003 deposit interest expenses decreased by
$831,000 to $5,687,000.
2002 compared with 2001
In 2002, the Corporation's net income was enhanced by robust activity
in the CRM subsidiary and the inclusion of the operating results of the Ridgeway
bank for the last half of the year. Interest rates declined in the last half of
2001 and were at or near historic lows during 2002. This condition helped to
increase home mortgage loan originations and refinancing activities. The
Corporation's interest income increased slightly in 2002 from 2001. In 2002 the
Corporation earned $22,744,000 in total interest income, up from the prior
year's $21,201,000. This represented a $1,543,000 or 7.3% increase. This growth
was the result of increased volumes of earning assets, which more than offset
the reduction in yields.
For the year ended December 31, 2002, the Corporation recorded net
income of $5,401,000, an increase of $1,493,000, or 38.2%, over net income of
$3,908,000 for 2001. Net income per share for 2002 was $1.42 compared with $1.21
for 2001. Per share net income, assuming dilution for unexercised stock options
was $1.38 for 2002 and $1.20 for 2001. Return on average assets was 1.43% for
2002 compared with 1.36% for 2001. Return on average shareholders' equity was
15.10% for 2002 compared with 15.58% for 2001. Because the Ridgeway bank was
acquired in a purchase method transaction in July 2002, the 2002 statistics
include the Ridgeway bank's income, average assets and average equity amounts
for only one-half year.
Comprehensive Income
Comprehensive income for 2003, 2002 and 2001 was $5,595,000,
$5,506,000, and $4,032,000, respectively. Accounting principles generally
require that recognized revenue, expenses, gains and losses be included in net
income. Other elements of comprehensive income for the Corporation are
correlated directly to the effects that changing market rates of interest have
on the fair values of the Corporation's holdings of available-for-sale
securities. The resulting changes in unrealized holding gains and losses on such
securities are reported as a separate component of shareholders' equity. Those
changes in fair value, net of income tax effects, are the only elements of
comprehensive income.
Net Interest Income
Net interest income, the difference between interest income earned and
interest expense incurred, is the principal source of the Corporation's
earnings. Net interest income is affected by changes in the levels of interest
rates and by changes in the volume and mix of interest earning assets and
interest bearing liabilities. During 2003 and 2002, market interest rates were
generally stable. In 2001, however, market interest rates fell sharply
throughout the year. During the three year period ended December 31, 2003, the
Federal Reserve Board sought to provide stimulus to the U.S. economy by
attaining and, then, maintaining interest rates at low levels. The effects of
these actions on the Corporation were varied. The Corporation's overall funding
costs decreased during the period, but there were similar decreases in the
yields realized on loans and investments. The mortgage subsidiary was inundated
with extremely large volumes of originations and refinancing activity, which
strained its ability both to fund and to process those transactions until the
volume diminished in the fourth quarter of 2003.
Net interest income was $16,708,000, $14,625,000, and $10,940,000 for
2003, 2002, and 2001, respectively. The amounts of interest income increased in
each of the past two years, and interest expense amounts decreased. Average
earning assets and average interest bearing liabilities amounts increased
steadily over those two years, also. However, a large percentage of the increase
is attributable to the Ridgeway bank acquisition. Similarly, because the
acquisition of CRM was effected in November of 2001, interest income for 2002
and 2003 include full year results from that company, while 2001 reflects its
operations for only two months.
The following table presents the average balance sheets, the average
yield and the interest earned on earning assets, and the average rate and the
interest expense on interest bearing liabilities for the years ended December
31, 2003, 2002, and 2001.
14
Average Balances, Yields and Rates
Years Ended December 31,
-----------------------------------------------------------------------------------
2003 2002 2001
---------------------------- -------------------------- --------------------------
Interest Interest Interest
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates Balances Expense Rates
-------- ------- ----- ---------------- ----- -------- ------- -----
(Dollars in thousands)
Assets
Interest earning deposits .................. $ 990 $ 19 1.92% $ 1,229 $ 36 2.93% $ 4,044 $ 161 3.98%
Investment securities - taxable ............ 45,488 1,414 3.11% 43,980 1,970 4.48% 37,751 2,167 5.74%
Investment securities - tax exempt (1) ..... 9,174 322 3.51% 4,888 217 4.44% 766 29 3.79%
Federal funds sold ......................... 26,582 279 1.05% 21,364 347 1.62% 19,095 734 3.84%
Loans, including loans held-for-sale (2) ... 340,518 22,234 6.53% 281,907 20,174 7.16% 211,901 18,110 8.55%
-------- -------- -------- ------- --------- -------
Total interest earning assets .... 422,752 24,268 5.74% 353,368 22,744 6.44% 273,557 21,201 7.75%
Cash and due from banks .................... 14,452 14,222 9,305
Allowance for loan losses .................. (3,861) (3,201) (2,655)
Premises and equipment ..................... 6,996 6,011 4,614
Intangible assets .......................... 7,772 4,360 149
Other assets ............................... 3,400 3,350 3,036
-------- -------- --------
Total assets ..................... $451,511 $378,110 $288,006
======== ======== ========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts $ 44,481 $ 193 0.43% $ 41,101 $ 285 0.69% $ 26,917 $ 264 0.98%
Savings .............................. 70,552 766 1.09% 55,790 905 1.62% 38,194 1,117 2.92%
Time deposits ........................ 186,502 4,728 2.54% 162,512 5,328 3.28% 136,938 7,494 5.47%
-------- -------- -------- ------- --------- -------
Total interest bearing deposits .. 301,535 5,687 1.89% 259,403 6,518 2.51% 202,049 8,875 4.39%
Short-term borrowings ...................... 29,026 750 2.58% 18,712 478 2.55% 7,533 237 3.15%
Long-term debt ............................. 20,395 1,123 5.51% 20,254 1,123 5.54% 19,899 1,149 5.77%
-------- -------- -------- ------- --------- -------
Total interest bearing liabilities 350,956 7,560 2.15% 298,369 8,119 2.72% 229,481 10,261 4.47%
Noninterest bearing demand deposits ........ 52,047 41,198 31,643
Other liabilities .......................... 2,217 2,783 1,799
Shareholders' equity ....................... 46,291 35,760 25,083
-------- -------- --------
Total liabilities and shareholders' equity . $451,511 $378,110 $288,006
======== ======== ========
Interest rate spread (3) ................... 3.59% 3.72% 3.28%
Net interest income and net yield
on earning assets (4) ................ $ 16,708 3.95% $ 14,625 4.14% $10,940 4.00%
(1) Interest income on tax-exempt investment securities has not been calculated
on a tax-equivalent basis.
(2) Nonaccruing loans are included in the average balances and income from such
loans is recognized on a cash basis.
(3) Total interest earning assets yield less total interest bearing liabilities
rate.
(4) Net yield equals net interest income divided by total interest earning
assets.
15
As shown in the table above, loan and other earning assets volumes are
increasing significantly faster than are deposit liabilities volumes. Further,
loans, the highest yielding category of earning assets, grew as a percentage of
total average earning assets from 77.5% in 2001 to 79.8% in 2002 and to 80.5% in
2003. Average loans in 2003 were $340,518,000, an increase of $128,617,000, or
60.7%, over the 2001 average amount. Average earning assets in 2003 were
$422,752,000, an increase of $149,195,000, or 54.5%, over the 2001 average
amount. Average deposits for 2003, however, increased by only $119,890,000, or
51.3%, over the 2001 amount. The Corporation and its subsidiaries increasingly
have made use of short-term borrowed funds in 2002 and 2003 to meet their
funding needs. The funding needs of the mortgage banking subsidiary are
particularly vulnerable to rapid fluctuations, and it is the primary cause of
the increases in short-term borrowings shown in the table. It is notable,
however that the amount of short-term borrowings as of the years ended December
31, 2003 and 2002 were $17,960,000 and $34,551,000, respectively, indicating
that, at the end of 2003, the Corporation's short-term borrowing needs were
significantly reduced, primarily due to lower amounts of loans recently
originated by the mortgage subsidiary.
Time deposits make up the majority of the Corporation's deposit
liabilities. Interest rates paid for such liabilities have decreased
dramatically over the last two years. Accordingly, total interest expense
decreased from $10,261,000 in 2001 to $8,119,000 in 2002 and to $7,560,000 in
2003. The average rates paid for time deposits declined from 5.47% in 2001 to
2.54% in 2003.
During the first quarter of 2004, the Corporation began to reduce its
dependence on short-term external funding sources by obtaining longer-term
financing in the form of trust preferred securities of $9,815,000. These funds
will be deployed to the subsidiaries in various amounts to fund their
operations. Even though the trust preferred securities have a variable interest
rate (3 month LIBOR plus 2.80% for five years), the acquisition of these funds
is expected to reduce somewhat the variability of interest rates associated with
the Corporation's cost of funds. The cost of funds is not expected to increase
significantly due to this transaction, however, since longer-term financing is
currently available at attractive rates.
The table "Volume and Rate Variance Analysis" provides a summary of
changes in net interest income resulting from changes in volume and changes in
rate. The changes in volume are the difference between the current and prior
year's balances multiplied by the prior year's rate. The changes in rate are the
difference between the current and prior year's rate multiplied by the prior
year's balance.
As reflected in the table, the increases in net interest income during
each of the past two years primarily are due to higher volumes of earning assets
coupled with reductions in the rates paid on deposit liabilities. Loan growth
has been especially valuable in leading to increases in interest income.
Similarly, the lower rates paid on deposits have been instrumental in offsetting
the effects of larger volumes of short-term borrowings.
16
Volume and Rate Variance Analysis
2003 compared with 2002 2002 compared with 2001
----------------------- -----------------------
Volume * Rate * Total Volume * Rate * Total
-------- ------ ----- -------- ------ -----
(Dollars in thousands)
Interest earning assets
Interest earning deposits .................................. $ (6) $ (11) $ (17) $ (90) $ (35) $ (125)
Investment securities - taxable ............................ 66 (622) (556) 324 (521) (197)
Investment securities - tax exempt ......................... 158 (53) 105 182 6 188
Federal funds sold ......................................... 73 (141) (68) 78 (465) (387)
Loans ...................................................... 3,936 (1,876) 2,060 5,331 (3,267) 2,064
------- ------- ------- ------- ------- -------
Interest income ............................. 4,227 (2,703) 1,524 5,825 (4,282) 1,543
------- ------- ------- ------- ------- -------
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts .............. 22 (114) (92) 113 (92) 21
Savings ............................................ 204 (343) (139) 398 (610) (212)
Time deposits ...................................... 716 (1,316) (600) 1,221 (3,387) (2,166)
------- ------- ------- ------- ------- -------
Total interest bearing deposits ............. 942 (1,773) (831) 1,732 (4,089) (2,357)
Short-term borrowings ...................................... 266 6 272 293 (52) 241
Long-term debt ............................................. 8 (8) - 20 (46) (26)
------- ------- ------- ------- ------- -------
Total interest expense ...................... 1,216 (1,775) (559) 2,045 (4,187) (2,142)
------- ------- ------- ------- ------- -------
Net interest income ......................... $ 3,011 $ (928) $ 2,083 $ 3,780 $ (95) $ 3,685
======= ======= ======= ======= ======= =======
-------
* The change in interest due to both volume and rate has been allocated to
change due to volume and change due to rate in proportion to the absolute value
of the change in each.
Management currently expects that interest rates may move slightly
higher in 2004. Management has not presently identified any factors that it
believes might cause interest rates to increase sharply in a short period of
time. However, changes in interest rates that can significantly affect the
Corporation, either positively or negatively, are possible. In the absence of
significant changes in market interest rate levels, any significant changes in
net interest income during 2004 are expected to result from changes in the
volumes of interest earning assets and liabilities. Management expects to
continue using its marketing strategies to increase the Corporation's market
share of both deposits and quality loans within its market areas. These
strategies involve offering attractive interest rates and outstanding customer
service.
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and its
estimate of the related allowance for loan losses. Provisions for loan losses
totaled $1,119,000, $1,033,000 and $650,000 for the years ended December 31,
2003, 2002 and 2001, respectively. The significant increase in the 2002
provision was related to a very small number of commercial loan relationships
and was not believed to be indicative of a general trend in the loan portfolio.
See "Impaired Loans," "Potential Problem Loans," "Allowance for Loan Losses,"
and "The Application of Critical Accounting Policies" for further information
and a discussion of the methodology used and the factors considered by
management in its estimate of the allowance for loan losses.
Noninterest Income
Noninterest income for 2003 increased by $1,931,000 or 26.8% over 2002.
Service charges on deposit accounts increased by $589,000 or 21.3% due primarily
to increased service charges assessed on pre-arranged overdraft protection
services. Also, mortgage brokerage income, primarily fees associated with the
origination of mortgage loans for home purchases and refinancing of existing
loans, was $5,198,000 in 2003, an increase of $1,543,000 or 42.2% over the 2002
amount. The mortgage brokerage subsidiary and Banks generally obtain take-out
commitments for mortgage loans originated for resale at the same time that they
issue commitments to make loans. Accordingly, no gains or losses on the sales of
such loans are recognized.
17
Noninterest income for 2002 increased by $3,610,000 or 100.7% over the
2001 amount. Mortgage brokerage income for 2002 was $2,622,000 more than in
2001, as the mortgage banking subsidiary's operations were included for the full
twelve months of 2002, but for only 2 months in 2001. In addition, the
pre-arranged overdraft protection service was first offered in the second
quarter of 2001. Therefore, the 2002 results reflect the first full-year affect
of this product.
Noninterest Expenses
Noninterest expenses for 2003 increased by $3,467,000 or 27.8% over the
2002 amount. Salaries and employee benefits expenses increased by $1,845,000 due
primarily to the opening, in February 2003, of a new branch office of the Sumter
bank and the commission-driven compensation system employed by the mortgage
brokerage subsidiary. Expenses for premises and equipment increased by $360,000
or 24.9% due primarily to the opening of the branch office, higher expenses
associated with the rental of office space for the mortgage brokerage
subsidiary's operations, and the acquisition and implementation of imaging
equipment and software for customer statement rendering and other purposes.
Also, other expenses increased by $981,000. Approximately 40% of this increase
was directly attributable to twelve months of operation of the Ridgeway bank
compared with only six months during 2002. The remaining increases were normal
increases associated with the operation of the other banks, the mortgage
brokerage subsidiary and the holding company.
Noninterest expenses increased by $4,655,000 or 59.6% in 2002,
primarily reflecting the first full year effect of the operations of the
mortgage brokerage subsidiary and one-half year operations of the Ridgeway bank.
The remaining increases were due to normal growth in the business of the other
Banks.
Income Taxes
Income tax expense for 2003 was $3,147,000, an increase of $227,000 or
7.8% over the 2002 amount. Income tax expense for 2002 was $764,000 or 35.4%
higher than in 2001. The effective income tax rate (income tax expense divided
by income before income taxes) was 35.8%, 35.1% and 35.6% for 2003, 2002 and
2001, respectively.
INVESTMENT PORTFOLIO
The Corporation's investment portfolio consists primarily of short-term
U.S. Treasury and U.S. Government agency debt issues. The acquisition of the
Ridgeway bank in 2002 significantly increased the Corporation's tax exempt
portfolio. Investment securities averaged $54,662,000 in 2003, $48,868,000 in
2002, and $38,517,000 in 2001.
The table below summarizes the amortized cost and fair value of the
Corporation's investment portfolio for the past three years.
Securities Portfolio Composition
December 31,
------------
2003 2002 2001
---- ---- ----
Amortized Estimated Amortized Estimated Amortized Estimated
cost Fair value cost Fair value cost Fair value
---- ---------- ---- ---------- ---- ----------
(Dollars in thousands)
Securities available-for sale
U.S. Treasury and U.S.
Government agencies ......................... $56,633 $56,477 $41,488 $41,531 $40,437 $40,415
States and political subdivisions .............. 8,140 8,387 9,514 9,625 801 811
------- ------- ------- ------- ------- -------
Total available-for-sale ...................... $64,773 $64,864 $51,002 $51,156 $41,238 $41,226
======= ======= ======= ======= ======= =======
Securities held-to-maturity
States and political subdivisions .............. $ 2,000 $ 2,155 $ - $ - $ 500 $ 500
------- ------- ------- ------- ------- -------
Total held-to-maturity ........................ $ 2,000 $ 2,155 $ - $ - $ 500 $ 500
======= ======= ======= ======= ======= =======
18
The following is a summary of maturities and weighted average yields of
securities as of December 31, 2003:
Securities Portfolio Maturities and Yields
December 31, 2003
---------------------------------------------------------------------------------------
After After
One Year Five Years
Within Through Through After
One Year Five Years Ten Years Ten Years Total
-------- ---------- --------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Treasuries .......................... $ 2,243 0.96% $ - 0.00% $ - 0.00% $ - 0.00% $ 2,243 0.96%
U.S. Government agencies ................. - 0.00% 33,418 2.92% 17,575 3.24% 963 4.05% 51,956 3.05%
States and political ..................... 790 3.44% 3,905 3.46% 5,692 3.70% - 0.00% 10,387 3.59%
subdivisions (1)
Mortgage-backed securities(2) ............ - 0.00% 2,261 5.63% - 0.00% 17 5.41% 2,278 5.63%
------- ------- ------- ------- -------
Total ............................... $ 3,033 1.61% $39,584 3.13% $23,267 3.35% $ 980 4.07% $66,864 3.15%
======= ======= ======= ======= =======
(1) Yields on tax-exempt securities of states and political subdivisions have
not been calculated on a tax-equivalent basis.
