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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, 2004 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, 2004 was approximately $59,459,000.
As of March 09, 2005, there were 4,390,784 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 ..................................................................... 11
Item 4 Submission of Matters to a Vote of Security Holders ................................... 11
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities .............................................. 12
Item 6 Selected Financial Data ............................................................... 13
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................... 14
Item 7A Quantitative and Qualitative Disclosures about Market Risk ............................ 32
Item 8 Financial Statements and Supplementary Data ........................................... 36
Report of Independent Registered Public Accounting Firm ............................... 37
Consolidated Balance Sheets, December 31, 2004 and 2003 ............................... 38
Consolidated Statements of Income,
Years Ended December 31, 2004, 2003 and 2002 ....................................... 39
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 2004, 2003 and 2002 ....................................... 40
Consolidated Statements of Cash Flows,
Years Ended December 31, 2004, 2003 and 2002 ....................................... 41
Notes to Consolidated Financial Statements ............................................ 42
Quarterly Data for 2004 and 2003 ...................................................... 68
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ............................................. 69
Item 9A Controls and Procedures ............................................................... 69
Item 9B Other Information ..................................................................... 69
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 ................................................ *
Part IV
Item 15 Exhibits and Financial Statement Schedules ............................................ 71
* Incorporated by reference to Registrant's Proxy Statement for the 2005 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.
References to our Website Address
References to our website address throughout this Annual Report on Form
10-K and in any documents incorporated into this Form 10-K by reference are for
informational purposes only, or to fulfill specific disclosure requirements of
the Securities and Exchange Commission's rules or the American Stock Exchange
listing standards. These references are not intended to, and do not, incorporate
the contents of our website by reference into this Form 10-K or the accompanying
materials.
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 two offices located in Florence, South
Carolina. A second office was opened in early 2005.
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).
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Business of banking
The Orangeburg, Sumter, Florence and Ridgeway banks (hereafter referred
to as the Banks) offer a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. The Federal Deposit Insurance Corporation
insures deposits up to applicable limits. Most of the Banks' deposits are
attracted from individuals and small businesses.
The Banks offer secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial and consumer
purposes. Consumer loans include car loans, home equity improvement loans
secured by first and second mortgages, personal expenditure loans, education
loans, and the like. Commercial loans include short-term unsecured loans, short
and intermediate term real estate mortgage loans, loans secured by listed
stocks, loans secured by equipment, inventory, accounts receivable, and the
like. The Banks do not and will not discriminate against any applicant for
credit on the basis of race, color, creed, sex, age, marital status, familial
status, handicap, or derivation of income from public assistance programs.
Other services offered by the Banks include safe deposit boxes, night
depository service, VISA and Master Card 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, 2004,
there were five FDIC insured financial institutions competing with the
Corporation in the city of Orangeburg, eight financial institutions competing
with the Corporation in Sumter County, and 15 financial institutions competing
with the Corporation in the city of Florence. At June 30, 2004, 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 sixth largest deposit base in the city of Florence; and the Ridgeway bank
had the largest deposit base in Fairfield County and approximately half the
deposits in the town of Blythewood.
The mortgage company has offices in Anderson, Richland and Sumter
Counties of South Carolina, where it competes with hundreds of financial
institutions and mortgage originators.
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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
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. 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
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company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of stockholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
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 South Carolina state banks can pay
shareholders. Any dividends by a South Carolina state bank that exceed the
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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.
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 the 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.
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Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
Federal Deposit Insurance Act ("FDIA") restricting payment of capital
distributions and management fees; requiring the OCC to monitor the condition of
the bank; requiring submission by the bank of a capital restoration plan;
restricting the growth of the bank's assets and requiring prior approval of
certain expansion proposals. A bank that is "significantly undercapitalized" is
also subject to restrictions on compensation paid to senior management of the
bank, and a bank that is "critically undercapitalized" is further subject to
restrictions on the activities of the bank and restrictions on payments of
subordinated debt of the bank. The purpose of these provisions is to require
banks with less than adequate capital to act quickly to restore their capital
and to have the OCC move promptly to take over banks that are unwilling or
unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 ("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.
