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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, 2002 File Number 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 Identification Number)
Incorporation or Organization)
791 Broughton St., Orangeburg, South Carolina 29115
(Address of Principal Executive Office, Zip Code)
Registrant's Telephone Number, Including Area Code: (803) 535-1060
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value - American Stock Exchange
(Title of Class) - (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all the
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No [ ]
Indicate by check mark 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. [X]
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, 2002, was approximately.
$42,156,000.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates on March 7, 2002 was approximately $49,547,000. As of
March 12, 2003 there were 4,304,384 shares of the Registrant's Common Stock, no
par value, outstanding. For purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Proxy Statement for the 2003 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 Common Equity and Related Stockholder Matters 11
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results of 13
Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk 31
Item 8 Financial Statements and Supplementary Data 33
Independent Auditor's Report 35
Consolidated Balance Sheets, December 31, 2002 and 2001 36
Consolidated Statements of Income, Years Ended December 31, 2002, 2001 and 2000 37
Consolidated Statements of Changes in Shareholders' Equity, Years Ended December 39
31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows, Years Ended December 31, 2002, 2001 and 41
2000
Notes to Consolidated Financial Statements 43
Quarterly Data for 2002 and 2001 74
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial 75
Disclosure
Part III
Item 10 Directors and Executive Officers *
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 75
Item 13 Certain Relationships and Related Transactions *
Item 14 Controls and Procedures 76
Part IV
Item 15 Exhibits and Reports on Form 8-K 76
* Incorporated by reference to Registrant's Proxy Statement for 2003 Annual
Meeting of Shareholders
2
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 all the common stock of 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
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 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 (not yet available in the Ridgeway
bank). 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.
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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, that 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. At June 30, 2002, there were four financial institutions
competing with the Corporation in the city of Orangeburg, seven financial
institutions competing with the Corporation in Sumter County, and 14 financial
institutions competing with the Corporation in the city of Florence. At June 30,
2002, the Orangeburg bank had the second largest deposit base in the city of
Orangeburg. At June 30, 2002, the Sumter bank had the fifth largest deposit base
in Sumter County. At June 30, 2002, the Florence bank had the fifth largest
deposit base in the city of Florence. At June 30, 2002, The Ridgeway bank had
the largest deposit base in Fairfield County and approximately 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 recently adopted extensive changes in the laws governing the financial
services 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 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.
4
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 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
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
5
liability, subordinated liability, general creditor or stockholder. This
provision would give 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 20 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
6
statements, which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
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"). To
cover these obligations, during 2002, the FDIC assessed both BIF and SAIF
insured deposits a range of 1.82 to 1.70 basis points per $100 of deposits.
Currently, the FDIC is assessing BIF and SAIF insured deposits each 1.68 basis
points per $100 of deposits to cover the interest on the FICO obligations. The
FICO assessment will continue to be 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 examination by the OCC bank examiners. The Bank of
Ridgeway is subject to 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 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.
7
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."
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 ("Riegel-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 Riegel-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
Other proposed legislation which could significantly affect the
business of banking has been introduced or may be 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
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act,
which makes it easier for affiliations between banks, securities firms and
insurance companies to take place. The Act removes Depression-era barriers that
had separated banks and securities firms, and seeks to protect the privacy of
8
consumers' financial information. Most of the provisions of the Act require the
applicable regulators to adopt regulations in order to implement these
provisions, and a significant number of regulations have already been adopted.
Under provisions of the new legislation, which were effective March 11,
2000, 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
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.
CBI anticipates that the Act and the regulations adopted pursuant to
the Act will be likely to create new opportunities for it 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. CBI further expects that the Act will increase 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
9
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.
Employees
At December 31, 2002 the Corporation employed 175 full time equivalent
employees. Management believes that its employee relations are excellent.
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 new branch facility located adjacent
to the old building. This new 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 being leased under a
noncancellable operating lease for an initial term of twenty years. The details
of the lease are discussed in Note 6 to the financial statements contained
elsewhere in this report.
The Florence bank is leasing 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 details of the lease are discussed in
Note 6 to the financial statements contained elsewhere in this report. The
Corporation has 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 St., Suite 201, Columbia, SC, 304 W. Westmark, Sumter, SC, and 2406 N.
Main St., Anderson, SC.
See Note 6 to the Corporation's audited financial statements included
in this report for further information about the lease terms.
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, 2002, 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 2002.
10
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
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
Mar. 31, 2001 $11.25 $10.20
June 30, 2001 $11.49 $10.65
Sept. 30, 2001 $12.60 $10.30
Dec. 31, 2001 $13.20 $11.00
Mar. 31, 2002 $14.75 $12.75
June 30, 2002 $17.75 $14.35
Sept. 30, 2002 $17.50 $15.00
Dec. 31, 2002 $16.75 $14.60
During 2002 the Corporation had a stock sales volume of 268,400 shares compared
to 133,900 shares the prior year.
There were 2,087 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 2002 compared to 1,891 the prior year.
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. During 2001, the Corporation
authorized and paid quarterly cash dividends totaling 28 cents per share. The
total cost of these dividends was $904,000 or 23% 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, 2002 the Banks could pay up to $8,070,000 in dividends without
special approval of their regulators.
The information required by Item 201(d) of Regulation S-K is set forth
in Item 12 of this Form 10-K.
Item 6. Selected Financial Data
The following is a summary of the consolidated financial position and
results of operations of the Corporation for the years ended December 31, 1998
through December 31, 2002.
