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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, 2003 Commission File No. 000-22054
COMMUNITY BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0966962
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
791 Broughton Street, Orangeburg, SC 29115
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code (803) 535-1060
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, No Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act:) Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of the last business day of the registrant's most recently
completed second fiscal quarter, June 30, 2003 was approximately $53,081,000.
As of March 12, 2004, there were 4,336,112 shares of the registrant's common
stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of
Shareholders - Part III
10-K TABLE OF CONTENTS
Part I Page
Item 1 Description of Business .............................................................. 3
Item 2 Description of Property .............................................................. 10
Item 3 Legal Proceedings .................................................................... 10
Item 4 Submission of Matters to a Vote of Security Holders .................................. 10
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Securities .................................................... 11
Item 6 Selected Financial Data .............................................................. 12
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................ 13
Item 7A Quantitative and Qualitative Disclosures about Market Risk ........................... 31
Item 8 Financial Statements and Supplementary Data .......................................... 34
Independent Auditor's Report ......................................................... 35
Consolidated Balance Sheets, December 31, 2003 and 2002 .............................. 36
Consolidated Statements of Income,
Years Ended December 31, 2003, 2002 and 2001 ...................................... 37
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 2003, 2002 and 2001 ...................................... 38
Consolidated Statements of Cash Flows,
Years Ended December 31, 2003, 2002 and 2001 ...................................... 39
Notes to Consolidated Financial Statements ........................................... 40
Quarterly Data for 2003 and 2002 ..................................................... 67
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ............................................ 67
Item 9A Controls and Procedures .............................................................. 67
Part III
Item 10 Directors and Executive Officers of the Registrant ................................... *
Item 11 Executive Compensation ............................................................... *
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ....................................................... *
Item 13 Certain Relationships and Related Transactions ....................................... *
Item 14 Principal Accountant Fees and Services ............................................... 70
Part IV
Item 15 Exhibits and Reports on Form 8-K ..................................................... 71
* Incorporated by reference to Registrant's Proxy Statement for the 2004 Annual
Meeting of Shareholders
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FORWARD-LOOKING STATEMENTS
Statements included in this report which are not historical in nature
are intended to be, and are hereby identified as `forward-looking statements'
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use the of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "projects," and similar expressions.
The Corporation's expectations, beliefs, estimates and projections are expressed
in good faith and are believed by the Corporation to have a reasonable basis,
including without limitation, management's examination of historical operating
trends, data contained in the Corporation's records and other data available
from third parties, but there can be no assurance that management's
expectations, beliefs, estimates or projections will result or be achieved or
accomplished. The Corporation cautions readers that forward-looking statements,
including without limitation, those relating to the Corporation's recent and
continuing expansion, its future business prospects, revenues, working capital,
liquidity, capital needs, interest costs, income, and adequacy of the allowance
for loan losses, are subject to risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward-looking
statements, due to several important factors herein identified, among others,
and other risks and factors identified from time to time in the Corporation's
reports filed with the Securities and Exchange Commission. The Corporation
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
PART I
Item 1. Description of Business
Form of organization
Community Bankshares, Inc. (CBI or the Corporation) is a South Carolina
corporation and a bank holding company. CBI commenced operations on July 1,
1993, upon effectiveness of the acquisition of the Orangeburg National Bank as a
wholly-owned subsidiary. In June 1996 CBI acquired all the stock of Sumter
National Bank, which is also a wholly-owned subsidiary. In July 1998 CBI
acquired all the stock of Florence National Bank, which is also a wholly-owned
subsidiary. In July 2002 CBI acquired by merger Ridgeway Bancshares, Inc., the
parent company of the Bank of Ridgeway.
Orangeburg National Bank (the Orangeburg bank) is a national bank,
chartered in 1987, operating from two offices located in Orangeburg, South
Carolina.
Sumter National Bank (the Sumter bank) is a national bank, chartered in
1996, operating from two offices located in Sumter, South Carolina.
Florence National Bank (the Florence bank) is a national bank,
chartered in 1998, operating from one office located in Florence, South
Carolina.
Bank of Ridgeway (the Ridgeway bank) is a South Carolina
state-chartered bank, organized in 1898, operating from one office in Ridgeway,
one office in Winnsboro, and one office in Blythewood, South Carolina.
In November 2001, CBI acquired all the common stock of Resource
Mortgage Inc., a Columbia, South Carolina based mortgage company. The mortgage
company operates as a wholly-owned subsidiary of the holding company and is now
named Community Resource Mortgage, Inc. (CRM).
Business of banking
The Orangeburg, Sumter, Florence and Ridgeway banks (hereafter referred
to as the Banks) offer a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. The Federal Deposit Insurance Corporation
insures deposits up to applicable limits. Most of the Banks' deposits are
attracted from individuals and small businesses.
The Banks offer secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial and consumer
purposes. Consumer loans include car loans, home equity improvement loans
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secured by first and second mortgages, personal expenditure loans, education
loans, and the like. Commercial loans include short-term unsecured loans, short
and intermediate term real estate mortgage loans, loans secured by listed
stocks, loans secured by equipment, inventory, accounts receivable, and the
like. The Banks do not and will not discriminate against any applicant for
credit on the basis of race, color, creed, sex, age, marital status, familial
status, handicap, or derivation of income from public assistance programs.
Other services offered by the Banks include safe deposit boxes, night
depository service, VISA and Master Card brand charge cards (through a
correspondent), tax deposits, sale of U.S. Treasury bonds, notes and bills and
other U. S. government securities (through a correspondent), twenty-four hour
automated teller service, and Internet banking services. Each of the Banks has
ATMs and they are all part of the Star and Cirrus networks.
The mortgage company provides a wide variety of one to four family
residential mortgage products in the Columbia, Sumter and Anderson, South
Carolina markets.
Competition
The market for financial institutions in our various markets is
generally highly competitive. Banks generally compete with other financial
institutions through the banking services and products offered, the pricing of
services, the level of service provided, the convenience and availability of
services, and the degree of expertise and personal concern with which services
are offered. The Banks encounter strong competition from most of the financial
institutions in their market areas.
The market area for the Orangeburg bank generally encompasses an area
extending nine miles around the city of Orangeburg. The market area for the
Sumter bank generally encompasses the county of Sumter. The market area for the
Florence bank generally encompasses the city of Florence. The market area for
the Ridgeway bank generally encompasses Fairfield County (for the Ridgeway and
Winnsboro offices) and the town of Blythewood in Richland County. In the conduct
of certain banking business, the Banks also compete with credit unions, consumer
finance companies, insurance companies, money market mutual funds, and other
financial institutions, some of which are not subject to the same degree of
regulation and restrictions imposed upon the Banks. Many of these competitors
have substantially greater resources and lending limits than the Banks and offer
certain services, such as international banking and trust services, which the
Banks do not provide. The Banks believe, however, that their relatively small
size permits them to offer more personalized services than many of their
competitors. The Banks attempt to compensate for their lower lending limits by
participating larger loans with other institutions, often with each other.
Most of the other financial institutions in the Orangeburg, Sumter,
Florence and most of the Ridgeway service areas are branch offices of large,
regional banks with offices located throughout South Carolina. At June 30, 2003,
there were five financial institutions competing with the Corporation in the
city of Orangeburg, eight financial institutions competing with the Corporation
in Sumter County, and 16 financial institutions competing with the Corporation
in the city of Florence. At June 30, 2003, the Orangeburg bank had the second
largest deposit base in the city of Orangeburg; the Sumter bank had the third
largest deposit base in Sumter County; the Florence bank had the seventh largest
deposit base in the city of Florence; and the Ridgeway bank had the largest
deposit base in Fairfield County and half the deposits in the town of
Blythewood.
The mortgage company has offices in Anderson, Richland and Sumter
Counties of South Carolina, where it competes with hundreds of financial
institutions and mortgage originators.
Dependence on Major Customers
The Banks do not consider themselves dependent on any single customer
or small group of customers, either in the deposit or lending areas.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of CBI and the Banks.
As discussed below under the caption "Gramm-Leach-Bliley Act", Congress
has adopted extensive changes in the laws governing the financial services
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industry. Among the changes adopted are creation of the financial holding
company, a new type of bank holding company with powers that greatly exceed
those of standard holding companies, and creation of the financial subsidiary, a
subsidiary that can be used by national banks to engage in many, though not all,
of the same activities in which a financial holding company may engage. The
legislation also establishes the concept of functional regulation whereby the
various financial activities in which financial institutions engage are overseen
by the regulator with the relevant regulatory experience. Neither CBI nor any of
the Banks has yet made a decision as to how to adapt the new legislation to its
use. Accordingly, the following discussion relates to the supervisory and
regulatory provisions that apply to CBI and the Banks as they currently operate.