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.
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The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other. The
Florence bank and the Orangeburg bank each have a financial subsidiary for the
sale of securities and insurance products.
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, except as noted above, 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, which was enacted in 2002, 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.
9
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.
Employees
At December 31, 2004 the Corporation employed 182 full time equivalent
employees. Management believes that its employee relations are excellent.
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 for its main office. 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 built a 7,500 square foot, one-story building for
the Florence bank on the leased site. The Florence bank also leases
approximately one quarter acre of land and a 2,000 square foot building at 812
Second Loop Road, Florence, SC for its branch office. The lease is for an
initial term of five years and contains both early termination and renewal
options. The Florence bank has also purchased a 1.1 acre lot on the 600 block of
the Pamplico Highway in Florence for approximately $600,000. This property is
intended for future development.
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, and a 1,900 square foot one story branch office
on a one acre site at 610 West Moultrie St. in Winnsboro, SC. The bank also owns
approximately 1.5 acres of land on Longtown Road in Northeast Richland County,
SC, where it intends to build a new full-service banking office. Construction is
tentatively scheduled to begin in 2006. The Ridgeway Bank has signed a letter of
intent to move its Blythewood, SC office from its present location to the
Village, located off Blythewood Road near Interstate 77. The Bank will occupy
approximately 6,600 square feet of a two story building which is expected to be
built by early 2006.
The mortgage company operates from leased offices located at 508
Hampton Street, Suite 201, Columbia, SC, 10253 Two Notch Road, Columbia, SC, 304
West Westmark, Sumter, SC, and 1704 E. Greenville Street, Anderson, SC. The
Hampton Street, 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. The mortgage company expects to move its Sumter operations into the
Sumter National Bank branch located on West Liberty Street in early 2005.
Information about future lease payments is included in Note 7 to the
consolidated financial statements contained elsewhere in this report.
10
The Corporation has acquired approximately three acres of land in the
northeast area of the City of Orangeburg and expects to soon begin the
construction of a two story, 16,000 square foot corporate headquarters and
operations center building on that property. It is anticipated that the new
building will be completed in early 2006. The Corporation expects this project
to cost approximately $2,000,000.
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, 2004, 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 2004.
11
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity 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, 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
March 31, 2004 $ 20.92 $ 17.70
June 30, 2004 $ 19.00 $ 16.80
September 30, 2004 $ 18.90 $ 17.30
December 31, 2004 $ 19.50 $ 17.37
During 2004, the Corporation had stock sales volume of 385,500 shares
compared with 416,600 shares the prior year.
There were 2,183 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 2004 compared with 2,104 the prior year.
During 2004, the Corporation authorized and paid quarterly cash
dividends totaling 40 cents per share. The total cost of these dividends was
$1,744,000 or 54.3% of after tax profits. 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. 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 prior
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, 2004 the Banks could pay up to approximately $7,961,000 in
dividends without prior 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 2004. The Corporation did not sell any of its securities
in transactions that were not registered under the Securities Act of 1933 during
the year ended December 31, 2004.
12
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 2004.
