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, 2005 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.)
102 Founders Court, Orangeburg, SC 29118
(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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the
Act.
[ ] Yes [X] No
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 a large accelerated filer, an
accelerated filer, or a non-accelerated file. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act: (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
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, 2005 was approximately $59,776,000.
As of March 17, 2006, there were 4,425,648 shares of the registrant's common
stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement
for the 2006 Annual Meeting of Shareholders - Part III
10-K TABLE OF CONTENTS
Part I Page
Item 1 Description of Business 3
Item 1A Risk Factors 12
Item 1B Unresolved Staff Comments 16
Item 2 Properties 16
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 17
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 20
Item 7A Quantitative and Qualitative Disclosures about Market Risk 47
Item 8 Financial Statements and Supplementary Data 51
Report of Independent Registered Public Accounting Firm 52
Consolidated Balance Sheets, December 31, 2005 and 2004 53
Consolidated Statements of Income,
Years Ended December 31, 2005, 2004 and 2003 54
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 2005, 2004 and 2003 55
Consolidated Statements of Cash Flows,
Years Ended December 31, 2005, 2004 and 2003 56
Notes to Consolidated Financial Statements 57
Quarterly Data for 2005 and 2004 90
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 91
Item 9A Controls and Procedures 91
Item 9B Other Information 91
Part III
Item 10 Directors and Executive Officers of the Registrant 91
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 92
Item 13 Certain Relationships and Related Transactions *
Item 14 Principal Accountant Fees and Services *
Part IV
Item 15 Exhibits and Financial Statement Schedules 94
* Incorporated by reference to Registrant's Proxy Statement for the 2006 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.
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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).
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 consumer and commercial Internet banking services.
Each of the Banks has ATMs and they are all part of the Star and Cirrus
networks.
CRM provides a wide variety of one to four family residential mortgage
products in the Columbia, Sumter, Anderson, and Charleston 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.
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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, generally 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 that have offices located throughout South Carolina. At June 30,
2005, there were nine FDIC insured financial institutions competing with the
Corporation in the city of Orangeburg, eight such financial institutions
competing with it in the city of Sumter, 14 such financial institutions
competing with it in the city of Florence, three such financial institutions
competing with it in Fairfield County, and 15 such financial institutions
competing with it in the Richland County market areas. At June 30, 2005, the
Orangeburg bank had the second largest deposit base in the city of Orangeburg;
the Sumter bank had the third largest deposit base in the city of Sumter; 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, Sumter and
Charleston Counties of South Carolina, where it competes with hundreds of
financial institutions and mortgage originators.
Dependence on Major Customers
The Banks do not consider themselves dependent on any single customer
or small group of customers, either in the deposit or lending areas.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of CBI and the Banks.
As discussed below under the caption "Gramm-Leach-Bliley Act", Congress
has adopted extensive changes in the laws governing the financial services
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
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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 Office of the Comptroller of the Currency
("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
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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 pay dividends only 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
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 the Banks' 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
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based on quarterly Call Report and Thrift Financial Report submissions. The
Federal Deposit Insurance Reform Act of 2005 will change the manner and amount
of insurance assessments beginning in 2006. The changes are not expected to have
a material effect on the Banks in 2006.
Regulation of the Banks
Orangeburg National Bank, Sumter National Bank, and Florence National
Bank are subject to regulation and examination by 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, which prohibit discrimination on the
basis of certain prohibited factors in extending credit; 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 also subject to
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 USA PATRIOT Act,
dealing with, among other things, requiring the establishment of anti-money
laundering programs including standards for verifying customer information at
account opening.
The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's actual
performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
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 bank's primary federal
regulator to monitor the condition of the bank; requiring submission by the bank
of a capital restoration plan; prohibiting the acceptance of employee benefit
plan deposits; restricting the growth of the bank's assets and requiring prior
approval of certain expansion proposals. A bank that is "significantly
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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 bank's primary federal regulator 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 interest rates that may be paid on such deposits), 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
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those of standard holding companies. These expanded powers include authority to
engage in "financial activities," which are activities that are (1) financial in
nature; (2) incidental to activities that are financial in nature; or (3)
complementary to a financial activity and that do not impose a safety and
soundness risk. Significantly, the permitted financial activities for financial
holding companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other. The
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.
11
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 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.
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, 2005 the Corporation employed 194 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 1A. Risk Factors
Risks Related to Our Industry
We are subject to governmental regulation which could change and
increase our cost of doing business or have an adverse effect on our business.
We operate in a highly regulated industry and are subject to
examination, supervision and comprehensive regulation by various federal and
state agencies. Most of this regulation is designed to protect our depositors
12
and other customers, not our shareholders. Our compliance with the requirements
of these agencies is costly and may limit our growth and restrict certain of our
activities, including, payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, and locations of offices. We are
also subject to capitalization guidelines established by federal authorities and
our failure to meet those guidelines could result in limitations being imposed
on our activities or, in an extreme case, in our banks being placed in
receivership. We have also recently been subjected to the extensive and
expensive requirements imposed on public companies by the Sarbanes-Oxley Act of
2002 and related regulations.
The laws and regulations applicable to the banking industry could
change at any time, and we cannot predict the impact of these changes on our
business or profitability. Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding
companies, our cost of compliance could adversely affect our ability to operate
profitably.
We are susceptible to changes in monetary policy and other economic
factors which may adversely affect our ability to operate profitably.
Changes in governmental, economic and monetary policies may affect the
ability of our bank to attract deposits and make loans. The rates of interest
payable on deposits and chargeable on loans are affected by governmental
regulation and fiscal policy as well as by national, state and local economic
conditions. All of these matters are outside of our control and affect our
ability to operate profitably.
Risks Related to Our Business
We depend on the services of a number of key personnel, and a loss of
any of those personnel could disrupt our operations and result in reduced
revenues.
The success of our business depends to a great extent on our customer
relationships. Our growth and development to date have depended in large part on
the efforts of our senior management team. A number of these senior officers
have primary contact with our customers and are extremely important in
maintaining personalized relationships with our customer base, a key aspect of
our business strategy, and in increasing our market presence. The unexpected
loss of services of one or more of these key employees could have a material
adverse effect on our operations and possibly result in reduced revenues if we
were unable to find suitable replacements promptly.
We may be unable to successfully manage our sustained growth.
Our future profitability will depend in part on our ability to manage
growth successfully. Our ability to manage growth successfully will depend on
our ability to maintain cost controls and asset quality while attracting
additional loans and deposits, as well as on factors beyond our control, such as
economic conditions and interest rate trends. If we grow too quickly and are not
able to control costs and maintain asset quality, growth could materially
adversely affect our financial performance.
Our continued pace of growth or regulatory requirements may require us
to raise additional capital in the future, but that capital may not be available
when it is needed or be available on favorable terms.
We anticipate that our current capital resources will satisfy our
capital requirements for the foreseeable future. Nevertheless, we may need to
raise additional capital to support additional growth or to meet regulatory
requirements. Our ability to raise additional capital, if needed, will depend,
13
among other things, on conditions in the capital markets at that time, which are
outside our control, and on our financial condition and performance. If we
cannot raise additional capital on acceptable terms when needed, our ability to
further expand our operations through internal growth and acquisitions could be
limited.
If our loan customers do not pay us as they have contracted to, we may
experience losses.
Our principal revenue producing business is making loans. If the loans
are not repaid, we will suffer losses. Even though we maintain an allowance for
loan losses, the amount of the allowance may not be adequate to cover the losses
we experience. We attempt to mitigate this risk by a thorough review of the
creditworthiness of loan customers. Nevertheless, there is risk that our credit
evaluations will prove to be inaccurate due to changed circumstances or
otherwise.
We face strong competition from larger, more established competitors
which may adversely affect our ability to operate profitably.
We encounter strong competition from financial institutions operating
in our market areas. In the conduct of our business, we also compete with credit
unions, insurance companies, money market mutual funds and other financial
institutions, some of which are not subject to the same degree of regulation as
we are. Many of these competitors have substantially greater resources and
lending abilities than we have and offer services, such as investment banking,
trust and international banking services that we do not provide. We believe that
we have competed, and will continue to be able to compete, effectively with
these institutions because of our experienced bankers and personalized service,
as well as through loan participations and other strategies and techniques.
However, we cannot promise that we are correct in our belief. If we are wrong,
our ability to operate profitably may be negatively affected.
Technological changes affect our business, and we may have fewer
resources than many of our competitors to invest in technological improvements.
The financial services industry continues to undergo rapid
technological changes with frequent introductions of new technology-driven
products and services. In addition to enabling financial institutions to serve
clients better, the effective use of technology may increase efficiency and may
enable financial institutions to reduce costs. Our future success may depend, in
part, upon our ability to use technology to provide products and services that
provide convenience to customers and to create additional efficiencies in our
operations. We may need to make significant additional capital investments in
technology in the future, and we may not be able to effectively implement new
technology-driven products and services. Many of our competitors have
substantially greater resources to invest in technological improvements.
Our profitability and liquidity may be affected by changes in interest
rates and economic conditions.
Our profitability depends upon our net interest income, which is the
difference between interest earned on our interest-bearing assets, such as loans
and investment securities, and interest expense on interest-bearing liabilities,
such as deposits and borrowings. Our net interest income will be adversely
affected if market interest rates change such that the interest we pay on
deposits and borrowings increases faster than the interest earned on loans and
investments. Interest rates, and consequently our results of operations, are
affected by general economic conditions (domestic and foreign) and fiscal and
monetary policies. Monetary and fiscal policies may materially affect the level
and direction of interest rates. Beginning in June 2004 through January 2006,
14
the Federal Reserve has raised rates fourteen times for a total increase of
3.50%. Increases in interest rates generally decrease the market values of
interest-bearing investments and loans held and therefore may adversely affect
our liquidity and earnings. Increased interest rates also generally affect the
volume of mortgage loan originations, the resale value of mortgage loans
originated for resale, and the ability of borrowers to perform under existing
loans of all types.
Risks Related to Our Common Stock
Our common stock has a limited trading market, which may limit your
ability to sell your stock.
Our common stock is traded on the American Stock Exchange under the
symbol "SCB." Since January 1, 2005, the average weekly trading volume has been
approximately 6,200 shares. Accordingly, a shareholder who wishes to sell a
large number of shares may experience a delay in selling the shares or have to
sell them at a lower price in order to sell them promptly.
We may issue additional securities, which could affect the market price
of our common stock and dilute your ownership.
We may issue additional securities to raise additional capital, to
support growth, or to make acquisitions. Sales of a substantial number of shares
of our common stock, or the perception by the market that those sales could
occur, could cause the market price of our common stock to decline or could make
it more difficult for us to raise capital through the sale of common stock or to
use our common stock in future acquisitions.
There is no guarantee we will continue to pay cash dividends in the
future at the same or any level.
Declaration and payment of dividends are within the discretion of our
board of directors. Our banks are currently our only source of funds with which
to pay cash dividends. Our banks' declaration and payment of future dividends to
us are within the discretion of the banks' boards of directors, and are
dependent upon their earnings, financial condition, their need to retain
earnings for use in the business and any other pertinent factors. The banks'
payment of dividends is also subject to various regulatory requirements and the
ability of the banks' regulators to forbid or limit their payment of dividends.
Provisions in our articles of incorporation and South Carolina law may
discourage or prevent takeover attempts, and these provisions may have the
effect of reducing the market price for our stock.
Our articles of incorporation include several provisions that may have
the effect of discouraging or preventing hostile takeover attempts, and
therefore of making the removal of incumbent management difficult. The
provisions include staggered terms for our board of directors and requirements
of supermajority votes to approve certain business transactions. In addition,
South Carolina law contains several provisions that may make it more difficult
for a third party to acquire control of us without the approval of our board of
directors, and may make it more difficult or expensive for a third party to
acquire a majority of our outstanding common stock. To the extent that these
provisions are effective in discouraging or preventing takeover attempts, they
may tend to reduce the market price for our stock.
15
Our common stock is not insured, so you could lose your total
investment.
Our common stock is not a deposit, savings account or obligation of our
bank and is not insured by the Federal Deposit Insurance Corporation or any
other government agency. Should our business fail you could lose your total
investment.
Item 1B. Unresolved Staff Comments
Not applicable because the Registrant is not an accelerated filer or a
large accelerated filer.
Item 2. Description of Property
The Corporation owns approximately three acres of land located at 102
Founders Court in the northeast area of the City of Orangeburg on which it
constructed a two story, 16,000 square foot corporate headquarters and
operations center building. The new building was completed during the fourth
quarter of 2005, and the Corporation began fully operating from this facility in
mid-January 2006.
The Corporation leases office space for its Chief Credit Officer and
Director of Human Resources at 508 Hampton Street, Suite 203, Columbia, SC under
the terms of a lease that expires in November, 2007. At the end of that period,
the lease will automatically renew on a month-to-month basis.
The Orangeburg bank owns land located at 1820 Columbia Road NE, in
Orangeburg, South Carolina, where the Orangeburg bank maintains its main office,
which is a one-story building of approximately 7,000 square feet. The Orangeburg
bank also owns a 6,500 square foot branch office at 791 Broughton Street in
Orangeburg, as well as a building, which was previously a branch of the bank, at
the corner of Broughton and Glover Streets in Orangeburg. The Orangeburg bank
previously rented the building at the corner of Glover and Broughton to the
Corporation for office space. Those offices have now been moved into the
Corporation's new headquarters and operations building and the Orangeburg bank
now intends to demolish the old building. 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 Sumter bank owns the property at 683 Bultman Drive in Sumter where
its main office is housed in a one-story 6,500 square foot building. The Sumter
bank opened a branch bank at 1135 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, with four five-year renewal options. 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 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.
16
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 Street in Ridgeway. The
bank also owns a 1,590 square foot one story branch office on a .9 acre site at
115 McNulty Street in Blythewood, SC, and a 1,900 square foot one story branch
office on a one acre site at 610 West Moultrie Street in Winnsboro, SC. The bank
owned approximately 1.5 acres of land on Longtown Road in Northeast Richland
County, SC, where it previously had plans to build a new full-service banking
office. Those plans are no longer in effect and the property was sold to an
unrelated third-party in late December 2005 for approximately $355,000. The
Ridgeway Bank has obtained regulatory approval to move its Blythewood, SC office
from its present location to the Village, located off of Blythewood Road near
Interstate 77. The Bank intends to lease approximately 7,500 square feet of a
two story building which is currently under construction. Completion of this
project and relocation of this office is expected to be accomplished during the
second quarter of 2006.
CRM operates from leased offices located at 508 Hampton Street, Suite
201, Columbia, SC, 10253 Two Notch Road, Columbia, SC, 1135 West Liberty Street,
Sumter, SC, 2406 North Main Street, Anderson, SC, and 1156 Bowman Road, Suite
103, Mount Pleasant, 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.
Information about future lease payments is included in Note 7 to the
consolidated financial statements contained elsewhere in this report.
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, 2005, 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 2005.
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.
17
Quarter Ended High Low
------------- ---- ---
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
March 31, 2005 $ 18.59 $ 16.45
June 30, 2005 $ 18.50 $ 15.91
September 30, 2005 $ 17.95 $ 16.45
December 31, 2005 $ 18.24 $ 16.60
During 2005, the Corporation had stock sales volume of 324,300 shares
compared with 385,500 shares the prior year.