Regulation of Bank Holding Companies
General
As a bank holding company registered under the Bank Holding Company Act
("BHCA"), CBI is subject to the regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). Under the BHCA, CBI's activities
and those of its subsidiaries are limited to banking, managing or controlling
banks, furnishing services to or performing services for its subsidiaries or
engaging in any other activity which the Federal Reserve determines to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. The BHCA prohibits CBI from acquiring direct or indirect
control of more than 5% of the outstanding voting stock or substantially all of
the assets of any bank or from merging or consolidating with another bank
holding company without prior approval of the Federal Reserve. The BHCA also
prohibits CBI from acquiring control of any bank operating outside the State of
South Carolina unless such action is specifically authorized by the statutes of
the state where the bank to be acquired is located.
Additionally, the BHCA prohibits CBI from engaging in or from acquiring
ownership or control of more than 5% of the outstanding voting stock of any
company engaged in a non-banking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA generally does not place territorial restrictions on
the activities of such non-banking-related activities.
As discussed below under "Gramm-Leach-Bliley Act", a bank holding
company that meets certain requirements may now qualify as a financial holding
company and thereby significantly increase the variety of services it may
provide and the investments it may make.
CBI is also subject to limited regulation and supervision by the South
Carolina State Board of Financial Institutions (the "State Board"). A South
Carolina bank holding company may be required to provide the State Board with
information with respect to the financial condition, operations, management and
inter-company relationships of the holding company and its subsidiaries. The
State Board also may require such other information as is necessary to keep
itself informed about whether the provisions of South Carolina law and the
regulations and orders issued thereunder by the State Board have been complied
with, and the State Board may examine any bank holding company and its
subsidiaries. Furthermore, pursuant to applicable law and regulations, the
Company must receive approval of, or give notice to (as applicable) the State
Board prior to engaging in the acquisition of banking or non-banking
institutions or assets.
Obligations of Holding Company to its Subsidiary Banks
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policies that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of stockholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
5
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision gives depositors a preference over general and subordinated creditors
and stockholders in the event a receiver is appointed to distribute the assets
of the bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's shareholders', pro rata, and to the
extent necessary, if any such assessment is not paid by any shareholder after
three months notice, to sell the stock of such shareholder to make good the
deficiency.
Capital Adequacy Guidelines for Bank Holding Companies and Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC, have adopted risk-based and leverage capital adequacy guidelines
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance-sheet exposures, as adjusted for credit risks. The
capital guidelines and CBI's capital position are summarized in Note 19 to the
Financial Statements, contained elsewhere in this report. All four of the Banks
are considered well capitalized.
Failure to meet capital guidelines could subject the Banks to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.
Payment of Dividends
CBI is a legal entity separate and distinct from the Banks. Most of the
revenues of CBI result from dividends paid to CBI by the Banks. There are
statutory and regulatory requirements applicable to the payment of dividends by
subsidiary banks as well as by CBI to its shareholders.
Each national banking association is required by federal law to obtain
the prior approval of the OCC for the payment of dividends if the total of all
dividends declared by the board of directors of such bank in any year will
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two years, less any required
transfers to surplus. In addition, national banks can only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined by regulation). South Carolina banking regulations
also restrict the amount of dividends that banks can pay shareholders. Any
dividends by a South Carolina state bank that exceed the bank's total
year-to-date earnings are subject to prior approval of the South Carolina
Commissioner of Banking and are generally payable only from undivided profits.
Payment of dividends by a state bank would also be prohibited if the effect
would be to cause the Bank's capital to fall below applicable minimum capital
requirements.
The payment of dividends by CBI and the Banks may also be affected or
limited by other factors, such as the requirements to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the Banks, could include the payment of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. The OCC has indicated that paying dividends that deplete a national
bank's capital base to an inadequate level would be an unsafe and unsound
banking practice. The Federal Reserve, the OCC and the FDIC have issued policy
statements, which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
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Certain Transactions by CBI with its Affiliates
Federal law regulates transactions among CBI and its affiliates,
including the amount of the Banks' loans to or investments in nonbank affiliates
and the amount of advances to third parties collateralized by securities of an
affiliate. Further, a bank holding company and its affiliates are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
Because Orangeburg National Bank's, Sumter National Bank's, Florence
National Bank's and the Bank of Ridgeway's deposits are insured by the Bank
Insurance Fund of the FDIC ("BIF"), the Banks are subject to semiannual
insurance assessments imposed by the FDIC. Since January 1, 1997, the
assessments imposed on all FDIC deposits for deposit insurance have an effective
rate ranging from 0 to 27 basis points per $100 of insured deposits, depending
on the institution's capital position and other supervisory factors. However,
legislation enacted in 1996 requires that both Savings Association Insurance
Fund ("SAIF") insured and BIF insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO").
The FICO assessment is adjusted quarterly to reflect changes in the assessment
bases of the respective funds based on quarterly Call Report and Thrift
Financial Report submissions.
Regulation of the Banks
Orangeburg National Bank, Sumter National Bank, and Florence National
Bank are also subject to regulation and examination by the OCC bank examiners.
The Bank of Ridgeway is subject to regulation and examination by FDIC and the
State Board. In addition, the Banks are subject to various other state and
federal laws and regulations, including state usury laws, laws relating to
fiduciaries, consumer credit laws and laws relating to branch banking. The
Banks' loan operations are subject to certain federal consumer credit laws and
regulations promulgated thereunder, including, but not limited to: the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to
provide certain information concerning their mortgage lending; the Equal Credit
Opportunity Act and the Fair Housing Act, prohibiting discrimination on the
basis of certain prohibited factors in extending credit; the Fair Credit
Reporting Act, governing the use and provision of information to credit
reporting agencies; the Bank Secrecy Act, dealing with, among other things, the
reporting of certain currency transactions; and the Fair Debt Collection Act,
governing the manner in which consumer debts may be collected by collection
agencies. The deposit operations of the Banks are subject to the Truth in
Savings Act, requiring certain disclosures about rates paid on savings accounts;
the Expedited Funds Availability Act, which deals with disclosure of the
availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's actual
performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
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A bank that is "undercapitalized" becomes subject to provisions of the
Federal Deposit Insurance Act ("FDIA") restricting payment of capital
distributions and management fees; requiring the OCC to monitor the condition of
the bank; requiring submission by the bank of a capital restoration plan;
restricting the growth of the bank's assets and requiring prior approval of
certain expansion proposals. A bank that is "significantly undercapitalized" is
also subject to restrictions on compensation paid to senior management of the
bank, and a bank that is "critically undercapitalized" is further subject to
restrictions on the activities of the bank and restrictions on payments of
subordinated debt of the bank. The purpose of these provisions is to require
banks with less than adequate capital to act quickly to restore their capital
and to have the OCC move promptly to take over banks that are unwilling or
unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 ("Riegle-Neal"), CBI and any other adequately capitalized bank holding
company located in South Carolina can acquire a bank located in any other state,
and a bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. Riegle-Neal also provides that, in any state that has not
previously elected to prohibit out-of-state banks from operating interstate
branches within its territory, adequately capitalized and managed bank holding
companies can consolidate their multistate bank operations into a single bank
subsidiary and branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if it is expressly permitted by the laws of
the host state. The authority of a bank to establish and operate branches within
a state will continue to be subject to applicable state branching laws. South
Carolina law was amended, effective July 1, 1996, to permit such interstate
branching but not de novo branching by an out-of-state bank.
The Riegle-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger customers. These advantages
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region. As a result, the Banks do not generally
attempt to compete for the banking relationships of large corporations, but
concentrate their efforts on small to medium-sized businesses and on
individuals. CBI believes its Banks have competed effectively in this market
segment by offering quality, personal service.
Legislative Proposals
Legislation which could significantly affect the business of banking is
introduced in Congress from time to time. CBI cannot predict the future course
of such legislative proposals or their impact on CBI should they be adopted.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act, which makes it easier for affiliations
between banks, securities firms and insurance companies to take place, became
effective in March 2000. The Act removes Depression-era barriers that had
separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information.