Community Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except per share data)
Years Ended December 31,
------------------------
Five Year
Compound
2004 2003 2002 (1) 2001 (2) 2000 1999 Growth Rate
---- ---- -------- -------- ---- ---- -----------
INCOME STATEMENT DATA
Net interest income .................... $ 17,843 $ 16,708 $ 14,625 $ 10,940 $ 10,228 $ 8,430 16.18%
Provision for loan losses .............. 5,102 1,119 1,033 650 688 612 52.83%
Noninterest income ..................... 7,278 9,125 7,194 3,584 1,966 1,479 37.53%
Noninterest expense .................... 15,039 15,932 12,465 7,810 6,552 6,066 19.91%
Net income ............................. 3,209 5,635 5,401 3,908 3,147 2,182 8.02%
PER COMMON SHARE (3)
Net income - basic ..................... $0.74 $1.31 $1.42 $1.21 $0.99 $0.68 1.71%
Net income - diluted ................... 0.72 1.27 1.38 1.20 0.98 0.68 1.15%
Cash dividends ......................... 0.40 0.36 0.32 0.28 0.22 0.19 16.05%
Book value ............................. 11.39 11.10 10.16 8.35 7.24 6.35 12.40%
BALANCE SHEET DATA (YEAR END)
Total assets ........................... $512,377 $466,580 $437,320 $318,617 $273,323 $228,030 17.58%
Loans held for sale .................... 15,090 8,411 24,664 10,265 343 269 123.76%
Loans, net ............................. 389,302 327,900 302,911 237,340 192,996 155,422 20.16%
Deposits ............................... 423,458 378,704 337,062 255,433 218,811 184,364 18.09%
Shareholders' equity ................... 50,027 48,070 43,717 27,547 23,139 20,245 19.83%(4)
FINANCIAL RATIOS
Return on average assets ............... 0.67% 1.25% 1.43% 1.36% 1.26% 1.06%
Return on average equity ............... 6.41% 12.17% 15.10% 15.58% 14.67% 11.12%
Net interest margin .................... 4.00% 3.95% 4.14% 4.00% 4.34% 4.37%
OPERATIONS DATA
Banks' branch offices .................. 9 8 8 4 4 4
Mortgage loan offices .................. 4 3 3 3 - -
Employees (full-time equivalent) ....... 182 190 175 126 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.
13
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, 2004. 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 2004 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 two offices 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
2004 compared with 2003
For the year ended December 31, 2004, the Corporation recorded net
income of $3,209,000, a decrease of $2,426,000, or 43.1%, from net income of
$5,635,000 for 2003. Net income per share for 2004 was $.74 compared with $1.31
for 2003. Diluted net income per share was $.72 for 2004 compared with $1.27 for
2003. Return on average assets was .67% for 2004 compared with 1.25% for 2003.
Return on average shareholders' equity was 6.41% for 2004 compared with 12.17%
for 2003.
Net income for 2004 was affected primarily by the following factors:
o the 2004 loan loss provision expense increased by $3,983,000 over 2003
due to problems associated with several large commercial loans,
o mortgage loan brokerage income decreased $2,070,000 because of a
significant reduction in residential mortgage loan production,
o noninterest expenses decreased by $893,000, primarily due to lower
commission based salaries and benefits paid for mortgage brokerage
staffing;
o increased average holdings of loans and investments resulted in a
$606,000 increase in interest and dividend income;
o interest expense was decreased by $529,000 primarily due to lower
interest rates paid on time deposits and lower funding costs for
mortgage brokerage activities;
o income tax expense was reduced by $1,376,000 due to the net effect of
the factors enumerated above.
Net interest income for 2004 increased by $1,135,000 over the 2003
amount due to increases of $587,000 and $90,000 in interest income on loans and
investment securities, respectively, and decreases of $465,000 and $545,000 in
interest expenses related to time deposits and short-term borrowings,
14
respectively. Interest expense for long-term debt increased by $401,000 in 2004,
primarily due to the issuance of $10,000,000 of trust preferred securities by
the Corporation. The proceeds of this debt were used primarily to increase the
capitalization of some of the subsidiary Banks, to fund mortgage loan brokerage
production and for other general corporate purposes.
2003 compared with 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 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.
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
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.
Comprehensive Income
Comprehensive income for 2004, 2003, and 2002 was $3,061,000,
$5,595,000, and $5,506,000, 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 the first six months of 2004 and throughout
2003 and 2002, market interest rates were generally stable. Beginning in 2000
and continuing until late in the second quarter of 2004, the Federal Reserve
Board's policy was to provide stimulus to the U.S. economy by first setting, 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 experienced 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. Refinancing activity during the first six months of
2004 was driven primarily by uncertainty and concern about whether the Federal
Reserve Board would begin to cause interest rates to rise, and, if so, the
magnitude and timing of those increases. Finally, late in the second quarter of
2004, the Federal Reserve Board implemented a series of "measured increases."