There were 2,003 holders of record of the Corporation's Common Stock
(no par value) as of December 31, 2005 compared with 2,183 the prior year.
During 2005, the Corporation authorized and paid quarterly cash
dividends totaling $.40 per share. The total cost of these dividends was
$1,761,000 or 174.2% of after tax profits. 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. 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). As
of December 31, 2005, the Banks could have declared additional dividends of up
to $5,747,000 without the approval of regulatory authorities. As of January 1,
2006, the dividend restrictions would have allowed the Banks to pay no more than
approximately $2,411,000 in dividends without the prior approval of 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 2005. The Corporation sold 775 shares of its common stock
in transactions that were not registered under the Securities Act of 1933 during
the year ended December 31, 2005. Details of this sale were included in the Form
10-Q for the quarter ended June 30, 2005.
18
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, 2001
through 2005.
Years Ended December 31,
------------------------
2005 2004 2003 2002 (1) 2001 (2)
---- ---- ---- -------- --------
INCOME STATEMENT DATA (Dollars in Thousands)
Net interest income ........................... $ 20,801 $ 17,843 $ 16,708 $ 14,625 $ 10,940
Provision for loan losses ..................... 9,637 5,102 1,119 1,033 650
Noninterest income ............................ 8,003 7,278 9,125 7,194 3,584
Noninterest expense ........................... 17,391 15,039 15,932 12,465 7,810
Net income .................................... 1,011 3,209 5,635 5,401 3,908
PER COMMON SHARE
Net income - basic ............................ $ 0.23 $ 0.74 $ 1.31 $ 1.42 $ 1.21
Net income - diluted .......................... 0.22 0.72 1.27 1.38 1.20
Cash dividends ................................ 0.40 0.40 0.36 0.32 0.28
Book value .................................... 11.12 11.39 11.10 10.16 8.35
BALANCE SHEET DATA (YEAR END)
Total assets .................................. $556,836 $512,377 $466,580 $437,320 $318,617
Loans held for sale ........................... 12,447 15,090 8,411 24,664 10,265
Loans, net .................................... 402,343 389,302 327,900 302,911 237,340
Deposits ...................................... 464,209 423,458 378,704 337,062 255,433
Shareholders' equity .......................... 48,992 50,027 48,070 43,717 27,547
FINANCIAL RATIOS
Return on average assets ...................... 0.19% 0.67% 1.25% 1.43% 1.36%
Return on average equity ...................... 1.94% 6.41% 12.17% 15.10% 15.58%
Net interest margin ........................... 4.12% 3.98% 3.95% 4.14% 4.00%
OPERATIONS DATA
Banks' branch offices ......................... 9 9 8 8 4
Mortgage loan offices ......................... 4 4 3 3 3
Employees (full-time equivalent) .............. 194 182 190 175 126
(1) July, 2002 - Ridgeway Bancshares, Inc. acquired.
(2) November, 2001 - Community Resource Mortgage, Inc. acquired.
19
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, 2005. 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, and a mortgage company subsidiary,
Community Resource Mortgage, Inc. CBI provides executive management, item and
data processing and other technical services for its subsidiaries. The
consolidated financial report for 2005 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., a South Carolina corporation, 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, Charleston and Anderson, South Carolina.
EARNINGS PERFORMANCE
2005 compared with 2004
For the year ended December 31, 2005, the Corporation recorded net
income of $1,011,000, a decrease of $2,198,000, or 68.5%, from net income of
$3,209,000 for 2004. Net income per share for 2005 was $.23 compared with $.74
for 2004. Diluted net income per share was $.22 for 2005 compared with $.72 for
2004. Return on average assets was .19% for 2005 compared with .67% for 2004.
Return on average shareholders' equity was 1.94% for 2005 compared with 6.41%
for 2004.
The change in net income for 2005 was affected primarily by the
following factors:
o the 2005 loan loss provision expense increased by $4,535,000 over 2004
primarily due to credit quality issues centered mainly in one bank
subsidiary;
20
o mortgage loan brokerage income increased by $571,000 due to an increase in
residential mortgage loan production that resulted, in part, from modifying
the mortgage subsidiary's loan origination and funding activities, and from
a resurgence in demand for residential mortgage loans;
o noninterest expenses increased by $2,352,000, primarily due to the hiring
of additional corporate executive and administrative officers, and
increased commission-based compensation paid by the mortgage subsidiary;
o increased average holdings of loans and investments and higher yields
associated with those instruments resulted in a $6,732,000 increase in
interest and dividend income;
o interest expense increased by $3,774,000 principally due to higher interest
rates paid on time deposits; and
o income tax expense was reduced by $1,006,000 due to lower taxable income
resulting from the net effect of the factors enumerated above.
Net interest income for 2005 increased by $2,958,000 over the 2004
amount due to increases of $6,134,000 and $426,000 in interest income on loans
and federal funds sold, respectively, and increases of $3,438,000 and $343,000
in interest expenses related to interest-bearing deposits and long-term debt,
respectively. Interest expense for long-term debt increased in 2005 due to
increases in the average amount of such debt outstanding and increased variable
interest rates paid for $10,000,000 of junior subordinated debt issued by the
Corporation during 2004. 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.
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.
The change in 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
primarily 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
21
interest expenses related to time deposits and short-term borrowings,
respectively. Interest expense for long-term debt increased by $401,000 in 2004,
primarily due to the issuance of $10,000,000 of junior subordinated debt by the
Corporation
Credit Quality Issues in 2005 and 2004
The greatest single factor in changing net income in 2005 and 2004 was
the tremendous increase in the provisions for loan losses. In 2005 the provision
was $9,637,000 and in 2004 it was $5,102,000. This compares to $1,119,000 in
2003, $1,033,000 in 2002 and $650,000 in 2001.
More than 80% of the provisions made in 2005 and 2004 were attributable
to credit quality issues at one of the Corporation's subsidiary banks. The
Corporation became aware of credit quality issues at the bank in mid-2004 in
connection with the departure of a senior lending officer of the bank.
Management initially became aware of a number of loans with significant issues
and began a program to strengthen and collect those loans. That program was only
partially successful as some of the borrowers' financial conditions and value of
collateral deteriorated during collection efforts. The Corporation also realized
that it would benefit from strengthening its credit risk management system. In
2004 that effort was carried out by redirecting the Corporation's existing
capabilities to focus on the bank in question.
As part of the ongoing process of risk assessment and mitigation,
management hired a Chief Credit Officer for the Corporation early in the second
quarter of 2005. Also, during the second quarter of 2005 management changed its
outside independent loan review firm to gain greater resources and expertise.
The changes allowed the Corporation to obtain the benefits of detailed, thorough
reviews of a greater portion of its loan portfolio in a shorter time period than
had previously been possible.
During 2005 the independent loan review firm reviewed all of the
Corporation's loan relationships greater than $400,000, approximately 40% of
loans outstanding. Their review resulted in the movement of a significant number
and dollar amount of loans into less favorable risk grades. In such cases,
management also undertook a review of the value of any collateral securing the
loans to estimate the net realizable value of the collateral in the event of a
default.
In some cases, management concluded that it was probable that the
Corporation would be unable to collect the amounts due according to the
contractual terms of the loan agreement and categorized those loans as impaired.
In other cases, the downgraded loans were designated as potential problem loans.
Although designation as a potential problem loan does not represent management's
estimate that the Corporation will suffer a loss with respect to the loan, it
does identify loans that merit close attention to reduce the risk of loss.
The Corporation is required to estimate the collectibility of its loan
portfolio as of each accounting period end and, as a result, provide an
allowance for loan losses. The allowance for loan losses is increased by the
provision for loan losses which is charged to expense and by any recoveries
received on loans previously charged off. The allowance is decreased by
deducting the amount of uncollectible loans charged off. The reviews referred to
above were factored into management's estimates of the probable losses inherent
in the Corporation's loan portfolio at December 31, 2004 and 2005 and resulted
in substantial increases in the amount of the allowance at each of those dates
which, in turn, was substantially responsible for the very large provisions for
loan losses recorded in 2004 and 2005.
22
At year end 2005, approximately 55% of the Corporation's impaired loans
and 58% of the potential problem loans were associated with the same bank
subsidiary, although that bank accounted for only 29.29% of the Corporation's
total loans. Over the course of 2005, management of the Corporation took a
number of additional actions to improve credit risk management at that
subsidiary. These included more aggressive review of maturing loans to improve
the bank's collateral position and the borrowers' ability to service the debt;
the hiring of an experienced special assets officer on a contract basis, under
the supervision of the Chief Credit Officer, to work out problem loans; a more
frequent level of loan review conducted by the external loan review firm; and a
mandatory loan approval review of larger loan relationships conducted by the
Chief Credit Officer as well as the Loan Committee of the bank. Management
believes that this will result in a significant improvement in the early
identification of problem and potential problem loans and it will also improve
the quality of new loans.
Additional information about the Corporation's provision for loan
losses, allowance for loan losses, impaired loans and potential problem loans is
discussed under the heading "Allowance for Loan Losses," below.
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. Beginning in mid-2004 and continuing throughout
2005, the Federal Reserve Board steadily increased certain short-term interest
rates under its control. These actions resulted in similar increases in other
market rates of interest, primarily in the short and intermediate terms up to
about seven years. Longer term rates remained at approximately the same levels
as previously. These actions affected CBI in several ways: loan yields and
interest costs increased as interest rates on loans with variable interest rates
were reset and maturing time deposits and newly acquired time deposits were
priced at current market levels; savings, NOW and money market rates were
adjusted upward primarily in response to market competition for deposits; and
borrowing costs increased as rates associated with those instruments moved
higher. Because longer-term rates were largely unaffected by the Federal Reserve
Board's actions, especially those in the 15- to 30-year range which largely
influences mortgage rates, the mortgage subsidiary experienced a resurgence in
demand during 2005. Consequently, fees and other mortgage brokerage income items
were favorably affected.
From 2002 and through the first six months of 2004, 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.
Net interest income was $20,801,000, $17,843,000, and $16,708,000 for
2005, 2004, and 2003, respectively. The amounts of interest income increased in
both 2005 and 2004, and interest expense amounts increased in 2005 and decreased
23
in 2004. Average earning assets and average interest bearing liabilities amounts
increased steadily over those two years, also.
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, 2005, 2004, and 2003.
24
Average Balances, Yields and Rates
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
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 ... $ 694 $ 49 7.06% $ 1,086 $ 20 1.84% $ 990 $ 19 1.92%
Investment securities - taxable .............. 54,077 1,758 3.25% 49,546 1,518 3.06% 45,488 1,414 3.11%
Investment securities - tax exempt (1) ....... 6,259 215 3.44% 9,201 312 3.39% 9,174 322 3.51%
Federal funds sold ........................... 17,900 629 3.51% 16,950 203 1.20% 26,582 279 1.05%
Loans, including held for sale (1) (2) (3) ... 426,384 28,955 6.79% 371,061 22,821 6.15% 340,518 22,234 6.53%
--------- ------- -------- ------- --------- -------
Total interest earning assets ....... 505,314 31,606 6.25% 447,844 24,874 5.55% 422,752 24,268 5.74%
Cash and due from banks ...................... 15,671 15,587 14,452
Allowance for loan losses .................... (5,402) (4,615) (3,861)
Premises and equipment ....................... 8,257 7,327 6,996
Intangible assets ............................ 7,280 7,526 7,772
Other assets ................................. 4,573 4,041 3,400
--------- -------- ---------
Total assets ........................ $ 535,693 $477,710 $ 451,511
========= ======== =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ... $ 60,785 $ 452 0.74% $ 54,918 $ 225 0.41% $ 44,481 $ 193 0.43%
Savings ................................. 89,407 1,393 1.56% 80,534 814 1.01% 70,552 766 1.09%
Time deposits ........................... 225,627 6,895 3.06% 190,290 4,263 2.24% 186,502 4,728 2.54%
--------- ------- -------- ------- -------- -------
Total interest bearing deposits ..... 375,819 8,740 2.33% 325,742 5,302 1.63% 301,535 5,687 1.89%
Short-term borrowings ........................ 8,584 198 2.31% 10,309 205 1.99% 29,026 750 2.58%
Long-term debt ............................... 32,815 1,867 5.69% 28,601 1,524 5.33% 20,395 1,123 5.51%
--------- ------- -------- ------- -------- -------
Total interest
bearing liabilities ............... 417,218 10,805 2.59% 364,652 7,031 1.93% 350,956 7,560 2.15%
Noninterest-bearing demand deposits .......... 64,339 61,220 52,047
Other liabilities ............................ 2,116 1,782 2,217
Shareholders' equity ......................... 52,020 50,056 46,291
--------- -------- --------
Total liabilities and
shareholders' equity .............. $ 535,693 $477,710 $451,511
========= ======== ========
Interest rate spread (4) ..................... 3.66% 3.62% 3.59%
Net interest income and net yield
on earning assets (5) ................ $20,801 4.12% $ 17,843 3.98% $16,708 3.95%
======= ======== =======
(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) Interest income includes immateral amounts of loan fees.
(4) Total interest earning assets yield less total interest bearing liabilities
rate.
(5) Net yield equals net interest income divided by total interest earning
assets.
25
During 2005, loans, including loans held for sale, grew $17,692,000
over the amount as of December 31, 2004. Average loans including loans held for
sale, however, were $55,323,000 more in 2005 than in 2004 and represented almost
all of the increase in average total interest earning assets during 2005.
Deposit growth was robust in 2005, as well, with the 2005 year-end amount
increasing by $40,751,000 over the 2004 year-end, and the average amount of
deposits increasing by $53,196,000 for 2005 over the comparable 2004 amount.
Deposits are generally obtained from within the Banks' market areas. Although
some of the Banks obtain limited amounts of deposit funding through the use of
brokered time deposits, the amounts of such deposits do not create significant
liquidity concerns for the affected Banks. The Banks have recently begun
accepting Health Savings Account deposits as an additional product offering, but
the amounts of such deposits are not yet significant. Interest costs associated
with deposits increased primarily due to increased market rates.
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 was not 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 junior subordinated debt to
provide additional capital to 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 surges in mortgage loan
demand. The Corporation also changed its allocation of assets such that its
investments in federal funds sold and securities available-for-sale decreased
significantly by the end of 2004 compared with 2003. This also allowed the
Corporation to invest significantly more dollars in the higher yielding loan
asset category.
Time deposits are the largest category of the Corporation's deposit
liabilities. Interest rates paid for such liabilities increased during 2005.
Accordingly, total interest expense reversed its recent trend and increased to
$10,805,000 in 2005 from $7,031,000 in 2004 and $7,560,000 in 2003. The average
rates paid for time deposits increased to 3.06% in 2005 from 2.24% in 2004 and
2.54% in 2003. Interest expenses for short-term borrowings were largely
unchanged in 2005, primarily due to the lower average amounts of that funding
source. Long-term debt is composed of fixed rate advances from the Federal Home
Loan Bank of Atlanta and variable-rate junior subordinated debt. Until
short-term interest rate increases cease, the Corporation expects that its
interest expenses will continue to increase, as well.
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 shown 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. In
addition, by moving quickly to increase yields on interest earning assets during
2005 while limiting increases in rates paid, the Corporation was able to obtain
favorable results from the rate component, as well. Loan growth has been
prominent in contributing to increases in interest income.