(2) Maturity category based upon final stated maturity dates. Average maturity
is expected to be substantially shorter because of the monthly return of
principal on certain securities.
On an ongoing basis, management assigns securities upon purchase into
one of three categories (trading, available-for-sale or held-to-maturity) based
on intent, taking into consideration other factors including expectations for
changes in market rates of interest, liquidity needs, asset/liability management
strategies, and capital requirements. The Corporation has never held securities
for trading purposes. No transfers of available-for-sale or held-to-maturity
securities to other categories were effected in any of the years 2001 through
2003.
During 2003, management altered the composition of the securities
portfolio, primarily by purchasing U.S. Government agencies securities with
slightly longer maturities. Because the rates earned on short-term U.S.
Government agencies securities were, and continue to be, at historically low
levels, management intentionally lengthened the maturities of its recent
purchases in order to capture the additional yield that is available for longer
maturity instruments. Consequently, the Corporation increased the amount of its
securities maturing in the over five years to ten years category to $23,267,000,
or 34.8% of the total investment portfolio, as of December 31, 2003 from
$10,455,000, or 19.7% of the portfolio, as of December 31, 2002. The average
life of the securities portfolio was 4.84 years as of December 31, 2003,
compared with 4.08 years one year earlier. Although this strategy involves the
acceptance of a slightly higher level of interest rate risk (including the risk
that the Corporation might find itself with significant amounts of securities
with large unrealized losses), management does not believe that the current
level of risk is unacceptably high. Management will continue to monitor the
investment portfolio, however, and is prepared to take prudent actions to
mitigate the negative effects of future interest rate increases.
During the years ended December 31, 2003, 2002 and 2001, the
Corporation sold investment securities of $2,068,000, $20,543,000 and
$7,074,000, respectively. Realized gains and (losses) on those transactions were
($252,000), $119,000, and $31,000, for the years ended December 31, 2003, 2002
and 2001, respectively. Securities may be sold to provide liquidity, to reduce
interest rate risk, or for other reasons.
All mortgage-backed securities held by the Corporation were issued by
the Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association or the Government National Mortgage Association.
LOAN PORTFOLIO
Management believes the loan portfolio is adequately diversified. There
are no significant concentrations of loans in any particular individual,
industry or groups of related individuals or industries, and there are no
foreign loans.
19
The following table shows the composition of the loan portfolio by
category:
Loan Portfolio Composition
December 31,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Commercial, financial and agricultural ............. $ 84,844 $ 78,210 $ 56,515 $ 52,264 $ 40,220
Real estate - construction ......................... 23,590 23,345 19,557 15,389 9,156
Real estate - mortgage ............................. 188,530 168,499 127,002 98,154 84,680
Loans to individuals ............................... 35,142 36,430 26,831 29,270 23,033
-------- -------- -------- -------- --------
Total loans - gross .......................... $332,106 $306,484 $229,905 $195,077 $157,089
======== ======== ======== ======== ========
Risk taking is inherent in the granting of credit. To control the
amounts and types of risks incurred, and to minimize losses, management has
established loan policies and practices. Such policies and practices include
limitations on loan-to-collateral values for various types of collateral,
requirements for appraisals of real estate collateral, problem loan management
practices, collection procedures, and nonaccrual and charge-off guidelines.
Management also has provided a program for the independent review of all
significant credits on an ongoing basis.
Commercial, financial, and agricultural loans, primarily representing
loans made to small and medium size businesses, may be made on either a secured
or an unsecured basis. When taken, security usually consists of liens on
inventories, receivables, equipment, and furniture and fixtures. Unsecured
business loans are generally short-term with emphasis on repayment strengths and
low debt-to-worth ratios. Commercial lending involves significant risk because
repayment usually depends on the cash flows generated by a borrower's business,
and debt service capacity can deteriorate because of downturns in national and
local economic conditions. Management generally controls risks by conducting
more in-depth and ongoing financial analysis of a borrower's cash flows and
other financial information. Each of the banking subsidiaries has a Loan
Committee which is responsible for overseeing the credit granting and monitoring
processes.
Real estate loans consist of construction loans and other loans secured
by mortgages. Because the Corporation's subsidiaries are community banks, real
estate loans comprise the bulk of the loan portfolio. Loan-to-value ratios for
real estate loans generally are limited to 80%.
The Banks generally do not compete with 15 and 30 year fixed rate
secondary market mortgage interest rates, so they have elected to pursue the
origination of mortgage loans that could easily be sold into the secondary
mortgage market. CRM also originates such loans for sale in the secondary
market. These loans are generally pre-qualified with various underwriters so
that problems in the sale of the loans are minimized. In 2003, 2002 and 2001,
the Corporation sold $309,914,000, $176,011,000, and $34,915,000, respectively,
of such loans. These loans are usually sold at par so no gain or loss is
recognized at the time of sale. However, the origination and sale of these loans
generates fee income. The Corporation's subsidiaries may originate mortgage
loans for their own loan portfolios. Such loans are usually for a shorter term
than loans originated to sell and usually have a variable, rather than a fixed,
interest rate.
Loans to individuals are generally for personal, automobile, or
household purposes and may be secured or unsecured.
The Corporation has a geographic concentration of loans within the
Banks' market areas because of the nature of its business. As of December 31,
2003, the Corporation had no other significant concentrations of credit to
customers engaged in similar business activities.
20
Unsecured Loans
The Corporation does not aggressively seek to make unsecured loans,
since these loans may be somewhat more risky than collateralized loans. There
are, however, occasions when it is in the business interests of the Corporation
to provide short-term, unsecured loans to certain customers. At December 31,
2003, the Corporation had approximately $25,400,000, or 7.6% of its loan
portfolio, in unsecured loans. As of December 31, 2002, the Corporation had
approximately $20,200,000 in unsecured loans, or 6.6% of its loan portfolio.
Such loans are made on the basis of management's evaluation of the customer's
ability to repay and net worth.
Maturity and Interest Sensitivity Distribution of Loans
The following table sets forth the maturity distribution of the
Corporation's loans, by type, as of December 31, 2003 as well as the type of
interest requirement on loans due after one year.
December 31, 2003
---------------------------------------------------------
After one year
Within one but within five After five
year years years Total
---- ----- ----- -----
(Dollars in thousands)
Commercial, financial and agricultural ............................. $ 45,142 $ 36,012 $ 3,690 $ 84,844
Real estate ........................................................ 51,344 109,063 51,713 212,120
Loans to individuals ............................................... 10,477 23,215 1,450 35,142
-------- -------- -------- --------
Total .............................................................. $106,963 $168,290 $ 56,853 $332,106
======== ======== ======== ========
Predetermined rate, maturity greater than one year ................. $ - $116,753 $ 32,508 $149,261
Variable rate or maturity within one year .......................... 106,963 51,537 24,345 182,845
Impaired Loans
Impaired loans are those loans on which, based on current information
and events, it is probable that the Corporation will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Loans
which management has identified as impaired generally are nonaccrual loans. The
Corporation had no restructured loans in the past five years. Following is a
summary of the Corporation's nonaccrual and other nonperforming loans:
Nonaccrual and Past Due Loans
December 31,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans ........................................ $2,595 $ 796 $ 281 $ 238 $ 90
Accruing loans 90 days or more past due ................. 146 1,740 17 93 6
------ ------ ------ ------ ------
Total .............................................. $2,741 $2,536 $ 298 $ 331 $ 96
====== ====== ====== ====== ======
Total as a % of outstanding loans .................. 0.83% 0.83% 0.13% 0.17% 0.06%
Other real estate ....................................... $ 327 $ 219 $ 267 $ - $ -
Impaired loans (included in nonaccrual) ................. $2,595 $ 796 $ 281 $ 238 $ 90
As of December 31, 2003, approximately $1,350,000, or 52%, of the
Corporation's nonaccrual loans consisted of one loan relationship. That
company's principals have been involved in a legal dispute among themselves.
During the first quarter of 2004, the Corporation collected all amounts due
under this credit.
Gross income that would have been recorded for the years ended December
31, 2003, 2002 and 2001, if nonaccrual loans had been performing in accordance
with their original terms was approximately $117,000, $39,000 and $7,000,
21
respectively. No cash basis interest income was recognized in 2003, 2002 and
2001 on non-accrual loans.
The Corporation's accounting policies on nonaccrual and impaired loans
are discussed in Note 2 to the consolidated financial statements.
Nonaccrual loans and impaired loans were not material in relation to
the portfolio as a whole in 2003. Management is aware of no trends, events or
uncertainties that would cause a material adverse change in nonaccrual loans in
2004.
Potential Problem Loans
At December 31, 2003 the Corporation's internal loan review program had
identified $3,237,000 (1.0% of the portfolio) in various loans, not including
loans identified as nonaccrual or 90 days past due and still accruing loans
shown above, where information about credit problems of borrowers had caused
management to have doubts about the ability of the borrowers to comply with
original repayment terms. The amount identified does not represent management's
estimate of the potential losses since a large portion of these loans are
secured by real estate and other collateral.
Other Real Estate
Other real estate, consisting of foreclosed properties, was $327,000,
$219,000, and $267,000 as of December 31, 2003, 2002 and 2001, respectively.
Other real estate is initially recorded at the lower of net loan balance or the
property's estimated fair value, net of estimated disposal costs. The estimate
of fair value for other real estate is determined by appraisal at the time of
acquisition.
22
ALLOWANCE FOR LOAN LOSSES
The table, "Analysis of the Allowance for Loan Losses," summarizes loan
balances as of the end of each period indicated, averages for each period,
changes in the allowance arising from mergers, charge-offs and recoveries by
loan category, and additions to the allowance which have been charged to
expense.
The allowance for loan losses is increased by the provision for loan
losses, which is a direct charge to expense. Losses on specific loans are
charged against the allowance in the period in which management determines that
such loans become uncollectible. Recoveries of previously charged-off loans are
credited to the allowance. See "The Application of Critical Accounting Policies
- Provision and Allowance for Loan Losses."
Analysis of the Allowance for Loan Losses
Years Ended December 31,
------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Total amount of loans outstanding at end of year ........ $332,106 $306,484 $229,905 $195,077 $157,089
======== ======== ======== ======== ========
Average amount of loans outstanding ..................... $340,518 $281,907 $211,901 $179,654 $139,215
======== ======== ======== ======== ========
Allowance for loan losses - January 1 ................... $ 3,573 $ 2,830 $ 2,424 $ 1,936 $ 1,459
-------- -------- -------- -------- --------
Changes incident to merger activities ................... - 444 28 - -
-------- -------- -------- -------- --------
Loans charged-off
Real estate ............................................. 250 175 9 78 -
Installment ............................................. 247 223 202 116 95
Credit cards and related plans .......................... - - 9 9 5
Commercial and other .................................... 163 374 87 33 80
-------- -------- -------- -------- --------
Total charge-offs ....................................... 660 772 307 236 180
-------- -------- -------- -------- --------
Recoveries
Real Estate ............................................. 105 1 - 3 -
Installment ............................................. 58 20 33 25 17
Credit cards and related plans .......................... - - 2 2 3
Commercial .............................................. 11 17 - 6 25
-------- -------- -------- -------- --------
Total recoveries ........................................ 174 38 35 36 45
-------- -------- -------- -------- --------
Net charge-offs ......................................... 486 734 272 200 135
-------- -------- -------- -------- --------
Provision for loan losses charged to expense ............ 1,119 1,033 650 688 612
-------- -------- -------- -------- --------
Allowance for loan losses - December 31 ................. $ 4,206 $ 3,573 $ 2,830 $ 2,424 $ 1,936
======== ======== ======== ======== ========
Ratios
Net charge-offs to average loans outstanding ............ 0.14% 0.26% 0.13% 0.11% 0.10%
Net charge-offs to loans outstanding at end of .......... 0.15% 0.24% 0.12% 0.10% 0.09%
year
Allowance for loan losses to average loans .............. 1.24% 1.27% 1.34% 1.35% 1.39%
Allowance for loan losses to total loans at end ......... 1.27% 1.17% 1.23% 1.24% 1.23%
of year
Net charge-offs to allowance for losses ................. 11.55% 20.54% 9.61% 8.25% 6.97%
Net charge-offs to provision for loans losses ........... 43.43% 71.06% 41.85% 29.07% 22.06%
The Corporation operates four independent community banks in South
Carolina. Under the provisions of law and regulations governing banks, each
bank's board of directors is responsible for determining the adequacy of its
bank's loan loss allowance. In addition, each bank is supervised and regularly
examined by the Office of the Comptroller of the Currency (the "OCC") (or the
South Carolina State Board of Financial Institutions (the "State Board") in the
23
case of the Ridgeway bank) or the Federal Deposit Insurance Corporation (the
"FDIC"). As a normal part of a safety and soundness examination, bank examiners
assess and comment on the adequacy of a bank's allowance for loan losses and may
require that changes be made in the allowance. The allowance presented in the
consolidated financial statements is on an aggregated basis and as such might
differ from the allowance that would be presented if the Corporation had only
one banking subsidiary.
The nature of community banking is such that the individual loan
portfolios are predominantly composed of small and medium size business and
individual loans. As community banks, there exists, by definition, a geographic
concentration of loans within each Bank's respective city or county. Management
at each bank monitors the loan concentrations and loan portfolio quality on an
ongoing basis including, but not limited to: quarterly analysis of loan
concentrations, monthly reporting of past dues, nonaccruals, and watch loans,
and quarterly reporting of loan charge-offs and recoveries. These efforts focus
on historical experience and are bolstered by quarterly analysis of local and
state economic conditions, which are part of the Banks' assessment of the
adequacy of their allowances for loan losses.
DEPOSITS
The average deposits for the Corporation for the years ended December
31, 2003, 2002 and 2001 are summarized below:
Average Deposits
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Average Average Average Average Average Average
balance cost balance cost Balance cost
------- ---- ------- ---- ------- ----
(Dollars in thousands)
Noninterest bearing demand ..................... $ 52,047 - $ 41,198 - $ 31,643 -
Interest bearing transaction accounts .......... 44,481 0.43% 41,101 0.69% 26,917 0.98%
Savings-regular ................................ 20,998 0.53% 14,469 1.01% 8,705 1.60%
Savings - money market ......................... 49,554 1.32% 41,321 1.85% 29,489 3.37%
Time deposits less than $100,000 ............... 122,488 2.58% 104,509 3.30% 92,515 5.45%
Time deposits of $100,000 or more .............. 64,014 2.45% 58,003 3.28% 44,423 5.50%
-------- ----- -------- ----- -------- ----
Total average deposits ......................... $353,582 $300,601 233,692
======== ======== =======
Deposits are the primary source of funds for the Banks' lending and
investing activities. Deposits are attracted principally from customers within
the Banks' local market areas through the offering of a variety of products with
varying features and by offering competitive interest rates.
At December 31, 2003 the Corporation had $68,388,000 in certificates of
deposit of $100,000 or more. Approximately $21,380,000 mature within three
months, $14,905,000 mature over three through six months, $21,976,000 mature
over six months through twelve months and $10,127,000 mature after one year.
This level of large time deposits, as well as the growth in other deposits, can
be attributed to planned growth by management. The majority of time deposits
$100,000 and over is acquired within the Company's market areas in the ordinary
course of business from customers with standing banking relationships. It is a
common industry practice not to consider time deposits of $100,000 or more as
core deposits since their retention can be influenced heavily by rates offered.
Therefore, such deposits have the characteristics of shorter-term purchased
funds. Certificates of deposit $100,000 and over require that the Corporation
achieve and maintain an appropriate matching of maturity distributions and a
diversification of sources to achieve an appropriate level of liquidity. The
Corporation generally does not purchase brokered deposits.
SHORT-TERM BORROWINGS
The Corporation's short-term borrowings may consist of federal funds
purchased and securities sold under agreements to repurchase, which generally
have maturities ranging from daily to no more than ninety days, and warehouse
and general purpose lines of credit payable. As of December 31, 2003, securities
sold under agreements to repurchase totaled $8,090,000. These amounts are
24
secured by pledges of investment securities and the interest rate is subject to
change daily. Warehouse lines of credit payable are used to fund loan production
for CRM. General purpose lines of credit are used, when needed, to fund any
operating needs of the Corporation and CRM.
At December 31, 2003, balances due under the warehouse lines of credit
totaled $7,743,000 and there was additional availability under those lines
totaling $32,257,000. Of the amount outstanding under the warehouse lines,
$6,749,000 was borrowed at the one month LIBOR rate plus 1.95% and $994,000
bears interest at the one month LIBOR rate plus an additional 2.25% to 5.25%
based upon the number of days that each underlying loan is outstanding. The
warehouse lines are secured by substantially all of CRM's loans held-for-sale
and are guaranteed by the Corporation.