Under provisions of the legislation and regulations adopted by the
appropriate regulators, banks, securities firms and insurance companies are able
to structure new affiliations through a holding company structure or through a
financial subsidiary. The legislation creates a new type of bank holding company
called a "financial holding company" which has powers much more extensive than
those of standard holding companies. These expanded powers include authority to
engage in "financial activities," which are activities that are (1) financial in
nature; (2) incidental to activities that are financial in nature; or (3)
complementary to a financial activity and that do not impose a safety and
soundness risk. Significantly, the permitted financial activities for financial
holding companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
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a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.
The Act and the regulations adopted pursuant to the Act create new
opportunities for CBI to offer expanded services to customers in the future,
though CBI has not yet determined what the nature of the expanded services might
be or when CBI might find it feasible to offer them. The Act has increased
competition from larger financial institutions that are currently more capable
than CBI of taking advantage of the opportunity to provide a broader range of
services. However, CBI continues to believe that its commitment to providing
high quality, personalized service to customers will permit it to remain
competitive in its market area.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of CBI are subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on CBI cannot be predicted.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act was signed into law on July 30, 2002, and
mandated extensive reforms and requirements for public companies. The SEC has
adopted extensive new regulations pursuant to the requirements of the
Sarbanes-Oxley Act. The Sarbanes-Oxley Act and the SEC's new regulations have
increased the Corporation's cost of doing business, particularly its fees for
internal and external audit services and legal services, and the law and
regulations are expected to continue to do so. However, the Corporation does not
believe that it will be affected by Sarbanes-Oxley and the new SEC regulations
in ways that are materially different or more onerous than those of other public
companies of similar size and in similar businesses.
Employees
At December 31, 2003 the Corporation employed 190 full time equivalent
employees. Management believes that its employee relations are excellent.
9
Further Information
Further information about the business of the Corporation and the Banks
is set forth in this Form 10-K under Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Item 2. Description of Property
The Orangeburg bank owns land located at 1820 Columbia Road NE, in
Orangeburg, South Carolina, where the Orangeburg bank maintains its main office.
The Bank operates from a one-story building of approximately 7,000 square feet.
The Orangeburg bank also owns a building, which was previously a branch of the
bank, at the corner of Broughton and Glover Streets in Orangeburg. The
Orangeburg bank currently rents this facility to the Corporation for office
space. In June 1999, the Bank moved into a branch facility located adjacent to
the old building. This branch office is approximately 6,500 square feet.
The Corporation's Sumter bank has fee simple title to land and a
one-story 6,500 square foot building located at 683 Bultman Drive, in Sumter,
South Carolina, where the Sumter bank maintains its main office. The Sumter bank
opened a branch bank on West Liberty Street in Sumter in February 2002. The
branch is a one-story building of approximately 3,600 square feet. The land,
approximately one acre, is leased under a non-cancellable operating lease for an
initial term of twenty years. The lease terms provide for four five-year renewal
options after the initial term. The Sumter bank is responsible for property
taxes and improvements.
The Florence bank leases approximately 1.7 acres of land located at
2009 Hoffmeyer Road in Florence, South Carolina. This land is the site of the
main office for the Florence bank. The lease is for an initial term of ten years
and provides for two ten year renewals and a final two year renewal. The
Florence bank is responsible for property taxes and improvements. The
Corporation constructed a one-story building for the Florence bank of
approximately 7,500 share feet on the leased site.
The Ridgeway bank's main office is located in a two story building on a
quarter acre site owned by the Bank at 100 S. Palmer St. in Ridgeway. The bank
also owns a 1,590 square foot one story branch office on a .9 acre site at 115
McNulty St. in Blythewood, SC. The bank also owns a 1,900 square foot one story
branch office on a one acre site at 610 West Moultrie St. in Winnsboro, SC.
The mortgage company operates from leased offices located at 508
Hampton Street, Suite 201, Columbia, SC, 304 West Westmark, Sumter, SC, and 2406
North Main Street, Anderson, SC. The Columbia office is leased under the terms
of a five year lease. At the end of that period, the lease will automatically
renew on a month-to-month basis. The other offices are rented under
month-to-month rental agreements.
Information about future lease payments is included in Note 7 to the
consolidated financial statements contained elsewhere in this report.
The Corporation has acquired approximately three acres of land in the
northeast area of the City of Orangeburg and will soon begin the construction of
a corporate headquarters and operations center building on that property. It is
anticipated that the new building will be completed in early 2005.
Item 3. Legal Proceedings
The Company, the Banks and the Mortgage Company are from time to time
subject to legal proceedings in the ordinary course of their business. No
proceedings were pending at December 31, 2003, that management believes are
likely to have a material adverse effect on the Company or its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the security holders during the
fourth quarter of 2003.
10
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Securities
The Corporation's shares of Common Stock are traded on the American
Stock Exchange (the AMEX) under the ticker symbol SCB.
The following table summarizes the range of high and low prices for the
Corporation's Common Stock as reported on the American Stock Exchange for each
quarterly period over the last two years.
Quarter Ended High Low
------------- ----- ---
March 31, 2002 $ 14.75 $ 12.75
June 30, 2002 $ 17.75 $ 14.35
September 30, 2002 $ 17.50 $ 15.00
December 31, 2002 $ 16.75 $ 14.60
March 31, 2003 $ 17.09 $ 14.50
June 30, 2003 $ 16.45 $ 15.00
September 30, 2003 $ 18.85 $ 15.91
December 31, 2003 $ 19.40 $ 18.10
During 2003, the Corporation had stock sales volume of 416,600 shares
compared with 268,400 shares the prior year.
There were 2,104 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 2003 compared with 2,087 the prior year.
During 2003, The Corporation authorized and paid quarterly cash
dividends totaling 36 cents per share. The total cost of these dividends was
$1,554,000 or 27.6% of after tax profits. During 2002, the Corporation
authorized and paid quarterly cash dividends totaling 32 cents per share. The
total cost of these dividends was $1,218,000 or 22.6% of after tax profits. The
dividend policy of the Corporation is subject to the discretion of the Board of
Directors and depends upon a number of factors, including earnings, financial
condition, cash needs and general business conditions, as well as applicable
regulatory considerations. Subject to ongoing review of these circumstances, the
Board expects to maintain a reasonable, safe, and sound dividend payment policy.
The current source of dividends to be paid by the Corporation is the
dividends received from its banking subsidiaries. Accordingly, the laws and
regulations that govern the payment of dividends by national banking
associations and state chartered banks may restrict the Corporation's ability to
pay dividends. National banks may pay dividends only out of present and past
earnings and state banks may only pay out of current earnings without regulatory
approval. Both are subject to numerous limitations designed to ensure that the
Banks have adequate capital to operate safely and soundly (See Item 1.
Description of Business - Supervision and Regulation - Payment of Dividends). At
December 31, 2003 the Banks could pay up to $9,902,000 in dividends without
special approval of their regulators.
The information required by Item 201(d) of Regulation S-K is set forth
in Item 12 of this Form 10-K.
The Corporation did not purchase any shares of its common stock during
the fourth quarter of 2003.
11
Item 6. Selected Financial Data
The following is a summary of the consolidated financial position and
results of operations of the Corporation for the years ended December 31, 1999
through December 31, 2003.
Community Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except per share data)
Years Ended December 31,
------------------------
Five Year
Compound
2003 2002 (1) 2001 (2) 2000 1999 Growth Rate
---- -------- -------- ---- ---- -----------
INCOME STATEMENT DATA
Net interest income ...................... $ 16,708 $ 14,625 $ 10,940 $ 10,228 $ 8,430 19.82%
Provision for loan losses ................ 1,119 1,033 650 688 612 18.25%
Noninterest income ....................... 9,125 7,194 3,584 1,966 1,479 53.96%
Noninterest expense ...................... 15,932 12,465 7,810 6,552 6,066 25.55%
Net income ............................... 5,635 5,401 3,908 3,147 2,182 29.17%
PER COMMON SHARE (3)
Net income - basic ....................... $ 1.31 $ 1.42 $ 1.21 $ 0.99 $ 0.68 20.30%
Net income - diluted ..................... 1.27 1.38 1.20 0.98 0.68 20.02%
Cash dividends ........................... 0.36 0.32 0.28 0.22 0.19 19.14%
Book value ............................... 11.10 10.16 8.35 7.24 6.35 12.54%
BALANCE SHEET DATA (YEAR END)
Total assets ............................. $466,580 $437,320 $318,617 $273,323 $228,030 20.68%
Loans held for resale .................... 8,411 24,664 10,265 343 269 63.40%
Loans, net ............................... 327,900 302,911 237,340 192,996 155,422 22.88%
Deposits ................................. 378,704 337,062 255,433 218,811 184,364 20.73%
Shareholders' equity ..................... 48,070 43,717 27,547 23,139 20,245 19.58%(4)
FINANCIAL RATIOS
Return on average assets ................. 1.25% 1.43% 1.36% 1.26% 1.06%
Return on average equity ................. 12.17% 15.10% 15.58% 14.67% 11.12%
Net interest margin ...................... 3.95% 4.14% 4.00% 4.34% 4.37%
OPERATIONS DATA
Banks' branch offices .................... 8 8 4 4 4
Mortgage loan offices .................... 3 3 3 - -
Employees (full-time equivalent) ......... 190 175 126 84 85
(1) July, 2002 - Ridgeway Bancshares, Inc. acquired.