26
Volume and Rate Variance Analysis
2005 compared with 2004 2004 compared with 2003
----------------------- -----------------------
Volume * Rate * Total Volume * Rate * Total
-------- ------ ----- -------- ------ -----
(Dollars in thousands)
Interest earning assets
Interest-bearing deposits with other banks .......... $ (10) $ 39 $ 29 $ 2 $ (1) $ 1
Investment securities - taxable ..................... 144 96 240 124 (20) 104
Investment securities - tax exempt .................. (101) 4 (97) 1 (11) (10)
Federal funds sold .................................. 12 414 426 (111) 35 (76)
Loans, including held for sale ...................... 3,611 2,523 6,134 1,924 (1,337) 587
------- ------- ------- ------- ------- -------
Interest income ........................ 3,656 3,076 6,732 1,940 (1,334) 606
------- ------- ------- ------- ------- -------
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts ......... 26 201 227 43 (11) 32
Savings ....................................... 98 481 579 103 (55) 48
Time deposits ................................. 889 1,743 2,632 94 (559) (465)
------- ------- ------- ------- ------- -------
Total interest bearing deposits ........ 1,013 2,425 3,438 240 (625) (385)
Short-term borrowings ............................... (37) 30 (7) (402) (143) (545)
Long-term debt ...................................... 235 108 343 438 (37) 401
------- ------- ------- ------- ------- -------
Total interest expense ................. 1,211 2,563 3,774 276 (805) (529)
------- ------- ------- ------- ------- -------
Net interest income .................... $ 2,445 $ 513 $ 2,958 $ 1,664 $ (529) $ 1,135
======= ======= ======= ======= ======= =======
* 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.
Although management currently expects that interest rates will continue
to increase in 2006, 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 2006 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 adequacy of the related allowance for loan losses. Provisions
for loan losses totaled $9,637,000, $5,102,000, and $1,119,000 for the years
ended December 31, 2005, 2004 and 2003, respectively. Net charge-offs for 2005
were $2,038,000, compared with $4,961,000 and $486,000 for 2004 and 2003,
respectively.
27
During the second half of 2004, management became aware of credit
quality concerns relative to the loan portfolio of one of its subsidiary banks
and a $3,435,000 real estate secured loan at another of its subsidiary banks.
Consequently, during that period significant increases were recorded in the
Corporation's loan loss provision resulting in an overall provision of
$5,102,000 for the year.
In 2005, the Corporation's external loan review firm reviewed the
larger loan relationships at the subsidiary bank with credit quality concerns
about its loan portfolio. Based on those reviews, and further analysis and
review conducted by management, significant increases were recorded in the
Corporation's loan loss provision during the last two quarters of 2005. This
resulted in a provision of $9,637,000 for the year so that, in the opinion of
management, the allowance for loan losses would be adequate to absorb the
probable losses remaining in the loan portfolio.
Because of personnel changes as well as the Corporation's upgrading of
its credit risk management systems, management does not believe that the
magnitude of the provisions for loan losses in 2004 and 2005 represent a trend,
although it realizes that the level of provisions may remain somewhat above 2003
levels as the problem loans and potential problem loans which contributed to the
high level of provisions in 2004 and 2005 are finally resolved.
See "Impaired Loans," "Potential Problem Loans," "Allowance for Loan
Losses," and "The Application of Critical Accounting Policies" for further
discussion of the loans and provisions for loan losses referenced above 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 2005 increased by $725,000 or 10.0% over the
2004 amount, primarily as a result of increased mortgage brokerage income.
Interest rates associated with mortgage loans did not change significantly in
2005, and the demand for housing in the Corporation's market areas remains
strong. Service charges on deposit accounts increased by $158,000 in 2005 due to
increased management oversight of fee waivers and changes in the fee structure.
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 early in the second
quarter of 2004 to decrease the costs and complexity of funding the mortgage
brokerage operation. Those measures included establishing CRM as a loan
production office of one of its subsidiary banks, closing loans in the bank's
name, and assigning the loan back to CRM upon the loans' sale into the secondary
market. Management estimates that the process resulted in cost savings of
approximately $183,000 for the Corporation over the final three quarters of
2004.
Service charges on deposit accounts were $112,000 lower in 2004 than in
2003. 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 Expenses
Noninterest expense for 2005 increased by $2,352,000 or 15.6% over the
2004 amount. Higher salaries and employee benefits expenses were largely
responsible for this increase. These items increased by $1,304,000, primarily
due to the operation of an additional office of Florence National Bank in 2005,
higher commissions and bonuses paid by the mortgage subsidiary, and the hiring
of a new Chief Executive Officer, a Chief Credit Officer, and a Human Resources
Director. Expenses related to premises and equipment increased in 2005 by
28
$250,000 over the 2004 amount due to higher depreciation expenses that resulted
from an additional office of Florence National Bank and equipment purchased and
placed in service during the year. Construction of a new headquarters office and
operations building was completed during the fourth quarter of 2005 and the
building was placed in service in the first quarter of 2006. The Corporation
recorded $50,000 in relocation expenses in 2005 for moving to the new building.
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 primarily because of the decline in mortgage loan
originations resulting in less commission expense.
Income Taxes
Income tax expense for 2005 was $765,000, a decrease of $1,006,000 or
56.8% from $1,771,000 recorded for 2004. Income tax expense for 2004 decreased
$1,376,000 or 43.7% from the 2003 amount. The decreasing income tax expense
amounts resulted directly from the lower amounts of income before income taxes
during 2005 and 2004. The effective income tax rate (income tax expense divided
by income before income taxes) was 43.1%, 35.6%, and 35.8% for 2005, 2004 and
2003, respectively. The effective tax rate for 2005 is abnormally high because
South Carolina requires that each of the four subsidiary banks file a separate
income tax return. One of the subsidiary banks recorded a loss for 2005. South
Carolina bank tax is based on a bank's net income for financial reporting
purposes but does not provide any offsetting benefit for operating losses.
INVESTMENT PORTFOLIO
The Corporation's investment portfolio consists primarily of short- and
intermediate-term U.S. Treasury and U.S. Government agency debt issues.
Investment securities averaged $60,336,000 in 2005, $58,747,000 in 2004, and
$54,662,000 in 2003.
The table below summarizes the amortized cost and estimated fair value
of the Corporation's investment portfolio for the past three years.
Securities Portolio Composition
December 31,
------------
2005 2004 2003
---- ---- ----
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 ........................ $55,781 $54,917 $50,619 $50,361 $56,633 $56,477
States and political subdivisions ............ 3,754 3,784 4,985 5,110 8,140 8,387
------- ------- ------- ------- ------- -------
Total available for sale ..................... $59,535 $58,701 $55,604 $55,471 $64,773 $64,864
======= ======= ======= ======= ======= =======
Securities held-to-maturity
States and political subdivisions ............ $ 1,850 $ 1,820 $ 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, 2005:
29
Securities Portfolio Maturities and Yields
December 31, 2005
-----------------
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 .............. $13,360 2.68% $29,743 3.76% $10,765 3.87% $ - 0.00% $53,868 3.51%
States and political subdivisions (1) .... 597 3.84% 2,558 3.73% 2,479 3.67% - 0.00% 5,634 3.72%
Mortgage-backed securities (2) ........... 1 0.00% 1,037 2.89% - 0.00% 11 4.38% 1,049 2.90%
------- ------- ------- ----- -------
Total ............................ $13,958 2.73% $33,338 3.73% $13,244 3.83% $ 11 4.38% $60,551 3.52%
======= ======= ======= ===== =======
(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.
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 2003 through 2005.
During 2005, the composition of the securities portfolio was little
changed. The amount of securities held at the end of 2005 was only $3,155,000
more than the amount held at the end of 2004. Purchases for the securities
accounts during 2005 were generally made to replace issues called or matured
during the year. Securities purchased had maturities ranging from approximately
two years to approximately eight years in the future.
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 were 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, 2005, 2004 and 2003, the
Corporation sold investment securities for gross proceeds of $4,412,000,
$13,676,000, and $2,068,000, respectively. Realized (losses) and gains on those
transactions were ($10,000), $76,000, and ($252,000) for the years ended
December 31, 2005, 2004 and 2003, 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.
30
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,
------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(Dollars in thousands)
Commercial, financial and agricultural ............. $ 95,023 $ 96,275 $ 84,844 $ 78,210 $ 56,515
Real estate - construction ......................... 37,923 29,968 23,590 23,345 19,557
Real estate - mortgage ............................. 243,837 230,986 188,530 168,499 127,002
Consumer installment ............................... 37,201 36,420 35,142 36,430 26,831
-------- -------- -------- -------- --------
Total loans - gross .......................... $413,984 $393,649 $332,106 $306,484 $229,905
======== ======== ======== ======== ========
Commercial, financial, and agricultural loans, primarily representing
loans made to small and medium size businesses, may be made on either a secured
or an unsecured basis. When taken, security usually consists of liens on
inventories, receivables, equipment, and furniture and fixtures. Unsecured
business loans are generally short-term with emphasis on repayment strengths and
low debt-to-worth ratios. Commercial lending involves significant risk because
repayment usually depends on the cash flows generated by a borrower's business,
and debt service capacity can deteriorate because of downturns in national and
local economic conditions. Each of the banking subsidiaries has a Loan Committee
which is responsible for overseeing the credit granting and monitoring
processes. The Corporation's Chief Credit Officer has specific authority over
significantly large loan requests.
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 policies of the
subsidiary Banks generally limit loan-to-value ratios for real estate loans 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 2005, 2004 and 2003, the Corporation sold
$213,195,000, $174,074,000, and $309,914,000, 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 the terms of the loans require that the
interest rate be adjusted to the current market rate 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.
31
The Corporation has a geographic concentration of loans within the
Banks' market areas because of the nature of its business. As of December 31,
2005, 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 its most credit-worthy customers.
Unsecured loans accommodate the credit needs of those customers and provide the
banks the opportunity to earn additional interest income through pricing
commensurate with the loans' increased risk. At December 31, 2005, the
Corporation had approximately $23,000,000, or 5.6% of its loan portfolio, in
unsecured loans. As of December 31, 2004, the Corporation had approximately
$25,000,000 in unsecured loans, or 6.4% 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.
As of December 31, 2005, unsecured loans totaling $180,000 were
included in nonaccrual loans, $421,000 of such loans were included in accruing
loans 90 or more days past due, and $1,371,000 of such loans were included in
potential problem loans.
Maturity and Interest Sensitivity Distribution of Loans
The following table sets forth the maturity and interest sensitivity
distribution of the Corporation's loans, by type, as of December 31, 2005 as
well as the type of interest requirement on loans due after one year.
December 31, 2005
-----------------
After one
Within one year but within After five
year five years years Total
---- ---------- ----- -----
(Dollars in thousands)
Commercial, financial and agricultural ............................. $ 46,432 $ 40,858 $ 7,733 $ 95,023
Real estate ........................................................ 75,108 149,949 56,703 281,760
Consumer installment ............................................... 11,320 25,056 825 37,201
-------- -------- -------- --------
Total .............................................................. $132,860 $215,863 $ 65,261 $413,984
======== ======== ======== ========
Predetermined rate, maturity greater than one year ............. $ - $162,890 $ 37,995 $200,885
Variable rate or maturity within one year ...................... $132,860 $ 52,973 $ 27,266 $213,099
Impaired Loans, Other Nonperforming Loans and Potential Problem 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.
Following is a summary of the Corporation's nonaccrual and other nonperforming
loans included in total loans at December 31 of each year shown:
32
Nonaccrual and Past Due Loans
December 31,
------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans ................................... $11,651 $ 4,941 $ 2,595 $ 796 $ 281
Accruing loans 90 days or more past due ............ 729 137 146 1,740 17
------- ------- ------- ------- -------
Total ......................................... $12,380 $ 5,078 $ 2,741 $ 2,536 $ 298
======= ======= ======= ======= =======
Total as a % of outstanding loans ............. 2.99% 1.29% 0.83% 0.83% 0.13%
Impaired loans (included in non accrual) ........... $11,651 $ 4,941 $ 2,595 $ 796 $ 281
Impaired loans a percentage of allowance ........... 100.09% 113.66% 61.70% 22.28% 9.93%
for loan losses
Gross income that would have been recorded for the years ended December
31, 2005, 2004 and 2003, if nonaccrual loans had been performing in accordance
with their original terms was approximately $448,000, $63,000, and $117,000,
respectively. No cash basis interest income was recognized in 2005, 2004 and
2003 on non-accrual loans.
The Corporation's accounting policies on nonaccrual and impaired loans
are discussed in Note 2 to the consolidated financial statements.
Potential problem loans, a lower level of concern than impaired and
nonperforming loans, are defined as loans where information about the borrowers'
credit problems causes management to have more than normal concern about the
borrowers' ability to comply with the original repayment terms.
The following table is a summary of nonperforming loans and potential
problem loans for each of the past four quarters.
90 days + Total Potential
Nonaccrual past due and nonperforming % of total problem % of total
loans still accruing loans loans loans loans
----- -------------- ----- ----- ----- -----
(Dollars in thousands)
December 31, 2004 ................ $ 4,941 $ 137 $ 5,078 1.29% $ 4,628 1.20%
Net change ....................... 118 215 333 2,972
------- ------- ------- -------
March 31, 2005 ................... 5,059 352 5,411 1.33% 7,600 1.87%
Net change ....................... 200 (9) 191 10,400
------- ------- ------- -------
June 30, 2005 .................... 5,259 343 5,602 1.35% 18,000 4.35%
Net change ....................... 4,954 74 5,028 (4,107)
------- ------- ------- -------
September 30, 2005 ............... $10,213 $ 417 $10,630 2.57% $13,893 3.35%
Net change ....................... 1,438 312 1,750 15,420
------- ------- ------- -------
December 31, 2005 ................ $11,651 $ 729 $12,380 2.99% $29,313 7.08%
======= ======= ======= =======
Nonaccrual loans increased $6,710,000 during 2005. The major components
of nonaccrual loans and the increase are discussed below.
33
Approximately $2,434,000 of the December 31, 2005 and 2004
nonperforming loan amounts represent the balance of a loan relationship that
originated in July 2004 to finance the purchase of a business. During the fourth
quarter of 2004, management became aware that the business was not performing as
expected and the borrower stopped making the required payments. The borrower
alleged that financial information furnished by the seller and relied upon in
establishing the value of the business (and its purchase price) was fraudulent.
Management determined during the fourth quarter of 2004 that the loan had become
collateral dependent and wrote the loan down to the estimated net realizable
value of the collateral as of December 31, 2004. An independent appraisal of the
real estate, fixtures and equipment of the business was completed during the
second quarter of 2005 under the assumption that the business was not operating
as a going concern. That appraisal supports management's estimated net
realizable value and the loan's carrying amount has not since changed. The
Corporation is presently exercising forbearance with respect to this
relationship and continues to work with the borrower who is actively trying to
sell the business as a going concern. Management has retained legal counsel to
assist with respect to this loan.
The other nonperforming loans consist of approximately 100 loans to
various individuals and businesses with an aggregate balance of $5,880,000. The
amounts of the individual loans range up to approximately $780,000.