The mortgage subsidiary has a $3,000,000 unsecured line of credit with
an unaffiliated lender which was used to support loans that it is currently
servicing. These are loans that CRM intends to sell during 2004. As of December
31, 2003, the mortgage subsidiary had borrowed $1,492,000 under this line. This
line of credit is guaranteed by the Corporation and interest accrues at the
prime rate. The Corporation has arranged for a $700,000 unsecured line of credit
with an unaffiliated lender which was used to purchase imaging technology. As of
December 31, 2003, $635,000 was outstanding under this line, with interest at
the prime rate. Summary information about total short-term debt is provided in
the following table.
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Outstanding at year-end .............................. $17,960 $34,551
Interest rate at year-end ............................ 2.38% 3.93%
Interest expense ..................................... $ 750 $ 478
Maximum month-end balance during the year ............ $39,379 $40,474
Average amount outstanding during the year ........... $29,026 $18,712
Weighted average interest rate during the year ....... 2.58% 2.55%
LONG-TERM DEBT
The Corporation's banking subsidiaries are members of the Federal Home
Loan Bank of Atlanta ("FHLB"). As such they have access to long-term borrowing
from the FHLB. As of December 31, 2003, the Banks had borrowed a total of
$20,140,000 from the FHLB. The borrowings are secured by blanket liens on all
qualifying first lien residential mortgage loans held by the Banks, specifically
excluding such loans originated for resale on the secondary market.
RETURN ON EQUITY AND ASSETS
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2003, 2002 and 2001.
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Return on assets (ROA) .................. 1.25% 1.43% 1.36%
Return on equity (ROE) .................. 12.17% 15.10% 15.58%
Dividend payout ratio ................... 27.48% 22.54% 23.14%
Equity as a percent of assets ........... 10.25% 9.46% 8.71%
The decline in return on equity in 2003 is related to the issuance in
July 2002 of one million shares of CBI common stock in connection with the
acquisition of Ridgeway Bancshares, Inc. which were outstanding for all of 2003
but for only half of 2002.
25
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in a timely and economical manner.
The most manageable sources of liquidity are composed of liabilities, with the
primary focus of liquidity management being on the ability to attract deposits
within the Banks' market areas. Core deposits (total deposits less certificates
of deposit of $100,000 or more) provide a relatively stable funding base.
Certificates of deposit of $100,000 or more are generally more sensitive to
changes in rates, so they must be monitored carefully. Asset liquidity is
provided by several sources, including amounts due from banks, federal funds
sold, and investments available-for-sale.
The Corporation maintains an available-for-sale investment securities
portfolio. While investment securities purchased for this portfolio are
generally purchased with the intent to be held to maturity, such securities are
marketable and occasional sales may occur prior to maturity as part of the
process of asset/liability and liquidity management. The Corporation also
occasionally designates securities as held-to-maturity. Securities in this
portfolio are generally not considered a primary source of liquidity. Management
deliberately maintains a relatively short-term maturity schedule for its
investments so that there is a continuing stream of maturing investments. The
Corporation intends to maintain a relatively short-term investment portfolio in
order to continue to be able to supply liquidity to its loan portfolio and for
customer withdrawals.
The Corporation has substantially more liabilities maturing in the next
12 months than it has assets maturing in the same period. The Corporation also
has legal obligations to extend credit pursuant to loan commitments, lines of
credit and standby letters of credit which totaled $15,501,000, $36,735,000, and
$4,489,000, respectively, at December 31, 2003 (see Note 15 to the consolidated
financial statements). However, based on its historical experience, and that of
similar companies, the Corporation believes that it is unlikely that so many
deposits would be withdrawn, without being replaced by other deposits, and
extensions of credit would be required, that the Corporation would be unable to
meet its liquidity needs with the proceeds of maturing assets, in the ordinary
course of business.
The Corporation also maintains various federal funds lines of credit
with correspondent banks and is able to borrow from the Federal Home Loan Bank
of Atlanta and the Federal Reserve's discount window.
The Corporation, through its Banks, has a demonstrated ability to
attract deposits from its market area. Deposits grew from $184,364,000 as of
December 31, 1999 to $378,704,000 as of December 31, 2003. This consistently
growing base of deposits is the major source of operating liquidity.
In the opinion of management, the current and projected liquidity
position is adequate.
CAPITAL
Dividends
The Corporation exists as a legal entity distinct from its
subsidiaries. Its main sources of revenues consist of service fees and dividends
paid to it by the Banks. The Banks are subject to various laws and regulations
that limit the amounts of dividends that they may pay. In addition, the
Corporation and the Banks are each subject to regulatory minimum capital
adequacy guidelines. These regulatory restrictions have not historically
hindered the Corporation's or the Banks' ability to pay reasonable dividends and
no such future restrictions are anticipated. During the year ended December 31,
2003, the Corporation received dividends from the Banks totaling $1,741,000.
Subject to restrictions imposed by state laws and federal regulations, the
Boards of Directors of the Banks could have declared additional dividends from
their retained earnings of up to $9,092,000 as of December 31, 2003.
Capital Adequacy
The Federal Reserve and federal bank regulatory agencies have adopted
risk-based capital standards for assessing the capital adequacy of bank holding
companies and financial institutions. Under the risk-based capital requirements,
the Corporation and each of the Banks are required to maintain a minimum ratio
of capital to risk-weighted assets (including certain off-balance-sheet
activities, such as letters of credit) of 8%. At least half of total capital
must be composed of common equity, retained earnings and qualifying perpetual
26
preferred stock and certain hybrid instruments, less certain intangibles ("Tier
1 Capital"). The remainder may consist of certain subordinated debt or hybrid
capital instruments, qualified preferred stock and a limited amount of the
allowance for loan losses ("Tier 2 Capital," which, along with Tier 1 Capital,
composes "Total Capital"). Unrealized gains and losses on available-for-sale
securities generally are excluded from the calculation of the risk-based capital
ratios. To be considered well-capitalized under the risk-based capital
guidelines, an institution must maintain a total risk-weighted capital ratio of
at least 10% and a Tier 1 risk-weighted ratio of at least 6%.
Each of the Federal bank regulatory agencies also has established
minimum leverage capital requirements for banking organizations. Pursuant to
these requirements, banking organizations generally must maintain a minimum
ratio of Tier 1 Capital to adjusted average quarterly assets equal to from 4% to
5%, subject to federal bank regulatory evaluation of the institution's overall
safety and soundness.
Federal regulators may categorize an institution as less than
well-capitalized based on subjective criteria. Management believes that there
are no conditions or events that would cause the Corporation's or the Banks'
capital category to be other than resulting from meeting the minimum ratio
requirements.
Under the risk-based capital standards and pursuant to the provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991, federal
bank regulatory agencies are required to implement prescribed "prompt corrective
actions" if an institution's capital position deteriorates to specified levels.
The corrective actions become increasingly stringent as the capital position
continues to deteriorate.
The Banks are each considered to be `well capitalized' for regulatory
purposes. Detailed information on the Corporation's and the Banks' capital
positions can be found in Note 19 to the consolidated financial statements.
The mortgage subsidiary is also subject to minimum capital requirements
to maintain its certification as a HUD-approved Title II Loan Correspondent.
Certain investor and warehouse credit line agreements require that the mortgage
subsidiary maintain its HUD certification. Failure of CRM to meet its capital
requirements could result in a significant limitation of the mortgage
subsidiary's ability to originate, fund or sell loans, and therefore could have
a direct, material adverse effect on its business and the consolidated financial
statements. As of December 31, 2003, CRM exceeded its minimum regulatory capital
requirement by approximately $1,439,000.
During the first quarter of 2004, the Corporation acquired $9,815,000
in proceeds from the issuance of trust preferred securities. Of this amount,
$3,000,000 was used to provide additional capital to two of the Banks,
approximately $1,400,000 was used to repay a short-term line of credit of the
mortgage subsidiary and approximately $635,000 was used to repay the
Corporation's short-term borrowings. The remainder will be used for the
Corporation's general corporate purposes. Under current Federal Reserve policy,
the Corporation is allowed to treat the trust preferred securities, subject to
certain limitations, as capital for capital adequacy purposes.
INFLATION
The assets and liabilities of the Corporation are mostly monetary in
nature. Accordingly, the financial results and operations of the Corporation are
much more affected by changes in interest rates than changes in inflation. There
is, however, a strong correlation between increasing inflation and increasing
interest rates. The rate of inflation has been very moderate over the past
several years, about 2.3% in 2003 and 1.6% in 2002. Prospects appear reasonable
for continued low inflation, despite some risk related to energy prices and the
political and military situation in the Middle East. Although inflation does not
normally affect a financial institution as dramatically as it does businesses
with large investments in plants and inventories, it does have an effect. During
periods of high inflation there are usually corresponding increases in the money
supply and banks experience above-average growth in assets, loans, and deposits.
General increases in the prices of goods and services also result in increased
operating expenses.
OFF-BALANCE-SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT
LIABILITIES AND COMMITMENTS
The Company presently engages in only limited off-balance sheet
arrangements. Such arrangements are defined as potentially material
transactions, agreements, or other contractual arrangements which the Company
has entered into that involve an entity that is not consolidated into its
financial statements and, under which the Company, whether or not it is a party
to the arrangement, has, or in the future may have:
o any obligation under a direct or indirect guarantee or similar
arrangement;
27
o a retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement;
o derivatives, to the extent that the fair value thereof is not fully
reflected as a liability or asset in the financial statements; or
o any obligation or liability, including a contingent obligation or
liability, to the extent that it is not fully reflected in the
financial statements (excluding the footnotes thereto).
The Company's off-balance sheet arrangements presently include only
commitments to extend credit and standby letters of credit. Such instruments
have elements of credit risk in excess of the amount recognized in the balance
sheet. The exposure to credit loss in the event of nonperformance by the other
parties to these instruments is represented by the contractual, or notional,
amount of those instruments. Generally, the same credit policies used for
on-balance sheet instruments, such as loans, are used in extending loan
commitments and letters of credit. The following table sets out the contractual
or notional amounts of those arrangements:
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Loan commitments ................................... $15,501 $14,603
Unfunded commitments under lines of credit ......... 36,735 20,493
Standby letters of credit .......................... 4,489 2,506
Loan commitments involve agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and some
involve payment of a fee. Many of the commitments are expected to expire without
being fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers.
As described under "Liquidity," management believes that its various
sources of liquidity provide the resources necessary for the Banks to fund the
loan commitments and to perform under standby letters of credit, if the need
arises. Neither the Company nor the Banks are involved in other off-balance
sheet contractual relationships or transactions that could result in liquidity
needs or other commitments or significantly impact earnings.
The Corporation's contractual cash obligations are summarized in the
following table. Other commitments include commitments to lend money. Not all of
these commitments are expected to be drawn upon; thus, the actual cash
requirements are expected to be less than the amounts reported in the table.
December 31, 2003
-----------------
Payments due by period
------------------------------------------------------------
Less Than 1 to 3 3 to 5 After 5
Total 1 Year Years Years Years
----- ------ ----- ----- -----
(Dollars in thousands)
Contractual Cash Obligations
Time deposits ................................. $184,930 $151,972 $ 29,963 $ 2,993 $ 2
Long-term debt ................................ 20,140 70 1,870 3,500 14,700
Operating lease obligations ................... 2,791 182 368 263 1,978
-------- -------- -------- -------- --------
Total ......................................... $207,861 $152,224 $ 32,201 $ 6,756 $ 16,680
======== ======== ======== ======== ========
28
THE APPLICATION OF CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are based on the selection and
application of accounting principles generally accepted in the United States of
America, which require management to make estimates and assumptions about future
events that affect the amounts reported in the financial statements and
accompanying notes. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results could differ from those estimates, and any
such differences may be material to the financial statements. Management
believes that the following policy may involve a higher degree of judgment and
complexity in its application and represents the critical accounting policy used
in the preparation of the Corporation's financial statements. If different
assumptions or conditions were to prevail, the results could be materially
different from the reported results.
Provision and Allowance for Loan Losses
The Corporation is required to estimate the collectibility of its loan
portfolio as of each accounting period end and, as a result, provide for an
allowance for possible loan losses. The allowance for loan losses is increased
by the provision for loan losses charged to expense, and any recoveries received
on loans previously charged off. The allowance is decreased by deducting the
amount of uncollectible loans charged off.
A considerable amount of judgment is required in order to compute an
estimate of the amount of the allowance for loan losses. Management's judgments
must be applied in assessing the current creditworthiness of the Corporation's
borrowers and in estimating uncertain future events and their effects based on
currently known facts and circumstances. Changes in the estimated allowance for
loan losses arising as new events occur or more information is obtained are
accounted for as changes in accounting estimates in the accounting period in
which such a change occurs.
Management reviews its allowance for loan losses utilizing three broad
categories: commercial, real estate and loans to individuals. Within these
categories, the allowance for loan losses is composed of specific and general
amounts. Specific allowance amounts are provided for individual loans based on
management's evaluation of the Corporation's loss exposure taking into account
the current payment status, underlying collateral and other known information
about the borrower's circumstances. Typically, these loans are identified as
impaired or nonperforming, or have been assigned internal risk grades of
management attention, special mention, substandard or doubtful. General amounts
are provided for all other loans, excluding those for which specific amounts
were determined, by applying estimated loss percentages to the portfolio
categorized using risk grades. These percentages are based on management's
current evaluation with consideration given to historical loss experience,
general national and local economic and business conditions affecting key
lending market areas, credit quality trends, collateral values, loan volumes,
portfolio seasoning, and any identified credit concentrations. The findings of
internal and external credit reviews and results from external audits and
regulatory examinations are also considered.
The following table presents the allocation of the allowance for loan
losses, as of December 31, 1999 through 2003, compared with the percent of loans
in the applicable categories to total loans.
29
December 31,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance allocated to loan category
Commercial, financial and agricultural .................. $1,796 $1,479 $1,019 $ 801 $ 660
Real estate ............................................. 1,800 1,548 1,322 1,136 916
Loans to individuals .................................... 610 546 489 487 360
------ ------ ------ ------ ------
Total .............................................. $4,206 $3,573 $2,830 $2,424 $1,936
====== ====== ====== ====== ======
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Percentage of loans in category
Commercial, financial and agricultural .................. 25.5% 25.5% 24.6% 26.8% 25.6%
Real estate ............................................. 63.9% 62.6% 63.7% 58.2% 59.7%
Loans to individuals .................................... 10.6% 11.9% 11.7% 15.0% 14.7%
----- ----- ----- ----- -----
Total .............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The Corporation utilizes its risk grading system for all loans held in
the portfolio. This system involves the Corporation's lending officers'
assigning a risk grade, on a loan-by-loan basis, considering information about
the borrower's capacity to repay, collateral, payment history, and other known
factors. Risk grades assigned are updated monthly for any known changes in
circumstances affecting the borrower or the loan. The risk grading system is
monitored on a continuing basis by management and the Corporation's external
credit review consultant who is independent of the lending function.
The provision for loan losses charged to expense increased in 2003 to
$1,119,000 after increasing significantly to $1,033,000 in 2002 compared with
$650,000 in 2001. The allowance for loan losses at the end of 2003 was
$4,206,000, up $633,000 or 17.7% as compared with the allowance of $3,573,000 as
of the end of 2002. As a percentage of total loans outstanding at year end, the
allowance for loan losses stood at 1.27%, 1.17% and 1.23% for 2003, 2002 and
2001, respectively. Net loan charge-offs decreased to $486,000 in 2003, a
decrease of 33.8% from the 2002 amount. In 2002, net charge-offs increased to
$734,000 or 169.9% over the 2001 amount. As of the end of 2003, non-performing
loans (nonaccrual and accruing loans 90 days or more past due) grew to
$2,741,000, up from $2,536,000 and $298,000 at the end of 2002 and 2001,
respectively. Potential problem loans, exclusive of non-performing loans, grew
to $3,237,000 at the end of 2003, compared with $2,737,000 and $1,386,000 at the
end of 2002 and 2001, respectively.
As of December 31, 2003 and 2002, approximately $1,350,000, or 49% and
53%, respectively, of the Corporation's nonperforming loans consisted of one
loan relationship. That company's principals have been involved in a legal
dispute among themselves. The Corporation collected all amounts due under this
contract during the first quarter of 2004.
While management believes that the local economies within its market
areas remain relatively healthy, there are concerns that if the current apparent
recovery from the recent national economic downturn that began in 2001 and
continued throughout 2002 and 2003 is not sustained, there eventually might be
more noticeable effect locally. Loan growth has also been a contributing factor
toward the increased provisions for loan losses in 2003 and 2002. Total year end
loans grew 8.4% and 33.3% in 2003 and 2002, respectively (includes effects of
the acquisition of Ridgeway Bancshares, Inc. in July, 2002).
Management has established loan and credit policies and practices that
are designed to control credit risks as a part of the loan underwriting process.