15
Net interest income was $17,843,000, $16,708,000, and $14,625,000 for
2004, 2003, and 2002, respectively. The amounts of interest income increased in
both 2004 and 2003, and interest expense amounts decreased. Average earning
assets and average interest bearing liabilities amounts increased steadily over
those two years, also. A large percentage of the increase in 2003 is
attributable to the Ridgeway bank acquisition in July 2002.
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, 2004, 2003, and 2002.
16
Average Balances, Yields and Rates
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
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-bearing deposits with other banks $ 1,086 $ 20 1.84% $ 990 $ 19 1.92% $ 1,229 $ 36 2.93%
Investment securities - taxable 49,546 1,518 3.06% 45,488 1,414 3.11% 43,980 1,970 4.48%
Investment securities - tax exempt (1) 9,201 312 3.39% 9,174 322 3.51% 4,888 217 4.44%
Federal funds sold 16,950 203 1.20% 26,582 279 1.05% 21,364 347 1.62%
Loans, including held for sale (1) (2) 371,061 22,821 6.15% 340,518 22,234 6.53% 281,907 20,174 7.16%
-------- ------- -------- ------- -------- -------
Total interest earning assets 447,844 24,874 5.55% 422,752 24,268 5.74% 353,368 22,744 6.44%
Cash and due from banks 15,587 14,452 14,222
Allowance for loan losses (4,615) (3,861) (3,201)
Premises and equipment 7,327 6,996 6,011
Intangible assets 7,526 7,772 4,360
Other assets 4,041 3,400 3,350
------ -------- -------
Total assets $477,710 $451,511 $378,110
======== ======== ========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts $ 54,918 $ 225 0.41% $ 44,481 $ 193 0.43% $ 41,101 $ 285 0.69%
Savings 80,534 814 1.01% 70,552 766 1.09% 55,790 905 1.62%
Time deposits 190,290 4,263 2.24% 186,502 4,728 2.54% 162,512 5,328 3.28%
-------- ------- -------- ------- -------- -------
Total interest bearing deposits 325,742 5,302 1.63% 301,535 5,687 1.89% 259,403 6,518 2.51%
Short-term borrowings 10,309 205 1.99% 29,026 750 2.58% 18,712 478 2.55%
Long-term debt 28,601 1,524 5.33% 20,395 1,123 5.51% 20,254 1,123 5.54%
-------- ------- -------- ------- -------- -------
Total interest bearing liabilities 364,652 7,031 1.93% 350,956 7,560 2.15% 298,369 8,119 2.72%
Noninterest-bearing demand deposits 61,220 52,047 41,198
Other liabilities 1,782 2,217 2,783
Shareholders' equity 50,056 46,291 35,760
-------- -------- --------
Total liabilities and
shareholders' equity $477,710 $451,511 $378,110
======== ======== ========
Interest rate spread (3) 3.62% 3.59% 3.72%
Net interest income and net yield
on earning assets (4) $17,843 3.98% $16,708 3.95% $14,625 4.14%
(1) Interest income on tax-exempt loans and 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.
17
By year end 2004 compared with 2003, gross loans grew $61,543,000,
while deposits grew $44,754,000. Because the growth in deposit liabilities in
2004 has not been sufficient to fund the Corporation's growth in loans,
management took several actions. Early in the second quarter of 2004, the
Corporation issued approximately $10,000,000 in long-term debt trust preferred
securities to enhance the capital positions of some of the banking subsidiaries
and to provide a more stable funding source for its mortgage banking operations.
As a result, the Corporation reduced its reliance on short-term, relatively high
cost borrowings in 2004. The Corporation continues to maintain a short-term line
of credit with another financial institution which can be used to fund
construction mortgage loan demand. The Corporation also changed its asset
allocation such that its investments in federal funds sold and securities
available-for-sale decreased significantly by the end of 2004 compared 2003.
This also allowed the Corporation to invest significantly more dollars in the
higher yielding loan earning asset category.