Approximately $4,353,000 of the increase in nonaccrual loans during the
third quarter of 2005 represents larger loan relationships that were transferred
from the potential problem loan category as the borrowers' failures to meet
their obligations became more severe. In addition, current evaluations of the
collateral held indicated potential short-falls in those values. During the
fourth quarter of 2005, approximately $2,243,000 of loans were added to
nonaccrual loans due to performance issues and/or as a result of continuing
reviews of the loan portfolio, including valuations of collateral. Charge-offs
of loans from the nonaccrual category approximated $437,000 during the fourth
quarter of 2005.
Loans that are 90 days or more past due and still accruing interest
represent loans with significant performance issues, but where management
believes that each loan's collateral position provides enough protection that
the bank expects full recovery of principal and interest on the loan. At
December 31, 2005 this category represented approximately .18% of the loan
portfolio.
At December 31, 2005, the Corporation had identified $29,313,000, or
7.08%, of the loan portfolio, as potential problem loans. This is an increase of
$24,685,000 over the amount as of December 31, 2004. Approximately $17,485,000
or 71% of this increase in potential problem loans resulted from risk grade
changes recommended by a new loan review firm during their initial loan
portfolio reviews in 2005 and management-initiated loan downgrades.
Approximately $7,200,000 or 29% of this increase in potential problem loans
resulted from a consumer loan portfolio credit scoring project conducted during
the fourth quarter by management at the banking subsidiary most impacted by
problem loans.
The amount of potential problem loans does not represent management's
estimate of potential losses since a significant portion of these loans are
secured by real estate and other forms of collateral. Approximately $1,371,000
of potential problem loans were unsecured as of December 31, 2005.
Management will continue to closely monitor the levels of nonperforming
and potential problem loans and address the weaknesses in those credits to
enhance the amount of ultimate collection or recovery of these assets.
34
Foreclosed Assets
Foreclosed assets were carried in the consolidated balance sheets at
$185,000, $252,000, and $327,000 as of December 31, 2005, 2004 and 2003,
respectively. Foreclosed assets are initially recorded at fair value, less
estimated costs to sell, at the date of foreclosure, establishing a new cost
basis. Loan losses arising from the acquisition of such property are charged
against the allowance for loan losses as of that date. Subsequent to
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of the new cost basis or fair value, less estimated
costs to sell. Revenues and expenses from operations and changes in any
subsequent valuation allowance are included in net foreclosed assets costs and
expenses.
Special Assets Management
In late 2005 management hired an experienced Special Assets Officer on
a contract basis. The initial term of his agreement with the Corporation is
through June 30, 2006. Under the direction and supervision of the Chief Credit
Officer, he will assist in working to aggressively reduce the aggregate level of
problem loans through all appropriate banking and legal options.
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.
35
Analysis of the Allowance for Loan Losses
Years Ended December 31,
------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(Dollars in thousands)
Total amount of loans outstanding at end of year ....... $ 413,984 $ 393,649 $ 332,106 $ 306,484 $ 229,905
========= ========= ========= ========= =========
Average amount of loans outstanding .................... $ 426,384 $ 371,061 $ 340,518 $ 281,907 $ 211,901
========= ========= ========= ========= =========
Allowance for loan losses - January 1 .................. $ 4,347 $ 4,206 $ 3,573 $ 2,830 $ 2,424
--------- --------- --------- --------- ---------
Changes incident to merger activities .................. - - - 444 28
--------- --------- --------- --------- ---------
Transfer of allowance for off-balance-sheet
contingencies to other liabilities .................. (305) - - - -
--------- --------- --------- --------- ---------
Loans charged-off
Real estate .......................................... 99 1,293 250 175 9
Installment .......................................... 432 387 247 223 202
Credit cards and related plans ....................... - - - - 9
Commercial and other ................................. 1,714 3,400 163 374 87
--------- --------- --------- --------- ---------
Total charge-offs .................................. 2,245 5,080 660 772 307
--------- --------- --------- --------- ---------
Recoveries
Real estate .......................................... 16 21 105 1 -
Installment .......................................... 55 67 58 20 33
Credit cards and related plans ....................... - - - - 2
Commercial and other ................................. 136 31 11 17 -
--------- --------- --------- --------- ---------
Total recoveries ................................... 207 119 174 38 35
--------- --------- --------- --------- ---------
Net charge-offs ........................................ 2,038 4,961 486 734 272
--------- --------- --------- --------- ---------
Provision for loan losses charged to expense ........... 9,637 5,102 1,119 1,033 650
--------- --------- --------- --------- ---------
Allowance for loan losses - December 31 ................ $ 11,641 $ 4,347 $ 4,206 $ 3,573 $ 2,830
========= ========= ========= ========= =========
Ratios
Net charge-offs to average loans outstanding ........... 0.48% 1.34% 0.14% 0.26% 0.13%
Net charge-offs to loans outstanding at end of ......... 0.49% 1.26% 0.15% 0.24% 0.12%
year
Allowance for loan losses to average loans ............. 2.73% 1.17% 1.24% 1.27% 1.34%
Allowance for loan losses to total loans at end ........ 2.81% 1.10% 1.27% 1.17% 1.23%
of year
Net charge-offs to allowance for losses ................ 17.51% 114.12% 11.55% 20.54% 9.61%
Net charge-offs to provision for loan losses ........... 21.15% 97.24% 43.43% 71.06% 41.85%
A discussion of the allocation of the allowance for loan losses is set
forth under the section "The Application of Critical Accounting Policies."
The Corporation operates four independent community banks in South
Carolina. Under the provisions of law and regulations governing banks, each
bank's board of directors is responsible for determining the adequacy of its
bank's loan loss allowance. In addition, each bank is supervised and regularly
examined by the Office of the Comptroller of the Currency (the "OCC") (or the
South Carolina State Board of Financial Institutions (the "State Board") in the
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
36
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.
A considerable degree of judgment is exercised in computing an estimate
of the allowance for loan losses. Management's judgment must be applied in
assessing the current creditworthiness of borrowers and in estimating uncertain
future events and their effects based on currently known facts and
circumstances. Changes in the estimated allowance for loan losses arising as new
events occur or more information is obtained are accounted for as changes in
accounting estimates in the accounting period in which such changes occur.
Management reviews its allowance for loan losses utilizing three broad
loan categories: commercial, real estate and consumer installment loans to
individuals. Within these categories, the allowance for loan losses is composed
of specific and general amounts. Specific allowance amounts are provided for
individual loans based on management's evaluation of loss exposure taking into
account the current payment status, underlying collateral and other known
information about the borrower's circumstances. Typically, these loans are
identified as impaired or nonperforming, or have been assigned internal risk
grades of management attention, special mention, substandard or doubtful.
General allowance amounts are provided for all other loans, excluding those for
which specific amounts were determined, by applying estimated loss percentages
to the portfolio categorized using risk grades. These percentages are based on
management's current evaluation with consideration given to historical loss
experience, general national and local economic and business conditions
affecting key lending market areas, credit quality trends, collateral values,
loan volumes, portfolio seasoning, and any identified credit concentrations. The
findings of internal and external credit reviews and results from external
audits and regulatory examinations are also considered.
The following table presents the allocation of the Corporation's
allowance for loan losses, as of December 31, 2001 through 2005, compared with
the percentage of loans in the applicable categories to total loans.
December 31,
------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(Dollars in thousands)
Amount allocated to loan category
---------------------------------
Commercial, financial and agricultural .................. $ 6,333 $ 1,960 $ 1,796 $ 1,479 $ 1,019
Real estate ............................................. 4,831 1,907 1,800 1,548 1,322
Consumer installment .................................... 477 480 610 546 489
------- ------- ------- ------- -------
Total .............................................. $11,641 $ 4,347 $ 4,206 $ 3,573 $ 2,830
======= ======= ======= ======= =======
December 31,
------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Percentage of loans in category
-------------------------------
Commercial, financial and agricultural .................. 23.0% 24.5% 25.5% 25.5% 24.6%
Real estate ............................................. 68.1% 66.3% 63.9% 62.6% 63.7%
Consumer installment .................................... 8.9% 9.2% 10.6% 11.9% 11.7%
----- ----- ----- ----- -----
Total .............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The Corporation utilizes a risk grading system for all loans held in
the portfolio. This system involves the lending officers' assigning a risk
grade, on a loan-by-loan basis, considering information about the borrower's
37
capacity to repay, collateral, payment history, and other known factors.
Assigned risk grades are updated monthly for any known changes in circumstances
affecting the borrower or the loan. The risk grading system is monitored on a
continuing basis by management and the external credit review firm which is
independent of the lending function.
The following discussion presents specific factors that influenced
management's judgment of the amounts of additions to the allowance through
provisions charged to operating expenses for each of the years presented in the
table.
In 2001, $650,000 was provided for loan losses for normally expected
loan loss expense and due to significant growth in the loan portfolio during
that year and the expectation that the loans booked in the newer Florence market
could exhibit a higher loss potential than the Corporation's older markets.
In 2002, $1,033,000 was provided for loan losses due to growth in the
loan portfolio totaling $76,579,000, of which approximately $44,078,000 was
obtained in the merger of Ridgeway Bankshares, Inc. Furthermore, net charge-offs
almost tripled compared with the prior year and an increase of $5,827,000 was
noted in the combined amounts of nonaccrual loans, accruing loans 90 or more
days past due, and potential problem loans.
In 2003, $1,119,000 was provided for loan losses, primarily due to
growth in the loan portfolio and a significant increase in the amount of
nonaccrual loans.
The $5,102,000 and $9,637,000 provisions for loan losses recorded for
2004 and 2005, respectively, resulted from the circumstances detailed above.
DEPOSITS
The average deposits for the Corporation for the years ended December
31, 2005, 2004 and 2003 are summarized below:
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Average Average Average Average Average Average
balance cost balance cost balance cost
------- ---- ------- ---- ------- ----
(Dollars in thousands)
Noninterest-bearing demand ..................... $ 64,339 - $ 61,220 - $ 52,047 -
Interest bearing transaction accounts .......... 60,785 0.74% 54,918 0.41% 44,481 0.43%
Savings - regular .............................. 24,617 0.46% 20,106 0.54% 20,998 0.53%
Savings - money market ......................... 64,790 1.98% 60,428 1.17% 49,554 1.32%
Time deposits less than $100 ................... 136,087 2.97% 122,125 2.26% 122,488 2.58%
Time deposits greater than $100 ................ 89,540 3.19% 68,165 2.20% 64,014 2.45%
-------- -------- --------
Total average deposits ..................... $440,158 $386,962 $353,582
======== ======== ========
Deposits are the primary source of funds for the Banks' lending and
investing activities. Deposits are attracted principally from customers within
38
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, 2005 the Corporation had $98,428,000 in certificates of
deposit of $100,000 or more. Approximately $36,385,000 mature within three
months, $23,876,000 mature over three through six months, $23,559,000 mature
over six months through twelve months and $14,608,000 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. However,
as of December 31, 2005, the Banks had $7,201,000 in brokered certificates of
deposit, all of which were issued in denominations of $100,000 or over. The
brokered certificates of deposit mature throughout 2006 and have interest rates
ranging from 2.60% to 4.10%. 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 four days, and mortgage loan
warehouse and general purpose lines of credit payable. As of December 31, 2005,
securities sold under agreements to repurchase totaled $5,372,000. These amounts
are collateralized by investment securities and the interest rate is subject to
change daily. Federal funds purchased totaled $421,000 as of December 31, 2005,
are unsecured and mature on a daily basis. $1,182,000 was outstanding under
warehouse lines of credit as of December 31, 2005. Other short-term debt was
outstanding on December 31, 2005 under an unsecured short-term credit facility
granted to the Corporation by another financial institution. That variable-rate
facility expires during the fourth quarter of 2006.
Summary information about total short-term borrowings is provided in
the following table.
December 31,
------------
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Balance outstanding at end of year ........................................ $ 8,975 $ 6,662 $17,960
Weighted average interest rate at end of the period ....................... 4.26% 1.54% 2.38%
Interest expense .......................................................... $ 198 $ 205 $ 750
Maximum outstanding at any month-end during the period .................... $ 8,975 $17,940 $39,379
Average outstanding during the period ..................................... $ 8,584 $10,309 $29,026
Weighted average interest rate during the period .......................... 2.31% 1.99% 2.58%
LONG-TERM DEBT
The Corporation's banking subsidiaries are members of the Federal Home
Loan Bank of Atlanta ("FHLB"). As such, they have access to long-term borrowing
from the FHLB. As of December 31, 2005, the Banks had borrowed a total of
$21,886,000 from the FHLB. The borrowings are secured by blanket liens on all
39
qualifying first lien residential mortgage loans held by the Banks, specifically
excluding such loans originated for resale on the secondary market.
Early in the second quarter of 2004, the Corporation sponsored the
creation of SCB Capital Trust I (the "Trust"). The Trust issued securities
totaling $10,310,000. The Trust invested the proceeds of its debt issuance by
purchasing a like amount of junior subordinated debt issued by the Corporation.
The amount of the Corporation's debt is includible in Tier 1 capital for
purposes of computing regulatory required capital ratios.
RETURN ON EQUITY AND ASSETS
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2005, 2004 and 2003.
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Return on assets (ROA) .................... 0.19% 0.67% 1.25%
Return on equity (ROE) .................... 1.94% 6.41% 12.17%
Dividend payout ratio ..................... 173.91% 54.05% 27.48%
Equity as a percent of assets ............. 9.71% 10.48% 10.25%
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in a timely and economical manner.
The most manageable sources of liquidity are composed of liabilities, with the
primary focus of liquidity management being on the ability to attract deposits
within the Banks' market areas. Core deposits (total deposits less certificates
of deposit of $100,000 or more) provide a relatively stable funding base.
Certificates of deposit of $100,000 or more are generally more sensitive to
changes in rates, so they must be monitored carefully. Asset liquidity is
provided by several sources, including amounts due from banks, federal funds
sold, and investments available-for-sale.
The Corporation maintains an available-for-sale investment securities
portfolio. While investment securities purchased for this portfolio are
generally purchased with the intent to be held to maturity, such securities are
marketable and occasional sales may occur prior to maturity as part of the
process of asset/liability and liquidity management. The Corporation also
occasionally designates securities as held-to-maturity. Securities in that
portion of the portfolio are generally not considered a primary source of
liquidity. Management deliberately maintains a relatively short-term maturity
schedule for its investments so that there is a continuing stream of maturing
investments that enables the Corporation to supply liquidity to its loan
portfolio and for customer withdrawals. In addition, to the extent that the
Corporation must maintain continuing positions in investment securities due to
pledging or other requirements, regular periodic maturities of investments helps
to ensure that the Corporation invests funds throughout periods of changing
rates which tends to mitigate the effects such changes have on the fair values
of investment securities.
40
The Corporation has substantially more liabilities maturing in the next
12 months than it has assets maturing in the same period. The Corporation also
has legal obligations to extend credit pursuant to loan commitments, lines of
credit and standby letters of credit which totaled $13,386,000, $42,974,000, and
$2,024,000, respectively, at December 31, 2005 (see Note 15 to the consolidated
financial statements). However, based on its historical experience, and that of
similar companies, the Corporation believes that it is unlikely that so many
deposits would be withdrawn, without being replaced by other deposits, and
extensions of credit would be required, that the Corporation would be unable to
meet its liquidity needs with the proceeds of maturing assets, in the ordinary
course of business.
The Corporation also maintains various federal funds lines of credit
with correspondent banks and is able to borrow from the Federal Home Loan Bank
of Atlanta and the Federal Reserve's discount window.