These policies and practices include, for example, requirements for minimum loan
to collateral value ratios, real estate appraisal requirements and obtaining
credit and financial information on borrowers. However, if the capacity for
borrowers to repay and/or collateral values should deteriorate subsequent to the
underwriting process, the estimate of the provision and allowance for loan
losses might have to increase, thereby decreasing net income and shareholders'
equity. During 2003 and 2002, the total of loans secured by real estate
mortgages increased by $65,561,000 from $146,559,000 at the end of 2001 to
$212,120,000 by the end of 2003. Any significant, prolonged downturn in national
30
and local economic and business conditions could negatively affect the
borrowers' capacity to repay these loans as well as the value of the underlying
collateral. This scenario would be likely to substantially increase the level of
impaired or non-performing loans and non-earning foreclosed real estate, and
increase overall credit risk by shrinking the margin of collateral values as
compared with loans outstanding. Another factor that could adversely affect
borrowers' ability to make payments in accordance with loan terms is the
potential for increases in rates charged for loans. The Corporation has a
significant amount of variable rate loans outstanding. In addition, some loans
are refinanced at maturity rather than being paid out in a lump sum. If interest
rates were to increase sharply in a short time period, some loan customers might
not be able to afford payments on loans made or repriced at the higher resulting
interest rates, nor would they necessarily be able to obtain more favorable
terms elsewhere. This could also cause an increase in the amounts of impaired or
non-performing assets and other credit risks.
Management believes that the allowance for loan losses, as of December
31, 2003, is sufficient to absorb any losses inherent in the loan portfolio.
Management will continue to monitor closely the levels of non-performing and
potential problem loans and will address the weaknesses in those credits to
enhance the amount of ultimate collection or recovery of these assets
IMPACT OF RECENT ACCOUNTING CHANGES
Other-Than-Temporary Impairment of Certain Investments In November 2003, the
Emerging Issues Task Force ("EITF") reached consensus on Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF Issue 03-1 requires tabular disclosure of the amounts of
unrealized losses and the related estimated fair values of investments with
unrealized losses aggregated for each category of investment that is disclosed
in accordance with SFAS No. 115. In addition, it requires sufficient narrative
disclosure to allow financial statement users to understand both the aggregated
tabular information and the positive and negative information considered in
reaching the conclusion that the impairments are not other-than-temporary. See
Note 4 to the consolidated financial statements for the required disclosure.
The effects of other recent accounting changes are discussed in Note 2 to the
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Corporation's market risk arises principally from interest rate
risk inherent in its lending, deposit and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Corporation manages other risks, such as credit quality and liquidity risk in
the normal course of business, management considers interest rate risk to be its
most significant market risk and this risk could potentially have the largest
material effect on the Corporation's financial condition and results of
operations. Other types of market risks such as foreign currency exchange risk
and commodity price risk do not arise in the normal course of community banking
activities.
Achieving consistent growth in net interest income is the primary goal
of the Corporation's asset/liability function. The Corporation attempts to
control the mix and maturities of assets and liabilities to achieve consistent
growth in net interest income despite changes in market interest rates. The
Corporation seeks to accomplish this goal while maintaining adequate liquidity
and capital. The Corporation's asset/liability mix is sufficiently balanced so
that the effect of interest rates moving in either direction is not expected to
be material over time.
The Corporation's Asset/Liability Committee uses a simulation model to
assist in achieving consistent growth in net interest income while managing
interest rate risk. The model takes into account interest rate changes as well
as changes in the mix and volume of assets and liabilities. The model simulates
the Corporation's balance sheet and income statement under several different
rate scenarios. The model's inputs (such as interest rates and levels of loans
and deposits) are updated on a quarterly basis in order to obtain the most
accurate forecast possible. The forecast presents information over a
twelve-month period. It reports a base case in which interest rates remain flat
and variations that occur when rates increase and decrease 100, 200 and 300
basis points. According to the model, as of December 31, 2003 the Corporation is
positioned so that net interest income would increase $434,000 and net income
would increase $267,000 if interest rates were to rise 100 basis points in the
next twelve months. Conversely, net interest income would decline $434,000 and
net income would decline $267,000 if interest rates were to decline 100 basis
points. Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates and loan prepayment, and should not be relied upon as indicative of actual
results. Further, the computations do not contemplate any actions the
Corporation could undertake in response to changes in interest rates or the
effects of responses by others, including borrowers and depositors.
The following table summarizes the Corporation's interest sensitivity
position as of December 31, 2003.
31
Interest Sensitivity Analysis
Within 3 Within 4-12 Within 1-5
months months years Over 5 years Total
------ ------ ----- ------------ -----
(Dollars in thousands)
Interest earning assets
Interest bearing deposits with banks ........... $ 1,124 $ - $ - $ - $ 1,124
Taxable investment securities .................. 2,218 1,247 35,679 17,178 56,322
Tax exempt investment securities ............... 439 351 3,905 5,847 10,542
Federal funds sold ............................. 25,321 - - - 25,321
Loans held for sale (1) ........................ 8,411 - - - 8,411
Loans, net of unearned income .................. 152,551 27,256 118,119 34,180 332,106
--------- --------- --------- --------- ---------
Total interest earning assets .................. 190,064 28,854 157,703 57,205 433,826
--------- --------- --------- --------- ---------
Interest bearing liabilities
Savings ........................................ $ 77,216 $ - $ - $ - $ 77,216
Interest bearing transaction accounts .......... 57,221 - - - 57,221
Time deposits .................................. 51,404 100,569 32,957 - 184,930
Short term borrowings .......................... 17,960 - - - 17,960
Long-term debt ................................. - - 5,440 14,700 20,140
--------- --------- --------- --------- ---------
Total interest bearing liabilities ............. 203,801 100,569 38,397 14,700 357,467
--------- --------- --------- --------- ---------
Interest sensitivity gap ....................... $ (13,737) $ (71,715) $ 119,306 $ 42,505 $ 76,359
Cumulative gap ................................. $ (13,737) $ (85,452) $ 33,854 $ 76,359
RSA/RSL (2) .................................... 93% 29%
Cumulative RSA/RSL (2) ......................... 93% 72%
---------
(1) Loans held for sale are reflected in the period of expected sale.
(2) RSA- rate sensitive assets; RSL- rate sensitive liabilities
The above table reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amortizing fixed rate loans are reflected at the scheduled maturity date.
Variable rate amortizing loans are reflected at the earliest date at which they
may be repriced contractually. Deposits in other banks and debt securities are
reflected at each instrument's ultimate maturity date. Overnight federal funds
sold are reflected as instantly repriceable. Interest bearing liabilities with
no contractual maturity, such as savings deposits and interest bearing
transaction accounts, are reflected in the earliest repricing period possible.
Fixed rate time deposits are reflected at their maturity dates.
The static interest rate sensitivity gap position, while not a complete
measure of interest sensitivity, is also reviewed periodically to provide
insights related to the static repricing structure of the Banks' assets and
liabilities. At December 31, 2003 on a cumulative basis through twelve months,
rate sensitive liabilities exceeded rate sensitive assets by $85,452,000. The
liability sensitive position is largely due to the assumption that the Banks'
$134,437,000 in interest bearing transaction accounts, savings accounts, and
money market accounts will reprice within a year. This assumption may or may not
be valid, since these accounts vary greatly in their sensitivity to interest
rate changes in the market. Rising interest rates would be likely to diminish
net interest income of banks in a liability sensitive position if the assumption
is valid and in the absence of factors which would be likely to occur.
The Market Risk table, which follows this discussion, shows the
Corporation's financial instruments that are sensitive to changes in interest
rates. The Corporation uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments, and prepayment of principal and potential calls.
For core deposits without contractual maturity (i.e., interest checking, savings
and money market accounts), the table presents principal cash flows based on
management's judgment concerning their most likely runoff. The actual maturities
and runoff could vary substantially if future prepayments, runoff and calls
differ from the Corporation's historical experience.
32
December 31, 2003
2003 Year- -----------------
End Expected Maturity / Runoff
Average ----------------------------------------------------------
Rate 2004 2005 2006 2007 2008 Thereafter Balance Fair Value
---- ---- ---- ---- ---- ---- ---------- ------- ----------
(Dollars in thousands)
Interest earning assets
Interest bearing deposits with banks 0.85% $ 1,124 $ - $ - $ - $ - $ - $ 1,124 $ 1,124
Investment securities ............... 3.15% 49,116 1,791 3,126 2,311 4,946 5,574 66,864 67,019
Federal funds sold .................. 0.94% 25,321 - - - - - 25,321 25,321
Loans held for sale ................. 7.50% 8,411 - - - - - 8,411 8,411
Loans, gross ........................ 6.24% 107,129 30,885 45,567 42,691 49,240 56,594 332,106 328,432
Interest bearing liabilities
Savings ............................. 0.52% $ 77,216 $ - $ - $ - $ - $ - $ 77,216 $ 77,216
Interest bearing transaction accounts 0.68% 57,221 - - - - - 57,221 57,221
Time deposits ....................... 2.25% 151,972 25,086 4,877 2,576 417 2 184,930 185,987
-------- -------- -------- -------- -------- -------- -------- --------
Total interest bearing deposits ..... 1.55% 286,409 25,086 4,877 2,576 417 2 319,367 320,424
Short term borrowings ............... 2.38% 17,960 - - - - - 17,960 17,960
Long-term debt ...................... 5.53% 70 1,370 500 1,000 2,500 14,700 20,140 21,665
33
Item 8. Financial Statements and Supplementary Data
COMMUNITY BANKSHARES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report ............................................ 35
Consolidated Balance Sheets, December 31, 2003 and 2002 ................. 36
Consolidated Statements of Income, Years Ended December 31,
2003, 2002, and 2001 ........................................... 37
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 2003, 2002, and 2001 .................. 38
Consolidated Statements of Cash Flows, Years Ended December 31,
2003, 2002, and 2001 ........................................... 39
Notes to Consolidated Financial Statements .............................. 40-67
34
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
Community Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Community
Bankshares, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community
Bankshares, Inc. and subsidiaries at December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
Columbia, South Carolina s\ J. W. Hunt and Company LLP
January 22, 2004
35
COMMUNITY BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Assets
Cash and due from banks .............................................................. $ 16,554 $ 14,738
Federal funds sold ................................................................... 25,321 23,831
-------- --------
Total cash and cash equivalents ................................................ 41,875 38,569
Interest-bearing deposits with other banks ........................................... 1,124 511
Securities available-for-sale ........................................................ 64,864 51,156
Securities held-to-maturity (fair value approximates
$2,155 for 2003) ..................................................................... 2,000 -
Other investments .................................................................... 2,038 1,910
Loans held for sale .................................................................. 8,411 24,664
Loans receivable, net of allowance for loan
losses of $4,206 for 2003 and $3,573 for 2002 ........................................ 327,900 302,911
Premises and equipment - net ......................................................... 6,915 6,376
Accrued interest receivable .......................................................... 2,186 2,131
Net deferred income tax assets ....................................................... 805 584
Intangible assets .................................................................... 7,650 7,896
Prepaid expenses and other assets .................................................... 812 612
-------- --------
Total assets ................................................................... $466,580 $437,320
======== ========
Liabilities
Deposits
Demand, non interest-bearing ...................................................... $ 59,337 $ 47,128
Interest-bearing transaction accounts ............................................. 57,221 40,963
Savings ........................................................................... 77,216 65,660
Certificates of deposit of $100 and over .......................................... 68,388 67,946
Other time deposits ............................................................... 116,542 115,365
-------- --------
Total deposits ................................................................. 378,704 337,062
Short-term borrowings ................................................................ 17,960 34,551
Long-term debt ....................................................................... 20,140 20,210
Accrued interest payable ............................................................. 585 759
Accrued expenses and other liabilities ............................................... 1,121 1,021
-------- --------
Total liabilities .............................................................. 418,510 393,603
-------- --------
Commitments and contingent liabilities
Shareholders' equity
Common stock - no par value, 12,000,000 authorized shares;
issued and outstanding - 4,331,460 shares for 2003
and 4,304,384 shares for 2002 ........................................................ 29,402 29,090
Retained earnings .................................................................... 18,610 14,529
Accumulated other comprehensive income ............................................... 58 98
-------- --------
Total shareholders' equity ..................................................... 48,070 43,717
-------- --------
Total liabilities and shareholders' equity ..................................... $466,580 $437,320
======== ========
See accompanying notes to consolidated financial statements.
36
COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands, except per share)
Interest and dividend income
Loans, including fees ............................................. $ 22,234 $ 20,174 $ 18,110
Interest bearing deposits with other banks ........................ 19 36 161
Debt securities
Taxable ........................................................ 1,341 1,872 2,040
Tax exempt ..................................................... 322 217 29
Dividends ......................................................... 73 98 127
Federal funds sold and securities
purchased under agreements to resell .............................. 279 347 734
-------- -------- --------
Total interest and dividend income .......................... 24,268 22,744 21,201
-------- -------- --------
Interest expense
Deposits
Interest-bearing transaction accounts .......................... 193 285 264
Savings ........................................................ 766 905 1,117
Certificates of deposit of $100 and over ....................... 1,568 1,876 2,415
Certificates of deposit of less than $100 ...................... 3,160 3,452 5,079
-------- -------- --------
Total interest on deposits .................................. 5,687 6,518 8,875
Short-term borrowings ............................................. 750 478 237
Long-term debt .................................................... 1,123 1,123 1,149
-------- -------- --------
Total interest expense ...................................... 7,560 8,119 10,261
-------- -------- --------
Net interest income ................................................... 16,708 14,625 10,940
Provision for loan losses ............................................. 1,119 1,033 650
-------- -------- --------
Net interest income after provision ................................... 15,589 13,592 10,290
-------- -------- --------
Noninterest income
Service charges on deposit accounts ............................... 3,349 2,760 2,058
Mortgage brokerage income ......................................... 5,198 3,655 1,033
Gains (losses) on sales of securities ............................. (252) 119 31
Deposit box rent .................................................. 50 39 27
Bank card fees .................................................... 32 29 28
Credit life insurance commissions ................................. 77 62 62
Other ............................................................. 671 530 345
-------- -------- --------
Total noninterest income .................................... 9,125 7,194 3,584
-------- -------- --------
Noninterest expenses
Salaries and employee benefits .................................... 9,657 7,812 4,651
Premises and equipment ............................................ 1,804 1,444 1,009
Marketing ......................................................... 441 338 266
Regulatory fees ................................................... 233 205 181
Supplies .......................................................... 337 284 166
Director fees ..................................................... 283 190 162
FDIC insurance .................................................... 54 50 48
Other ............................................................. 3,123 2,142 1,327
-------- -------- --------
Total noninterest expenses .................................. 15,932 12,465 7,810
-------- -------- --------
Income before income taxes ............................................ 8,782 8,321 6,064
Provision for income taxes ............................................ 3,147 2,920 2,156
-------- -------- --------
Net income ............................................................ $ 5,635 $ 5,401 $ 3,908
======== ======== ========
Earnings per share
Basic ............................................................. $ 1.31 $ 1.42 $ 1.21
Diluted ........................................................... $ 1.27 $ 1.38 $ 1.20
See accompanying notes to consolidated financial statements
37
COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock
------------ Accumulated
Number of Retained Other Comprehensive
Shares Amount Earnings Income (Loss) Total
------ ------ -------- ------------- -----
(Dollars in thousands, except per share)
Balance, January 1, 2001 ............................. 3,199,180 $ 15,928 $ 7,342 $ (131) $ 23,139
Comprehensive income
Net income ....................................... - - 3,908 - 3,908
Unrealized holding gains arising
during the period, net of
income tax effects of $81 ........................ - - - 144 144
Reclassification adjustment,
net of income tax effects of $11 ................. - - - (20) (20)
--------- ---------
Total other comprehensive income ................. - - - - 124
---------
Total comprehensive income ....................... - - - - 4,032
---------
Common stock issued in purchase
of Resource Mortgage, Inc., net
of issuance costs of $42 ......................... 95,454 1,241 - - 1,241
Exercise of stock options ............................ 5,040 39 - - 39
Cash dividends ($.28 per share) ...................... - - (904) - (904)
--------- --------- --------- --------- ---------
Balance, December 31, 2001 ........................... 3,299,674 17,208 10,346 (7) 27,547
Comprehensive income
Net income ....................................... - - 5,401 - 5,401
Unrealized holding gains arising
during the period, net of
income tax effects of $102 ....................... - - - 181 181
Reclassification adjustment,
net of income tax effects of $43 ................. - - - (76) (76)
--------- ---------
Total other comprehensive income ................. - - - - 105
---------
Total comprehensive income ....................... - - - - 5,506
---------
Common stock issued in purchase of
Ridgeway Bancshares, Inc., net
of issuance costs of $178 ........................ 1,000,000 11,842 - - 11,842
Exercise of stock options ............................ 4,710 40 - - 40
Cash dividends ($.32 per share) ...................... - - (1,218) - (1,218)
--------- --------- --------- --------- ---------
Balance, December 31, 2002 ........................... 4,304,384 29,090 14,529 98 43,717
Comprehensive income
Net income ....................................... - - 5,635 - 5,635
Unrealized holding losses arising
during the period, net of
income tax effects of $113 ....................... - - - (201) (201)
Reclassification adjustment,
net of income tax effects of $91 ................. - - - 161 161
--------- ---------
Total other comprehensive income (loss) .......... - - - - (40)
---------
Total comprehensive income ....................... - - - - 5,595
---------
Exercise of stock options ............................ 27,076 312 - - 312
Cash dividends ($.36 per share) ...................... - - (1,554) - (1,554)
--------- --------- --------- --------- ---------
Balance, December 31, 2003 ........................... 4,331,460 $ 29,402 $ 18,610 $ 58 $ 48,070
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
38
COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Operating activities
Net income .................................................................... $ 5,635 $ 5,401 $ 3,908
Adjustments to reconcile net income to net cash provided
(used) by operating activities
Provision for loan losses ............................................... 1,119 1,033 650
Depreciation ............................................................ 793 643 467
Amortization of definite-lived purchased intangibles .................... 246 123 -
Deferred income taxes ................................................... 47 (15) (140)
Securities accretion and premium amortization ........................... 420 9 (23)
(Gain) loss on sale of available-for-sale securities .................... 252 (119) (31)
(Increase) decrease in accrued interest receivable ...................... (55) (369) 568
(Decrease) increase in accrued interest payable ......................... (174) (187) (278)
(Increase) decrease in prepaid expenses and other assets ................ (433) 504 (477)
Increase (decrease) in accrued expenses and other liabilities ........... 65 (191) 522
Originations of loans held for sale ..................................... (293,706) (190,410) (34,414)
Proceeds of sales of loans held for sale ................................ 309,914 176,011 34,915
--------- --------- ---------
Net cash provided (used) by operating activities .................... 24,123 (7,567) 5,667
--------- --------- ---------
Investing activities
Net (increase) decrease in interest-bearing deposits with other banks ......... (613) 1,865 (1,729)
Purchases of held-to-maturity securities ...................................... (2,000) - (1,650)
Purchases of available-for-sale securities .................................... (80,633) (91,018) (84,959)
Maturities of held-to-maturity securities ..................................... - 500 13,525
Maturities of available-for-sale securities ................................... 64,145 60,831 76,111
Proceeds from sale of available-for-sale securities ........................... 2,068 20,543 7,074
Purchases of other investments ................................................ (352) - -
Proceeds from sales of other investments ...................................... 224 - -
Acquisitions accounted for using the purchase method .......................... - 8,922 529
Cash paid in connection with purchase acquisition ............................. - (4,000) -
Net increase in loans made to customers ....................................... (26,063) (76,869) (35,113)
Purchases of premises and equipment ........................................... (1,332) (1,842) (1,164)
--------- --------- ---------
Net cash used by investing activities ............................... (44,556) (81,068) (27,376)
--------- --------- ---------
Financing activities
Net increase in deposits ...................................................... 41,642 81,629 36,622
Net (decrease) increase in short-term borrowings .............................. (16,591) 21,352 (6,626)
Repayments of long-term debt .................................................. (70) (70) (70)
Exercise of stock options ..................................................... 312 40 39
Issuance costs of common stock in business combinations ....................... - (178) (42)
Cash dividends paid ........................................................... (1,554) (1,218) (904)
--------- --------- ---------
Net cash provided by financing activities ........................... 23,739 101,555 29,019
--------- --------- ---------
Increase in cash and cash equivalents .............................................. 3,306 12,920 7,310
Cash and cash equivalents, beginning ............................................... 38,569 25,649 18,339
--------- --------- ---------
Cash and cash equivalents, ending .................................................. $ 41,875 $ 38,569 $ 25,649
========= ========= =========
Supplemental disclosures of cash flow information
Cash payments for interest expense ................................................. $ 7,734 $ 8,306 $ 10,539
Cash payments for income taxes ..................................................... 3,054 3,130 2,240
Supplemental disclosures of non-cash investing activities
Transfers of loans receivable to other real estate ................................. $ 353 $ 219 $ 267
Fair value of common stock issued in business combinations ......................... - 12,020 1,283
Other comprehensive income (loss) .................................................. (40) 105 124
See accompanying notes to consolidated financial statements.