11
Community Bankshares, Inc. and Subsidiaries
($ in thousands, except per share data)
Years Ended December 31, Five-Year
------------------------ Compound
2002(1) 2001(2) 2000 1999 1998(3) Growth Rate
------- ------- ---- ---- ------- -----------
INCOME STATEMENT DATA
Net interest income ............................ $ 13,867 $ 10,940 $ 10,228 $ 8,430 $ 6,766 20.6%
Provision for loan losses ...................... 1,033 650 688 612 484 23.6%
Noninterest income ............................. 7,952 3,584 1,966 1,479 1,055 59.6%
Noninterest expense ............................ 12,465 7,810 6,552 6,066 5,107 25.5%
Net income ..................................... 5,401 3,908 3,147 2,182 1,567 34.7%
-------- -------- -------- -------- -------- -----
PER COMMON SHARE
Net income - basic ............................. $ 1.42 $ 1.21 $ 0.99 $ 0.68 $ 0.52 26.4%
Net income - diluted ........................... 1.38 1.20 0.98 0.68 0.51 26.3%
Cash dividends ................................. 0.32 0.28 0.22 0.19 0.15 18.0%
Book value ..................................... 10.16 8.35 7.24 6.35 6.15 16.6%
-------- -------- -------- -------- -------- -----
BALANCE SHEET DATA (YEAR END)
Total assets ................................... $437,320 $318,617 $273,323 $228,030 $182,281 26.6%
Loans, net of unearned income .................. 327,575 237,340 192,996 155,422 117,058 29.1%
Deposits ....................................... 337,062 255,433 218,811 184,364 147,630 23.5%
Shareholders' equity ........................... 43,717 27,547 23,139 20,245 19,659 27.4%(4)
-------- -------- -------- -------- -------- --------
FINANCIAL RATIOS
Return on average assets ....................... 1.43% 1.36% 1.26% 1.06% 0.99%
Return on average equity ....................... 15.10% 15.58% 14.67% 11.12% 8.91%
Net interest margin ............................ 3.92% 4.00% 4.34% 4.37% 4.60%
-------- -------- -------- -------- --------
OPERATIONS DATA
Banks' branch offices .......................... 8 4 4 4 4
Mortgage loan offices .......................... 3 3 - - -
Employees (full-time equivalent) ............... 175 126 84 85 75
-------- -------- -------- -------- --------
(1) July, 2002 - Ridgeway Bancshares, Inc. acquired
(2) November, 2001 - Community Resource Mortgage, Inc. acquired
(3) July 1998- Florence National Bank opened
(4) Includes growth from sales 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, 2002.
Forward Looking Statements
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations 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. The words "estimate," "project," "intend,",
"expect," "believe," "anticipate," "plan," and similar expressions identify
forward-looking statements. The Corporation cautions readers that forward
looking statements, including without limitation, those relating to the
Corporation's future business prospects, ability to successfully integrate
recent acquisitions, revenues, adequacy of the allowance for loan losses,
working capital, liquidity, capital needs, interest costs, and income, are
subject to certain 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.
Critical Accounting Policies
The Corporation has adopted various accounting policies, which govern
the application of accounting principles generally accepted in the United States
of America in the preparation of the Corporation's financial statements. The
significant accounting policies of the Corporation are described in detail in
the notes to the consolidated financial statements.
Certain accounting policies involve significant judgments and estimates
by management, which have a material impact on the carrying value of certain
assets and liabilities. Management considers such accounting policies to be
critical accounting policies. The judgments and estimates used by management are
based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ from these judgments
and estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of operations of the Corporation.
The Corporation is a holding company for community banks and as a
financial institution believes the allowance for loan losses is a critical
accounting policy that requires the most significant judgments and estimates
used in preparation of its consolidated financial statements. Refer to the
sections "Allowance for Loan Losses" and "Provision for Loan Losses" for a
detailed description of the Corporation's estimation process and methodology
related to the allowance for loan losses.
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. ("CRM"), which was
acquired in November 2001. CBI provides item and data processing and other
technical services for its subsidiaries. The consolidated financial report for
2002 represents the operations of the holding company and its banks and its
mortgage company. 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,
13
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 size businesses.
Community Resource Mortgage is a South Carolina corporation which
commenced business in 1996, and was acquired by the Corporation in 2001. It is a
mortgage company that provides a variety of one to four family residential
mortgage products from offices in Columbia, Sumter and Anderson, South Carolina.
Stock Dividend
On January 31, 2000 the Corporation effected a five-percent stock
dividend. All references to per share information contained in this discussion
have been adjusted accordingly.
14
DISTRIBUTION OF ASSETS AND LIABILITIES
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 paid on interest bearing liabilities for the years ended December 31,
2002, 2001, and 2000.
Years ended December 31, 2002 2001 2000
---- ---- ----
(Dollar amounts in thousands) Interest Interest Interest
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Assets Balance Exp.(1) Rates(1) Balance Exp. (1) Rates(1) Balance Exp.(1) Rates(1)
------- ------- -------- ------- -------- -------- ------- ------- --------
Interest bearing deposits $ 1,229 $ 36 2.93% $ 4,044 $ 161 3.98% $ 1,024 $ 64 6.25%
Investment securities - taxable 43,980 1,970 4.48% 37,751 2,167 5.74% 47,377 3,025 6.38%
Investment securities--tax exempt 4,888 217 6.73% 766 29 5.74% 807 32 6.01%
Federal funds sold 21,364 347 1.62% 19,095 734 3.84% 6,670 430 6.45%
Loans receivable(2) 281,907 19,416 6.89% 211,901 18,110 8.55% 179,654 16,652 9.27%
-------- ------- -------- ------- -------- -------
Total interest earning assets 353,368 21,986 6.22% 273,557 21,201 7.75% 235,532 20,203 8.58%
Cash and due from banks 14,222 9,305 8,582
Allowance for loan losses (3,201) (2,655) (2,186)
Premises and equipment 6,011 4,614 4,564
Goodwill 4,360 149 -
Other assets 3,350 3,036 3,232
-------- -------- --------
Total assets $378,110 $288,006 $249,724
======== ======== ========
Liabilities and
Shareholders' Equity
Interest bearing deposits
Savings $ 55,790 $ 905 1.62% $ 38,194 $ 1,117 2.92% $ 33,445 $ 1,358 4.06%
Interest bearing
transaction accounts 41,101 285 0.69% 26,917 264 0.98% 21,039 329 1.56%
Time deposits 162,512 5,328 3.28% 136,938 7,494 5.47% 119,949 6,905 5.76%
-------- ------- -------- ------- -------- -------
Total interest bearing deposits 259,403 6,518 2.51% 202,049 8,875 4.39% 174,433 8,592 4.93%
Short term borrowing 8,419 122 1.45% 7,533 237 3.15% 4,501 218 4.84%
Warehouse lines of credit 10,293 356 3.46% - - - -
FHLB advances 20,254 1,123 5.54% 19,899 1,149 5.77% 19,385 1,165 6.01%
-------- ------- -------- ------- -------- -------
Total interest
bearing liabilities 298,369 8,119 2.72% 229,481 10,261 4.47% 198,319 9,975 5.03%
Noninterest bearing demand deposits 41,198 31,643 28,531
Other liabilities 2,783 1,799 1,421
Shareholders' equity 35,760 25,083 21,453
-------- -------- --------
Total liabilities
and shareholders' equity $378,110 $288,006 $249,724
======== ======== ========
Interest rate spread(3) 3.50% 3.28% 3.55%
Net interest income and
net yield on earning assets(4) $13,867 3.92% $10,940 4.00% $10,228 4.34%
1. Computed on a fully taxable equivalent basis using a federal tax rate of
34%.