The Corporation, through its Banks, has a demonstrated ability to
attract deposits from its market area. Deposits grew from $218,811,000 as of
December 31, 2000 to $464,209,000 as of December 31, 2005, a five year compound
growth rate of 16.23%. This consistently growing base of deposits is the major
source of operating liquidity.
CAPITAL
Dividends
The Corporation exists as a legal entity distinct from its
subsidiaries. Its main sources of revenues consist of service fees and dividends
paid to it by the Banks. The Banks are subject to various laws and regulations
that limit the amounts of dividends that they may pay. In addition, the
Corporation and the Banks are each subject to regulatory minimum capital
adequacy guidelines. These regulatory restrictions have not historically
hindered the Corporation's or the Banks' ability to pay reasonable dividends and
no such restrictions are anticipated in 2006.
During 2005, the Corporation contributed $3,000,000 of capital to two
of the Banks and received dividends from the other Banks totaling $4,266,000.
Subject to restrictions imposed by state laws and federal regulations, the
Boards of Directors of the Banks could have declared additional dividends from
their retained earnings of up to approximately $5,747,000 as of December 31,
2005. As of January 1, 2006, the effect of those restrictions was to further
restrict the amount of dividends that the Banks could declare to $2,411,000. The
Corporation made dividend payments to shareholders of $1,761,000, $1,744,000 and
$1,554,000 during 2005, 2004 and 2003, respectively.
Capital Adequacy
The Federal Reserve and federal bank regulatory agencies have adopted
risk-based capital standards for assessing the capital adequacy of bank holding
companies and financial institutions. Under the risk-based capital requirements,
the Corporation and each of the Banks are required to maintain a minimum ratio
of total capital to risk-weighted assets (including certain off-balance-sheet
activities, such as letters of credit) of 8%. At least half of total capital
41
must be composed of common equity, retained earnings and qualifying perpetual
preferred stock and certain hybrid instruments, less certain intangibles ("Tier
1 Capital"). The remainder may consist of certain subordinated debt or hybrid
capital instruments, qualified preferred stock and a limited amount of the
allowance for loan losses ("Tier 2 Capital," which, along with Tier 1 Capital,
composes "Total Capital"). Unrealized gains and losses on available-for-sale
securities generally are excluded from the calculation of the risk-based capital
ratios. To be considered well-capitalized under the risk-based capital
guidelines, an institution must maintain a total risk-weighted capital ratio of
at least 10% and a Tier 1 risk-weighted ratio of at least 5%.
Each of the Federal bank regulatory agencies also has established
minimum leverage capital requirements for banking organizations. Pursuant to
these requirements, banking organizations generally must maintain a minimum
ratio of Tier 1 Capital to adjusted average quarterly assets equal to from 4% to
5%, subject to federal bank regulatory evaluation of the institution's overall
safety and soundness.
Federal regulators may categorize an institution as less than
well-capitalized based on subjective criteria. Management believes that there
are no conditions or events that would cause the Corporation's or the Banks'
capital category to be other than resulting from meeting the minimum ratio
requirements.
Under the risk-based capital standards and pursuant to the provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991, federal
bank regulatory agencies are required to implement prescribed "prompt corrective
actions" if an institution's capital position deteriorates to specified levels.
The corrective actions become increasingly stringent as the capital position
continues to deteriorate.
The Banks are each considered to be "well capitalized" for regulatory
purposes. Detailed information on the Corporation's and the Banks' capital
positions can be found in Note 19 to the consolidated financial statements.
The mortgage subsidiary is also subject to minimum capital requirements
to maintain its certification as a HUD-approved Title II Loan Correspondent.
Certain investor and warehouse credit line agreements require that the mortgage
subsidiary maintain its HUD certification. Failure of CRM to meet its capital
requirements could result in a significant limitation of the mortgage
subsidiary's ability to originate, fund or sell loans, and therefore could have
a direct, material adverse effect on its business and the consolidated financial
statements. As of December 31, 2005, CRM exceeded its minimum regulatory capital
requirement by approximately $1,424,000.
During the first quarter of 2004, the Corporation acquired $10,310,000
in proceeds from the issuance of junior subordinated debt. Of this amount,
$3,000,000 was used to provide additional capital to two of the Banks,
approximately $1,400,000 was used to repay a short-term line of credit of the
mortgage subsidiary and approximately $635,000 was used to repay the
Corporation's short-term borrowings. The remainder is being used for the
Corporation's general corporate purposes. Under current Federal Reserve policy,
the Corporation is allowed to treat the junior subordinated debt, subject to
certain limitations, as Tier 1 Capital for capital adequacy purposes.
INFLATION
The assets and liabilities of the Corporation are mostly monetary in
nature. Accordingly, the financial results and operations of the Corporation are
much more affected by changes in interest rates than changes in inflation. There
42
is, however, a strong correlation between increasing inflation and increasing
interest rates. The rate of inflation, as measured by the average change in the
Consumer Price Index for All Urban Consumers, has been moderate, but increasing,
over the past several years, about 3.4% in 2005, 3.3% in 2004 and 1.9% in 2003.
Prospects appear reasonable for continued moderate inflation, despite risks
related to energy prices and the political and military situation in the Middle
East. Although inflation does not normally affect a financial institution as
dramatically as it does businesses with large investments in plants and
inventories, it does have an effect. During periods of high inflation there are
usually corresponding increases in the money supply and banks experience
above-average growth in assets, loans, and deposits. General increases in the
prices of goods and services also result in increased operating expenses.
Further, inflation may adversely affect the Corporation's customers and
indirectly affect the business of the Corporation.
OFF-BALANCE-SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT
LIABILITIES AND COMMITMENTS
The Corporation presently only engages in limited off-balance sheet
arrangements. Such arrangements are defined as potentially material
transactions, agreements, or other contractual arrangements which the
Corporation has entered into to which an entity unconsolidated with the
registrant is a party and, under which the Corporation, whether or not it is a
party to the arrangement, has, or in the future may have:
o any obligation under a direct or indirect guarantee or similar
arrangement;
o a retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to such entity for such assets;
o derivatives, to the extent that the fair value thereof is not fully
reflected as a liability or asset in the financial statements; or
o any obligation, including a contingent obligation, arising out of a
variable interest (as referenced in FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (January 2003), as may be
modified or supplemented), in an unconsolidated entity that is held
by, and material to, the registrant, where such entity provides
financing, liquidity, market risk or credit support to, or engages in
leasing, hedging or research and development services with, the
Corporation.
The Corporation's off-balance sheet arrangements presently include only
commitments to extend credit and standby letters of credit. Such instruments
have elements of credit risk in excess of the amount recognized in the balance
sheet. The exposure to credit loss in the event of nonperformance by the other
parties to these instruments is represented by the contractual, or notional,
amount of those instruments. Generally, the same credit policies used for
on-balance sheet instruments, such as loans, are used in extending loan
commitments and letters of credit. The following table sets out the contractual
or notional amounts of those arrangements:
43
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Loan commitments ................................... $13,386 $11,644
Unfunded commitments under lines of credit ......... 42,974 43,312
Standby letters of credit .......................... 2,024 2,919
Loan commitments involve agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and some
involve payment of a fee. Many of the commitments are expected to expire without
being fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers.
As described under "Liquidity," management believes that its various
sources of liquidity provide the resources necessary for the Banks to fund the
loan commitments and to perform under standby letters of credit, if the need
arises. Neither the Company nor the Banks are involved in other off-balance
sheet contractual relationships or transactions that could result in liquidity
needs or other commitments or significantly impact earnings.
The Corporation's contractual cash obligations are summarized in the
following table.
December 31, 2005
----------------------------------------------------------------------------
Payments due by period
------------------------------------------------------------
Less than 1
Total Year 1 to 3 Years 3 to 5 Years After 5 Years
----- ---- ------------ ------------ -------------
(Dollars in thousands)
Contractual Cash Obligations
Time deposits ................................. $235,488 $192,194 $ 40,107 $ 3,180 $ 7
Long-term debt ................................ 32,196 500 3,500 12,200 15,996
Operating lease obligations ................... 2,966 360 540 277 1,789
-------- -------- -------- -------- --------
Total ......................................... $270,650 $193,054 $ 44,147 $ 15,657 $ 17,792
======== ======== ======== ======== ========
THE APPLICATION OF CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are based on the selection and
application of accounting principles generally accepted in the United States of
America, which require management to make estimates and assumptions about future
events that affect the amounts reported in the financial statements and
accompanying notes. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires the
44
exercise of judgment. Actual results could differ from those estimates, and any
such differences may be material to the financial statements. Management
believes that the policy relating to the allowance for loan losses discussed in
the section entitled "Allowance for Loan Losses" may involve a higher degree of
judgment and complexity in its application and represents the critical
accounting policy used in the preparation of the Corporation's financial
statements. If different assumptions or conditions were to prevail, the results
could be materially different from the reported results.
IMPACT OF RECENT ACCOUNTING CHANGES
Share-Based Payment Management adopted the provisions of SFAS No. 123
(revised 2004) ("SFAS No. 123(R)"), "Share-Based Payment," effective January 1,
2006, as required under the provisions of that Statement and applicable
Securities and Exchange ("SEC") Commission Rules. That Statement requires that
stock-based compensation awards be measured and reported at their grant date
fair value, with their costs recognized generally over the vesting period of the
awards. The fair value of such stock-based awards is affected by the Company's
stock price and by assumptions regarding a number of complex and subjective
variables and the related tax impact. In addition, In March, 2005, the
Securities and Exchange Commission issued its Staff Accounting Bulletin No. 107
which expresses the views of the SEC staff regarding the interaction between
SFAS No 123(R) and certain SEC rules and regulations as well as the SEC staff's
views regarding the valuation of share-based payment arrangements for public
companies. The provisions of, and guidance provided in, SAB No. 107 will be
incorporated into the Company's implementation of SFAS No. 123(R).
The Company will recognize the compensation cost for stock-based awards
on a straight-line basis over the requisite service period for the entire award
and at present intends to use the modified prospective transition method of
accounting for previously issued stock options. Accordingly, only costs
associated with the unvested portions of prior awards and awards granted after
December 31, 2005 will affect the Company's financial position and results of
operations. All of the options previously granted by the Corporation were vested
as of December 31, 2005; therefore, no compensation expense is expected to be
recognized in the future for previously awarded stock options.
SFAS 123(R) also amends SFAS No. 95 to require that excess tax benefits
resulting from those transactions be reported as financing cash flows rather
than as a reduction of taxes paid.
Management expects that adoption of SFAS No. 123(R) will affect the
Company's future net income and net income per share calculations in much the
same manner as previously reported in the pro forma disclosures as provided in
Note 2 to the consolidated financial statements.
Other-Than-Temporarily Impaired Investments On November 3, 2005, the
Financial Accounting Standards Board issued FASB Staff Position ("FSP") FAS
115-1 and FAS 124-1 which reverts to other-than-temporary impairment ("OTTI")
guidance that existed prior to the effective date of Emerging Issues Task Force
("EITF") Issue 03-1. However, the new FSP retains the disclosure requirements of
03-1 that have been in effect since the end of 2003.
FSP FAS 115-1 and 124-1 requires the application of a three-step model
to assess and account for investments that may be impaired. If an investment is
found to be impaired (its fair value is less than the recorded cost), the extent
of the impairment is assessed using the guidance contained in Paragraph 16 of
SFAS No. 115, SEC Staff Accounting Bulletin Topic 5.M, Paragraph 6 of Accounting
Principles Board Opinion 18 and EITF Issue 99-20. If the assessment results in a
45
conclusion that the impairment is other-than-temporary, an impairment loss equal
to the amount that the investment's recorded cost exceeds its fair value is
recognized in earnings and the investment's carrying value is reduced to its
fair value. That fair value becomes the investment's new "cost" basis and any
subsequent recoveries of fair value are not recognized. After recognition of an
impairment loss, income recognition is based on the investment's estimated cash
flows rather than its contractual cash flows, and any discount or premium would
be amortized over the remaining life of the security.
The provisions of this FSP were adopted as of December 31, 2005, as
permitted, and had no effects on the financial position or results of operations
of the Company.
Accounting Changes and Error Corrections In May 2005, the FASB issued
SFAS No. 154, "Accounting Changes and Error Corrections." This Statement applies
to all voluntary changes in accounting principles and to changes required by an
accounting pronouncement when the pronouncement does not include specific
transition provisions. The Statement requires that changes in accounting
principles be applied retrospectively unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. In
those cases, retrospective application of the new accounting principle is
required to be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable with a corresponding adjustment to retained earnings (or other
appropriate equity account) at that time. If application of the new principle is
impracticable for all prior periods, then it is to be adopted prospectively from
the earliest date practicable. Only the direct effects of the change are to be
applied retrospectively; indirect changes are accounted for in the period of the
change.
This Statement also requires that certain changes in accounting methods
be accounted for as a change in accounting estimate affected by a change in
accounting principle with retrospective application applied.
This Statement carries forward the guidance of APB Opinion 20 with
regard to corrections of accounting errors. Restatement of prior period
financial statements is required in these cases, with adjustments made to the
carrying amounts of assets and liabilities, with an offsetting capital account
adjustment, as of the beginning of the first period presented.
This Statement was adopted effective January 1, 2006 and had no effect
on the Company's financial position or results of operations for any period
presented in the consolidated financial statements.
RECENT DEVELOPMENTS
As part of an ongoing planning process, during the first quarter of
2006, the Corporation's Board of Directors concluded that the multi-bank holding
company concept was not in the best long range interest of its shareholders,
customers or employees. The board directed management to plan for a transition
to a single bank charter, to be implemented by year-end 2006, contingent on all
required legal and regulatory approvals.
The Corporation anticipates that, when implemented, the single bank
charter model will result in significant financial savings and improved
operational effectiveness. The Corporation also anticipates that this change
will improve customer services by substantially increasing the number of branch
banking locations available to all of the Banks' customers, by improving the
nature and quality of deposit and loan products, and by accelerating the
approval process for most conforming loans.
46
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Corporation's market risk arises principally from interest rate
risk inherent in its lending, deposit and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Corporation manages other risks, such as credit quality and liquidity risk in
the normal course of business, management considers interest rate risk to be its
most significant market risk and this risk could potentially have the largest
material effect on the Corporation's financial condition and results of
operations. Other types of market risks such as foreign currency exchange risk
and commodity price risk do not arise in the normal course of community banking
activities.
Achieving consistent growth in net interest income is the primary goal
of the Corporation's asset/liability function. The Corporation attempts to
control the mix and maturities of assets and liabilities to achieve consistent
growth in net interest income despite changes in market interest rates. The
Corporation seeks to accomplish this goal while maintaining adequate liquidity
and capital. The Corporation's asset/liability mix is sufficiently balanced so
that the effect of interest rates moving in either direction is not expected to
be material over time.