(2) November, 2001 - Community Resource Mortgage, Inc. acquired
(3) Per share amounts have been retroactively adjusted to reflect a five
percent stock dividend issued in 2000.
(4) Includes growth from proceeds of issuances of stock
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
INTRODUCTION
The discussion and data presented below analyze major factors and
trends regarding the financial condition and results of operations of Community
Bankshares Inc. and its subsidiaries for the three year period ended December
31, 2003. This information should be reviewed in conjunction with the
consolidated financial statements and related notes contained elsewhere in this
report.
Business of the Corporation
Community Bankshares Inc. is a bank holding company. CBI owns four
banking subsidiaries: Orangeburg National Bank, Sumter National Bank, Florence
National Bank, and the Bank of Ridgeway (acquired in July 2002), and a mortgage
company subsidiary, Community Resource Mortgage, Inc. (acquired in November
2001). CBI provides item and data processing and other technical services for
its subsidiaries. The consolidated financial report for 2003 represents the
operations of the holding company, its banks and the mortgage company on a
consolidated basis. Condensed parent-only financial statements are presented in
the notes to the consolidated financial statements.
Orangeburg National Bank is a national banking association and
commenced operations in November 1987. It operates two offices in Orangeburg,
South Carolina. Sumter National Bank is a national banking association and
commenced operations in June 1996. It operates two offices in Sumter, South
Carolina. Florence National Bank is a national banking association and commenced
operations in July 1998. It operates one office in Florence, South Carolina. The
Bank of Ridgeway is a state chartered bank and operates from three offices,
located in Ridgeway, Winnsboro and Blythewood, SC. The banks provide a variety
of commercial banking services in their respective communities. Their primary
customer markets are consumers and small to medium sized businesses.
Community Resource Mortgage, Inc. is a South Carolina corporation that
commenced business in 1996, and was acquired by the Corporation in 2001. It is a
mortgage brokerage company that provides a variety of one to four family
residential mortgage products, primarily for resale in the secondary market,
from offices in Columbia, Sumter and Anderson, South Carolina.
EARNINGS PERFORMANCE
2003 compared with 2002
Net income for 2003 was substantially influenced by four major factors:
o interest rates were stable at historically low levels which put pressure on
net interest margin but also resulted in extremely heavy volumes of initial
financing and refinancing of residential real estate loans (refinancing
activity diminished significantly in the fourth quarter) and continuing
"call" activity by issuers of investment securities;
o the Corporation recorded twelve months of operations for Bank of Ridgeway,
which was acquired in July of 2002;
o the Sumter bank opened an additional branch office; and
o there were significant increases in noninterest income and expenses,
primarily due to increased fee income in CRM and the recognition of the
results of operations of the Ridgeway bank for a full year in 2003 compared
with only half of a year in 2002.
For the year ended December 31, 2003, the Corporation recorded net
income of $5,635,000, an increase of $234,000, or 4.3%, over net income of
$5,401,000 for 2002. Net income per share for 2003 was $1.31 compared with $1.42
for 2002. Diluted net income per share was $1.27 for 2003 and $1.38 for 2002.
Return on average assets was 1.25% for 2003 compared with 1.43% for 2002. Return
on average shareholders' equity was 12.17% for 2003 compared with 15.10% for
2002. Per share income amounts were affected negatively in 2003 by the
anticipated dilutive effect of the inclusion for the entire year of the one
million shares issued to acquire the Ridgeway bank. Such shares impacted the
2002 calculation of average shares outstanding for only one-half of the year.
Similarly, the 2003 return statistics include the Ridgeway bank's average assets
and average equity amounts for the full year in 2003, but only one-half year of
such amounts were included in 2002.
Net interest income increased significantly for 2003 despite a 19 basis
point (one basis point equals one one-hundredth of one percent) decrease in the
net interest margin. Increased volumes of loans and significantly reduced rates
paid for interest bearing deposit liabilities offset, to a large extent, the
13
effects of a 70 basis point reduction in the earning assets yield. CBI's
short-term borrowings costs increased, however, due to the funding needs of CRM.
Average short-term borrowings for 2003 were $10,314,000 more than the average
amount for 2002 and the rate paid in 2003 was slightly higher than in 2002.
Interest expense related to this funding source increased by $272,000 in 2003.
The average rate paid for interest bearing deposits in 2003 decreased by 62
basis points from the 2002 rate and 2003 deposit interest expenses decreased by
$831,000 to $5,687,000.
2002 compared with 2001
In 2002, the Corporation's net income was enhanced by robust activity
in the CRM subsidiary and the inclusion of the operating results of the Ridgeway
bank for the last half of the year. Interest rates declined in the last half of
2001 and were at or near historic lows during 2002. This condition helped to
increase home mortgage loan originations and refinancing activities. The
Corporation's interest income increased slightly in 2002 from 2001. In 2002 the
Corporation earned $22,744,000 in total interest income, up from the prior
year's $21,201,000. This represented a $1,543,000 or 7.3% increase. This growth
was the result of increased volumes of earning assets, which more than offset
the reduction in yields.
For the year ended December 31, 2002, the Corporation recorded net
income of $5,401,000, an increase of $1,493,000, or 38.2%, over net income of
$3,908,000 for 2001. Net income per share for 2002 was $1.42 compared with $1.21
for 2001. Per share net income, assuming dilution for unexercised stock options
was $1.38 for 2002 and $1.20 for 2001. Return on average assets was 1.43% for
2002 compared with 1.36% for 2001. Return on average shareholders' equity was
15.10% for 2002 compared with 15.58% for 2001. Because the Ridgeway bank was
acquired in a purchase method transaction in July 2002, the 2002 statistics
include the Ridgeway bank's income, average assets and average equity amounts
for only one-half year.
Comprehensive Income
Comprehensive income for 2003, 2002 and 2001 was $5,595,000,
$5,506,000, and $4,032,000, respectively. Accounting principles generally
require that recognized revenue, expenses, gains and losses be included in net
income. Other elements of comprehensive income for the Corporation are
correlated directly to the effects that changing market rates of interest have
on the fair values of the Corporation's holdings of available-for-sale
securities. The resulting changes in unrealized holding gains and losses on such
securities are reported as a separate component of shareholders' equity. Those
changes in fair value, net of income tax effects, are the only elements of
comprehensive income.
Net Interest Income
Net interest income, the difference between interest income earned and
interest expense incurred, is the principal source of the Corporation's
earnings. Net interest income is affected by changes in the levels of interest
rates and by changes in the volume and mix of interest earning assets and
interest bearing liabilities. During 2003 and 2002, market interest rates were
generally stable. In 2001, however, market interest rates fell sharply
throughout the year. During the three year period ended December 31, 2003, the
Federal Reserve Board sought to provide stimulus to the U.S. economy by
attaining and, then, maintaining interest rates at low levels. The effects of
these actions on the Corporation were varied. The Corporation's overall funding
costs decreased during the period, but there were similar decreases in the
yields realized on loans and investments. The mortgage subsidiary was inundated
with extremely large volumes of originations and refinancing activity, which
strained its ability both to fund and to process those transactions until the
volume diminished in the fourth quarter of 2003.
Net interest income was $16,708,000, $14,625,000, and $10,940,000 for
2003, 2002, and 2001, respectively. The amounts of interest income increased in
each of the past two years, and interest expense amounts decreased. Average
earning assets and average interest bearing liabilities amounts increased
steadily over those two years, also. However, a large percentage of the increase
is attributable to the Ridgeway bank acquisition. Similarly, because the
acquisition of CRM was effected in November of 2001, interest income for 2002
and 2003 include full year results from that company, while 2001 reflects its
operations for only two months.