2. Nonaccruing loans are included in the average loan balances and income from
such loans is recognized on a cash basis. Loans fees included in the
computations are immaterial.
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
Earnings Performance, 2002 compared to 2001
The recently completed fiscal year 2002 was influenced by three major
factors: interest rates held stable for most of the year at historically low
levels, the Corporation had twelve months of operations for Community Resource
Mortgage Inc., and the Corporation acquired the Bank of Ridgeway in July. Low
interest rates have put pressure on the Banks' net interest margin, which
declined eight basis points from 2001 to 2002, but the low rates were also
responsible for the unprecedented volume of mortgage loan originations and
refinances done by CRM. Twelve months of operation for the mortgage company had
a significant impact on the Corporation's noninterest income and expense. Six
months of operation for the Bank of Ridgeway had a significant impact on the
Corporation's balance sheet and income statement. The substantial dollar and
percentage changes that are discussed throughout this document are due in large
measure to these business combination related changes in the Corporation's
structure.
The Corporation's net income was $5,401,000 or $1.42 per share in 2002.
This compares to $3,908,000 or $1.21 per share in 2001, an increase of
$1,493,000 or 38.2%.
This increase in earnings resulted from improved profit at Orangeburg
National Bank, Sumter National Bank, Florence National Bank, plus a full year of
operation for Community Resource Mortgage and the mid-year acquisition of the
Bank of Ridgeway. Earnings at the Orangeburg bank increased to $2,803,000 in
2002 from $2,506,000 in 2001, an increase of 11.9% or $297,000. Earnings at the
Sumter bank increased to $1,294,000 in 2002 from $1,184,000 in 2001, an increase
of 9.3% or $110,000. The Sumter bank opened a new banking office in Sumter in
February and the costs associated with its opening restrained the bank's
earnings somewhat. Earnings at the Florence bank increased to $413,000 in 2002
from $154,000 in 2001, an increase of 168% or $259,000. At year end the Florence
bank had recovered all of its initial operating losses and it began 2003 with
positive retained earnings.
Earnings at Community Resource Mortgage, acquired November 1, 2001,
were $447,000 for the twelve-month period ended December 31, 2002. Earnings were
$172,000 for the two-month period ended December 31, 2001. This added $275,000
more to the Corporation's profit for 2002. CRM has benefited from historically
low interest rates, which have increased demand for home mortgages and mortgage
refinancing. Earnings at CRM are expected to be more volatile than earnings at
the banks.
Earnings at the Bank of Ridgeway, acquired July 1, 2002, were $605,000
for the six-month period ended December 31, 2002. The bank earned $410,000 for
the six-month period ended June 30, 2002 for a total of $1,015,000 for 2002.
This compares to $1,087,000 for 2001, a decline of $72,000 or 6.6%. The decline
in earnings was mostly attributable to expenses related to the pending merger
with Community Bankshares Inc. Only earnings for the second half of 2002 were
included in the consolidated financial statements of the Corporation.
Interest Income and Interest Expense, 2002 compared to 2001
The Corporation's interest income and interest expense were
substantially influenced by the extraordinary and historically low interest rate
environment during 2001 and 2002. The prime lending rate started the two year
period at 9%, fell rapidly during 2001, and ended 2002 at 4.25%.
The Corporation's interest income increased slightly in 2002 from 2001.
In 2002 the Corporation earned $21,986,000 in total interest income, up from the
prior year's $21,201,000. This represented a $785,000 or a 3.7% increase. This
growth was the result of increased volume of earning assets, which more than
offset the reduction in yields.
Interest bearing deposits in other banks contributed $36,000 to
interest income in 2002, down from $161,000 the prior year, a decrease of
$125,000 or 77.6%. In 2002 the Corporation had an average of $1,229,000 in
interest bearing deposits, down from the prior year's $4,044,000, a decrease of
$2,815,000 or 69.6%. The average yield on these deposits during 2002 was 2.93%,
down from the prior year's 3.98%. Most of the decrease in this category was
associated with a change in the collateral requirements for FHLB advances at one
of our banks.
16
Taxable investments contributed $1,970,000 to interest income in 2002,
down from $2,167,000 the prior year, a decrease of $197,000 or 9.1%. The
investment portfolio averaged $43,980,000 in 2002, up from the prior year's
$37,751,000, an increase of $6,229,000 or 16.5%. The Corporation's investment
portfolio consists mostly of short-term U. S. government and agency debt issues.
The average yield on investments during 2002 was 4.48%, down from 5.74% in 2001.
The Corporation's tax-exempt securities portfolio earned $217,000
during 2002, up from $29,000 the prior year, an increase of $188,000 or 648%.
The portfolio averaged $4,888,000 in 2002, up from $766,000 in 2001, an increase
of $4,122,000 or 538%. Virtually all of the increase in this area is due to the
acquisition of the Ridgeway bank in July 2002. The average yield was 6.73%,
compared to 5.74% the prior year, on a taxable equivalent basis.
Federal funds sold represent temporary surplus funds that one bank
lends to another and they are a source of day to day operating liquidity.
Federal funds sold contributed $347,000 to interest income in 2002, down from
$734,000 in the prior year, a decrease of $387,000 or 52.7%. The Corporation had
an average of $21,364,000 in federal funds during 2002, up from the prior year's
$19,095,000, an increase of $2,269,000 or 11.9%. The average yield on federal
funds during 2002 was 1.62%, down from 3.84% in 2001. The decline in market
interest rates caused numerous investments to be called prior to maturity, which
generated unusually high amounts of cash that the Corporation placed in federal
funds.