Time deposits are the largest category of the Corporation's deposit
liabilities. Interest rates paid for such liabilities continued to decrease
during 2004. Accordingly, total interest expense decreased from $8,119,000 in
2002, to $7,560,000 in 2003 and to $7,031,000 in 2004. The average rates paid
for time deposits declined from 3.28% in 2002 to 2.24% in 2004. Recent increases
in short-term market rates of interest are expected to cause the Corporation to
begin increasing the rates it offers for deposit liabilities. The trust
preferred securities were issued with a variable rate, as well. As a result, it
is expected that the costs of deposits and other funding sources will increase
in 2005.
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 prominent in contributing to increases in interest income.
Volume and Rate Variance Analysis
2004 compared with 2003 2003 compared with 2002
----------------------- -----------------------
Volume* Rate* Total Volume* Rate* Total
------- ----- ----- ------- ----- -----
(Dollars in thousands)
Interest earning assets
Interest-bearing deposits with other banks ............ $ 2 $ (1) $ 1 $ (6) $ (11) $ (17)
Investment securities - taxable ....................... 124 (20) 104 66 (622) (556)
Investment securities - tax exempt .................... 1 (11) (10) 158 (53) 105
Federal funds sold .................................... (111) 35 (76) 73 (141) (68)
Loans, including held for sale ........................ 1,924 (1,337) 587 3,936 (1,876) 2,060
------- ------- ------- ------- ------- -------
Interest income ............................... 1,940 (1,334) 606 4,227 (2,703) 1,524
------- ------- ------- ------- ------- -------
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts ............. 43 (11) 32 22 (114) (92)
Savings ........................................... 103 (55) 48 204 (343) (139)
Time deposits ..................................... 94 (559) (465) 716 (1,316) (600)
------- ------- ------- ------- ------- -------
Total interest bearing deposits ............... 240 (625) (385) 942 (1,773) (831)
Short-term borrowings ................................. (402) (143) (545) 266 6 272
Long-term debt ........................................ 438 (37) 401 8 (8) -
------- ------- ------- ------- ------- -------
Total interest expense ........................ 276 (805) (529) 1,216 (1,775) (559)
------- ------- ------- ------- ------- -------
Net interest income ........................... $ 1,664 $ (529) $ 1,135 $ 3,011 $ (928) $ 2,083
======= ======= ======= ======= ======= =======
* The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of rate or volume variance to the sum of the two absolute variances except
in categories having balances in only one period. In such cases, the entire
variance is attributed to volume variance.
18
Although management currently expects that interest rates will increase
in 2005, 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, positively or negatively, are possible. In the absence of
significant changes in market interest rate levels, any significant changes in
net interest income during 2005 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 $5,102,000, $1,119,000, and $1,033,000 for the years ended December 31,
2004, 2003 and 2002, respectively. The significant increase in the 2004
provision was associated with several large problem commercial loan
relationships, most of which were handled by a former lending officer. The other
major component of the increase was a writedown on a large commercial loan which
financed the purchase of a business. Following the sale the business did not
perform at the level expected by the buyer who has charged the seller with
fraud. Net charge-offs for 2004 were $4,961,000, compared with $486,000 and
$734,000 for 2003 and 2002, respectively. The underlying causes of these
problems are believed by management to be isolated and not indicative of a
general trend in the loan portfolio. Management continues to monitor these loans
and is pursuing all available legal options. 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 2004 decreased by $1,847,000 or 20.2% from 2003,
primarily due to a $2,070,000 or 39.8% decrease in mortgage brokerage income.
This decrease resulted from a mortgage-industry-wide slowdown in refinancing
activity in 2004. The Corporation inititated measures in 2004 that are intended
to decrease the costs and complexity of funding its mortgage brokerage
operation. Service charges on deposit accounts were $112,000 lower in 2004 than
in 2003, as well. This resulted from a slight decrease in the volume of returned
check charges and a slowing in demand for the automated overdraft service.
During 2004, gains on the sale of investment securities totaled $76,000 compared
with losses of $252,000 in 2003.
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 and gains associated
with the origination and sale 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.
Noninterest Expenses
Noninterest expenses for 2004 decreased by $893,000 or 5.6% from the
2003 amount, primarily due to lower expenses for salaries and employee benefits.