The following table presents the average balance sheets, the average
yield and the interest earned on earning assets, and the average rate and the
interest expense on interest bearing liabilities for the years ended December
31, 2003, 2002, and 2001.
14
Average Balances, Yields and Rates
Years Ended December 31,
-----------------------------------------------------------------------------------
2003 2002 2001
---------------------------- -------------------------- --------------------------
Interest Interest Interest
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates Balances Expense Rates
-------- ------- ----- ---------------- ----- -------- ------- -----
(Dollars in thousands)
Assets
Interest earning deposits .................. $ 990 $ 19 1.92% $ 1,229 $ 36 2.93% $ 4,044 $ 161 3.98%
Investment securities - taxable ............ 45,488 1,414 3.11% 43,980 1,970 4.48% 37,751 2,167 5.74%
Investment securities - tax exempt (1) ..... 9,174 322 3.51% 4,888 217 4.44% 766 29 3.79%
Federal funds sold ......................... 26,582 279 1.05% 21,364 347 1.62% 19,095 734 3.84%
Loans, including loans held-for-sale (2) ... 340,518 22,234 6.53% 281,907 20,174 7.16% 211,901 18,110 8.55%
-------- -------- -------- ------- --------- -------
Total interest earning assets .... 422,752 24,268 5.74% 353,368 22,744 6.44% 273,557 21,201 7.75%
Cash and due from banks .................... 14,452 14,222 9,305
Allowance for loan losses .................. (3,861) (3,201) (2,655)
Premises and equipment ..................... 6,996 6,011 4,614
Intangible assets .......................... 7,772 4,360 149
Other assets ............................... 3,400 3,350 3,036
-------- -------- --------
Total assets ..................... $451,511 $378,110 $288,006
======== ======== ========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts $ 44,481 $ 193 0.43% $ 41,101 $ 285 0.69% $ 26,917 $ 264 0.98%
Savings .............................. 70,552 766 1.09% 55,790 905 1.62% 38,194 1,117 2.92%
Time deposits ........................ 186,502 4,728 2.54% 162,512 5,328 3.28% 136,938 7,494 5.47%
-------- -------- -------- ------- --------- -------
Total interest bearing deposits .. 301,535 5,687 1.89% 259,403 6,518 2.51% 202,049 8,875 4.39%
Short-term borrowings ...................... 29,026 750 2.58% 18,712 478 2.55% 7,533 237 3.15%
Long-term debt ............................. 20,395 1,123 5.51% 20,254 1,123 5.54% 19,899 1,149 5.77%
-------- -------- -------- ------- --------- -------
Total interest bearing liabilities 350,956 7,560 2.15% 298,369 8,119 2.72% 229,481 10,261 4.47%
Noninterest bearing demand deposits ........ 52,047 41,198 31,643
Other liabilities .......................... 2,217 2,783 1,799
Shareholders' equity ....................... 46,291 35,760 25,083
-------- -------- --------
Total liabilities and shareholders' equity . $451,511 $378,110 $288,006
======== ======== ========
Interest rate spread (3) ................... 3.59% 3.72% 3.28%
Net interest income and net yield
on earning assets (4) ................ $ 16,708 3.95% $ 14,625 4.14% $10,940 4.00%
(1) Interest income on tax-exempt investment securities has not been calculated
on a tax-equivalent basis.
(2) Nonaccruing loans are included in the average balances and income from such
loans is recognized on a cash basis.
(3) Total interest earning assets yield less total interest bearing liabilities
rate.
(4) Net yield equals net interest income divided by total interest earning
assets.
15
As shown in the table above, loan and other earning assets volumes are
increasing significantly faster than are deposit liabilities volumes. Further,
loans, the highest yielding category of earning assets, grew as a percentage of
total average earning assets from 77.5% in 2001 to 79.8% in 2002 and to 80.5% in
2003. Average loans in 2003 were $340,518,000, an increase of $128,617,000, or
60.7%, over the 2001 average amount. Average earning assets in 2003 were
$422,752,000, an increase of $149,195,000, or 54.5%, over the 2001 average
amount. Average deposits for 2003, however, increased by only $119,890,000, or
51.3%, over the 2001 amount. The Corporation and its subsidiaries increasingly
have made use of short-term borrowed funds in 2002 and 2003 to meet their
funding needs. The funding needs of the mortgage banking subsidiary are
particularly vulnerable to rapid fluctuations, and it is the primary cause of
the increases in short-term borrowings shown in the table. It is notable,
however that the amount of short-term borrowings as of the years ended December
31, 2003 and 2002 were $17,960,000 and $34,551,000, respectively, indicating
that, at the end of 2003, the Corporation's short-term borrowing needs were
significantly reduced, primarily due to lower amounts of loans recently
originated by the mortgage subsidiary.
Time deposits make up the majority of the Corporation's deposit
liabilities. Interest rates paid for such liabilities have decreased
dramatically over the last two years. Accordingly, total interest expense
decreased from $10,261,000 in 2001 to $8,119,000 in 2002 and to $7,560,000 in
2003. The average rates paid for time deposits declined from 5.47% in 2001 to
2.54% in 2003.
During the first quarter of 2004, the Corporation began to reduce its
dependence on short-term external funding sources by obtaining longer-term
financing in the form of trust preferred securities of $9,815,000. These funds
will be deployed to the subsidiaries in various amounts to fund their
operations. Even though the trust preferred securities have a variable interest
rate (3 month LIBOR plus 2.80% for five years), the acquisition of these funds
is expected to reduce somewhat the variability of interest rates associated with
the Corporation's cost of funds. The cost of funds is not expected to increase
significantly due to this transaction, however, since longer-term financing is
currently available at attractive rates.
The table "Volume and Rate Variance Analysis" provides a summary of
changes in net interest income resulting from changes in volume and changes in
rate. The changes in volume are the difference between the current and prior
year's balances multiplied by the prior year's rate. The changes in rate are the
difference between the current and prior year's rate multiplied by the prior
year's balance.
As reflected in the table, the increases in net interest income during
each of the past two years primarily are due to higher volumes of earning assets
coupled with reductions in the rates paid on deposit liabilities. Loan growth
has been especially valuable in leading to increases in interest income.
Similarly, the lower rates paid on deposits have been instrumental in offsetting
the effects of larger volumes of short-term borrowings.
16
Volume and Rate Variance Analysis
2003 compared with 2002 2002 compared with 2001
----------------------- -----------------------
Volume * Rate * Total Volume * Rate * Total
-------- ------ ----- -------- ------ -----
(Dollars in thousands)
Interest earning assets
Interest earning deposits .................................. $ (6) $ (11) $ (17) $ (90) $ (35) $ (125)
Investment securities - taxable ............................ 66 (622) (556) 324 (521) (197)
Investment securities - tax exempt ......................... 158 (53) 105 182 6 188
Federal funds sold ......................................... 73 (141) (68) 78 (465) (387)
Loans ...................................................... 3,936 (1,876) 2,060 5,331 (3,267) 2,064
------- ------- ------- ------- ------- -------
Interest income ............................. 4,227 (2,703) 1,524 5,825 (4,282) 1,543
------- ------- ------- ------- ------- -------
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts .............. 22 (114) (92) 113 (92) 21
Savings ............................................ 204 (343) (139) 398 (610) (212)
Time deposits ...................................... 716 (1,316) (600) 1,221 (3,387) (2,166)
------- ------- ------- ------- ------- -------
Total interest bearing deposits ............. 942 (1,773) (831) 1,732 (4,089) (2,357)
Short-term borrowings ...................................... 266 6 272 293 (52) 241
Long-term debt ............................................. 8 (8) - 20 (46) (26)
------- ------- ------- ------- ------- -------
Total interest expense ...................... 1,216 (1,775) (559) 2,045 (4,187) (2,142)
------- ------- ------- ------- ------- -------
Net interest income ......................... $ 3,011 $ (928) $ 2,083 $ 3,780 $ (95) $ 3,685
======= ======= ======= ======= ======= =======
- -------
* The change in interest due to both volume and rate has been allocated to
change due to volume and change due to rate in proportion to the absolute value
of the change in each.