The Corporation's major source of interest income is the loan
portfolio, which contributed $19,416,000 to interest income in 2002, up from
$18,110,000 in the prior year, an increase of $1,306,000 or 7.2%. The average
loan portfolio for 2002 was $281,907,000 compared to the prior year's
$211,901,000, an increase of $70,006,000 or 33%. The average yield on loans
during 2002 was 6.89%, down from 8.55% in 2001.
The Corporation had average earning assets in 2002 of $353,368,000,
which earned an average yield of 6.22%. The Corporation had average earning
assets in 2001 of $273,557,000, which earned an average yield of 7.75%. Average
earning assets increased $79,811,000 or 29.2%, while the average yield on these
assets decreased by 153 basis points or 19.7%.
Savings accounts consist of savings and money market accounts. Total
savings accounts averaged $55,790,000 in 2002, up from $38,194,000 in the prior
year, an increase of $17,596,000 or 46.1%. The average cost of these funds
decreased to 1.62% in 2002 from 2.92% in the prior year.
Interest bearing transaction accounts are the primary checking accounts
that the Banks offer customers. This overall category averaged $41,101,000 in
2002, up from $26,917,000 in 2001, an increase of $14,184,000 or 52.7%. The
average cost of these funds was .69% in 2002 compared to .98% in the prior year.
Time deposits are the largest category of deposits, averaging
$162,512,000 in 2002, up from $136,938,000 in the prior year, an increase of
$25,574,000 or 18.7%. The average cost of time deposits decreased to 3.28% from
5.47%.
Short-term borrowing includes federal funds purchased and securities
sold under agreements to repurchase. The repurchase agreements are entered into
with a number of larger commercial customers. These accounts are not deposits;
they are considered other obligations of the Banks. Balances in these accounts
are subject to wide fluctuation and they constitute a relatively small portion
of the balance sheet. The average balance for 2002 was $8,419,000, up from
$7,533,000 in the prior year, an increase of $886,000 or 11.8%. The average cost
of these funds decreased to 1.45% from 3.15%.
The Corporation's mortgage subsidiary, CRM, maintains warehouse lines
of credit with non-affiliated institutions to fund its mortgage loan production.
The average balance for 2002 for these lines was $10,293,000 at an average cost
of 3.46%. The average amounts outstanding for the prior year were immaterial.
The Banks, with the exception of the Bank of Ridgeway, are members of
and have the ability to borrow from the Federal Home Loan Bank of Atlanta
(FHLB). The Banks had an average $20,254,000 outstanding borrowing balance
17
during 2002 at an average cost of 5.54%. The Banks had an average $19,899,000
outstanding during 2001 at an average cost of 5.77%. Borrowings increased by
$355,000 or 1.8%. These borrowings are mostly for longer terms than other
interest bearing liabilities. These loans are secured by a blanket lien on the
Banks' one-to-four family residential mortgage loan portfolios and the stock the
Banks hold in the FHLB.
The Corporation had average total interest bearing liabilities in 2002
of $298,369,000 costing an average of 2.72% compared with interest bearing
liabilities in 2001 of $229,481,000 costing an average of 4.47%. Average
interest bearing liabilities increased $68,888,000 or 30%, while the average
cost of these liabilities decreased by 175 basis points or 39.1%.
Earnings Performance, 2001 compared to 2000
The Corporation's net income was $3,908,000 or $1.21 per share in 2001.
This compares to $3,147,000 or $.99 per share in 2000, an increase of $761,000,
or 24.2%.
This increase in earnings resulted from improved profit at all three
banks. Earnings at the Sumter bank increased to $1,184,000 in 2001 from $908,000
in 2000, an increase of 30.4% or $276,000. Earnings at the Orangeburg bank
increased to $2,507,000 in 2001 from $2,243,000 in 2000, an increase of 11.8% or
$264,000. Earnings at the Florence bank increased to $154,000 in 2001 from
$78,000 in 2000, an increase of 97.4% or $76,000.
On November 1, 2001 the Corporation acquired Community Resource
Mortgage in a purchase transaction. Resource earned $172,000 for the two month
period ended December 31, 2001.
Interest Income and Interest Expense, 2001 compared to 2000
The Corporation's interest income and interest expense were
substantially influenced by the extraordinary interest rate environment during
2001. When the year began, the prime lending rate was at 9.5%, and by year end
the rate had fallen to 4.75%, a fifty percent decline in market rates within
twelve months.
The Corporation's interest income increased slightly in 2001 from 2000.
In 2001 the Corporation earned $21,201,000 in total interest income, up from the
prior year's $20,203,000. This represented a $998,000 or a 4.9% increase. This
growth was the result of increased volume of earning assets at the banks, which
more than offset the reduction in rates.
Interest bearing deposits in other banks contributed $161,000 to
interest income in 2001, up from $64,000 the prior year, an increase of $97,000
or 152%. In 2001 the Corporation had an average of $4,044,000 in interest
bearing deposits, up from the prior year's $1,024,000, an increase of $3,020,000
or 295%. The average yield on these deposits during 2001 was 3.98%, down from
the prior year's 6.25%. The decline in market interest rates caused a large
number of investments to be called prior to maturity, generating extra cash
which was placed in interest bearing deposits and federal funds sold.
Taxable investments contributed $2,167,000 to interest income in 2001,
down from $3,025,000 the prior year, a decrease of $858,000 or 28.4%. The
investment portfolio averaged $37,751,000 in 2001, down from the prior year's
$47,377,000, a decrease of $9,626,000 or 20.3% primarily resulting from higher
yielding investments being called prior to maturity. The Corporation's
investment portfolio consists primarily of short-term U. S. government and
agency debt issues. The average yield on investments during 2001 was 5.74%, down
from 6.38% in 2000.
The Corporation's tax-exempt securities portfolio earned $29,000 during
2001, down from $32,000 the prior year, a decrease of $3,000 or 9.4%. The
portfolio averaged $766,000 in 2001, down from $807,000 in 2000, a decrease of
$41,000 or 5.1%. The average yield was 5.74%, compared to 6.01% the prior year,
on a fully taxable equivalent basis.