The Corporation's Asset/Liability Committee uses a simulation model to
assist in achieving consistent growth in net interest income while managing
interest rate risk. The model takes into account interest rate changes as well
as changes in the mix and volume of assets and liabilities. The model simulates
the Corporation's balance sheet and income statement under several different
rate scenarios. The model's inputs (such as interest rates and levels of loans
and deposits) are updated on a quarterly basis in order to obtain the most
accurate forecast possible. The forecast presents information over a
twelve-month period. It reports a base case in which interest rates remain flat
and variations that occur when rates increase and decrease 100, 200 and 300
basis points. According to the model, as of December 31, 2005 the Corporation is
positioned so that net interest income would increase $193,000 and net income
would increase $117,000 if interest rates were to rise 100 basis points in the
next twelve months. Conversely, net interest income would decline $193,000 and
net income would decline $117,000 if interest rates were to decline 100 basis
points. Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates and loan prepayment, and should not be relied upon as indicative of actual
results. Further, the computations do not contemplate any actions the
Corporation could undertake in response to changes in interest rates or the
effects of responses by others, including borrowers and depositors.
The following table summarizes the Corporation's interest sensitivity
position as of December 31, 2005.
47
Interest Sensitivity Analysis
Within 3 Within 4-12 Within 1-5
months months years Over 5 years Total
------ ------ ----- ------------ -----
(Dollars in thousands)
Interest earning assets
Interest-bearing deposits ................... $ 1,038 $ - $ - $ - $ 1,038
Taxable investment securities ............... 2,244 11,117 30,780 10,776 54,917
Tax exempt investment securities ............ 446 151 2,558 2,479 5,634
Other investments ........................... 2,980 - - - 2,980
Federal funds sold .......................... 32,483 - - - 32,483
Loans held for sale (1) ..................... 12,447 - - - 12,447
Loans (2) ................................... 180,522 22,883 161,170 37,758 402,333
--------- --------- --------- --------- ---------
Total interest earning assets ............. 232,160 34,151 194,508 51,013 511,832
--------- --------- --------- --------- ---------
Interest bearing liabilities
Savings ..................................... $ 83,717 $ - $ - $ - $ 83,717
Interest bearing transaction accounts ....... 77,858 - - - 77,858
Time deposits < $100 ........................ 30,825 77,549 28,679 7 137,060
Time deposits > $100 ........................ 36,385 47,435 14,608 - 98,428
Short-term borrowings ....................... 6,975 2,000 - - 8,975
Long-term debt .............................. 10,810 - 15,700 5,686 32,196
--------- --------- --------- --------- ---------
Total interest bearing liabilities ........ 246,570 126,984 58,987 5,693 438,234
--------- --------- --------- --------- ---------
Interest sensitivity gap ....................... $ (14,410) $ (92,833) $ 135,521 $ 45,320 $ 73,598
Cumulative gap ................................. $ (14,410) $(107,243) $ 28,278 $ 73,598
RSA/RSL (3) .................................... 94% 27%
Cumulative RSA/RSL (3) ......................... 94% 71%
---------
(1) Loans held for sale are reflected in the period of expected sale.
(2) Excludes nonaccrual loans totaling $11,651,000.
(3) RSA- rate sensitive assets; RSL- rate sensitive liabilities
The above table reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amortizing fixed rate loans are reflected at the scheduled maturity date.
Variable rate amortizing loans are reflected at the earliest date at which they
may be repriced contractually. Deposits in other banks and debt securities are
reflected at each instrument's ultimate maturity date. Overnight federal funds
sold are reflected as instantly repriceable. Interest bearing liabilities with
no contractual maturity, such as savings deposits and interest bearing
transaction accounts, are reflected in the earliest repricing period possible.
Fixed rate time deposits are reflected at their maturity dates.
The static interest rate sensitivity gap position, while not a complete
measure of interest sensitivity, is also reviewed periodically to provide
insights related to the static repricing structure of the Banks' assets and
liabilities. At December 31, 2005 on a cumulative basis through twelve months,
rate sensitive liabilities exceeded rate sensitive assets by $107,243,000. The
liability sensitive position is largely due to the assumption that the Banks'
$161,575,000 in interest bearing transaction accounts, savings accounts, and
money market accounts will reprice within a year. This assumption may or may not
be valid, since these accounts vary greatly in their sensitivity to interest
rate changes in the market. Rising interest rates would be likely to diminish
net interest income of banks in a liability sensitive position if the assumption
is valid and in the absence of factors which would be likely to occur.
48
The Market Risk table, which follows this discussion, shows the
Corporation's financial instruments that are sensitive to changes in interest
rates. The Corporation uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments, and prepayment of principal and potential calls.
For core deposits without contractual maturity (i.e., interest checking, savings
and money market accounts), the table presents principal cash flows based on
management's judgment concerning their most likely runoff. The actual maturities
and runoff could vary substantially if future prepayments, runoff and calls
differ from the Corporation's historical experience.
49
December 31, 2005
------------------------------------------------------------------------------------
2005 Year-
End
Average Estimated
Rate 2006 2007 2008 2009 2010 Thereafter Balance Fair Value
---- ---- ---- ---- ---- ---- ---------- ------- ----------
(Dollars in thousands)
Interest earning assets
Interest-bearing deposits
with other banks ................ 4.09% $ 1,038 $ - $ - $ - $ - $ - $ 1,038 $ 1,038
Investment securities ............. 3.52% 13,958 11,449 13,539 7,036 1,314 13,255 60,551 60,521
Federal funds sold ................ 4.09% 32,483 - - - - - 32,483 32,483
Loans held for sale ............... 7.10% 12,447 - - - - - 12,447 12,447
Loans ............................. 7.21% 133,664 47,708 43,269 63,818 59,896 65,629 413,984 394,544
Interest bearing liabilities
Savings ........................... 0.65% $ 83,717 $ - $ - $ - $ - $ - $ 83,717 $ 83,717
Interest bearing transaction
accounts ........................ 1.57% 77,858 - - - - - 77,858 77,858
Time deposits ..................... 3.56% 192,194 33,441 6,666 2,210 970 7 235,488 235,952
-------- ------- ------ ------- ------- ------- -------- --------
Total interest bearing deposits ... 2.56% 353,769 33,441 6,666 2,210 970 7 397,063 397,527
Short-term borrowings ............. 4.26% 8,975 - - - - - 8,975 8,975
Long-term debt .................... 5.71% 500 1,000 2,500 5,000 7,200 15,995 32,195 34,110
50
Item 8. Financial Statements and Supplementary Data
COMMUNITY BANKSHARES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm .......................................... 52
Consolidated Balance Sheets, December 31, 2005 and 2004 .......................................... 53
Consolidated Statements of Income, Years Ended December 31,
2005, 2004, and 2003 ........................................................................ 54
Consolidated Statements of Changes in Shareholders' Equity, Years Ended
December 31, 2005, 2004, and 2003 ........................................................... 55
Consolidated Statements of Cash Flows, Years Ended December 31,
2005, 2004, and 2003 ........................................................................ 56
Notes to Consolidated Financial Statements ....................................................... 57 - 90
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Directors of
Community Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Community
Bankshares, Inc. and subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2005. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community
Bankshares, Inc. and subsidiaries at December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.
Columbia, South Carolina s/ J. W. Hunt and Company LLP
February 27, 2006
52
COMMUNITY BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................ $ 19,508 $ 14,397
Federal funds sold ..................................................................... 32,483 12,571
--------- ---------
Total cash and cash equivalents .................................................. 51,991 26,968
Interest-bearing deposits with other banks ............................................. 1,038 852
Securities available-for-sale .......................................................... 58,701 55,471
Securities held-to-maturity (estimated fair value
$1,820 for 2005 and $1,907 for 2004) ................................................... 1,850 1,925
Other investments ...................................................................... 2,980 2,642
Loans held for sale .................................................................... 12,447 15,090
Loans, net of allowance for loan
losses of $11,641 for 2005 and $4,347 for 2004 ....................................... 402,343 389,302
Premises and equipment - net ........................................................... 9,412 7,739
Accrued interest receivable ............................................................ 3,134 2,419
Net deferred income tax assets ......................................................... 3,655 599
Goodwill ............................................................................... 4,321 4,321
Core deposit intangible assets ......................................................... 2,837 3,083
Prepaid expenses and other assets ...................................................... 2,127 1,966
--------- ---------
Total assets ..................................................................... $ 556,836 $ 512,377
========= =========
Liabilities
Deposits
Demand, noninterest-bearing ......................................................... $ 67,146 $ 67,046
Interest-bearing transaction accounts ............................................... 77,858 64,870
Savings ............................................................................. 83,717 85,679
Certificates of deposit of $100 and over ............................................ 98,428 86,344
Other time deposits ................................................................. 137,060 119,519
--------- ---------
Total deposits ................................................................... 464,209 423,458
Short-term borrowings .................................................................. 8,975 6,662
Long-term debt ......................................................................... 32,196 30,573
Accrued interest payable ............................................................... 1,212 691
Accrued expenses and other liabilities ................................................. 1,252 966
--------- ---------
Total liabilities ................................................................ 507,844 462,350
--------- ---------
Commitments and contingent liabilities
Shareholders' equity
Common stock - no par value, 12,000,000 authorized shares; issued and
outstanding - 4,404,303 shares for 2005 and 4,390,784 shares for 2004 ............... 30,202 30,042
Retained earnings ...................................................................... 19,325 20,075
Accumulated other comprehensive income (loss) .......................................... (535) (90)
--------- ---------
Total shareholders' equity ....................................................... 48,992 50,027
--------- ---------
Total liabilities and shareholders' equity ....................................... $ 556,836 $ 512,377
========= =========
See accompanying notes to consolidated financial statements.
53
COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands, except per share)
Interest and dividend income
Loans, including fees ........................................... $ 28,955 $ 22,821 $ 22,234
Interest-bearing deposits with other banks ...................... 49 20 19
Debt securities
Taxable ...................................................... 1,643 1,441 1,341
Tax exempt ................................................... 215 312 322
Dividends ....................................................... 115 77 73
Federal funds sold .............................................. 629 203 279
-------- -------- --------
Total interest and dividend income ........................ 31,606 24,874 24,268
-------- -------- --------
Interest expense
Deposits
Interest-bearing transaction accounts ........................ 452 225 193
Savings ...................................................... 1,393 814 766
Certificates of deposit of $100 and over ..................... 2,852 1,498 1,568
Other time deposits .......................................... 4,043 2,765 3,160
-------- -------- --------
Total interest on deposits ................................ 8,740 5,302 5,687
Short-term borrowings ........................................... 198 205 750
Long-term debt .................................................. 1,867 1,524 1,123
-------- -------- --------
Total interest expense .................................... 10,805 7,031 7,560
-------- -------- --------
Net interest income .................................................. 20,801 17,843 16,708
Provision for loan losses ............................................ 9,637 5,102 1,119
-------- -------- --------
Net interest income after provision .................................. 11,164 12,741 15,589
-------- -------- --------
Noninterest income
Service charges on deposit accounts ............................. 3,395 3,237 3,349
Mortgage brokerage income ....................................... 3,699 3,128 5,198
Gains (losses) on sales of securities ........................... (10) 76 (252)
Deposit box rent ................................................ 52 51 50
Bank card fees .................................................. 35 30 32
Loan related insurance commissions .............................. 78 83 77
Other ........................................................... 754 673 671
-------- -------- --------
Total noninterest income .................................. 8,003 7,278 9,125
-------- -------- --------
Noninterest expenses
Salaries and employee benefits .................................. 9,532 8,228 9,657
Premises and equipment .......................................... 2,271 2,021 1,804
Marketing ....................................................... 421 445 441
Regulatory fees ................................................. 275 247 233
Supplies ........................................................ 261 288 337
Director fees ................................................... 312 298 283
FDIC insurance .................................................. 57 54 54
Other ........................................................... 4,262 3,458 3,123
-------- -------- --------
Total noninterest expenses ................................ 17,391 15,039 15,932
-------- -------- --------
Income before income taxes ........................................... 1,776 4,980 8,782
Income tax expense ................................................... 765 1,771 3,147
-------- -------- --------
Net income ........................................................... $ 1,011 $ 3,209 $ 5,635
======== ======== ========
Earnings per share
Basic ........................................................... $ 0.23 $ 0.74 $ 1.31
Diluted ......................................................... 0.22 0.72 1.27
See accompanying notes to consolidated financial statements
54
COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock
------------ Accumulated
Number of Retained Other Comprehensive
Shares Amount Earnings Income (Loss) Total
------ ------ -------- ------------- -----
(Dollars in thousands, except per share)
Balance, January 1, 2003 ............................. 4,304,384 $ 29,090 $ 14,529 $ 98 $ 43,717
Comprehensive income
Net income ....................................... - - 5,635 - 5,635
---------
Unrealized net holding losses arising
during the period, net of
income tax effects of $113 ..................... - - - (201) (201)
Reclassification adjustment,
net of income tax effects of $91 ............... - - - 161 161
---------
Total other comprehensive income (loss) ...... - - - - (40)
---------
Total comprehensive income ................. - - - - 5,595
---------
Exercise of stock options ............................ 27,076 312 - - 312
Cash dividends ($.36 per share) ...................... - - (1,554) - (1,554)
--------- --------- --------- --------- ---------
Balance, December 31, 2003 ........................... 4,331,460 29,402 18,610 58 48,070
Comprehensive income
Net income ....................................... - - 3,209 - 3,209
---------
Unrealized net holding losses arising
during the period, net of
income tax effects of $56 ...................... - - - (100) (100)
Reclassification adjustment,
net of income tax effects of $26 ............... - - - (48) (48)
---------
Total other comprehensive income (loss) ...... - - - - (148)
---------
Total comprehensive income ................. - - - - 3,061
---------
Exercise of stock options ............................ 59,324 640 - - 640
Cash dividends ($.40 per share) ...................... - - (1,744) - (1,744)
--------- --------- --------- --------- ---------
Balance, December 31, 2004 ........................... 4,390,784 30,042 20,075 (90) 50,027
Comprehensive income
Net income ....................................... - - 1,011 - 1,011
---------
Unrealized net holding losses arising
during the period, net of
income tax effects of $253 ..................... - - - (451) (451)
Reclassification adjustment,
net of income tax effects of $4 ................ - - - 6 6
---------
Total other comprehensive income (loss) ...... - - - - (445)
---------
Total comprehensive income ................. - - - - 566
---------
Sale of common stock ................................. 775 14 - - 14
Exercise of stock options ............................ 12,744 146 - - 146
Cash dividends ($.40 per share) ...................... - - (1,761) - (1,761)
--------- --------- --------- --------- ---------
Balance, December 31, 2005 ........................... 4,404,303 $ 30,202 $ 19,325 $ (535) $ 48,992
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
55
COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Operating activities
Net income .................................................................... $ 1,011 $ 3,209 $ 5,635
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses ............................................... 9,637 5,102 1,119
Depreciation ............................................................ 937 926 793
Writedowns of other real estate ......................................... - 50 -
Amortization of definite-lived purchased intangibles .................... 246 246 246
Deferred income taxes ................................................... (2,807) 288 47
Securities accretion and premium amortization ........................... 67 162 420
Loss (gain) on sale of available-for-sale securities .................... 10 (76) 252
Increase in accrued interest receivable ................................. (715) (233) (55)
Increase (decrease) in accrued interest payable ......................... 521 106 (174)
Gain on sale of other real estate ....................................... (24) (9) -
Increase in prepaid expenses and other assets ........................... (290) (1,243) (433)
Increase (decrease) in accrued expenses and other liabilities ........... 286 (155) 65
Originations of loans held for sale ..................................... (210,552) (180,753) (293,706)
Proceeds of sales of loans held for sale ................................ 213,195 174,074 309,914
--------- --------- ---------
Net cash provided by operating activities ............................ 11,522 1,694 24,123
--------- --------- ---------
Investing activities
Net (increase) decrease in interest-bearing deposits with other banks ......... (186) 272 (613)
Purchases of held-to-maturity securities ...................................... - - (2,000)
Purchases of available-for-sale securities .................................... (16,243) (35,749) (80,633)
Maturities of held-to-maturity securities ..................................... 75 75 -
Maturities of available-for-sale securities ................................... 7,829 31,150 64,145
Proceeds from sale of available-for-sale securities ........................... 4,412 13,676 2,068
Purchases of other investments ................................................ (338) (604) (352)
Proceeds from sales of other investments ...................................... - - 224
Net increase in loans made to customers ....................................... (22,748) (66,592) (26,063)
Purchases of premises and equipment ........................................... (2,610) (1,750) (1,332)
Proceeds from sales of other real estate ...................................... 224 136 -
--------- --------- ---------
Net cash used by investing activities ................................ (29,585) (59,386) (44,556)
--------- --------- ---------
Financing activities
Net increase in deposits ...................................................... 40,751 44,754 41,642
Net increase (decrease) in short-term borrowings .............................. 2,313 (11,298) (16,591)
Proceeds from issuance of long-term debt ...................................... 3,000 10,503 -
Repayments of long-term debt .................................................. (1,377) (70) (70)
Sale of common stock .......................................................... 14 - -
Exercise of stock options ..................................................... 146 640 312
Cash dividends paid ........................................................... (1,761) (1,744) (1,554)
--------- --------- ---------
Net cash provided by financing activities ............................ 43,086 42,785 23,739
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ................................... 25,023 (14,907) 3,306
Cash and cash equivalents, beginning ............................................... 26,968 41,875 38,569
--------- --------- ---------
Cash and cash equivalents, ending .................................................. $ 51,991 $ 26,968 $ 41,875
========= ========= =========
Supplemental disclosures of cash flow information
Cash payments for interest expense, including $12 capitalized
during construction .......................................................... $ 10,296 $ 6,925 $ 7,734
Cash payments for income taxes ..................................................... 3,869 2,498 3,054
Supplemental disclosures of non-cash investing activities
Transfers of loans receivable to other real estate ................................. $ 70 $ 88 $ 353
Other comprehensive income (loss) .................................................. (445) (148) (40)
See accompanying notes to consolidated financial statements.