Management currently expects that interest rates may move slightly
higher in 2004. Management has not presently identified any factors that it
believes might cause interest rates to increase sharply in a short period of
time. However, changes in interest rates that can significantly affect the
Corporation, either positively or negatively, are possible. In the absence of
significant changes in market interest rate levels, any significant changes in
net interest income during 2004 are expected to result from changes in the
volumes of interest earning assets and liabilities. Management expects to
continue using its marketing strategies to increase the Corporation's market
share of both deposits and quality loans within its market areas. These
strategies involve offering attractive interest rates and outstanding customer
service.
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and its
estimate of the related allowance for loan losses. Provisions for loan losses
totaled $1,119,000, $1,033,000 and $650,000 for the years ended December 31,
2003, 2002 and 2001, respectively. The significant increase in the 2002
provision was related to a very small number of commercial loan relationships
and was not believed to be indicative of a general trend in the loan portfolio.
See "Impaired Loans," "Potential Problem Loans," "Allowance for Loan Losses,"
and "The Application of Critical Accounting Policies" for further information
and a discussion of the methodology used and the factors considered by
management in its estimate of the allowance for loan losses.
Noninterest Income
Noninterest income for 2003 increased by $1,931,000 or 26.8% over 2002.
Service charges on deposit accounts increased by $589,000 or 21.3% due primarily
to increased service charges assessed on pre-arranged overdraft protection
services. Also, mortgage brokerage income, primarily fees associated with the
origination of mortgage loans for home purchases and refinancing of existing
loans, was $5,198,000 in 2003, an increase of $1,543,000 or 42.2% over the 2002
amount. The mortgage brokerage subsidiary and Banks generally obtain take-out
commitments for mortgage loans originated for resale at the same time that they
issue commitments to make loans. Accordingly, no gains or losses on the sales of
such loans are recognized.
17
Noninterest income for 2002 increased by $3,610,000 or 100.7% over the
2001 amount. Mortgage brokerage income for 2002 was $2,622,000 more than in
2001, as the mortgage banking subsidiary's operations were included for the full
twelve months of 2002, but for only 2 months in 2001. In addition, the
pre-arranged overdraft protection service was first offered in the second
quarter of 2001. Therefore, the 2002 results reflect the first full-year affect
of this product.
Noninterest Expenses
Noninterest expenses for 2003 increased by $3,467,000 or 27.8% over the
2002 amount. Salaries and employee benefits expenses increased by $1,845,000 due
primarily to the opening, in February 2003, of a new branch office of the Sumter
bank and the commission-driven compensation system employed by the mortgage
brokerage subsidiary. Expenses for premises and equipment increased by $360,000
or 24.9% due primarily to the opening of the branch office, higher expenses
associated with the rental of office space for the mortgage brokerage
subsidiary's operations, and the acquisition and implementation of imaging
equipment and software for customer statement rendering and other purposes.
Also, other expenses increased by $981,000. Approximately 40% of this increase
was directly attributable to twelve months of operation of the Ridgeway bank
compared with only six months during 2002. The remaining increases were normal
increases associated with the operation of the other banks, the mortgage
brokerage subsidiary and the holding company.
Noninterest expenses increased by $4,655,000 or 59.6% in 2002,
primarily reflecting the first full year effect of the operations of the
mortgage brokerage subsidiary and one-half year operations of the Ridgeway bank.
The remaining increases were due to normal growth in the business of the other
Banks.
Income Taxes
Income tax expense for 2003 was $3,147,000, an increase of $227,000 or
7.8% over the 2002 amount. Income tax expense for 2002 was $764,000 or 35.4%
higher than in 2001. The effective income tax rate (income tax expense divided
by income before income taxes) was 35.8%, 35.1% and 35.6% for 2003, 2002 and
2001, respectively.
INVESTMENT PORTFOLIO
The Corporation's investment portfolio consists primarily of short-term
U.S. Treasury and U.S. Government agency debt issues. The acquisition of the
Ridgeway bank in 2002 significantly increased the Corporation's tax exempt
portfolio. Investment securities averaged $54,662,000 in 2003, $48,868,000 in
2002, and $38,517,000 in 2001.
The table below summarizes the amortized cost and fair value of the
Corporation's investment portfolio for the past three years.
Securities Portfolio Composition
December 31,
------------
2003 2002 2001
---- ---- ----
Amortized Estimated Amortized Estimated Amortized Estimated
cost Fair value cost Fair value cost Fair value
---- ---------- ---- ---------- ---- ----------
(Dollars in thousands)
Securities available-for sale
U.S. Treasury and U.S.
Government agencies ......................... $56,633 $56,477 $41,488 $41,531 $40,437 $40,415
States and political subdivisions .............. 8,140 8,387 9,514 9,625 801 811
------- ------- ------- ------- ------- -------
Total available-for-sale ...................... $64,773 $64,864 $51,002 $51,156 $41,238 $41,226
======= ======= ======= ======= ======= =======
Securities held-to-maturity
States and political subdivisions .............. $ 2,000 $ 2,155 $ - $ - $ 500 $ 500
------- ------- ------- ------- ------- -------
Total held-to-maturity ........................ $ 2,000 $ 2,155 $ - $ - $ 500 $ 500
======= ======= ======= ======= ======= =======
18
The following is a summary of maturities and weighted average yields of
securities as of December 31, 2003:
Securities Portfolio Maturities and Yields
December 31, 2003
---------------------------------------------------------------------------------------
After After
One Year Five Years
Within Through Through After
One Year Five Years Ten Years Ten Years Total
-------- ---------- --------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Treasuries .......................... $ 2,243 0.96% $ - 0.00% $ - 0.00% $ - 0.00% $ 2,243 0.96%
U.S. Government agencies ................. - 0.00% 33,418 2.92% 17,575 3.24% 963 4.05% 51,956 3.05%
States and political ..................... 790 3.44% 3,905 3.46% 5,692 3.70% - 0.00% 10,387 3.59%
subdivisions (1)
Mortgage-backed securities(2) ............ - 0.00% 2,261 5.63% - 0.00% 17 5.41% 2,278 5.63%
------- ------- ------- ------- -------
Total ............................... $ 3,033 1.61% $39,584 3.13% $23,267 3.35% $ 980 4.07% $66,864 3.15%
======= ======= ======= ======= =======
(1) Yields on tax-exempt securities of states and political subdivisions have
not been calculated on a tax-equivalent basis.
(2) Maturity category based upon final stated maturity dates. Average maturity
is expected to be substantially shorter because of the monthly return of
principal on certain securities.
On an ongoing basis, management assigns securities upon purchase into
one of three categories (trading, available-for-sale or held-to-maturity) based
on intent, taking into consideration other factors including expectations for
changes in market rates of interest, liquidity needs, asset/liability management
strategies, and capital requirements. The Corporation has never held securities
for trading purposes. No transfers of available-for-sale or held-to-maturity
securities to other categories were effected in any of the years 2001 through
2003.
During 2003, management altered the composition of the securities
portfolio, primarily by purchasing U.S. Government agencies securities with
slightly longer maturities. Because the rates earned on short-term U.S.
Government agencies securities were, and continue to be, at historically low
levels, management intentionally lengthened the maturities of its recent
purchases in order to capture the additional yield that is available for longer
maturity instruments. Consequently, the Corporation increased the amount of its
securities maturing in the over five years to ten years category to $23,267,000,
or 34.8% of the total investment portfolio, as of December 31, 2003 from
$10,455,000, or 19.7% of the portfolio, as of December 31, 2002. The average
life of the securities portfolio was 4.84 years as of December 31, 2003,
compared with 4.08 years one year earlier. Although this strategy involves the
acceptance of a slightly higher level of interest rate risk (including the risk
that the Corporation might find itself with significant amounts of securities
with large unrealized losses), management does not believe that the current
level of risk is unacceptably high. Management will continue to monitor the
investment portfolio, however, and is prepared to take prudent actions to
mitigate the negative effects of future interest rate increases.
During the years ended December 31, 2003, 2002 and 2001, the
Corporation sold investment securities of $2,068,000, $20,543,000 and
$7,074,000, respectively. Realized gains and (losses) on those transactions were
($252,000), $119,000, and $31,000, for the years ended December 31, 2003, 2002
and 2001, respectively. Securities may be sold to provide liquidity, to reduce
interest rate risk, or for other reasons.
All mortgage-backed securities held by the Corporation were issued by
the Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association or the Government National Mortgage Association.
LOAN PORTFOLIO
Management believes the loan portfolio is adequately diversified. There
are no significant concentrations of loans in any particular individual,
industry or groups of related individuals or industries, and there are no
foreign loans.