Federal funds sold contributed $734,000 to interest income in 2001, up
from $430,000 in the prior year, an increase of $304,000 or 70.7%. The
Corporation had an average of $19,095,000 in federal funds during 2001, up from
18
the prior year's $6,670,000, an increase of $12,425,000 or 186%. The average
yield on federal funds during 2001 was 3.84%, down from 6.45% in 2000. As noted
above, the decline in market interest rates caused numerous investments to be
called prior to maturity, which generated unusually high amounts of cash that
the Company placed in interest bearing deposits and federal funds.
The loan portfolio contributed $18,110,000 to interest income in 2001,
up from $16,652,000 in the prior year, an increase of $1,458,000 or 8.8%. The
average loan portfolio for 2001 was $211,901,000 compared to the prior year's
$179,654,000, an increase of $32,247,000 or 17.95%. The average yield on loans
during 2001 was 8.55%, down from 9.27% in 2000.
The Corporation had average earning assets in 2001 of $273,557,000,
which earned an average yield of 7.75%. The Corporation had average earning
assets in 2000 of $235,532,000, which earned an average yield of 8.58%. Average
earning assets increased $38,025,000 or 16.1%, while the average yield on these
assets decreased by 83 basis points or 9.7%.
Total savings accounts averaged $38,194,000 in 2001, up from
$33,445,000 in the prior year, an increase of $4,749,000 or 14.2%. The average
cost of these funds decreased to 2.92% in 2001 from 4.06% in the prior year.
Interest bearing transaction accounts averaged $26,917,000 in 2001, up
from $21,039,000 in 2000, an increase of $5,878,000 or 27.9%. The average cost
of these funds was .98% in 2001 compared to 1.56% in the prior year.
Time deposits averaged $136,938,000 in 2001, up from $119,949,000 in
the prior year, an increase of $16,989,000 or 14.2%. The average cost of time
deposits decreased to 5.47% from 5.76%.
The average balance of short-term borrowing for 2001 was $7,533,000, up
from $4,501,000 in the prior year, an increase of $3,032,000 or 67.4%. The
average cost of these funds decreased to 3.15% from 4.84%.
The Banks had an average $19,899,000 outstanding borrowing balance
during 2001 at an average cost of 5.77%. The Banks had an average $19,385,000
outstanding during 2000 at an average cost of 6.01%. Borrowings increased by
$514,000 or 2.7%.
The Corporation had average total interest bearing liabilities in 2001
of $229,481,000 costing an average of 4.47% compared with interest bearing
liabilities in 2000 of $198,319,000 costing an average of 5.03%. Average
interest bearing liabilities increased $31,162,000 or 15.7%, while the average
cost of these liabilities decreased by 56 basis points or 11.1%.
Volume and Rate Variance Analysis
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 times the prior year's rate. The changes in rate are the
difference between the current and prior year's rate times the prior year's
balance.)
As reflected in the table, the increase in 2002 net interest income of
$2,927,000 is mostly due to changes in volume. The increased volume in the loan
portfolio was the strongest factor driving the $785,000 increase in interest
income. The decreased cost of time deposits was the strongest factor driving the
$2,142,000 decrease in interest expense.
As reflected in the table, the increase in 2001 net interest income of
$712,000 is also mostly due to changes in volume. The increased volume in the
loan portfolio was the strongest factor driving the $998,000 increase in
interest income. The increased cost of time deposits was the strongest factor
driving the $286,000 increase in interest expense.
As discussed above, the prime interest rate has changed dramatically
over the last two years. In January 2001 the Federal Reserve began a series of
19
rate cuts that brought the prime rate down from 9% to 4.25% by December 2002.
Management expects interest rates to be fairly stable in the near term.
Therefore, as in 2002, any improvements in net interest income during 2003 are
more likely to be the result of changes in volume and the mix of earning assets
and interest bearing liabilities than changes in rates.
Volume and Rate Variance Analysis
2002 compared to 2001 2001 compared to 2000
--------------------- ---------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest earning assets (Dollar amounts in thousands)
Interest bearing deposits ...................... $ (90) $ (35) $ (125) $ 127 $ (30) $ 97
Investment securities taxable .................. 299 (496) (197) (574) (284) (858)
Investment securities--tax exempt .............. 182 6 188 (2) (1) (3)
Federal funds sold ............................. 78 (465) (387) 536 (232) 304
Loans receivable ............................... 5,252 (3,946) 1,306 2,827 (1,369) 1,458
------- ------- ------- ------- ------- -------
Total interest income ........................ 5,721 (4,936) 785 2,914 (1,916) 998
------- ------- ------- ------- ------- -------
Interest bearing liabilities
Savings ........................................ 391 (603) (212) 175 (416) (241)
Interest bearing transaction accounts .......... 111 (90) 21 77 (142) (65)
Time deposits .................................. 1,213 (3,379) (2,166) 942 (353) 589
------- ------- ------- ------- ------- -------
Total interest bearing deposits .............. 1,715 (4,072) (2,357) 1,194 (911) 283
Short term borrowing ........................... 25 (140) (115) 113 (94) 19
Warehouse lines of credit ...................... 356 - 356 - - -
FHLB advances .................................. 21 (47) (26) 31 (47) (16)
------- ------- ------- ------- ------- -------
Total interest expense ....................... 2,117 (4,259) (2,142) 1,338 (1,052) 286
------- ------- ------- ------- ------- -------
Net interest income ............................ $ 3,604 $ (677) $ 2,927 $ 1,576 $ (864) $ 712
======= ======= ======= ======= ======= =======
The change in interest due to both volume and yield/rate has been allocated to
change due to volume and change due to yield/rate in proportion to the absolute
value of the change in each.
PREMISES AND EQUIPMENT
Premises and equipment were $6,376,000 at December 31, 2002 compared to
$5,177,000 the prior year, an increase of $1,199,000 or 23.2%. Most of the
increase was due to the acquisitions of the Ridgeway bank in July. Premises and
equipment are discussed further in Note 6 to the consolidated financial
statements.
INVESTMENT PORTFOLIO
The Corporation's investment portfolio consists primarily of short-term
U. S. government and agency debt issues. The acquisition of the Ridgeway bank
has significantly increased the Corporation's tax exempt portfolio. Investment
securities averaged $48.9 million in 2002, $38.5 million in 2001, and $48.2
million in 2000. Note 4 to the consolidated financial statements provides
further information on the investment portfolio.
20
The table below gives the amortized cost and fair value of the
Corporation's investment portfolio for the past three years.