39
COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Community Bankshares, Inc. (the "Corporation"), was organized under the laws of
the State of South Carolina and was chartered as a business corporation on
November 30, 1992. Pursuant to the provisions of the Federal Bank Holding
Company Act, an application was filed with and approved by the Board of
Governors of the Federal Reserve System for the Corporation to become a bank
holding company by the acquisition of Orangeburg National Bank (ONB).
In June 1996, Sumter National Bank (SNB), and in July 1998, Florence National
Bank (FNB), commenced operations in Sumter and Florence, South Carolina,
respectively, following approval by the Comptroller of the Currency and other
regulators. Upon completion of their organization, the common stock of SNB and
FNB was acquired by the Corporation.
In November 2001, the Corporation acquired all the common stock of Resource
Mortgage Inc., a Columbia, South Carolina based mortgage company. The
Corporation issued 95,454 shares of its common stock in exchange for 100% of the
common stock of Resource Mortgage Inc. The subsidiary was renamed Community
Resource Mortgage, Inc. (CRM).
In July 2002, Ridgeway Bancshares, Inc., the holding company for the Bank of
Ridgeway (BOR), merged into the Corporation. The Corporation issued 1,000,000
shares of its common stock and paid $4,000,000 cash in exchange for 100% of the
common stock of Ridgeway Bancshares, Inc. The transaction was consummated on
July 1, 2002.
The Banks and CRM operate as wholly-owned subsidiaries of the Corporation with
separate Boards of Directors and operating policies and they provide a variety
of financial services to individuals and businesses throughout South Carolina.
The primary deposit products are checking, savings and term certificate
accounts. The primary lending products are consumer, commercial and mortgage
loans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Corporation and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the balance sheet and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Corporation's
activities are with customers located within South Carolina. Note 4 discusses
the types of securities the Corporation purchases. Note 6 discusses the types of
lending in which the Corporation engages. The Banks grant commercial, consumer
and residential loans to customers throughout South Carolina. Although the Banks
have diversified loan portfolios, a substantial portion of their debtors'
ability to honor their contracts is dependent upon the economies of various
South Carolina communities. The mortgage company originates and sells loans into
the secondary market; it sometimes maintains loans for its own portfolio on a
limited basis.
CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash
flows, the Corporation has defined cash and cash equivalents as those amounts
included in the balance sheets under the caption, "Cash and due from banks" and
"Federal funds sold," all of which mature within ninety days.
INTEREST-BEARING DEPOSITS WITH OTHER BANKS Interest-bearing deposits with other
banks generally mature within one year and are carried at cost.
40
SECURITIES Securities that management has both the ability and positive intent
to hold to maturity are classified as held-to-maturity and carried at cost,
adjusted for amortization of premium and accretion of discounts using methods
approximating the interest method. The Corporation has made a management
decision generally to avoid acquiring further held-to-maturity securities.
Securities that may be sold prior to maturity for asset/liability management
purposes, or that may be sold in response to changes in interest rates, changes
in prepayment risk, increase in regulatory capital, or other similar factors,
are classified as available-for-sale and are carried at fair value. Unrealized
gains and losses on securities available-for-sale are excluded from earnings and
reported in other comprehensive income. Gains and losses on the sale of
securities available-for-sale are recorded on the trade date and are determined
using the specific identification method. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other-than-temporary are reflected in earnings as realized losses.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on
securities.
No securities are being held for short-term resale; therefore, the Corporation
does not currently use a trading account classification.
LOANS HELD FOR SALE The Corporation originates loans held for sale, generally
without recourse, to other financial institutions under commitments or other
arrangements in place prior to loan origination. Sales are completed at or near
the loan origination date.
Loans originated and intended for sale in the secondary market are generally
residential mortgage loans and are carried at the lower of cost or estimated
fair value in the aggregate. Gains and losses, if any, on the sale of such loans
are determined using the specific identification method. All fees and other
income from these activities are recognized in income when loan sales are
completed.
LOANS RECEIVABLE The Corporation grants mortgage, commercial and consumer loans
to customers. The ability of the Corporation's debtors to honor their contracts
is dependent upon the general economic conditions in its market areas. Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are carried at
principal amounts outstanding, increased or reduced by deferred net loan costs
or fees and any unamortized purchase premiums or discounts. Interest income on
loans is recognized using the interest method based upon the principal amounts
outstanding. Loan origination and commitment fees and certain direct loan
origination costs (principally salaries and employee benefits) are deferred and
amortized as an adjustment of the related loan's yield. Generally, these amounts
are amortized over the contractual life of the related loans or commitments.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well collateralized and
in process of collection. Residential real estate loans are typically placed on
nonaccrual at the time the loan is 120 days delinquent. Unsecured personal
credit lines and certain consumer finance loans are typically charged off no
later than the time the loan is 180 days delinquent.
Other consumer loans are charged off at the time the loan is 120 days
delinquent. Generally, loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual status. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a
provision for loan losses charged against earnings as losses are estimated to
have occurred. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
41
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Management of each Bank reviews its allowance for loan losses in three broad
categories: commercial and industrial, loans secured by real estate and loans to
individuals, and assigns an estimated percentage factor to each in the
determination of the estimate of the allowance for loan losses. Where the Banks'
internal and external loan review programs identify loans that are subject to
specific weaknesses such loans are reviewed for a specific loan loss allowance.
A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
known circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. This Statement requires that all derivatives be
recognized as assets or liabilities in the balance sheet and measured at fair
value.
In April, 2003, the Financial Accounting Standards Board issued Statement No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." Among other requirements, this Statement provides that loan
commitment contracts entered into or modified after June 30, 2003 that relate to
the origination of mortgage loans that will be held for sale shall be accounted
for as derivative instruments by the issuer of the loan commitment. The
Corporation issues mortgage loan rate lock commitments to potential borrowers to
facilitate its origination of home mortgage loans that are intended to be sold.
Between the time that the Corporation issues its commitments and the time that
the loans close and are sold, the Corporation is subject to variability in the
selling prices related to those commitments due to changes in market rates of
interest. However, the Corporation offsets this variability through the use of
so-called "forward sales contracts" to investors in the secondary market. Under
these arrangements, an investor agrees to purchase the closed loans at a
predetermined price. The Corporation generally enters into such forward sales
contracts at the same time that rate lock commitments are issued. These
arrangements are designated as fair value hedges. These derivative financial
instruments are carried in the balance sheet at estimated fair value and changes
in the estimated fair values of these derivatives are recorded in the statement
of income in net gains or losses on loans held for sale. Because the Corporation
has effectively matched its forward sales contracts to investors and rate lock
commitments to potential borrowers, no net gains or losses due to changes in
market interest rates have been recorded in the statement of income for 2003.
Derivative financial instruments are written in amounts referred to as notional
amounts. Notional amounts provide only the basis for calculating payments
between counterparties and do not represent amounts to be exchanged between
parties or a measure of financial risk. The table below presents the notional
principal amounts of rate lock commitments and forward sales contracts as of
December 31, 2003, and the estimated fair values of those financial instruments
included in other assets and liabilities in the balance sheet as of that date.
December 31, 2003
-----------------
Notional Amount Estimated Fair Value
--------------- --------------------
(Dollars in thousands)
Commitments to originate loans to be held for sale ................................. $(8,817) $ (35)
Forward sales commitments .......................................................... 8,817 35
------- -------
Total ................................................................ $ - $ -
======= =======
42
The SEC staff has indicated that all loan commitments related to mortgage loans
that will be held for sale and that are originated after March 31, 2004 must be
considered to be written options from the prospective lender's perspective.
Therefore, the prospective lender thereafter must report the fair values of such
written options as a liability, with an offsetting expense recognized to the
extent that compensation has not been received, in the prospective lender's
financial statements. Such commitments would continue to be reported as
liabilities until expiration or fulfillment of the commitment. Adoption of this
accounting change is not expected to have any material adverse or beneficial
effect on the Corporation's financial condition or its results of operation.
STOCK-BASED COMPENSATION Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, encourages all entities to
adopt a fair value based method of accounting for employee stock compensation
plans, whereby compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Corporation's stock option plans have no
intrinsic value at the grant date, and under APB Opinion No. 25 no compensation
cost is recognized for them. The Corporation has elected to continue with the
accounting methodology in APB Opinion No. 25 and, as a result, has provided pro
forma disclosures of net income and earnings per share and other disclosures, as
if the fair value based method of accounting had been applied. The Corporation
currently has no intentions to discontinue using the APB Opinion No. 25
methodology.
Had compensation cost for the Corporation's stock option plans been determined
based on the fair value at the grant dates for awards under the plans consistent
with the method prescribed by SFAS No. 123, the Corporation's net income and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands, except per share)
Net income, as reported ............................................ $ 5,635 $ 5,401 $ 3,908
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of any related tax effects ................................ - - (582)
--------- --------- ---------
Pro forma net income ............................................... $ 5,635 $ 5,401 $ 3,326
========= ========= =========
Net income per share, basic
As reported ................................................... $ 1.31 $ 1.42 $ 1.21
Pro forma ..................................................... 1.31 1.42 1.03
Net income per share, assuming dilution
As reported ................................................... $ 1.27 $ 1.38 $ 1.20
Pro forma ..................................................... 1.27 1.38 1.02
OTHER REAL ESTATE Other real estate, which is included in other assets, consists
of properties acquired through foreclosure or in full or partial satisfaction of
the related loan and is held for sale.
Other real estate is initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
management periodically performs valuations and the assets are carried at the
lower of carrying amount or fair value less costs to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in other
expenses.
43
PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less
accumulated depreciation computed principally on the straight-line method over
the estimated useful lives of the assets. Useful lives of assets are outlined
below:
Buildings 32 - 40 years
Building components 5 - 30 years
Vault doors, safe deposit boxes, night depository, etc. 32 - 40 years
Furniture, fixtures and equipment 5 - 25 years
INCOME TAXES Deferred income tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
OFF-BALANCE-SHEET CREDIT RELATED FINANCIAL INSTRUMENTS In the ordinary course of
business the Banks enter into commitments to extend credit and grant standby
letters of credit. Such off-balance-sheet financial instruments are recorded in
the consolidated financial statements when they are funded.
SEGMENTS Community Bankshares, Inc. through its banking subsidiaries, ONB, SNB,
FNB, BOR and its mortgage subsidiary, CRM, provides a broad range of financial
services to individuals and businesses in South Carolina. These services include
demand, time, and savings deposits; lending services; ATM processing; and
similar financial services. While the Corporation's decision makers monitor the
revenue streams of the various financial products and services, operations are
managed and financial performance is evaluated on a corporate-wide basis.
Accordingly, the subsidiary operations are not considered by management to
comprise more than one reportable operating segment.
COMPREHENSIVE INCOME Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
securities available-for-sale, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. Currently, the Corporation's only components
of other comprehensive income (loss) are unrealized gains (losses) on securities
available-for-sale.
TRANSFERS OF FINANCIAL ASSETS Transfers of financial assets are accounted for as
sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Corporation, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Asset Retirement Obligations FASB Statement No. 143, "Accounting
for Asset Retirement Obligations," addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The Statement requires recording the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred, along with increasing the carrying amount and depreciation of
the related asset. This Statement was effective for financial statements issued
for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The adoption of this Statement as of January 1, 2003 did not have
any material adverse or beneficial effect on the consolidated financial position
or results of operations of the Corporation.
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections FASB Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," addresses financial accounting and reporting for extinguishment of
debt and for certain lease modifications that have economic effects similar to
sale-leaseback transactions. This Statement requires that gains and losses from
debt extinguishments that are part of an entity's recurring operations not be
accounted for as extraordinary items. Furthermore, gains and losses from debt
extinguishments that are not part of an entity's recurring operations are
required to be evaluated using the criteria in Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
44
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," to determine whether extraordinary treatment
is warranted for those transactions. The provisions of this Statement related to
debt extinguishments were required to be applied in fiscal years beginning after
May 15, 2002, with early application encouraged. Restatement is required for
amounts that previously were classified as extraordinary, but that do not meet
the criteria in Opinion No. 30 for extraordinary treatment. The Statement's
other provisions were required to be applied either to transactions occurring
after May 15, 2002 or for financial statements issued on or after May 15, 2002,
with early application encouraged. The adoption of the provisions of FASB No.
145 as of their effective dates did not have any material adverse or beneficial
effect on the consolidated financial position or results of operations of the
Corporation.
Accounting for Costs Associated with Exit or Disposal Activities FASB Statement
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issues Nos. 88-10
and 94-3. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized at its fair value when the liability is
incurred, rather than the previous recognition of a liability at the date that
an entity committed to an exit plan. The provisions of this Statement were
effective for exit or disposal activities initiated after December 31, 2002,
with early application encouraged. The adoption of Statement No. 146 as of
January 1, 2003 did not have any material adverse or beneficial effect on the
consolidated financial position or results of operations of the Corporation.
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others The FASB issued its Interpretation
45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," which
addresses a guarantor's measurement and recognition of its liabilities under
certain guarantee transactions at inception and provides for new disclosures
regarding the nature and extent of such guarantees. The disclosure requirements
were effective for interim and annual financial statements ending after December
15, 2002. FIN 45's initial recognition and measurement provisions were effective
prospectively; that is, for guarantees issued or modified on or after January 1,
2003. The adoption of the disclosure provisions of this Interpretation as of
December 31, 2002 had no material adverse or beneficial effect on the
consolidated financial position or results of operations of the Corporation.
Furthermore, the adoption of the Interpretation's measurement and recognition
provisions as of January 1, 2003 did not have any material adverse or beneficial
effect on the Corporation's consolidated financial position or results of
operations.