19
The following table shows the composition of the loan portfolio by
category:
Loan Portfolio Composition
December 31,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Commercial, financial and agricultural ............. $ 84,844 $ 78,210 $ 56,515 $ 52,264 $ 40,220
Real estate - construction ......................... 23,590 23,345 19,557 15,389 9,156
Real estate - mortgage ............................. 188,530 168,499 127,002 98,154 84,680
Loans to individuals ............................... 35,142 36,430 26,831 29,270 23,033
-------- -------- -------- -------- --------
Total loans - gross .......................... $332,106 $306,484 $229,905 $195,077 $157,089
======== ======== ======== ======== ========
Risk taking is inherent in the granting of credit. To control the
amounts and types of risks incurred, and to minimize losses, management has
established loan policies and practices. Such policies and practices include
limitations on loan-to-collateral values for various types of collateral,
requirements for appraisals of real estate collateral, problem loan management
practices, collection procedures, and nonaccrual and charge-off guidelines.
Management also has provided a program for the independent review of all
significant credits on an ongoing basis.
Commercial, financial, and agricultural loans, primarily representing
loans made to small and medium size businesses, may be made on either a secured
or an unsecured basis. When taken, security usually consists of liens on
inventories, receivables, equipment, and furniture and fixtures. Unsecured
business loans are generally short-term with emphasis on repayment strengths and
low debt-to-worth ratios. Commercial lending involves significant risk because
repayment usually depends on the cash flows generated by a borrower's business,
and debt service capacity can deteriorate because of downturns in national and
local economic conditions. Management generally controls risks by conducting
more in-depth and ongoing financial analysis of a borrower's cash flows and
other financial information. Each of the banking subsidiaries has a Loan
Committee which is responsible for overseeing the credit granting and monitoring
processes.
Real estate loans consist of construction loans and other loans secured
by mortgages. Because the Corporation's subsidiaries are community banks, real
estate loans comprise the bulk of the loan portfolio. Loan-to-value ratios for
real estate loans generally are limited to 80%.
The Banks generally do not compete with 15 and 30 year fixed rate
secondary market mortgage interest rates, so they have elected to pursue the
origination of mortgage loans that could easily be sold into the secondary
mortgage market. CRM also originates such loans for sale in the secondary
market. These loans are generally pre-qualified with various underwriters so
that problems in the sale of the loans are minimized. In 2003, 2002 and 2001,
the Corporation sold $309,914,000, $176,011,000, and $34,915,000, respectively,
of such loans. These loans are usually sold at par so no gain or loss is
recognized at the time of sale. However, the origination and sale of these loans
generates fee income. The Corporation's subsidiaries may originate mortgage
loans for their own loan portfolios. Such loans are usually for a shorter term
than loans originated to sell and usually have a variable, rather than a fixed,
interest rate.
Loans to individuals are generally for personal, automobile, or
household purposes and may be secured or unsecured.
The Corporation has a geographic concentration of loans within the
Banks' market areas because of the nature of its business. As of December 31,
2003, the Corporation had no other significant concentrations of credit to
customers engaged in similar business activities.
20
Unsecured Loans
The Corporation does not aggressively seek to make unsecured loans,
since these loans may be somewhat more risky than collateralized loans. There
are, however, occasions when it is in the business interests of the Corporation
to provide short-term, unsecured loans to certain customers. At December 31,
2003, the Corporation had approximately $25,400,000, or 7.6% of its loan
portfolio, in unsecured loans. As of December 31, 2002, the Corporation had
approximately $20,200,000 in unsecured loans, or 6.6% of its loan portfolio.
Such loans are made on the basis of management's evaluation of the customer's
ability to repay and net worth.
Maturity and Interest Sensitivity Distribution of Loans
The following table sets forth the maturity distribution of the
Corporation's loans, by type, as of December 31, 2003 as well as the type of
interest requirement on loans due after one year.
December 31, 2003
---------------------------------------------------------
After one year
Within one but within five After five
year years years Total
---- ----- ----- -----
(Dollars in thousands)
Commercial, financial and agricultural ............................. $ 45,142 $ 36,012 $ 3,690 $ 84,844
Real estate ........................................................ 51,344 109,063 51,713 212,120
Loans to individuals ............................................... 10,477 23,215 1,450 35,142
-------- -------- -------- --------
Total .............................................................. $106,963 $168,290 $ 56,853 $332,106
======== ======== ======== ========
Predetermined rate, maturity greater than one year ................. $ - $116,753 $ 32,508 $149,261
Variable rate or maturity within one year .......................... 106,963 51,537 24,345 182,845
Impaired Loans
Impaired loans are those loans on which, based on current information
and events, it is probable that the Corporation will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Loans
which management has identified as impaired generally are nonaccrual loans. The
Corporation had no restructured loans in the past five years. Following is a
summary of the Corporation's nonaccrual and other nonperforming loans:
Nonaccrual and Past Due Loans
December 31,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans ........................................ $2,595 $ 796 $ 281 $ 238 $ 90
Accruing loans 90 days or more past due ................. 146 1,740 17 93 6
------ ------ ------ ------ ------
Total .............................................. $2,741 $2,536 $ 298 $ 331 $ 96
====== ====== ====== ====== ======
Total as a % of outstanding loans .................. 0.83% 0.83% 0.13% 0.17% 0.06%
Other real estate ....................................... $ 327 $ 219 $ 267 $ - $ -
Impaired loans (included in nonaccrual) ................. $2,595 $ 796 $ 281 $ 238 $ 90
As of December 31, 2003, approximately $1,350,000, or 52%, of the
Corporation's nonaccrual loans consisted of one loan relationship. That
company's principals have been involved in a legal dispute among themselves.
During the first quarter of 2004, the Corporation collected all amounts due
under this credit.
Gross income that would have been recorded for the years ended December
31, 2003, 2002 and 2001, if nonaccrual loans had been performing in accordance
with their original terms was approximately $117,000, $39,000 and $7,000,
21
respectively. No cash basis interest income was recognized in 2003, 2002 and
2001 on non-accrual loans.
The Corporation's accounting policies on nonaccrual and impaired loans
are discussed in Note 2 to the consolidated financial statements.
Nonaccrual loans and impaired loans were not material in relation to
the portfolio as a whole in 2003. Management is aware of no trends, events or
uncertainties that would cause a material adverse change in nonaccrual loans in
2004.
Potential Problem Loans
At December 31, 2003 the Corporation's internal loan review program had
identified $3,237,000 (1.0% of the portfolio) in various loans, not including
loans identified as nonaccrual or 90 days past due and still accruing loans
shown above, where information about credit problems of borrowers had caused
management to have doubts about the ability of the borrowers to comply with
original repayment terms. The amount identified does not represent management's
estimate of the potential losses since a large portion of these loans are
secured by real estate and other collateral.
Other Real Estate
Other real estate, consisting of foreclosed properties, was $327,000,
$219,000, and $267,000 as of December 31, 2003, 2002 and 2001, respectively.
Other real estate is initially recorded at the lower of net loan balance or the
property's estimated fair value, net of estimated disposal costs. The estimate
of fair value for other real estate is determined by appraisal at the time of
acquisition.
22
ALLOWANCE FOR LOAN LOSSES
The table, "Analysis of the Allowance for Loan Losses," summarizes loan
balances as of the end of each period indicated, averages for each period,
changes in the allowance arising from mergers, charge-offs and recoveries by
loan category, and additions to the allowance which have been charged to
expense.
The allowance for loan losses is increased by the provision for loan
losses, which is a direct charge to expense. Losses on specific loans are
charged against the allowance in the period in which management determines that
such loans become uncollectible. Recoveries of previously charged-off loans are
credited to the allowance. See "The Application of Critical Accounting Policies
- - Provision and Allowance for Loan Losses."