2002 2001 2000
---- ---- ----
Amortized Fair Amortized Fair Amortized Fair
cost value cost value cost value
---- ----- ---- ----- ---- -----
Securities held-to-maturity (Dollar amounts in thousands)
U.S. government and agencies ............. $ - $ - $ 500 $ 500 $12,371 $12,217
State and local government ............... - - - - - -
------- ------- ------- ------- ------- -------
Total held-to-maturity ............. $ - $ - $ 500 $ 500 $12,371 $12,217
======= ======= ======= ======= ======= =======
Securities available-for sale
U.S. government and agencies ............. $41,213 $41,531 $40,437 $40,415 $38,599 $38,403
State and local government ............... 9,114 9,625 801 811 813 810
Other securities ......................... 1,910 1,910 1,981 1,981 1,982 1,982
------- ------- ------- ------- ------- -------
Total available for sale ........... $52,237 $53,066 $43,219 $43,207 $41,394 $41,195
======= ======= ======= ======= ======= =======
Information on the maturity distribution of the investment portfolio is
presented in Note 4 to the consolidated financial statements. Other securities
consists of non-marketable equity investments in Federal Reserve stock, FHLB
stock and Bankers Bank stock. Further information is detailed in Note 4.
At December 31, 2002 the Corporation's available for sale portfolio
showed a net of taxes other comprehensive gain in the equity section of the
balance sheet of $98,000 compared to a loss of $7,000 the prior year. The change
in the valuation of the investment portfolio was directly related to the changes
in market interest rates during the year.
LOAN PORTFOLIO
The average size of the loan portfolio was $281.9 million in 2002,
$211.9 million in 2001 and $179.7 million in 2000.
At December 31, 2002 the net loan portfolio was $302.9 million,
compared to $227.1 million the prior year, an increase of $75.8 million or
33.4%.
Management believes the loan portfolio is adequately diversified. There
are no foreign loans and few agricultural loans.
The table, "Loan Portfolio Composition," in the following section,
indicates the amounts of loans outstanding according to the type of loan at the
dates indicated.
Loan Portfolio Composition
The following table shows the composition of the loan portfolio for the
years ended December 31, 1998 through 2002.
Loan category 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Commercial, financial and agricultural ............ $ 78,210 $ 56,515 $ 52,264 $ 40,220 $ 29,943
Real estate - construction ......................... 23,345 19,557 15,389 9,156 5,738
Real estate - mortgage ............................. 168,499 127,002 98,154 84,680 62,789
Loans to individuals ............................... 36,430 26,831 29,270 23,033 19,325
-------- -------- -------- -------- --------
Total loans - gross ........................... $306,484 $229,905 $195,077 $157,089 $117,795
======== ======== ======== ======== ========
21
Commercial, financial, and agricultural loans, primarily representing
loans made to small and medium size businesses, increased by $21.7 million or
38.4% during 2002. These loans 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.
Real estate loans consist of construction loans and loans secured by
mortgages. Construction loans are also generally secured with mortgages. Because
the Corporation's subsidiaries are community banks, real estate loans comprise
the bulk of the loan portfolio. Construction loans increased $3.8 million or
19.4% in 2002. Mortgage loans increased $41.5 million or 32.7% in 2002. The
increase in these categories is reflective of the low interest rate environment
for 2002.
The Corporation's 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 be easily sold into the
secondary mortgage market. Community Resource Mortgage also originates loans for
sale in the secondary market. These loans are generally pre-qualified with the
underwriters to avoid problems in the sale of the loans. In 2002, 2001 and 2000
the Corporation sold $176 million, $34.9 million and $5.9 million, respectively,
in 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 also makes mortgage loans for its own loan
portfolio. 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 or household purposes,
they may be secured or unsecured. These loans increased $9.6 million or 35.8% in
2002.
Interest income from the loan portfolio was $19.4 million in 2002
compared to $18.1 million in 2001, an increase of $1.3 million or 7.2%. The
average yield on the portfolio was 6.89% in 2002 compared to 8.55% in 2001.
Maturity Distribution of Loans
The following table sets forth the maturity distribution of the
Corporation's loans, by type, as of December 31, 2002 as well as the type of
interest on loans due after one year.
After one
year but
Within one within five Over five
Category year years years Total
- -------- ----- ----- ----- -----
(Dollar amounts in thousands)
Commercial .................................. $ 41,918 $ 32,422 $ 3,870 $ 78,210
Real estate ................................. 50,623 100,435 40,786 191,844
Individuals ................................. 10,191 24,678 1,561 36,430
-------- -------- ------- --------
Total ....................................... $102,732 $157,535 $46,217 $306,484
======== ======== ======= ========
Loans due after one year:
Predetermined interest rate ............ $201,712
Floating interest rate. ................ 2,040
--------
Total ....................................... $203,752
========
22
Lending Risks
Because extending credit involves a certain degree of risk, management
has established loan and credit policies designed to control both the types and
amounts of risks assumed and to minimize losses. Such policies include
limitations on loan-to-collateral values for various types of collateral,
requirements for appraisals of real estate collateral, problem loan management
practices and collection procedures, and nonaccrual and charge-off guidelines.
The Corporation also conducts internal loan reviews to monitor on an ongoing
basis the quality of its portfolio.
The Corporation has a geographic concentration of loans within its
Banks' local service areas in South Carolina because its primary business is
community banking.
Concentrations of credit also occur where a number of customers are
engaged in similar business activities. A concentration is generally defined for
this purpose as a concentration of loans exceeding 10% of total loans. The banks
regularly review their business lending in an effort to detect, monitor and
control such loan concentrations. At December 31, 2002 the Corporation had no
such loan concentrations.