Such expenses were reduced because of the decline in mortgage loan originations
resulting in less commission expense.
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.
19
Income Taxes
Income tax expense for for 2004 was $1,771,000, a decrease of
$1,376,000 or 43.7% from the 2003 amount. Income tax expense for 2003 was
$3,147,000, an increase of $227,000 or 7.8% over the 2002 amount. The effective
income tax rate (income tax expense divided by income before income taxes) was
35.6%, 35.8%, and 35.1% for 2004, 2003 and 2002, respectively.
INVESTMENT PORTFOLIO
The Corporation's investment portfolio consists primarily of short- and
intermediate-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 $58,747,000
in 2004, $54,662,000 in 2003 and $48,868,000 in 2002.
The table below summarizes the amortized cost and estimated fair value
of the Corporation's investment portfolio for the past three years.
Securities Portfolio Composition
December 31,
------------
2004 2003 2002
---- ---- ----
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 ........................ $50,619 $50,361 $56,633 $56,477 $41,213 $41,531
States and political subdivisions ............ 4,985 5,110 8,140 8,387 9,114 9,625
------- ------- ------- ------- ------- -------
Total available for sale .................... $55,604 $55,471 $64,773 $64,864 $50,327 $51,156
======= ======= ======= ======= ======= =======
Securities held-to-maturity
States and political subdivisions ............ $ 1,925 $ 1,907 $ 2,000 $ 2,155 $ - $ -
======= ======= ======= ======= ======= =======
The following is a summary of maturities and weighted average yields of
securities as of December 31, 2004:
Securities Portfolio Maturities and Yields
December 31, 2004
-----------------
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 Treasury and U.S.
Government agencies ............. $3,742 2.40% $35,877 2.96% $ 9,214 3.79% $ - 0.00% $48,833 3.07%
States and political subdivisions (1) .. 1,100 3.85% 3,014 3.60% 2,921 3.69% - 0.00% 7,035 3.68%
Mortgage-backed securities (2) ......... - 0.00% 1,514 2.33% - 0.00% 14 5.04% 1,528 2.35%
------ ------- ------- --- -------
Total ........................... $4,842 2.73% $40,405 2.98% $12,135 3.77% $14 5.04% $57,396 3.13%
====== ======= ======= === =======
(1) Yields on tax-exempt securities of states and political subdivisions have
not been calculated on a tax-equivalent basis.
(2) Maturity category based on final stated maturity dates. Average maturity is
expected to be substantially shorter because of the monthly return of
principal on certain securities.
20
On an ongoing basis, management assigns securities upon purchase into
one of two categories (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 made in any of the years 2002 through 2004.
During 2004, management changed the composition of the securities
portfolio, primarily by decreasing the amounts invested in securities throughout
the year. Despite investment securities being larger in average amount in 2004,
the Corporation's investment in such instruments at December 31, 2004 was
$9,468,000 less than at December 31, 2003. Proceeds from sales and calls of
investment securities and reductions in federal funds sold have been used, in
part, to fund loan growth in excess of the growth in deposits, short-term
borrowings and long-term debt.
During the years ended December 31, 2004, 2003 and 2002, the
Corporation sold investment securities for gross proceeds of $13,676,000,
$2,068,000, and $20,543,000, respectively. Realized gains and (losses) on those
transactions were $76,000, ($252,000), and $119,000, for the years ended
December 31, 2004, 2003 and 2002, respectively. Securities may be sold to
provide liquidity, to reduce interest rate risk, or for other reasons. There
were no sales of held-to-maturity securities in any of the periods presented.
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.
The following table shows the composition of the loan portfolio by
category:
Loan Portfolio Composition
December 31,
------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
Commercial, financial and agricultural ............. $ 96,275 $ 84,844 $ 78,210 $ 56,515 $ 52,264
Real estate - construction ......................... 29,968 23,590 23,345 19,557 15,389
Real estate - mortgage ............................. 230,986 188,530 168,499 127,002 98,154
Consumer installment ............................... 36,420 35,142 36,430 26,831 29,270
-------- -------- -------- -------- --------
Total loans - gross .......................... $393,649 $332,106 $306,484 $229,905 $195,077
======== ======== ======== ======== ========
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. On
an ongoing basis, management is always seeking ways to better manage risk and
improve internal control systems. As part of this continuous process, late in
2004 management began seeking a Chief Credit Officer for the Corporation. This
position will have specific loan approval authority over major commercial loan
relationships and will assist the subsidiary banks in other areas of loan
operation and administration. Management is also expanding the nature and scope
of its internal loan review system effective in early 2005.