Consolidation of Variable Interest Entities FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
provides a new framework for identifying variable interest entities ("VIEs") and
determining when a company should include the assets, liabilities,
noncontrolling interests and results of activities of a VIE in its consolidated
financial statements. FIN 46 requires that if a business enterprise has a
controlling financial interest in a VIE, the assets, liabilities and results of
the activities of the VIE must be included in the consolidated financial
statements of a business enterprise. This interpretation also requires existing
unconsolidated VIEs to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. VIEs that
effectively disperse risks will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. FIN 46 was effective immediately for VIEs created
after January 31, 2003, and to VIEs in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to VIEs in which an enterprise holds a variable interest
that it acquired before February 1, 2003. This Interpretation does not apply to
securitization structures that are qualified special purpose entities as defined
within FASB Statement No. 140. Management does not believe that adoption of this
Interpretation has had, or will have, any material adverse or beneficial effect
on the Corporation's consolidated financial position or results of operations.
Amendment of FASB Statement No. 133 The FASB issued its Statement No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
which amends and clarifies accounting and disclosure for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under FASB Statement No. 133. This Statement was effective
for contracts entered into or modified after June 30, 2003, except in certain
circumstances, and for hedging relationships designated after June 30, 2003.
Adoption of this Statement did not have a material adverse or beneficial effect
on the Corporation's consolidated financial position or results of operations.
45
Financial Instruments with Characteristics of both Liabilities and Equity FASB
Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," provides new rules on the
accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. Such financial instruments include
mandatorily redeemable shares, instruments that require the issuer to buy back
some of its shares in exchange for cash or other assets, or obligations that can
be settled with shares, the monetary value of which is fixed. Most of the
guidance in FASB Statement No. 150 was effective for financial instruments
entered into or modified after May 31, 2003, and otherwise was effective at the
beginning of the first interim period beginning after June 30, 2003. Adoption of
this Statement had no material adverse or beneficial effect on the Corporation's
consolidated financial position or results of operations.
ADVERTISING COSTS The cost of advertising is expensed as incurred.
OTHER Certain amounts previously reported in the statements have been
reclassified to conform to the current year's presentation and disclosure
requirements. These reclassifications had no effect on reported net income or
retained earnings.
NOTE 3 - CASH AND DUE FROM BANKS
The Banks are required to maintain average reserve balances with the Federal
Reserve or in available cash. The average daily reserve balance requirements at
December 31, 2003 and 2002 were approximately $2,140,000 and $1,800,000,
respectively. At December 31, 2003, the Corporation had cash balances with
correspondent banks totaling approximately $10,140,000, of which $1,303,000 was
fully insured by the FDIC.
NOTE 4 - SECURITIES
Securities consist of the following:
December 31,
------------
2003 2002
---- ----
Gross Gross Gross Gross
Unrealized Unrealized Estimated Unrealized Unrealized Estimated
Amortized Holding Holding Fair Amortized Holding Holding Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
(Dollars in thousands)
Securities available-for-sale
U.S. Treasury and U.S.
Government agencies ............... $56,633 $ 146 $ 302 $56,477 $41,488 $ 43 $ - $41,531
States and political
subdivisions ....................... 8,140 249 2 8,387 9,514 115 4 9,625
------- ------- ------- ------- ------- ------- ------- -------
Total securities
available-for-sale ............. $64,773 $ 395 $ 304 $64,864 $51,002 $ 158 $ 4 $51,156
======= ======= ======= ======= ======= ======= ======= =======
Securities held-to-maturity
States and political
subdivisions ....................... $ 2,000 $ 155 $ - $ 2,155 $ - $ - $ - $ -
------- ------- ------- ------- ------- ------- ------- -------
Total securities
held-to-maturity ............... $ 2,000 $ 155 $ - $ 2,155 $ - $ - $ - $ -
======= ======= ======= ======= ======= ======= ======= =======
The amortized cost and fair value of debt securities at December 31, 2003 and
2002, by contractual maturity are detailed below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
46
December 31,
------------
2003 2002
---- ----
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(Dollars in thousands)
Securities available-for-sale
Due within one year ........................................ $ 3,031 $ 3,033 $ 4,011 $ 3,970
Due after one through five years ........................... 39,540 39,584 38,185 36,701
Due after five through ten years ........................... 21,186 21,267 8,764 10,445
Due after ten years ........................................ 1,016 980 42 40
------- ------- ------ ------
Total securities available-for-sale ................... $64,773 $64,864 $51,002 $51,156
======= ======= ======= =======
Securities held-to-maturity
Due after five through ten years ........................... $ 2,000 $ 2,155 $ - $ -
------- ------- ------ ------
Total securities held-to-maturity ..................... $ 2,000 $ 2,155 $ - $ -
======= ======= ====== ======
The following table provides information about the Corporation's securities
holdings which were maintained in an unrealized loss condition as of December
31, 2003:
Countinuously in Unrealized Loss Position for a Period of
---------------------------------------------------------
Less than 12 Months 12 Months or more Total
------------------- ----------------- -----
Unrealized Unrealized Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
---------- ---- ---------- ---- ---------- ----
(Dollars in thousands)
U.S. Treasury and U.S.
Government agencies .......................... $17,132 $ 293 $ 528 $ 9 $17,660 $ 302
States and political subdivision- .............. - 204 2 204 2
------- ------- ------- ------- ------- -------
Total securities ............................... $17,132 $ 293 $ 732 $ 11 $17,864 $ 304
======= ======= ======= ======= ======= =======
Unrealized losses reflected in this table generally are the result of interest
rate changes that have occurred since the securities were purchased. No loss is
expected on any of these securities if they are held until their maturities.
At December 31, 2003 and 2002, investment securities with a carrying value of
$31,418,000 and $36,918,000, respectively, were pledged to secure public
deposits, repurchase agreements and for other purposes required and permitted by
law.
For the years ended December 31, 2003, 2002 and 2001, proceeds from sales of
securities available-for-sale amounted to $2,068,000, $20,543,000 and
$7,074,000, respectively. Gross realized gains totaled $73,000, $122,000 and
$31,000, respectively. Gross realized losses were $325,000, $3,000 and $0,
respectively. The tax benefit (provision) applicable to the net realized gains
and losses amounted to $90,000, $(43,000) and $(11,000), respectively.
NOTE 5 - OTHER INVESTMENTS
Other investments consist of restricted stocks of the Federal Reserve Bank of
Richmond, the Federal Home Loan Bank of Atlanta, and correspondent Bankers Banks
which are carried at cost. Management periodically evaluates these investments
for impairment, with any appropriate downward adjustments being made when
necessary.
47
NOTE 6 - LOANS RECEIVABLE
The following is a summary of loans by category:
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Commercial, financial and agricultural ......... $ 84,844 $ 78,210
Real estate- construction ...................... 23,590 23,345
Real estate - mortgage ......................... 188,530 168,499
Consumer installment ........................... 35,142 36,430
--------- ---------
Total ..................................... 332,106 306,484
Allowance for loan losses ...................... (4,206) (3,573)
--------- ---------
Loans - net ............................... $ 327,900 $ 302,911
========= =========
The loan portfolio included fixed rate and adjustable rate loans totaling
$194,550,000 and $137,556,000 respectively, at December 31, 2003.
Overdrawn demand deposits totaling $564,000 and $748,000 have been reclassified
as loan balances at December 31, 2003 and 2002, respectively.
Gross proceeds on sales of mortgage loans originated for resale were
approximately $309,914,000, $176,011,000, and $34,915,000 for the years ended
December 31, 2003, 2002, and 2001, respectively. Income from this activity is
recognized as mortgage brokerage income.
Loans outstanding to directors, executive officers, principal holders of equity
securities, or to any of their associates totaled $7,416,000 at December 31,
2003 and $11,037,000 at December 31, 2002. A total of $9,269,000 in loans were
made or added, while a total of $12,890,000 were repaid or deducted during 2003.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. Changes in the composition of the board of directors or the
group comprising executive officers also result in additions to or deductions
from loans outstanding to directors, executive officers or principal holders of
equity securities.
As of December 31, 2003 and 2002, there were no significant concentrations of
credit risk in any single borrower or groups of borrowers. The Corporation's
loan portfolio consists primarily of extensions of credit to businesses and
individuals in its local market areas in Orangeburg, Sumter, Florence, Richland,
Fairfield and Anderson counties of South Carolina. The Banks and CRM regularly
monitor various segments of their credit portfolios to assess potential
concentration risks and to obtain collateral when considered necessary.
Changes in the allowance for loan losses were as follows:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Balance at January 1 ....................... $ 3,573 $ 2,830 $ 2,424
Changes incident to merger activities ...... - 444 28
Provision charged to expense ............... 1,119 1,033 650
Recoveries ................................. 174 38 35
Charge-offs ................................ (660) (772) (307)
------- ------- -------
Balance at December 31 ..................... $ 4,206 $ 3,573 $ 2,830
======= ======= =======
The following is summary information pertaining to impaired loans:
48
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Impaired loans without a valuation allowance ................................................. $ - $ -
Impaired loan with a valuation allowance ..................................................... 2,595 796
------ ------
Total impaired loans ..................................................................... $2,595 $ 796
====== ======
Allowance for loan losses on impaired loans at year end ...................................... $ 389 $ 119
====== ======
Average total investment in impaired loans during the year ................................... $1,983 $ 862
Cash basis interest income recognized on impaired loans during year .......................... - -
No additional funds are committed to be advanced in connection with impaired
loans.
Nonaccrual, past due loans, and other real estate at December 31, 2003 and 2002,
were as follows:
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Nonaccrual loans ....................................... $2,595 $ 796
Accruing 90 days or more past due ...................... 146 1,740
------ ------
Total ........................................... $2,741 $2,536
====== ======
Total as a percentage of outstanding loans ...... 0.83% 0.83%
Other real estate ...................................... $ 327 $ 219
====== ======
Gross interest income that would have been recorded for the years ended December
31, 2003, 2002, and 2001 if nonaccrual loans had been performing in accordance
with their original terms was approximately $117,000, $39,000, and $7,000,
respectively.
NOTE 7 - PREMISES AND EQUIPMENT AND OPERATING LEASES
Premises and equipment at December 31, 2003 and 2002, consist of the following:
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Land ........................................... $ 1,260 $ 1,149
Buildings and components ....................... 3,884 3,975
Furniture, fixtures and equipment .............. 5,713 4,719
------- -------
Total ..................................... 10,857 9,843
Less, accumulated depreciation ................. 3,942 3,467
------- -------
Premises and equipment - net .............. $ 6,915 $ 6,376
======= =======
Depreciation expense was approximately $793,000, $643,000, and $467,000, for the
years ended December 31, 2003, 2002, and 2001, respectively.
As of December 31, 2003 future minimum rent commitments under various
noncancelable operating leases are as follows:
49
Year Amount
---- ------
(Dollars in thousands)
2004 ........................ $ 182
2005 ........................ 182
2006 ........................ 186
2007 ........................ 172
2008 ........................ 91
Thereafter ....................... $ 1,978
-------
Total .................. $ 2,791
=======
Total rent expense for the years ended December 31, 2003, 2002 and 2001 was
$205,000, $149,000 and $67,000, respectively.
NOTE 8 - INTANGIBLE ASSETS
Changes in the carrying amounts of goodwill for the years ended December 31,
2003 and 2002 are as follows:
Years Ended December 31,
------------------------
2003 2002
---- ----
(Dollars in thousands)
Balance, beginning of year ....................... $4,321 $1,260
Goodwill acquired during the year ................ - 3,061
Impairment losses ................................ - -
------ ------
Balance, end of year ............................. $4,321 $4,321
====== ======
Goodwill is tested for impairment annually by an independent consulting firm. As
of December 31, 2003, no impairment has been determined.
As part of the valuation of Ridgeway Bancshares, Inc., conducted by a third
party firm, a core deposit intangible was computed. All amortizable intangible
assets are evaluated annually to determine whether any revisions of their
estimated useful lives are warranted. For the years ended December 31, 2003 and
2002, and in 2001, no such revisions have resulted.
The following tables present the gross carrying amounts and accumulated
amortization for the Corporation's amortizable intangible assets as of December
31, 2003 and 2002, and the estimated amounts of amortization expense to be
recognized for each of the five succeeding fiscal years, as of December 31, 2003
and 2002. Such assets are being amortized on a straight-line basis over fifteen
years.
50
December 31,
------------
2003 2002
---- ----
Gross Gross
Carrying Accumulated Carying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(Dollars in thousands)
Amortizable intangible asset class
Core deposit intangible .................................... $3,698 $ 369 $3,698 $ 123
====== ====== ====== ======
Estimated amounts of amortization expense to be recognized in each of the next
five succeeding years:
Amount as of Amount as of
December 31, December 31,
2003 2002
------------ ------------
Year
(Dollars in thousands)
2004 $ 246 $ 246
2005 246 246
2006 246 246
2007 246 246
2008 246 -
NOTE 9 - DEPOSITS
At December 31, 2003, the scheduled maturities of time deposits are as follows:
Year Amount
---- ------
(Dollars in thousands)
2004 $ 151,972
2005 25,086
2006 4,877
2007 2,576
2008 417
Thereafter 2
-
Total $ 184,930
=========
Deposits of directors and officers and their related business interests
totaled approximately $6,982,000 and $5,074,000 at December 31, 2003 and 2002,
respectively.
NOTE 10 - SHORT-TERM BORROWINGS
The Corporation's short-term borrowings generally consist of federal funds
purchased, securities sold under agreements to repurchase, warehouse lines of
credit used to finance the mortgage subsidiary's operations and other borrowings
under short-term credit facilities. Federal funds purchased and securities sold
under agreements with customers to repurchase generally mature within one to
four days from the transaction date. Securities sold under agreements to
repurchase are reflected at the amount of cash received in connection with the
transaction. The Corporation monitors the fair value of the underlying
securities on a daily basis and it is the Banks' policy to maintain a collateral
value greater than the principal and accrued interest of the transaction. All
securities underlying these agreements are institution-owned securities.
51
Warehouse lines of credit consist of $6,749,000 borrowed by Community Resource
Mortgage, Inc. at the one month LIBOR rate plus 1.95% and $994,000 borrowed with
interest at the one month LIBOR rate plus an additional amount that ranges from
2.25% to 5.25% based on the number of days that each underlying loan is
outstanding. In related credit agreements, CRM and the Corporation have agreed
to certain covenants including: maintenance of certain minimum levels of
tangible net worth and liquidity, restricting additional borrowing from other
lenders, maintaining minimum levels of errors and omissions and fidelity
insurance, maintaining certain quality standards of mortgage loan documentation
and practices, and restrictions on merger or sale of assets, change in
management, permitting liens on other assets or guaranteeing the indebtedness of
others. The loan agreements also contain certain curtailment provisions that
require the repayment of advances under the lines at predetermined intervals.
The unaffiliated warehouse lenders each have security interests in the
approximately $7,673,000 in loans held for sale financed through those borrowing
arrangements. Additional availability under the warehouse lines of credit
totaled $32,257,000 as of December 31, 2003.
Other short-term credit facilities consist of $1,492,000 borrowed by the
mortgage subsidiary for its general corporate purposes at the prime rate under
an unsecured line of credit arrangement and $635,000 borrowed by the Corporation
for its general corporate purposes at the prime rate. Additional credit
availabilities under these lines of credit totaled $1,573,000 as of December 31,
2003. Each line is with an unaffiliated financial institution.
Each of the mortgage subsidiary's warehouse and other lines of credit are
guaranteed by the Corporation.
Short-term borrowings are summarized as follows:
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Securities sold under agreements to repurchase ......... $ 8,090 $16,302
Warehouse lines of credit .............................. 7,743 18,249
Other short-term debt .................................. 2,127 -
------- -------
Total .................................................. $17,960 $34,551
======= =======
The following summarizes information about short-term borrowings during each of
the periods presented:
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Outstanding at year-end .............................. $17,960 $34,551
Interest rate at year-end ............................ 2.38% 3.93%
Interest expense ..................................... $ 750 $ 478
Maximum month-end balance during the year ............ $39,379 $40,474
Average amount outstanding during the year ........... $29,026 $18,712
Weighted average interest rate during the year ....... 2.58% 2.55%
52
NOTE 11 - LONG-TERM DEBT
Long-term debt consists of advances from the Federal Home Loan Bank of Atlanta
("FHLB"). Interest rates associated with such borrowings outstanding as of
December 31, 2003 are generally fixed at rates ranging from 4.45% to 7.04%.
Collateral for the borrowings consists of blanket liens on the Banks'
one-to-four family residential loans and all of the Banks' stock in the FHLB.
Such collateral was carried in the consolidated balance sheet at approximately
$54,623,000 and $54,010,000 at December 31, 2003 and 2002, respectively.
Required future principal reductions of the Corporation's Federal Home Loan
Advances are summarized as follows:
Year Amount
---- ------
(Dollars in thousands)
2004 $ 70
2005 1,370
2006 500
2007 1,000
2008 2,500
Thereafter 14,700
------
Total $ 20,140
========
Under the blanket lien agreements, the Banks collectively have the ability to
borrow an additional $20,209,000 from the FHLB as of December 31, 2003. Any such
borrowings would be subject to the FHLB's normal approval process and would be
subject to interest rates established by the FHLB at the time of each such
transaction. The FHLB may terminate the availability at any time.
NOTE 12 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES
Under the Corporation's Dividend Reinvestment Plan, shareholders may reinvest
all or part of their cash dividends in shares of common stock and also purchase
additional shares of common stock. During the three-year period ended December
31, 2003 all shares purchased under this plan were purchased in the market, not
issued by the Corporation.