Analysis of the Allowance for Loan Losses
Years Ended December 31,
------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Total amount of loans outstanding at end of year ........ $332,106 $306,484 $229,905 $195,077 $157,089
======== ======== ======== ======== ========
Average amount of loans outstanding ..................... $340,518 $281,907 $211,901 $179,654 $139,215
======== ======== ======== ======== ========
Allowance for loan losses - January 1 ................... $ 3,573 $ 2,830 $ 2,424 $ 1,936 $ 1,459
-------- -------- -------- -------- --------
Changes incident to merger activities ................... - 444 28 - -
-------- -------- -------- -------- --------
Loans charged-off
Real estate ............................................. 250 175 9 78 -
Installment ............................................. 247 223 202 116 95
Credit cards and related plans .......................... - - 9 9 5
Commercial and other .................................... 163 374 87 33 80
-------- -------- -------- -------- --------
Total charge-offs ....................................... 660 772 307 236 180
-------- -------- -------- -------- --------
Recoveries
Real Estate ............................................. 105 1 - 3 -
Installment ............................................. 58 20 33 25 17
Credit cards and related plans .......................... - - 2 2 3
Commercial .............................................. 11 17 - 6 25
-------- -------- -------- -------- --------
Total recoveries ........................................ 174 38 35 36 45
-------- -------- -------- -------- --------
Net charge-offs ......................................... 486 734 272 200 135
-------- -------- -------- -------- --------
Provision for loan losses charged to expense ............ 1,119 1,033 650 688 612
-------- -------- -------- -------- --------
Allowance for loan losses - December 31 ................. $ 4,206 $ 3,573 $ 2,830 $ 2,424 $ 1,936
======== ======== ======== ======== ========
Ratios
Net charge-offs to average loans outstanding ............ 0.14% 0.26% 0.13% 0.11% 0.10%
Net charge-offs to loans outstanding at end of .......... 0.15% 0.24% 0.12% 0.10% 0.09%
year
Allowance for loan losses to average loans .............. 1.24% 1.27% 1.34% 1.35% 1.39%
Allowance for loan losses to total loans at end ......... 1.27% 1.17% 1.23% 1.24% 1.23%
of year
Net charge-offs to allowance for losses ................. 11.55% 20.54% 9.61% 8.25% 6.97%
Net charge-offs to provision for loans losses ........... 43.43% 71.06% 41.85% 29.07% 22.06%
The Corporation operates four independent community banks in South
Carolina. Under the provisions of law and regulations governing banks, each
bank's board of directors is responsible for determining the adequacy of its
bank's loan loss allowance. In addition, each bank is supervised and regularly
examined by the Office of the Comptroller of the Currency (the "OCC") (or the
South Carolina State Board of Financial Institutions (the "State Board") in the
23
case of the Ridgeway bank) or the Federal Deposit Insurance Corporation (the
"FDIC"). As a normal part of a safety and soundness examination, bank examiners
assess and comment on the adequacy of a bank's allowance for loan losses and may
require that changes be made in the allowance. The allowance presented in the
consolidated financial statements is on an aggregated basis and as such might
differ from the allowance that would be presented if the Corporation had only
one banking subsidiary.
The nature of community banking is such that the individual loan
portfolios are predominantly composed of small and medium size business and
individual loans. As community banks, there exists, by definition, a geographic
concentration of loans within each Bank's respective city or county. Management
at each bank monitors the loan concentrations and loan portfolio quality on an
ongoing basis including, but not limited to: quarterly analysis of loan
concentrations, monthly reporting of past dues, nonaccruals, and watch loans,
and quarterly reporting of loan charge-offs and recoveries. These efforts focus
on historical experience and are bolstered by quarterly analysis of local and
state economic conditions, which are part of the Banks' assessment of the
adequacy of their allowances for loan losses.
DEPOSITS
The average deposits for the Corporation for the years ended December
31, 2003, 2002 and 2001 are summarized below:
Average Deposits
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Average Average Average Average Average Average
balance cost balance cost Balance cost
------- ---- ------- ---- ------- ----
(Dollars in thousands)
Noninterest bearing demand ..................... $ 52,047 - $ 41,198 - $ 31,643 -
Interest bearing transaction accounts .......... 44,481 0.43% 41,101 0.69% 26,917 0.98%
Savings-regular ................................ 20,998 0.53% 14,469 1.01% 8,705 1.60%
Savings - money market ......................... 49,554 1.32% 41,321 1.85% 29,489 3.37%
Time deposits less than $100,000 ............... 122,488 2.58% 104,509 3.30% 92,515 5.45%
Time deposits of $100,000 or more .............. 64,014 2.45% 58,003 3.28% 44,423 5.50%
-------- ----- -------- ----- -------- ----
Total average deposits ......................... $353,582 $300,601 233,692
======== ======== =======
Deposits are the primary source of funds for the Banks' lending and
investing activities. Deposits are attracted principally from customers within
the Banks' local market areas through the offering of a variety of products with
varying features and by offering competitive interest rates.
At December 31, 2003 the Corporation had $68,388,000 in certificates of
deposit of $100,000 or more. Approximately $21,380,000 mature within three
months, $14,905,000 mature over three through six months, $21,976,000 mature
over six months through twelve months and $10,127,000 mature after one year.
This level of large time deposits, as well as the growth in other deposits, can
be attributed to planned growth by management. The majority of time deposits
$100,000 and over is acquired within the Company's market areas in the ordinary
course of business from customers with standing banking relationships. It is a
common industry practice not to consider time deposits of $100,000 or more as
core deposits since their retention can be influenced heavily by rates offered.
Therefore, such deposits have the characteristics of shorter-term purchased
funds. Certificates of deposit $100,000 and over require that the Corporation
achieve and maintain an appropriate matching of maturity distributions and a
diversification of sources to achieve an appropriate level of liquidity. The
Corporation generally does not purchase brokered deposits.
SHORT-TERM BORROWINGS
The Corporation's short-term borrowings may consist of federal funds
purchased and securities sold under agreements to repurchase, which generally
have maturities ranging from daily to no more than ninety days, and warehouse
and general purpose lines of credit payable. As of December 31, 2003, securities
sold under agreements to repurchase totaled $8,090,000. These amounts are
24
secured by pledges of investment securities and the interest rate is subject to
change daily. Warehouse lines of credit payable are used to fund loan production
for CRM. General purpose lines of credit are used, when needed, to fund any
operating needs of the Corporation and CRM.
At December 31, 2003, balances due under the warehouse lines of credit
totaled $7,743,000 and there was additional availability under those lines
totaling $32,257,000. Of the amount outstanding under the warehouse lines,
$6,749,000 was borrowed at the one month LIBOR rate plus 1.95% and $994,000
bears interest at the one month LIBOR rate plus an additional 2.25% to 5.25%
based upon the number of days that each underlying loan is outstanding. The
warehouse lines are secured by substantially all of CRM's loans held-for-sale
and are guaranteed by the Corporation.
The mortgage subsidiary has a $3,000,000 unsecured line of credit with
an unaffiliated lender which was used to support loans that it is currently
servicing. These are loans that CRM intends to sell during 2004. As of December
31, 2003, the mortgage subsidiary had borrowed $1,492,000 under this line. This
line of credit is guaranteed by the Corporation and interest accrues at the
prime rate. The Corporation has arranged for a $700,000 unsecured line of credit
with an unaffiliated lender which was used to purchase imaging technology. As of
December 31, 2003, $635,000 was outstanding under this line, with interest at
the prime rate. Summary information about total short-term debt is provided in
the following table.
December 31,
------------
2003 2002
---- ----
(Dollars in thousands)
Outstanding at year-end .............................. $17,960 $34,551
Interest rate at year-end ............................ 2.38% 3.93%
Interest expense ..................................... $ 750 $ 478
Maximum month-end balance during the year ............ $39,379 $40,474
Average amount outstanding during the year ........... $29,026 $18,712
Weighted average interest rate during the year ....... 2.58% 2.55%
LONG-TERM DEBT
The Corporation's banking subsidiaries are members of the Federal Home
Loan Bank of Atlanta ("FHLB"). As such they have access to long-term borrowing
from the FHLB. As of December 31, 2003, the Banks had borrowed a total of
$20,140,000 from the FHLB. The borrowings are secured by blanket liens on all
qualifying first lien residential mortgage loans held by the Banks, specifically
excluding such loans originated for resale on the secondary market.
RETURN ON EQUITY AND ASSETS
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2003, 2002 and 2001.
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Return on assets (ROA) .................. 1.25% 1.43% 1.36%
Return on equity (ROE) .................. 12.17% 15.10% 15.58%
Dividend payout ratio ................... 27.48% 22.54% 23.14%
Equity as a percent of assets ........... 10.25% 9.46% 8.71%
The decline in return on equity in 2003 is related to the issuance in
July 2002 of one million shares of CBI common stock in connection with the
acquisition of Ridgeway Bancshares, Inc. which were outstanding for all of 2003
but for only half of 2002.
25
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in a timely and economical