56
COMMUNITY BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Community Bankshares, Inc. (the "Corporation"), was organized under the laws of
the State of South Carolina and was chartered as a business corporation on
November 30, 1992. Pursuant to the provisions of the Federal Bank Holding
Company Act, an application was filed with and approved by the Board of
Governors of the Federal Reserve System for the Corporation to become a bank
holding company by the acquisition of Orangeburg National Bank (ONB).
In June 1996, Sumter National Bank (SNB), and in July 1998, Florence National
Bank (FNB), commenced operations in Sumter and Florence, South Carolina,
respectively, following approval by the Comptroller of the Currency and other
regulators. Upon completion of their organization, the common stock of SNB and
FNB was acquired by the Corporation.
In November 2001, the Corporation acquired all the common stock of Resource
Mortgage, Inc., a Columbia, South Carolina based mortgage brokerage company. The
Corporation issued 95,454 shares of its common stock in exchange for 100% of the
common stock of Resource Mortgage, Inc. The subsidiary was renamed Community
Resource Mortgage, Inc. (CRM).
In July 2002, Ridgeway Bancshares, Inc., the holding company for the Bank of
Ridgeway (BOR), merged into the Corporation. The Corporation issued 1,000,000
shares of its common stock and paid $4,000,000 cash in exchange for 100% of the
common stock of Ridgeway Bancshares, Inc. The transaction was consummated on
July 1, 2002.
ONB, SNB, FNB and BOR (the "Banks") and CRM operate as wholly-owned subsidiaries
of the Corporation with separate Boards of Directors and operating policies and
they provide a variety of financial services to individuals and businesses
throughout South Carolina. The primary deposit products are checking, savings
and term certificate accounts. The primary lending products are consumer,
commercial and mortgage loans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Corporation and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
57
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the balance sheet and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Corporation's
activities are with customers located within South Carolina. Note 4 discusses
the types of securities the Corporation purchases. Note 6 discusses the types of
lending in which the Corporation engages. The Banks grant commercial, consumer
and mortgage loans to customers throughout South Carolina. Although the Banks
have diversified loan portfolios, a substantial portion of their debtors'
ability to honor their contracts is dependent upon the economies of various
South Carolina communities. CRM generally originates and sells loans into the
secondary market; but it sometimes maintains loans for its own portfolio on a
limited basis. The Company does not engage in originating, holding,
guaranteeing, servicing or investing in loans where the terms of the loan
product give rise to a concentration of credit risk as that term is used in
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Values of Financial Instruments."
CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash
flows, the Corporation has defined cash and cash equivalents as those amounts
included in the balance sheets under the caption, "Cash and due from banks" and
"Federal funds sold," all of which mature within ninety days.
INTEREST-BEARING DEPOSITS WITH OTHER BANKS Interest-bearing deposits with other
banks generally mature within one year and are carried at cost.
SECURITIES Securities that management has both the ability and positive intent
to hold to maturity are classified as held-to-maturity and carried at cost,
adjusted for amortization of premium and accretion of discounts using methods
approximating the interest method. The Corporation has decided generally to
avoid acquiring further held-to-maturity securities in the near term. Securities
that may be sold prior to maturity for asset/liability management purposes, or
that may be sold in response to changes in interest rates, changes in prepayment
risk, increase in regulatory capital, or other similar factors, are classified
as available-for-sale and are carried at estimated fair value. Unrealized gains
and losses on securities available-for-sale are excluded from earnings and
reported in other comprehensive income. Gains and losses on the sale of
securities available-for-sale are recorded on the trade date and are determined
using the specific identification method. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other-than-temporary are reflected in earnings as realized losses.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on
securities.
No securities are being held for short-term resale; therefore, the Corporation
does not currently use a trading account classification.
LOANS HELD FOR SALE The Corporation originates loans held for sale to other
financial institutions under commitments or other arrangements in place prior to
loan origination. These loans are sold on a non-recourse basis. However,
58
standard contract warranties and representations apply to these sales and the
Corporation may from time to time be required to indemnify investors under those
provisions. As of December 31, 2005, the Corporation maintained an allowance of
$368,000 for this off-balance-sheet exposure. Loans originated and intended for
sale are residential mortgage loans and are carried at the lower of cost or
estimated fair value in the aggregate. Gains and losses, if any, on the sale of
such loans are determined using the specific identification method. All fees and
other income from these activities are recognized in income when loan sales are
completed.
LOANS The Corporation grants mortgage, commercial and consumer loans to
customers. The ability of the Corporation's debtors to honor their contracts is
dependent upon the general economic conditions in its market areas. Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are carried at
principal amounts outstanding, increased or reduced by deferred net loan costs
or fees and any unamortized purchase premiums or discounts. Interest income on
loans is recognized using the interest method based upon the principal amounts
outstanding. Loan origination and commitment fees and certain direct loan
origination costs (principally salaries and employee benefits) are deferred and
amortized as an adjustment of the related loan's yield. Generally, these amounts
are amortized over the contractual life of the related loans or commitments.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well collateralized and
in process of collection. Residential real estate loans are typically placed on
nonaccrual at the time the loan is 120 days delinquent. Unsecured personal
credit lines and certain consumer finance loans are typically charged off no
later than the time the loan is 180 days delinquent.
Other consumer loans are typically charged off at the time the loan is 120 days
delinquent. Generally, loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost recovery method, until the loans
qualify for return to accrual status. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a
provision for loan losses charged against earnings as losses are estimated to
have occurred. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
59
susceptible to significant revision as more information becomes available.
Management of each Bank reviews its allowance for loan losses in three broad
categories: commercial and industrial, loans secured by real estate and loans to
individuals, and assigns an estimated percentage factor to each in the
determination of the estimate of the allowance for loan losses. Where the Banks'
internal and external loan review programs identify loans that are subject to
specific weaknesses, such loans are reviewed for a specific loan loss allowance.
A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
known circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
DERIVATIVE FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, requires that all
derivatives be recognized as assets or liabilities in the balance sheet and
measured at fair value.
In April, 2003, the Financial Accounting Standards Board issued Statement No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." Among other requirements, this Statement provides that loan
commitment contracts entered into or modified after June 30, 2003 that relate to
the origination of mortgage loans that will be held for sale shall be accounted
for as derivative instruments by the issuer of the loan commitment. The
Corporation issues mortgage loan rate lock commitments to potential borrowers to
facilitate its origination of home mortgage loans that are intended to be sold.
Between the time that the Corporation issues its commitments and the time that
the loans close and are sold, the Corporation is subject to variability in the
selling prices related to those commitments due to changes in market rates of
interest. However, the Corporation offsets this variability through the use of
so-called "forward sales contracts" to investors in the secondary market. Under
these arrangements, an investor agrees to purchase the closed loans at a
predetermined price. The Corporation generally enters into such forward sales
contracts at the same time that rate lock commitments are issued. The forward
sales contracts provide both specific underwriting guidelines and definitive
price quotes. These arrangements effectively insulate the Corporation from the
effects of changes in interest rates during the time that the commitments are
outstanding, but the arrangements do not qualify, and are not designated, as
fair value hedges. In keeping with SEC Staff Accounting Bulletin 105, no income
is recognized as of the original commitment date on either the interest rate
lock commitments or the forward sales contracts. Subsequently, changes in the
fair values of the instruments are measured as of the end of each reporting
period and the changes in the fair values represent the amounts of the
derivative assets and liabilities. In addition, the changes in fair values of
derivatives are recorded in the statement of income in net gains or losses on
loans held for sale. Because the Corporation has effectively matched its forward
sales contracts to investors and rate lock commitments to potential borrowers,
no net gains or losses due to changes in market interest rates have been
recorded in the statement of income for 2005, 2004 or 2003.
60
Derivative financial instruments are written in amounts referred to as notional
amounts. Notional amounts provide only the basis for calculating payments
between counterparties and do not represent amounts to be exchanged between
parties or a measure of financial risk. The table below presents the notional
principal amounts of rate lock commitments and forward sales contracts as of
December 31, 2005 and 2004, and the estimated fair values of those financial
instruments included in other assets and liabilities in the balance sheets as of
those dates.
December 31,
------------
2005 2004
---- ----
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(Dollars in thousands)
Commitments to originate loans to be held for sale ................. $(12,585) $ 1 $ (2,612) $ (4)
Forward sales commitments .......................................... 12,585 (1) 2,612 4
-------- -------- -------- --------
Total ................................................ $ - $ - $ - $ -
======== ======== ======== ========
STOCK-BASED COMPENSATION Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, as amended, encourages all
entities to adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation
cost is the excess, if any, of the quoted market price of the stock at the grant
date (or other measurement date) over the amount an employee must pay to acquire
the stock. Stock options issued under the Corporation's stock option plans have
no intrinsic value at the grant date, and under APB Opinion No. 25 no
compensation cost is recognized for them. For 2005, the Corporation elected to
continue with the accounting methodology in APB Opinion No. 25 and, as a result,
has provided pro forma disclosures of net income and earnings per share and
other disclosures, as if the fair value based method of accounting had been
applied. However, as required by revisions to SFAS No. 123 and Securities and
Exchange Commission rules, the Corporation adopted the accounting methodology of
SFAS No. 123(R) effective January 1, 2006. See "Accounting Changes - Share-Based
Payment."
Had compensation cost for the Corporation's stock option plans been determined
based on the fair value at the grant dates for awards under the plans consistent
with the method prescribed by SFAS No. 123, the Corporation's net income and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
61
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands, except per share)
Net income, as reported ........................................... $ 1,011 $ 3,209 $ 5,635
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of any related tax effects ............................... (185) (626) -
--------- --------- ---------
Pro forma net income .............................................. $ 826 $ 2,583 $ 5,635
========= ========= =========
Net income per share, basic
As reported .................................................. $ 0.23 $ 0.74 $ 1.31
Pro forma .................................................... 0.19 0.59 1.31
Net income per share, assuming dilution
As reported .................................................. $ 0.22 $ 0.72 $ 1.27
Pro forma .................................................... 0.18 0.58 1.27
FORECLOSED ASSETS Assets (primarily real estate and vehicles) acquired through,
or in lieu of, loan foreclosure are held for sale and are initially recorded at
fair value, less estimated costs to sell, at the date of foreclosure,
establishing a new cost basis. Loan losses arising from the acquisition of such
property are charged against the allowance for loan losses as of that date.
Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of the new cost basis or fair value,
less estimated costs to sell. Revenues and expenses from operations and changes
in any subsequent valuation allowance are included in net foreclosed assets
costs and expenses. The carrying value of foreclosed assets included in the
balance sheets was $185,000 and $229,000 as of December 31, 2005 and 2004,
respectively.
PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less
accumulated depreciation computed principally on the straight-line method over
the estimated useful lives of the assets. Useful lives of assets are outlined
below:
Buildings ................................................ 32 - 40 years
Building components ...................................... 5 - 30 years
Vault doors, safe deposit boxes, night depository, etc. .. 32 - 40 years
Furniture, fixtures and equipment ........................ 5 - 25 years
Useful lives for leasehold improvements held under operating lease agreements
are estimated at the lesser of the assets' estimated useful lives as set forth
in the table above or the lease term, including certain renewals which are
deemed probable at lease inception.
INCOME TAXES Deferred income tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
OFF-BALANCE-SHEET CREDIT RELATED FINANCIAL INSTRUMENTS In the ordinary course of
business the Banks enter into commitments to extend credit and grant standby
62
letters of credit. Such off-balance-sheet financial instruments are recorded in
the consolidated financial statements when they are funded.
SEGMENTS Community Bankshares, Inc. through its banking subsidiaries, ONB, SNB,
FNB, BOR and its mortgage subsidiary, CRM, provides a broad range of financial
services to individuals and businesses in South Carolina. These services include
demand, time, and savings deposits; lending services; ATM processing; and
similar financial services. While the Corporation's decision makers monitor the
revenue streams of the various financial products and services, operations are
managed and financial performance is evaluated on a corporate-wide basis.
Accordingly, the subsidiary operations are not considered by management to
comprise more than one reportable operating segment.
COMPREHENSIVE INCOME Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Certain changes
in assets and liabilities, such as unrealized gains and losses on securities
available-for-sale, are reported as a separate component of the equity section
of the balance sheet. Such items, along with net income, are components of
comprehensive income. Currently, the Corporation's only components of other
comprehensive income (loss) are unrealized gains (losses) on securities
available-for-sale.
TRANSFERS OF FINANCIAL ASSETS Transfers of financial assets are accounted for as
sales when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Corporation, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.
ACCOUNTING CHANGES
Share-Based Payment Management adopted the provisions of SFAS No. 123 (revised
2004) ("SFAS No. 123(R)"), "Share-Based Payment," effective January 1, 2006, as
required under the provisions of that Statement and applicable Securities and
Exchange ("SEC") Commission Rules. That Statement requires that stock-based
compensation awards be measured and reported at their grant date fair value,
with their costs recognized generally over the vesting period of the awards. The
fair value of such stock-based awards is affected by the Company's stock price
and by assumptions regarding a number of complex and subjective variables and
the related tax impact. In addition, in March, 2005, the Securities and Exchange
Commission issued its Staff Accounting Bulletin No. 107 which expresses the
views of the SEC staff regarding the interaction between SFAS No 123(R) and
certain SEC rules and regulations as well as the SEC staff's views regarding the
valuation of share-based payment arrangements for public companies. The
provisions of, and guidance provided in, SAB No. 107 will be incorporated into
the Company's implementation of SFAS No. 123(R).