Nonaccrual and Past Due Loans
The nonaccrual, past due and impaired loans and other real estate owned
are summarized in Note 5 to the consolidated financial statements. The
Corporation had no restructured loans in the past five years.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Nonaccrual loans ............................................ $ 796 $ 281 $ 238 $ 90 $ 31
Accruing loans 90 days or more past due ..................... 1,740 17 93 6 187
------ ------ ------ ---- ------
Total .................................................. $2,536 $ 298 $ 331 $ 96 $ 218
====== ====== ====== ==== ======
Total as a % of outstanding loans ...................... 0.83% 0.13% 0.17% 0.06% 0.19%
====== ====== ====== ==== ======
Other Real Estate Owned ..................................... $ 219 $ 267 $ - $ - $ 266
====== ====== ====== ==== ======
Impaired Loans (included in non accrual) .................... $ 796 $ 281 $ 238 $ 90 $ 31
====== ====== ====== ==== ======
Most of the increase in the accruing loans greater than 90 days past
due is due to one loan relationship of $1.3 million. This account involves
principals who are having a legal dispute. Management believes that the bank's
collateral position is sufficient that no loss is expected. Approximately half
the increase in nonaccrual loans is related to the addition of the Ridgeway
bank, these credits represent a number of smaller dollar amounts. Management
does not expect any material loss in relation to these credits.
Gross income that would have been recorded for the years ended December
31, 2002 and 2001, if nonaccrual loans had been performing in accordance with
their original terms was approximately $39,000 and $7,000 respectively. No
interest income was recognized in the current period on the non-accrual loans.
The Corporation's 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 2002. Management is aware of no trends, events or
uncertainties that would cause nonaccrual loans to change materially in 2003.
Potential Problem Loans
At December 31, 2002 the Corporation's internal loan review program had
identified $5,273,000 (1.7% of the portfolio) in various loans where information
23
about credit problems of borrowers had caused management to have concerns 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
marketable collateral.
Secured versus 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. In 2002 the
Corporation had $20.2 million in unsecured loans or 6.6% of its loan portfolio.
In 2001 the Corporation had $16.1 million 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.
Loan Participations
Periodically, the Corporation's banking subsidiaries enter into sales
or purchases of loan participations with one another and other financial
institutions. The banks generally only sell participations in loans that would
cause the bank to exceed its lending limitation to a single customer. As the
Banks' lending limits increase they may buy back such loan participations. Such
loans are usually commercial in nature, subject to the purchasing Bank's
standard underwriting requirements, and all risks associated with the portion of
the loan sold flow to the purchaser.
At the end of 2002 the four banks had $26,953,000 in loan
participations purchased. Of these loans $8,658,000 was with nonaffiliated
banks.
At the end of 2001 the three banks had $16,868,000 in loan
participations purchased. Of these loans $5,265,000 was with nonaffiliated
banks.
At the end of 2002 the four banks had $20,173,000 in loan
participations sold. Of these loans $2,373,000 was with nonaffiliated banks.
At the end of 2001 the three banks had $11,953,000 in loan
participations sold. Of these loans $801,000 was with nonaffiliated banks.
Other Real Estate
Other real estate, consisting of foreclosed properties, was $219,000 in
2002, $267,000 in 2001 and $0 in 2000. Other real estate is initially recorded
at the lower of net loan balance or its estimated fair value, net of estimated
disposal costs. The estimate of fair value for foreclosed properties is
determined by appraisal at the time of acquisition.
SUMMARY OF LOAN LOSS EXPERIENCE
Allowance for Loan Losses
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. At December 31, 2002 and 2001 the allowance for loan
losses was 1.17% and 1.23%, respectively, of total loans. The following table
provides details on the changes in the allowance for loan losses during the past
five fiscal years.
24
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Average amount of loans outstanding ............................ $281,907 $211,901 $179,654 $139,215 $103,500
======== ======== ======== ======== ========
Allowance for loan losses - January 1* ......................... $ 3,274 $ 2,424 $ 1,936 $ 1,459 $ 1,140
-------- -------- -------- -------- --------
Loan charge-offs:
Real estate ................................................ 175 9 78 - 7
Installment ................................................ 223 202 116 95 111
Credit cards and related plans ............................. - 9 9 5 6
Commercial and other ....................................... 374 87 33 80 56
-------- -------- -------- -------- --------
Total charge-offs .............................................. 772 307 236 180 180
-------- -------- -------- -------- --------
Recoveries:
Real Estate ................................................ 1 - 3 - -
Installment ................................................ 20 33 25 17 12
Credit cards and related plans ............................. - 2 2 3 3
Commercial ................................................. 17 - 6 25 -
-------- -------- -------- -------- --------
Total recoveries ............................................... 38 35 36 45 15
-------- -------- -------- -------- --------
Net charge-offs ................................................ 734 272 200 135 165
Provision for loan losses ...................................... 1,033 678 688 612 484
-------- -------- -------- -------- --------
Allowance for loan losses - Dec. 31 ............................ $ 3,573 $ 2,830 $ 2,424 $ 1,936 $ 1,459
======== ======== ======== ======== ========
Ratios
Net charge-offs to average loans
outstanding ............................................... 0.26% 0.13% 0.11% 0.10% 0.16%
Net charge-offs to loans outstanding at
end of year ............................................... 0.24% 0.12% 0.10% 0.09% 0.14%
Allowance for loan losses to average
loans ..................................................... 1.27% 1.34% 1.35% 1.39% 1.41%
Allowance for loan losses to total loans
at end of year ............................................ 1.17% 1.23% 1.24% 1.23% 1.24%
Net charge-offs to allowance for losses ........................ 20.54% 9.61% 8.25% 6.97% 11.31%
Net charge-offs to provision for loans
losses .................................................... 71.06% 40.12% 29.07% 22.06% 34.09%
* Allowance balance includes $444 acquired when Ridgeway Bancshares was merged
into the Corporation on July 1, 2002
25
Management reviews its allowance for loan losses in three broad
categories: commercial, real estate and loans to individuals. The combination of
a relatively short operating history and relatively high asset quality precludes
management from establishing a meaningful specific loan loss percentage for the
computation of the allowance for each category. Instead management assigns an
estimated percentage factor to each in the computation of the overall allowance.
These estimates are not, however, intended to restrict the Corporation's ability
to respond to losses. The Corporation charges losses from any segment of the
portfolio to the allowance, regardless of the allocation. In general terms, the
real estate portfolio is subject to the least risk, followed by the commercial
loan portfolio, followed by the loans to individuals portfolio. The Banks'
internal and external loan review programs from time to time identify loans that
are subject to specific weaknesses and such loans are reviewed for a specific
loan loss allowance.