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
21
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 to
facilitate the sales process. In 2004, 2003 and 2002, the Corporation sold
$174,074,000, $309,914,000, and $176,011,000 respectively, of such loans. 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 rate or reprice within a three to five year
term.
Consumer installment 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,
2004, the Corporation had no other significant concentrations of credit to
customers engaged in similar business activities.
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,
2004, the Corporation had approximately $25,000,000, or 6.4% of its loan
portfolio, in unsecured loans. As of December 31, 2003, the Corporation had
approximately $25,400,000 in unsecured loans, or 7.6% 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, 2004 as well as the type of
interest requirement on loans due after one year.
December 31, 2004
-----------------
After one
Within one year but within After five
year five years years Total
---- ---------- ----- -----
(Dollars in thousands)
Commercial, financial and agricultural ............................. $ 52,449 $ 35,833 $ 7,993 $ 96,275
Real estate ........................................................ 63,317 143,315 54,322 260,954
Consumer installment ............................................... 8,824 23,276 4,320 36,420
-------- -------- -------- --------
Total ......................................................... $124,590 $202,424 $ 66,635 $393,649
======== ======== ======== ========
Predetermined rate, maturity greater than one year ............... $ - $140,213 $ 37,395 $177,608
Variable rate or maturity within one year ........................ $124,590 $ 62,211 $ 29,240 $216,041
22
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,
------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans ........................................ $4,941 $2,595 $ 796 $ 281 $ 238
Accruing loans 90 days or more past due ................. 137 146 1,740 17 93
------ ------ ------ ------ ------
Total .............................................. $5,078 $2,741 $2,536 $ 298 $ 331
====== ====== ====== ====== ======
Total as a % of outstanding loans .................. 1.29% 0.83% 0.83% 0.13% 0.17%
Impaired loans (included in non accrual) ................ $4,941 $2,595 $ 796 $ 281 $ 238
As of December 31, 2004, approximately $2,434,000, or 49%, of the
Corporation's nonaccrual loans consisted of the balances of one loan
relationship, net of a partial charge-off of $1,001,000. Problems with
information supplied by a third party supporting an appraisal underlying this
credit were discovered in the fourth quarter of 2004. Approximately $1,093,000,
or 22% of nonaccrual loans, represents the remaining loan balances included in a
former lending officer's portfolio, net of partial charge-offs of $1,200,000.
Management became aware of possible problems in the former officer's portfolio
during the third quarter of 2004. As of December 31, 2003, approximately
$1,350,000, or 52%, of the Corporation's nonaccrual loans consisted of one loan
relationship. 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, 2004, 2003 and 2002, if nonaccrual loans had been performing in accordance
with their original terms was approximately $63,000, $117,000 and $39,000,
respectively. No cash basis interest income was recognized in 2004, 2003 and
2002 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 2004. Management is aware of no trends, events or
uncertainties that would cause a material adverse change in nonaccrual loans in
2005.
Potential Problem Loans
At December 31, 2004 the Corporation's internal loan review process had
identified $4,628,000 (1.2% 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 $252,000,
$327,000, and $219,000 as of December 31, 2004, 2003 and 2002, 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.