At December 31, 2003, 205,183 common shares were reserved for issuance pursuant
to an employee stock option plan and 624,655 common shares were reserved for
issuance pursuant to the dividend reinvestment and additional stock purchase
plan.
During 2001, the Corporation amended its 1997 Stock Option Plan (the "Plan") to
increase by 200,000 shares the number of shares reserved for issuance upon
exercise of options and to permit participation in the plan by non-employee
directors. During 2003, the Corporation amended the Plan to increase by 300,000
shares the number of shares reserved for issuance upon exercise of employee
incentive stock options. Under the Plan, as amended, up to 785,600 shares of
common stock were authorized to be granted to selected officers, other
employees, and non-employee directors of the Corporation and/or its subsidiaries
pursuant to exercise of incentive and nonqualified stock options. Of such
shares, 590,050 were reserved for issuance pursuant to exercise of incentive
stock options and 195,550 were reserved for issuance pursuant to exercise of
nonqualified stock options.
The exercise price of any incentive option granted is equal to the fair value of
the common stock on the date the option is granted. Nonqualified options can be
issued for less than fair value; however, the Corporation has not elected to
issue these options for less than fair value at the date of the grant. The
options are vested upon issuance, but may be exercised no earlier than one year
after issuance.
A summary of the status of options issued pursuant to the Corporation's stock
option plan is presented below:
53
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Shares Exercise Shares Exercise
------ -------- ------ -------- ------ --------
Outstanding at beginning of year ............ 384,667 $ 11.26 396,718 $ 11.21 213,554 $ 11.34
Granted ..................................... 195,750 18.85 - - 191,300 11.00
Exercised ................................... (27,076) 11.57 (4,500) 8.63 (5,040) 7.62
Forfeited or expired ........................ (9,350) 18.85 (7,551) 10.26 (3,096) 12.48
------- ------- -------
Outstanding at end of year .................. 543,991 $ 13.85 384,667 $ 11.26 396,718 $ 11.21
======= ======= =======
Options exercisable at year end ............. 357,591 $ 11.24 384,667 $ 11.26 205,418 $ 11.41
The weighted average fair values of options granted each year are computed using
the Black-Scholes option pricing model using the assumptions detailed below:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Weighted average fair value of options
granted during the year ............... $ 4.33 $ - $ 4.32
Risk-free interest rate ..................... 3.72% 0.00% 5.05%
Expected life (years) ....................... 6.01 - 7.00
Expected volatility ......................... 24.01% 0.00% 32.81%
Yield ....................................... 2.00% 0.00% 1.21%
The following table summarizes information about the options outstanding:
December 31, 2003
-----------------
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Outstanding Price
------------------------ ----------- ------- ----- ----------- -----
$ 7.62 to $ 11.00 219,160 6.3 $ 10.24 219,160 $ 10.24
12.83 18.85 324,831 7.8 16.28 138,431 12.83
------- -------
543,991 7.3 $ 13.93 357,591 $ 11.24
======= =======
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized.
54
NOTE 13 - INCOME TAXES
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The provision for income taxes consists of the following:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Current
Federal .................................. $ 2,820 $ 2,687 $ 2,121
State .................................... 280 248 175
------- ------- -------
Total current ............... 3,100 2,935 2,296
------- ------- -------
Deferred ....................................... 47 (15) (140)
------- ------- -------
Total income tax expense .... $ 3,147 $ 2,920 $ 2,156
======= ======= =======
The provision for income taxes differs from that computed by applying federal
statutory rates at 34% to income before income tax expense as indicated in the
following summary:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Tax expense at statutory rate .................................... $ 2,986 $ 2,829 $ 2,062
State income tax, net of federal
income tax benefit ........................................... 174 156 121
Tax-exempt interest income ....................................... (136) (78) (16)
Amortization of organization costs and
core deposit intangibles ..................................... 63 25 (16)
Other, net ....................................................... 60 (12) 5
------- ------- -------
Total ................................................ $ 3,147 $ 2,920 $ 2,156
======= ======= =======
55
Temporary differences, which give rise to deferred tax assets and liabilities,
are as follows:
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Deferred tax assets
Allowance for loan losses .......................... $1,378 $1,131
Preopening costs ................................... - 5
Other .............................................. 82 1
------ ------
Gross deferred tax assets ............. 1,460 1,137
Valuation allowance ................................ - -
------ ------
Total ................................. 1,460 1,137
------ ------
Deferred tax liabilities
Accelerated depreciation ........................... 462 206
Accretion .......................................... 10 9
Unrealized net holding gains on
available-for-sale securities .................... 30 298
Purchase adjustments - securities .................. 92 -
Purchase adjustments - loans ....................... 61 -
Fair value effect of business combination .......... - 40
------ ------
Gross deferred tax liabilities ........ 655 553
------ ------
Net deferred income tax assets ........................... $ 805 $ 584
====== ======
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Corporation provides a defined contribution plan with an Internal Revenue
Code Section 401(k) provision. All employees who have completed 500 hours of
service during a six-month period and have attained age 21 may participate in
the plan.
A participant may elect to make tax deferred contributions up to a maximum of
12% of eligible compensation. The Corporation will make matching contributions
on behalf of each participant for 100% of the elective deferral, not exceeding
3% of the participant's compensation. The Corporation may also make additional
contributions determined at the discretion of the Board of Directors.
The Corporation's contributions for 401(k) related profit sharing for the years
ended December 31, 2003, 2002, and 2001 totaled approximately $170,000,
$132,000, and $146,000, respectively. Since 2001, the senior officers of the
Corporation are no longer included in this profit sharing program.
The Bank of Ridgeway maintains a defined benefit pension plan covering the
majority of its employees. This plan was in place prior to the Corporation's
acquisition of Ridgeway Bancshares, Inc. in 2002. Because there are no such
plans for the Corporation's other subsidiaries, and there are no plans to
establish any other such plans, the Corporation froze benefit accruals and
discontinued additional participation and voluntary contributions in the plan
during 2003. It is anticipated that the plan will be formally terminated, and
the plan assets distributed to participants, in 2004. The changes in the pension
plan have been accounted for as curtailments in accordance with the provisions
of SFAS No. 88. The following table shows the activity and status of that plan:
56
As of December 31,
------------------
2003 2002
---- ----
(Dollars in thousands)
Change in Benefit Obligation
Benefit obligation as of January 1 ................... $ 796 $ -
Service cost ......................................... 11 59
Interest cost ........................................ 50 50
Curtailments ......................................... (169) -
Actuarial (gain) loss ................................ 27 (41)
Acquisition .......................................... - 728
Benefits paid ........................................ (5) -
----- -----
Benefit obligation as of December 31 ................. 710 796
----- -----
Change in Plan Assets
Fair value of plan assets as of January 1 ............ 632 -
Actual return (loss) on plan assets .................. (27) (100)
Acquisition .......................................... - 672
Employer contributions ............................... 56 60
Benefits paid ........................................ (5) -
----- -----
Fair value of plan assets as of December 31 .......... 656 632
----- -----
Funded Status of the Plan ............................ (54) (164)
Unrecognized transition obligation ................... - 28
Unrecognized net loss ................................ 38 113
----- -----
Accrued benefit cost ................................. (16) (23)
----- -----
Amount Recognized in the Consolidated
Balance Sheets Consists of:
Accrued benefit cost ................................. $ (16) $ (23)
===== =====
Pension Benefits Weighted Average Assumptions
Discount rate ........................................ 7.25% 7.25%
Expected rate on plan assets ......................... 7.25% 7.25%
Rate of compensation increase ........................ 5.00% 5.00%
Components of Net Periodic Benefit Cost
Service cost ......................................... $ 11 $ 59
Interest cost ........................................ 50 50
Expected return on plan assets ....................... (41) (39)
Recognized net actuarial loss (gain) ................. 169 -
Amortization of transition obligation ................ - 3
Amortization of unrecognized net loss ................ 1 3
Curtailment (gain) loss .............................. (169) -
----- -----
Net periodic benefit cost ............................ $ 21 $ 76
===== =====
As of December 31, 2003 and 2002, pension plan assets consisted primarily of
shares of various mutual funds which invest principally in diversified
portfolios of stocks. As of December 31, 2003, plan assets included a $22,000
Bank of Ridgeway money market account bearing interest at the rate of 1.00%. The
plan did not hold any direct investment in the Corporation's common stock.
The Corporation maintains no postretirement or postemployment benefit plans.
57
NOTE 15 - OFF-BALANCE-SHEET COMMITMENTS
The Banks are parties to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Banks' exposure to credit loss is represented by the contractual notional
amount of these commitments. The Banks generally use the same credit policies in
making commitments as they do for on-balance-sheet instruments.
At December 31, 2003 and 2002, the following financial instruments were
outstanding whose contract amounts represent credit risk:
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Loan commitments ................................... $15,501 $14,603
Unfunded commitments under lines of credit ......... 36,735 20,493
Standby letters of credit .......................... 4,489 2,506
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies but may include personal
residences, accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support private borrowing arrangements. All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Banks generally hold collateral supporting those
commitments if deemed necessary. Since many of the standby letters of credit are
expected to expire without being drawn upon, the total letter of credit amounts
do not necessarily represent future cash requirements.
To reduce credit risk related to the use of credit-related financial
instruments, the Bank might deem it necessary to obtain collateral. The amount
and nature of the collateral obtained is based on the Banks' credit evaluation
of the customer. Collateral held varies but may include cash, securities,
accounts receivable, inventory, property, plant and equipment and real estate.
NOTE 16 - EARNINGS PER SHARE
Basic earnings per share represent income available to common shareholders
divided by the weighted-average number of shares outstanding during the year.
Diluted earnings per share reflect additional common shares that would have been
outstanding if all dilutive potential stock options were exercised at the
beginning of each year and the proceeds used to purchase shares of the
Corporation's common stock at the average market price during the year. Dilutive
potential common shares that may be issued by the Corporation relate solely to
outstanding stock options.
58
Earnings per common share were computed based on the following:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands, except per share)
Net income per share, basic
Numerator - net income ................................................. $ 5,635 $ 5,401 $ 3,908
========== ========== ==========
Denominator
Weighted average common shares issued and outstanding .................. 4,313,437 3,803,737 3,217,902
========== ========== ==========
Net income per share, basic ............................... $ 1.31 $ 1.42 $ 1.21
========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ................................................. $ 5,635 $ 5,401 $ 3,908
========== ========== ==========
Denominator
Weighted average common shares issued and outstanding .................. 4,313,437 3,803,737 3,217,902
Effect of dilutive stock options ....................................... 113,966 110,313 28,576
---------- ---------- ----------
Total shares .............................................. 4,427,403 3,914,051 3,246,478
========== ========== ==========
Net income per share, assuming dilution ................... $ 1.27 $ 1.38 $ 1.20
========== ========== ==========
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," as amended, excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate fair values.
Interest-bearing deposits with banks. The carrying amounts of
interest-bearing deposits with banks approximate their fair values.
Securities available-for-sale and held-to-maturity. Fair values for
securities are based on quoted market prices. The market values of state
and local government securities are established with the assistance of an
independent pricing service. The values are based on data which often
reflect transactions of relatively small size and are not necessarily
indicative of the value of the securities when traded in large volumes.
Other investments. Fair values of other investments, consisting of
restricted securities, approximate the carrying amounts and are based on
the redemption provisions of the issuers.
Loans held for sale. The carrying amounts approximate their fair values.
Loans receivable. Fair values for certain mortgage loans (for example,
one-to-four family residential) and other consumer loans are based on
quoted market prices of similar loans sold, adjusted for differences in
loan characteristics. Fair values for all other performing loans are
59
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for non-performing loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). Fair values for certificates of deposits
and other time deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Short-term borrowings. The carrying amounts of federal funds purchased and
borrowings under repurchase agreements approximate their fair values
because of the associated variable interest rates.
Long-term debt. The fair value of fixed-rate long-term debt is estimated
using discounted cash flow analyses based on the Corporation's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest. The carrying amounts of accrued interest receivable and
payable approximate fair value.
Off-balance-sheet commitments. Fair values for off-balance-sheet
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standings. The vast majority of loan commitments
do not involve the charging of a fee, and costs associated with outstanding
letters of credit are not material. For loan commitments and standby
letters of credit, the committed interest rates are either variable or
approximate current interest rates offered for similar commitments.
Therefore, the estimated fair values of these off-balance-sheet commitments
are nominal.
60
The estimated fair values and related carrying or notional amounts of the
Corporation's financial instruments at December 31, 2003 and 2002, are as
follows:
December 31,
------------
2003 2002
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
of Assets of Assets of Assets of Assets
(Liabilities) (Liabilities) (Liabilities) (Liabilities)
------------- ------------- ------------- -------------
(Dollars in thousands)
Cash and cash equivalents .................................. $ 41,875 $ 41,875 $ 38,569 $ 38,569
Interest bearing deposits with other banks ................. 1,124 1,124 511 511
Securities ................................................. 66,864 67,019 51,156 51,156
Other investments .......................................... 2,038 2,038 1,910 1,910
Loans held for sale ........................................ 8,411 8,411 24,664 24,664
Loans receivable, net ...................................... 327,900 328,432 302,911 303,845
Accrued interest receivable ................................ 2,186 2,186 2,131 2,131
Deposits ................................................... (378,704) (379,761) (337,062) (338,039)
Short-term borrowings ...................................... (17,960) (17,960) (34,551) (34,555)
Long-term debt ............................................. (20,140) (21,665) (20,210) (22,335)
Accrued interest payable ................................... (585) (585) (759) (759)
Off-balance-sheet commitments
Loan commitments ........................................... (15,501) - (14,603) -
Unfunded commitments under lines of credit ................. (36,735) - (20,493) -
Standby letters of credit .................................. (4,489) - (2,506) -
NOTE 18 - CONTINGENCIES
The Corporation is subject at times to claims and lawsuits arising out of the
normal course of business. As of December 31, 2003, no claims or lawsuits were
pending or threatened which, in the opinion of management are likely to have a
material effect on the Corporation's consolidated financial statements.
NOTE 19 - REGULATORY MATTERS
The Banks are subject to the dividend restrictions set forth by various banking
regulators. Under such restrictions, the national banks may not, without the
prior approval, declare dividends in excess of the sum of the current year's
earnings (as defined) plus the retained earnings (as defined) from the prior two
years and the state bank may not declare dividends in excess of the current
year's earnings. At December 31, 2003, the dividends that the Banks could
declare without the approval of their primary bank regulator amounted to
approximately $9,092,000. In addition, dividends paid by the Banks to the
Corporation would be prohibited if the effect thereof would cause the Banks'
capital to be reduced below applicable minimum capital requirements. The Banks
are also restricted by law as to the amount they may lend to any non-depository
affiliate, including the Corporation and CRM. Such loans are subject to the
requirements of Section 23A of the Federal Reserve Act including a general
limitation to not more than 10% of capital and specified ratios of the fair
market value of allowable collateral to loan amounts.
The Corporation (on a consolidated basis) and the Banks are each subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material adverse effect on the Corporation's and
the Banks' financial statements. Under capital adequacy guidelines and the
61
regulatory framework for prompt corrective action, the Corporation and the Banks
must meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2003 and
2002, that the Corporation and the Banks met all capital adequacy requirements
to which they are subject.
As of December 31, 2003, for ONB, for SNB, for FNB, and for BOR, the most recent
notifications from the FDIC categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since the notifications that management believes have
changed the Banks' categories. The Corporation's and the Banks' actual capital
amounts and ratios are also presented in the following table.