The Corporation operates four independent community banks in South
Carolina. Under the provisions of law and regulations governing banks, each
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 Federal
Deposit Insurance Corporation (the "FDIC") As a normal part of a safety and
soundness examination, the bank examiners assess and comment on the adequacy of
a bank's allowance for loan losses. 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 comprised of small and medium size business and
individual loans. As community banks, there is by definition a geographic
concentration of loans within the Banks' 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, non-accruals, 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 is part of the Banks' assessment of the
adequacy of their allowances for loan losses.
Based on the current levels of non-performing and other problem loans,
management believes that loan charge-offs in 2003 will be less than the 2002
levels as such loans progress through the collection, foreclosure, and
repossession process. Management believes that the allowance for loan losses, as
of December 31, 2002 is sufficient to absorb the inherent losses that remain in
the loan portfolio. Management will continue to closely monitor the levels of
non-performing and potential problem loans and address the weaknesses in these
credits to enhance the amount of ultimate collection or recovery of these
assets. Management considers the levels and trends in non-performing and past
due loans in determining how the provision for loan losses is adjusted.
The following table presents the allocation of the allowance for loan
losses, as of December 31, 1998 through 2002, compared with the percent of loans
in the applicable categories to total loans.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
% of % of % of % of % of
(Dollar amounts loans in loans in loans in loans in loans in
in thousands) Allowance category Allowance category Allowance category Allowance category Allowance category
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Commercial ...... $1,479 26% $1,019 24% $ 801 27% $ 660 28% $ 364 25%
Real estate ..... 1,548 63% 1,322 65% 1,136 58% 916 57% 707 59%
Individual ...... 546 11% 489 11% 487 15% 360 15% 388 16%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total ...... $3,573 100% $2,830 100% $2,424 100% $1,936 100% $1,459 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
The Corporation maintains an allowance for loan losses it believes is
sufficient to cover estimated losses inherent in the portfolio. The allowance is
allocated to different segments of the portfolio, based on management's
expectations of risk in that segment of the portfolio. This allocation is an
estimate only and is not intended to restrict the Corporation's ability to
26
respond to losses. The Corporation charges losses from any segment of the
portfolio to the allowance, regardless of the allocation.
In reviewing the adequacy of the allowance for loan losses at the end
of each period, the Corporation considers historical loan loss experience,
current economic conditions, loans outstanding, trends in non-performing and
delinquent loans, and the quality of collateral securing problem loans. The
allowance for loan losses is management's best estimate of probable loan losses
that have been incurred as of December 31, 2002.
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, general
economic conditions and the adequacy of the allowance for loan losses. The
amount of the provision is the amount which management believes, based on its
continuing analysis, is necessary to cause the allowance to be adequate.
Provisions for loan losses totaled $1,033,000 and $678,000 in 2002 and 2001,
respectively. The increase in the provision expense in 2002 was related to a
very small number of commercial loan relationships and is not indicative of a
portfolio trend. Based on the available information, the Corporation considers
its 2002 provision for loan losses adequate.
Net charge-offs in 2002 were $734,000 or 71.1% of the provision for
loan losses compared to $272,000 or 40.1% of the provision for loan losses in
the prior year. See "Allowance for Loan Losses" for a discussion of the factors
management considers in its review of the adequacy of the allowance and
provision for loan losses.
AVERAGE DEPOSITS
The Corporation's average deposits in 2002 were $ 301 million compared
to $234 million in 2001, an increase of $67 million or 28.6%.
The total average deposits for the Corporation for the years ended
December 31, 2002, 2001 and 2000 are summarized below:
2002 2001 2000
---- ---- ----
Average Average Average Average Average Average
balance cost balance cost balance cost
------- ---- ------- ---- ------- ----
(Dollar amounts in thousands)
Noninterest bearing demand $ 41,198 $ 31,643 $ 28,531
Interest bearing transaction accounts 41,101 0.69% 26,917 0.98% 21,039 1.56%
Savings-regular 14,469 1.01% 8,705 1.60% 8,414 2.12%
Savings- money market 41,321 1.85% 29,489 3.37% 25,031 4.73%
Time deposits less than $100,000 104,509 3.30% 92,515 5.45% 81,797 5.66%
Time deposits greater than $100,000 58,003 3.28% 44,423 5.50% 38,152 6.10%
-------- -------- --------
Total average deposits $300,601 $233,692 $202,964
======== ======== ========
At December 31, 2002 the Corporation had $67,946,000 in certificates of
deposit of $100,000 or more. The maturities of these certificates are as
follows:
Maturity
(Dollar amounts in thousands)
Of 3 months or less ..................... $23,362
From 3 to 6 months ...................... 14,254
From 6 to 12 months ..................... 21,381
Over 12 months .......................... 8,949
-------
Total .......................... $67,946
=======
27
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, 2002, 2001, and 2000.
2002 2001 2000
---- ---- ----
Return on assets (ROA) .................. 1.43% 1.36% 1.26%
Return on equity (ROE) .................. 15.10% 15.58% 14.67%
Dividend payout ratio ................... 22.55% 23.13% 20.50%
Equity as a percent of assets ........... 9.46% 8.71% 8.59%
The decline in return on equity is related to the issuance in July 2002 of one
million shares of CBI common stock in connection with the acquisition of the
Ridgeway bank.
SHORT-TERM BORROWINGS
The Corporation's short-term borrowings consist of federal funds
purchased and securities sold under agreements to repurchase, which generally
mature each business day. Information is provided in the following table.
2002 2001 2000
---- ---- ----
(Dollar amounts in thousands)
Outstanding at year-end ....................... $16,302 $ 4,171 $ 9,352
Interest rate at year-end ..................... .78% 2.08% 5.01%
Maximum month-end balance during the year ..... $16,302 $10,976 $ 9,532
Average amount outstanding during the year .... $ 8,419 $ 7,533 $ 4,501
Weighted average interest rate during the year 1.45% 3.15% 4.84%
LINES OF CREDIT
Lines of credit payable represent warehouse lines funding loan
production for CRM. At year end these balances totaled $18,249,000. Of this
amount, $12,326,000 was borrowed from BB&T at the one month LIBOR rate plus
1.95%. The BB&T line expires in October 2003. The line is secured with the value
of the underlying mortgages and the guarantee of the Corporation to a maximum of
$14 million. The remaining $5,923,000 is the balance on a line outstanding with
First Horizon, priced at the individual mortgage loan note rate. The operations
of CRM are included in the conso