23
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,
------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
Total amount of loans outstanding at end of year ........ $393,649 $332,106 $306,484 $229,905 $195,077
======== ======== ======== ======== ========
Average amount of loans outstanding ..................... $371,061 $340,518 $281,907 $211,901 $179,654
======== ======== ======== ======== ========
Allowance for loan losses - January 1 ................... $ 4,206 $ 3,573 $ 2,830 $ 2,424 $ 1,936
-------- -------- -------- -------- --------
Changes incident to merger activities ................... - - 444 28 -
-------- -------- -------- -------- --------
Loans charged-off
Real estate ........................................... 1,293 250 175 9 78
Installment ........................................... 387 247 223 202 116
Credit cards and related plans ........................ - - - 9 9
Commercial and other ....................... .......... 3,400 163 374 87 33
-------- -------- -------- -------- --------
Total charge-offs .................................. 5,080 660 772 307 236
-------- -------- -------- -------- --------
Recoveries
Real Estate ........................................... 21 105 1 - 3
Installment ........................................... 67 58 20 33 25
Credit cards and related plans ........................ - - - 2 2
Commercial and other .................................. 31 11 17 - 6
-------- -------- -------- -------- --------
Total recoveries ................................... 119 174 38 35 36
-------- -------- -------- -------- --------
Net charge-offs ......................................... 4,961 486 734 272 200
Provision for loan losses charged to expense ............ 5,102 1,119 1,033 650 688
-------- -------- -------- -------- --------
Allowance for loan losses - December 31 ................. $ 4,347 $ 4,206 $ 3,573 $ 2,830 $ 2,424
======== ======== ======== ======== ========
Ratios
Net charge-offs to average loans outstanding .......... 1.34% 0.14% 0.26% 0.13% 0.11%
Net charge-offs to loans outstanding at end of ........ 1.26% 0.15% 0.24% 0.12% 0.10%
year
Allowance for loan losses to average loans ............ 1.17% 1.24% 1.27% 1.34% 1.35%
Allowance for loan losses to total loans at end ....... 1.10% 1.27% 1.17% 1.23% 1.24%
of year
Net charge-offs to allowance for losses ............... 114.12% 11.55% 20.54% 9.61% 8.25%
Net charge-offs to provision for loan losses .......... 97.24% 43.43% 71.06% 41.85% 29.07%
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
24
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
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, 2004, 2003 and 2002 are summarized below:
Average Deposits
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
Average Average Average Average Average Average
balance cost balance cost balance cost
------- ---- ------- ---- ------- ----
(Dollars in thousands)
Noninterest-bearing demand ................... $ 61,220 - $ 52,047 - $ 41,198 -
Interest bearing transaction accounts ........ 54,918 0.41% 44,481 0.43% 41,101 0.69%
Savings - regular ............................ 20,106 0.54% 20,998 0.53% 14,469 1.01%
Savings - money market ....................... 60,428 1.17% 49,554 1.32% 41,321 1.85%
Time deposits less than $100 ................. 122,125 2.26% 122,488 2.58% 104,509 3.30%
Time deposits greater than $100 .............. 68,165 2.20% 64,014 2.45% 58,003 3.28%
--------- --------- ---------
Total average deposits ................... $ 386,962 $ 353,582 $ 300,601
========= ========= =========
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, 2004 the Corporation had $86,344,000 in certificates of
deposit of $100,000 or more. Approximately $26,040,000 mature within three
months, $16,542,000 mature over three through six months, $25,944,000 mature
over six months through twelve months and $17,818,000 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.
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 mortgage
loan warehouse and general purpose lines of credit payable. As of December 31,
2004, securities sold under agreements to repurchase totaled $4,979,000. These
25
amounts are secured by pledges of investment securities and the interest rate is
subject to change daily. Federal funds purchased totaled $1,683,000 as of
December 31, 2004 and are unsecured and mature on a daily basis. No amounts were
outstanding under warehouse lines of credit as of December 31, 2004.
Summary information about total short-term borrowings is provided in
the following table.
December 31,
------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Balance outstanding at end of year ........................................ $ 6,662 $17,960 $34,551
Weighted average interest rate at end of the period ....................... 1.54% 2.38% 0.78%
Interest expense .......................................................... $ 205 $ 750 $ 478
Maximum outstanding at any month-end during the period .................... $17,940 $39,379 $16,302
Average outstanding during the period ..................................... $10,309 $29,026 $18,712
Weighted average interest rate during the period .......................... 1.99% 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 D