62
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2003 (Dollars in thousands)
Tier I Capital (to Average Assets)
Consolidated ........................................ $40,380 9.1% $17,709 4.0% $26,564 6.0%
ONB ................................................. 16,285 9.1% 7,125 4.0% 10,688 6.0%
SNB ................................................. 9,058 7.6% 4,741 4.0% 7,111 6.0%
FNB ................................................. 5,047 8.9% 2,266 4.0% 3,399 6.0%
BOR ................................................. 6,906 8.2% 3,377 4.0% 5,065 6.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated ........................................ $40,380 12.0% $13,473 4.0% $20,210 6.0%
ONB ................................................. 16,285 12.5% 5,213 4.0% 7,820 6.0%
SNB ................................................. 9,058 9.0% 4,015 4.0% 6,022 6.0%
FNB ................................................. 5,047 9.9% 2,042 4.0% 3,063 6.0%
BOR ................................................. 6,906 14.4% 1,921 4.0% 2,881 6.0%
Total Capital (to Risk Weighted Assets)
Consolidated ........................................ $44,385 13.2% $26,947 8.0% $33,684 10.0%
ONB ................................................. 17,916 13.8% 10,427 8.0% 13,034 10.0%
SNB ................................................. 10,313 10.3% 8,030 8.0% 10,037 10.0%
FNB ................................................. 5,591 11.0% 4,083 8.0% 5,104 10.0%
BOR ................................................. 7,338 15.3% 3,841 8.0% 4,802 10.0%
December 31, 2002
Tier I Capital (to Average Assets)
Consolidated ........................................ $35,724 8.3% $17,233 4.0% $25,850 6.0%
ONB ................................................. 14,820 8.7% 6,831 4.0% 10,245 6.0%
SNB ................................................. 7,734 7.4% 4,176 4.0% 6,264 6.0%
FNB ................................................. 4,501 8.3% 2,176 4.0% 3,264 6.0%
BOR ................................................. 6,271 7.8% 3,229 4.0% 4,844 6.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated ........................................ $35,724 11.6% $12,366 4.0% $18,549 6.0%
ONB ................................................. 14,820 12.3% 4,828 4.0% 7,242 6.0%
SNB ................................................. 7,734 9.0% 3,456 4.0% 5,184 6.0%
FNB ................................................. 4,501 9.6% 1,870 4.0% 2,805 6.0%
BOR ................................................. 6,271 13.8% 1,823 4.0% 2,805 6.0%
Total Capital (to Risk Weighted Assets)
Consolidated ........................................ $39,255 12.7% $24,732 8.0% $30,915 10.0%
ONB ................................................. 16,329 13.5% 9,656 8.0% 12,070 10.0%
SNB ................................................. 8,734 10.1% 6,912 8.0% 8,640 10.0%
FNB ................................................. 5,009 10.7% 3,740 8.0% 4,675 10.0%
BOR ................................................. 6,715 14.7% 3,646 8.0% 4,558 10.0%
The mortgage subsidiary is subject to a minimum regulatory adjusted net worth
requirement to maintain its certification as a HUD-approved Title II Loan
Correspondent. Certain investor and warehouse credit line agreements require
that the mortgage subsidiary maintain its HUD certification. Accordingly,
failure to maintain the minimum regulatory adjusted net worth could result in a
significant limitation of the mortgage subsidiary's ability to originate, fund
or sell loans, and therefore could have a direct, material adverse effect on its
business and the Corporation's consolidated financial statements.
63
CRM's actual regulatory adjusted net worth and the minimum amount required by
HUD were as follows:
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Actual adjusted net worth ................ $ 1,502 $ 960
Minimum required ......................... 63 63
HUD regulations require that 20%, up to a maximum of $100,000, of the adjusted
net worth amount be held in liquid assets. CRM's liquid assets for regulatory
purposes totaled $1,310,000 and $876,000, respectively, as of December, 31, 2003
and 2002.
NOTE 20 - SUBSEQUENT EVENT
During the first quarter of 2003, the Corporation obtained $9,815,000 proceeds
from the issuance of a $10,000,000 series of trust preferred securities. Of this
amount, $3,000,000 was used to provide additional capital to two of the Banks,
approximately $1,400,000 was used to repay a short-term line of credit of the
mortgage banking subsidiary, and approximately $635,000 was used to repay the
Corporation's short-term borrowings. The remainder will be used for the
Corporation's general corporate purposes.
NOTE 21 - CONDENSED FINANCIAL STATEMENTS
Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Condensed Balance Sheets
Assets
Cash ............................................. $ 1,340 $ 712
Investment in banking subsidiaries ............... 44,082 40,397
Investment in nonbanking subsidiary .............. 1,502 960
Securities available-for-sale, at fair value ..... 96 50
Premises and equipment - net ..................... 1,009 429
Goodwill ......................................... 921 921
Other assets ..................................... 179 404
------- -------
Total assets .................................. $49,129 $43,873
======= =======
Liabilities
Short-term borrowings ............................ $ 635 $ -
Other liabilities ................................ 424 156
Shareholders' equity ................................ 48,070 43,717
------- -------
Total liabilities and shareholders' equity .... $49,129 $43,873
======= =======
64
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Condensed Statements of Income
Income
Management fees from subsidiaries ....................................... $ 2,066 $ 1,725 $ 1,440
Dividends received from banking subsidiaries ............................ 1,741 1,550 1,460
Interest income ......................................................... 17 32 79
Other income ............................................................ 11 11 -
------- ------- -------
Total income ......................................................... 3,835 3,318 2,979
------- ------- -------
Expenses
Salaries and employee benefits .......................................... 1,373 1,159 976
Premises and equipment .................................................. 435 217 278
Supplies ................................................................ 92 79 69
Directors' fees ......................................................... 49 24 22
Interest expense ........................................................ 9 - -
Other expenses .......................................................... 701 541 314
------- ------- -------
Total expenses ....................................................... 2,659 2,020 1,659
------- ------- -------
Income before income taxes and equity in
undistributed earnings of subsidiaries .................................. 1,176 1,298 1,320
Income tax expense (credit) ................................................ (192) (91) (53)
Equity in undistributed earnings of banking subsidiaries ................... 3,725 3,566 2,199
Equity in undistributed earnings of nonbanking subsidiary .................. 542 446 336
------- ------- -------
Net income ................................................................. $ 5,635 $ 5,401 $ 3,908
======= ======= =======
65
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Condensed Statements of Cash Flows
Operating activities
Net income .............................................................. $ 5,635 $ 5,401 $ 3,908
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings
of subsidiaries ............................................. (4,267) (4,012) (2,535)
Depreciation and amortization ................................. 205 130 103
Loss on disposal of premises and equipment .................... 9 - -
Decrease (increase) in other assets ........................... 225 (84) (156)
Increase in other liabilities ................................. 268 37 62
------- ------- -------
Net cash provided by
operating activities ..................................... 2,075 1,472 1,382
------- ------- -------
Investing activities
Purchase of securities available-for-sale ............................... (46) - -
Investment in BOR ....................................................... - (621) -
Purchases of premises and equipment ..................................... (794) (182) (269)
------- ------- -------
Net cash used by investing activities ....................... (840) (803) (269)
------- ------- -------
Financing activities
Increase in short-term borrowings, net .................................. 635 - -
Issuance costs of common stock in business combinations ................. - (178) (43)
Exercise of stock options ............................................... 312 40 39
Cash dividends paid ..................................................... (1,554) (1,218) (904)
------- ------- -------
Net cash used by financing activities ....................... (607) (1,356) (908)
------- ------- -------
Increase (decrease) in cash and cash equivalents ........................... 628 (687) 205
Cash and cash equivalents, beginning ....................................... 712 1,399 1,194
------- ------- -------
Cash and cash equivalents, ending .......................................... $ 1,340 $ 712 $ 1,399
======= ======= =======
66
NOTE 22 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Years Ended December 31,
-----------------------------------------------------------------------------
2003 2002
------------------------------------ -------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter* Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands, except per share)
Interest and dividend income ...................... $ 5,979 $ 6,155 $ 6,285 $ 5,849 $ 6,272 $ 6,330 $ 5,130 $ 5,012
Interest expense .................................. 1,705 1,894 1,960 2,001 2,084 2,165 1,864 2,006
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ............................... 4,274 4,261 4,325 3,848 4,188 4,165 3,266 3,006
Provision for loan losses ......................... 344 232 279 264 436 239 189 169
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision ............... 3,930 4,029 4,046 3,584 3,752 3,926 3,077 2,837
Noninterest income ................................ 1,971 2,523 2,374 2,509 2,196 1,924 1,499 1,456
Gains (losses) on sales of securities ............. - - (298) 46 - 15 62 42
Noninterest expense ............................... 3,870 4,109 4,218 3,735 3,702 3,440 2,745 2,578
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ........................ 2,031 2,443 1,904 2,404 2,246 2,425 1,893 1,757
Provision for income taxes ........................ 734 871 719 823 781 825 682 632
------- ------- ------- ------- ------- ------- ------- -------
Net income ........................................ $ 1,297 $ 1,572 $ 1,185 $ 1,581 $ 1,465 $ 1,600 $ 1,211 $ 1,125
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
Basic ............................................. $ 0.31 $ 0.36 $ 0.27 $ 0.37 $ 0.34 $ 0.37 $ 0.37 $ 0.34
Diluted ........................................... 0.29 0.35 0.27 0.36 0.33 0.36 0.36 0.33
-------
* BOR was acquired on July 1, 2002.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with or changes in accountants.
Item 9A. 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 Corporation's disclosure controls and procedures (as
defined in 17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Corporation's
chief executive officer and chief financial officer concluded that the
effectiveness of such controls and procedures, as of the end of the period
covered by this annual report, was adequate.
No disclosure is required under 17 C.F.R. Section 229.308.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the captions "Management - Directors" and
"Management - Executive Officers," "Management - Committees of the Board of
Directors - Audit Committee" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement to be used in conjunction with the 2004
Annual Meeting of Shareholders (the "Proxy Statement"), which will be filed
within 120 days of the Corporation's fiscal year end, is incorporated herein by
reference.
67
Audit Committee Financial Expert
The Corporation's board of directors has determined that the
Corporation does not have an "audit committee financial expert," as that term is
defined by Item 401(h) of Regulation S-K promulgated by the Securities and
Exchange Commission, serving on its audit committee. The Corporation's audit
committee is a committee of directors who are elected by the shareholders and
who are independent of the Corporation and its management. After reviewing the
experience and training of all of the Corporation's independent directors, the
board of directors has concluded that no independent director meets the SEC's
very demanding definition. Therefore, it would be necessary to find a qualified
individual willing to serve as both a director and member of the audit committee
and have that person elected by the shareholders in order to have an "audit
committee financial expert" serving on the Corporation's audit committee. The
Corporation's audit committee is, however, authorized to use consultants to
provide financial accounting expertise in any instance where members of the
committee believe such assistance would be useful. Accordingly, the Corporation
does not believe that it needs to have an "audit committee financial expert" on
its audit committee.
Code of Ethics
The Corporation has adopted a code of ethics (as defined by C.F.R.
229.406) that applies to its principal executive officer and principal financial
officer. The code of ethics is posted on the Corporation's website at
www.communitybanksharesinc.com.
Item 11. Executive Compensation
With the exception of the information set forth under the captions
"Board Report on Executive Officer Compensation" and "Shareholder Performance
Graph", which is not incorporated herein by reference, the information set forth
under the caption "Management Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
Equity Compensation Plan Information. The following table sets forth
aggregated information as of December 31, 2003 about all of the Corporation's
compensation plans (including individual compensation arrangements) under which
equity securities of the Corporation are authorized for issuance.
Number of securities
remaining available for
Number of securities to be Weighted average future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Stock option plan (a) (b) (c)
----------------- ------------------------- -------------------- --------------------------
Equity compensation plans
approved by security holders .............................. 357,591 $ 11.24 205,183
Equity compensation plans not
approved by security holders .............................. NA NA NA
------- --------- -------
Total ...................................................... 357,591 $ 11.24 205,183
======= ========= =======
The Corporation's 1997 Stock Option Plan, and issuance of up to 485,600 shares
under that plan, have previously been approved by shareholders. At its 2004
68
Annual Meeting of Shareholders, the Corporation plans to submit for shareholder
approval a proposal to increase the number of shares authorized for issuance
under this plan by 300,000 to an aggregate of 785,600.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
69
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Independent Public
Accountants - Fees Billed by Independent Auditors" and "- Audit Committee
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors" in the 2004 Proxy Statement is incorporated herein by reference.
Item 15. Exhibits and Reports on Form 8-K
(a) (1) All financial statements:
Consolidated Balance Sheets, December 31, 2003 and 2002
Consolidated Statements of Income, Years Ended December 31, 2003, 2002 and
2001
Consolidated Statements of Changes in Shareholders' Equity, Years Ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows, Years Ended December 31, 2003, 2002
and 2001
Notes to Consolidated Financial Statements
(2) Financial statement schedules:
Quarterly Data for 2003 and 2002
(3)
Exhibit No. Description
(from item 601 of
S-K)
3.1 Articles of Incorporation, as amended (incorporated by reference to exhibits
filed in the Registrant's Form 10-QSB filed September 30, 1997).
3.2 Bylaws, as amended (incorporated by reference to exhibits filed in the
Registrant's Form S-4, Commission File No. 33-55314).
4 Stockcertificate (incorporated by reference to exhibits filed in the
Registrant's Registration Statement on Form S-2, filed September 11,
1995, Commission File No. 33-96746).
10.1 Form S-8, filed June 22, 2001, Commission File No. 333-63598).
10.2 Leasefor site of Florence National Bank (incorporated by reference to
Registrant's Form 10-K for the year ended December 31, 1999).
10.3 Change of Control Agreements between the Registrant and each of William W.
Traynham, Michael A. Wolfe, William H. Nock and Jesse A. Nance
(incorporated by reference to exhibits to Registrant's Form 10-QSB for
the quarter ended June 30, 1999).
10.4 Loan Agreement, dated November 1, 2001, among Registrant, Resource Mortgage,
Inc. and Branch Bank and Trust Company (incorporated by reference to
exhibits filed in the Registrant's Form 10-Q for the quarter end
September 30, 2001).
10.5 Amended and Restated Guaranty, dated October 7, 2002, by Registrant of
obligations of Community Resource Mortgage, Inc. to Branch Bank and
Trust Company (incorporated by reference to exhibits filed in the
Registrant's Form 10-Q for the quarter end September 30, 2002).
10.6 Employment Agreement between Community Resource Mortgage Inc. and A. Wade
Douroux (incorporated by reference to exhibits filed in the Registrant's
Form S-4, Commission File No. 333-819000).
70
10.7 Form of Employment Agreement between the Corporation and William A. Harwell
(incorporated by reference to exhibits filed in the Registrant's Form
S-4, Commission File No. 333-819000).
21 Subsidiaries of the registrant
23 Consent of J. W. Hunt and Company, LLP
31.1 Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
32 18 U.S.C. Section 1350 Certifications
(b) Reports on Form 8-K. Form 8-K, filed on October 31, 2003, pursuant to Item
12 of that form.
71
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATED: March 29, 2004
By: s/ E. J. Ayers, Jr.
----------------------------
Chief Executive Officer
By s/ William W. Traynham
---------------------------
Chief Financial Officer
72
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
s/ Alvis J. Bynum Date: March 29, 2004
-----------------
Alvis J. Bynum, Director
s/ Martha Rose C. Carson Date: March 29, 2004
------------------------
Martha Rose C. Carson, Director
s/ Anna O. Dantzler Date: March 29, 2004
-------------------
Anna O. Dantzler, Director
s/ Thomas B. Edmunds Date: March 29, 2004
--------------------
Thomas B. Edmunds, Director
s/ A. Wade Douroux Date: March 29, 2004
------------------
A. Wade Douroux, Director
s/J. M. Guthrie Date: March 29, 2004
---------------
J. M. Guthrie, Director
s/ William A. Harwell Date: March 29, 2004
---------------------
William A. Harwell, Director
s/Richard L. Havekost Date: March 29, 2004
---------------------
Richard L. Havekost, Director
s/ Phil P. Leventis Date: March 29, 2004
-------------------
Phil P. Leventis, Director
s/John V. Nicholson Date: March 29, 2004
-------------------
John V. Nicholson, Director
s/William H. Nock Date: March 29, 2004
-----------------
William H. Nock, Director
s/ Samuel F. Reid, Jr. Date: March 29, 2004
----------------------
Samuel F. Reid, Jr., Director
s/ J. Otto Warren, Jr. Date: March 29, 2004
----------------------
J. Otto Warren, Jr., Director
73
s/Wm. Reynolds Williams Date: March 29, 2004
-----------------------
Wm. Reynolds Williams, II, Director
s/ Michael A. Wolfe Date: March 29, 2004
-------------------
Michael A. Wolfe, Director
74
EXHIBIT INDEX
Exhibit No. Description
(from item 601 of
S-K)
3.1 Articles of Incorporation, as amended (incorporated by reference to exhibits
filed in the Registrant's Form 10-QSB filed September 30, 1997).
3.2 Bylaws, as amended (incorporated by reference to exhibits filed in the
Registrant's Form S-4, Commission File No. 33-55314).
4 Stockcertificate (incorporated by reference to exhibits filed in the
Registrant's Registration Statement on Form S-2, filed September 11,
1995, Commission File No. 33-96746).
10.1 Form S-8, filed June 22, 2001, Commission File No. 333-63598).
10.2 Leasefor site of Florence National Bank (incorporated by reference to
Registrant's Form 10-K for the year ended December 31, 1999).
10.3 Change of Control Agreements between the Registrant and each of William W.
Traynham, Michael A. Wolfe, William H. Nock and Jesse A. Nance
(incorporated by reference to exhibits to Registrant's Form 10-QSB for
the quarter ended June 30, 1999).
10.4 Loan Agreement, dated November 1, 2001, among Registrant, Resource Mortgage,
Inc. and Branch Bank and Trust Company (incorporated by reference to
exhibits filed in the Registrant's Form 10-Q for the quarter end
September 30, 2001).
10.5 Amended and Restated Guaranty, dated October 7, 2002, by Registrant of
obligations of Community Resource Mortgage, Inc. to Branch Bank and
Trust Company (incorporated by reference to exhibits filed in the
Registrant's Form 10-Q for the quarter end September 30, 2002).
10.6 Employment Agreement between Community Resource Mortgage Inc. and A. Wade
Douroux (incorporated by reference to exhibits filed in the Registrant's
Form S-4, Commission File No. 333-819000).
10.7 Form of Employment Agreement between the Corporation and William A. Harwell
(incorporated by reference to exhibits filed in the Registrant's Form
S-4, Commission File No. 333-819000).
21 Subsidiaries of the registrant
23 Consent of J. W. Hunt and Company, LLP
31.1 Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
32 18 U.S.C. Section 1350 Certifications
75