The Company will recognize the compensation cost for stock-based awards on a
straight-line basis over the requisite service period for the entire award and
at present intends to use the modified prospective transition method of
accounting for previously issued stock options. Accordingly, only costs
associated with the unvested portions of prior awards and awards granted after
December 31, 2005 will affect the Company's financial position and results of
operations. All of the options previously granted by the Corporation were vested
as of December 31, 2005; therefore, no compensation expense is expected to be
recognized in the future for previously awarded stock options.
63
SFAS 123(R) also amends SFAS No. 95 to require that excess tax benefits
resulting from those transactions be reported as financing cash flows rather
than as a reduction of taxes paid.
Management expects that adoption of SFAS No. 123(R) will affect the Company's
future net income and net income per share calculations in much the same manner
as previously reported in the pro forma disclosures as provided above in this
Note 2 to the consolidated financial statements.
Other-Than-Temporarily Impaired Investments On November 3, 2005, the Financial
Accounting Standards Board issued FASB Staff Position ("FSP") FAS 115-1 and FAS
124-1 which reverts to other-than-temporary impairment ("OTTI") guidance that
existed prior to the effective date of Emerging Issues Task Force ("EITF") Issue
03-1. However, the new FSP retains the disclosure requirements of 03-1 that have
been in effect since the end of 2003.
FSP FAS 115-1 and 124-1 requires the application of a three-step model to assess
and account for investments that may be impaired. If an investment is found to
be impaired (its fair value is less than the recorded cost), the extent of the
impairment is assessed using the guidance contained in Paragraph 16 of SFAS No.
115, SEC Staff Accounting Bulletin Topic 5.M, Paragraph 6 of Accounting
Principles Board Opinion 18 and EITF Issue 99-20. If the assessment results in a
conclusion that the impairment is other-than-temporary, an impairment loss equal
to the amount that the investment's recorded cost exceeds its fair value is
recognized in earnings and the investment's carrying value is reduced to its
fair value. That fair value becomes the investment's new "cost" basis and any
subsequent recoveries of fair value are not recognized. After recognition of an
impairment loss, income recognition is based on the investment's estimated cash
flows rather than its contractual cash flows, and any discount or premium would
be amortized over the remaining life of the security.
The provisions of this FSP were adopted as of December 31, 2005, as permitted,
and had no effect on the financial position or results of operations of the
Company.
Accounting Changes and Error Corrections In May 2005, the FASB issued SFAS No.
154, "Accounting Changes and Error Corrections." This Statement applies to all
voluntary changes in accounting principles and to changes required by an
accounting pronouncement when the pronouncement does not include specific
transition provisions. The Statement requires that changes in accounting
principles be applied retrospectively unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. In
those cases, retrospective application of the new accounting principle is
required to be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable with a corresponding adjustment to retained earnings (or other
appropriate equity account) at that time. If application of the new principle is
impracticable for all prior periods, then it is to be adopted prospectively from
the earliest date practicable. Only the direct effects of the change are to be
applied retrospectively; indirect changes are accounted for in the period of the
change.
This Statement also requires that certain changes in accounting methods be
accounted for as a change in accounting estimate effected by a change in
accounting principle with retrospective application applied.
This Statement carries forward the guidance of APB Opinion 20 with regard to
corrections of accounting errors. Restatement of prior period financial
64
statements is required in these cases, with adjustments made to the carrying
amounts of assets and liabilities, with an offsetting capital account
adjustment, as of the beginning of the first period presented.
This Statement was adopted effective January 1, 2006 and had no effect on the
Company's financial position or results of operations for any period presented
in the consolidated financial statements.
ADVERTISING COSTS The cost of advertising is expensed as incurred.
OTHER Certain amounts previously reported in the consolidated financial
statements have been reclassified to conform to the current year's presentation
and disclosure requirements. These reclassifications had no effect on previously
reported net income or retained earnings.
NOTE 3 - CASH AND DUE FROM BANKS
The Banks are required to maintain average reserve balances with the Federal
Reserve or in available cash. The average daily reserve balance requirements at
December 31, 2005 and 2004 were approximately $3,942,000 and $3,893,000,
respectively. At December 31, 2005 the Corporation had cash balances with
unrelated correspondent banks, including bankers' banks and the Federal Reserve,
totaling approximately $14,142,000, of which $1,021,000 was fully insured by the
FDIC.
NOTE 4 - SECURITIES
Securities consist of the following:
December 31,
------------
2005 2004
---- ----
Gross Gross Gross Gross
Unrealized Unrealized Estimated Unrealized Unrealized Estimated
Amortized Holding Holding Fair Amortized Holding Holding Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
(Dollars in thousands)
Securities available-for-sale
U.S. Treasury and U.S.
Government agencies ................. $55,781 $ 1 $ 865 $54,917 $50,619 $ 9 $ 267 $50,361
States and political
subdivisions ........................ 3,754 31 1 3,784 4,985 126 1 5,110
------- ------- ------- ------- ------- ------- ------- -------
Total securities
available-for-sale .............. $59,535 $ 32 $ 866 $58,701 $55,604 $ 135 $ 268 $55,471
======= ======= ======= ======= ======= ======= ======= =======
Securities held-to-maturity
States and political
subdivisions ...................... $ 1,850 $ - $ 30 $ 1,820 $ 1,925 $ - $ 18 $ 1,907
======= ======= ======= ======= ======= ======= ======= =======
The amortized cost and fair value of debt securities at December 31, 2005 by
contractual maturity are detailed below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
65
December 31, 2005
-----------------
Available-for-sale Held-to-maturity
------------------ ----------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(Dollars in thousands)
Securities
Due within one year ........................................ $14,094 $13,958 $ - $ -
Due after one through five years ........................... 33,875 33,338 - -
Due after five through ten years ........................... 11,553 11,394 1,850 1,820
Due after ten years ........................................ 13 11 - -
------- ------- ------- -------
Total securities .................................... $59,535 $58,701 $ 1,850 $ 1,820
======= ======= ======= =======
The following tables provide information about the Corporation's securities
holdings which were maintained in an unrealized loss position as of December 31,
2005 and 2004:
December 31, 2005
-----------------
Continuously in Unrealized Loss Position for a Period of
--------------------------------------------------------
Less than 12 Months 12 Months or more Total
------------------- ----------------- -----
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
--------- ---------- --------- ---------- --------- ----------
(Dollars in thousands)
Description of Securities
U.S. Treasury and
U.S. Government agencies ..................... $15,433 $ 118 $37,788 $ 747 $53,221 $ 865
States and political subdivisions .............. - - 801 1 801 1
------- ------- ------- ------- ------- -------
Total securities .......................... $15,433 $ 118 $38,589 $ 748 $54,022 $ 866
======= ======= ======= ======= ======= =======
December 31, 2004
-----------------
Continuously in Unrealized Loss Position for a Period of
--------------------------------------------------------
Less than 12 Months 12 Months or more Total
------------------- ----------------- -----
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
--------- ---------- --------- ---------- --------- ----------
(Dollars in thousands)
Description of Securities
U.S. Treasury and
U.S. Government agencies ..................... $20,806 $ 102 $18,875 $ 165 $39,681 $ 267
States and political subdivisions .............. 1,907 18 101 1 2,008 19
------- ------- ------- ------- ------- -------
Total securities .......................... $22,713 $ 120 $18,976 $ 166 $41,689 $ 286
======= ======= ======= ======= ======= =======
At December 31, 2005, the Corporation held 20 securities that had been in an
unrealized loss position for less than 12 months and 46 securities that had been
in an unrealized loss position for 12 months or more. At December 31, 2004, the
Corporation held 28 securities that had been in an unrealized loss position for
less than 12 months and 16 securities that had been in an unrealized loss
position for 12 months or more. Unrealized losses reflected in this table
generally are the result of interest rate changes that have occurred since the
securities were purchased. The Corporation has the intent and ability to hold
66
these securities until maturity and no loss is expected on any of these
securities if they are held until their maturities. Accordingly, these losses
are not considered other-than-temporary.
At December 31, 2005 and 2004, investment securities with a carrying value of
$27,509,000 and $25,255,000, respectively, were pledged to secure public
deposits, repurchase agreements and for other purposes required and permitted by
law.
For the years ended December 31, 2005, 2004 and 2003, proceeds from sales of
securities available-for-sale amounted to $4,412,000, $13,676,000, and
$2,068,000, respectively. Gross realized gains totaled $0, $107,000 and $73,000,
respectively. Gross realized losses were $10,000, $31,000 and $325,000,
respectively. The tax benefit (provision) applicable to the net realized gains
and losses amounted to $4,000, $(26,000) and $91,000, respectively.
NOTE 5 - OTHER INVESTMENTS
Other investments consist of restricted stocks of the Federal Reserve Bank of
Richmond, the Federal Home Loan Bank of Atlanta, and correspondent bankers'
banks which are carried at cost. Management periodically evaluates these
investments for impairment, with any appropriate downward adjustments being made
when necessary.
NOTE 6 - LOANS
The following is a summary of loans by category:
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Commercial, financial and agricultural ......... $ 95,023 $ 96,275
Real estate- construction ...................... 37,923 29,968
Real estate - mortgage ......................... 243,837 230,986
Consumer installment ........................... 37,201 36,420
--------- ---------
Total .................................. 413,984 393,649
Allowance for loan losses ...................... (11,641) (4,347)
--------- ---------
Loans - net ............................ $ 402,343 $ 389,302
========= =========
Net deferred loan (fees) and costs of ($25,000) and $31,000 were allocated to
the various loan categories as of December 31, 2005 and 2004, respectively.
Overdrawn demand deposits totaling $382,000 and $379,000 have been reclassified
as loan balances at December 31, 2005 and 2004, respectively.
Gross proceeds from sales of mortgage loans originated for resale were
approximately $213,195,000, $174,074,000, and $309,914,000 for the years ended
December 31, 2005, 2004, and 2003, respectively. Income from this activity is
recognized as mortgage brokerage income.
67
Loans outstanding to directors, executive officers, principal holders of equity
securities, or to any of their associates totaled $7,071,000 at December 31,
2005 and $6,795,000 at December 31, 2004. A total of $5,246,000 in loans were
made or added, while a total of $4,970,000 were repaid or deducted during 2005.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. Changes in the composition of the board of directors or the
group comprising executive officers also result in additions to or deductions
from loans outstanding to directors, executive officers or principal holders of
equity securities.
As of December 31, 2005 and 2004, there were no significant concentrations of
credit risk in any single borrower or groups of borrowers. The Corporation's
loan portfolio consists primarily of extensions of credit to businesses and
individuals in its local market areas in Orangeburg, Sumter, Florence, Richland,
Fairfield and Anderson counties of South Carolina. The Banks and CRM regularly
monitor various segments of their credit portfolios to assess potential
concentration risks and to obtain collateral when considered necessary.
Changes in the allowance for loan losses were as follows:
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Balance at January 1 ....................... $ 4,347 $ 4,206 $ 3,573
Transfer of allowance for off-balance-sheet
contingencies to other liabilities ..... (305) - -
Provision charged to expense ............... 9,637 5,102 1,119
Recoveries ................................. 207 119 174
Charge-offs ................................ (2,245) (5,080) (660)
-------- -------- --------
Balance at December 31 ..................... $ 11,641 $ 4,347 $ 4,206
======== ======== ========
The following is summary information pertaining to impaired loans:
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Impaired loans without a valuation allowance ............................. $ 2,283 $ -
Impaired loans with a valuation allowance ................................ 9,368 4,941
------- -------
Total impaired loans .............................................. $11,651 $ 4,941
======= =======
Allowance for loan losses on impaired loans at year end .................. $ 3,767 $ 881
======= =======
Average total investment in impaired loans during the year ............... $ 7,725 $ 2,818
No additional funds are irrevocably committed to be advanced in connection with
impaired loans.
Nonaccrual and past due loans at December 31, 2005 and 2004 were as follows:
68
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Nonaccrual loans ............................... $11,651 $ 4,941
Accruing 90 days or more past due .............. 729 137
------- -------
Total ............................. $12,380 $ 5,078
======= =======
Gross interest income that would have been recorded for the years ended December
31, 2005, 2004, and 2003 if nonaccrual loans had been performing in accordance
with their original terms was approximately $448,000, $63,000, and $117,000,
respectively. No cash basis income was recognized on such loans during 2005,
2004 and 2003.
NOTE 7 - PREMISES AND EQUIPMENT; OPERATING LEASES
Premises and equipment at December 31, 2005 and 2004 consist of the following:
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Land ............................................. $ 1,952 $ 2,258
Buildings and components ......................... 3,884 3,884
Furniture, fixtures and equipment ................ 6,633 6,341
Construction in process - gross .................. 2,432 67
------- -------
Total .................................... 14,901 12,550
Less, accumulated depreciation ................... 5,489 4,811
------- -------
Premises and equipment - net ............. $ 9,412 $ 7,739
======= =======
Depreciation expense was approximately $937,000, $926,000, and $793,000, for the
years ended December 31, 2005, 2004, and 2003, respectively. During 2005, the
Corporation capitalized interest of $12,000 to construction in progress.
As of December 31, 2005 future minimum rent commitments under various
non-cancelable operating leases are as follows:
69
Year Amount
---- ------
(Dollars in thousands)
2006 $ 360
2007 344
2008 196
2009 179
2010 98
Thereafter 1,789
------
Total $2,966
======
Total rent expense for the years ended December 31, 2005, 2004, and 2003 was
$413,000, $308,000, and $205,000, respectively. Some leases provide for the
payment of executory costs and contain options to renew; lease payments for such
renewal periods are generally higher than during the original lease term.
NOTE 8 - INTANGIBLE ASSETS
Changes in the carrying amounts of goodwill for the years ended December 31,
2005 and 2004 are as follows:
Years Ended December 31,
------------------------
2005 2004
---- ----
(Dollars in thousands)
Balance, beginning of year ....................... $4,321 $4,321
Goodwill acquired during the year ................ - -
Impairment losses ................................ - -
------ ------
Balance, end of year ........................... $4,321 $4,321
====== ======
Goodwill is tested for impairment annually. As of December 31, 2005 no
impairment has been determined.
As part of the valuation of Ridgeway Bancshares, Inc. that was conducted by a
third party firm in conjunction with its acquisition by the Company, a core
deposit intangible was computed. Such amortizable intangible assets are
evaluated annually to determine whether any revisions of their estimated useful
lives are warranted. For the years ended December 31, 2005 and 2004, and 2003,
no such revisions have resulted.
The following tables present the gross carrying amounts and accumulated
amortization for the Corporation's amortizable intangible assets as of December
31, 2005 and 2004, and the estimated amounts of amortization expense to be
recognized for each of the five succeeding fiscal years, as of December 31, 2005
and 2004. Such assets are being amortized on a straight-line basis over fifteen
years, a period which represents the expected runoff period of the deposits
acquired.
70
December 31,
------------
2005 2004
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(Dollars in thousands)
Amortizable intangible asset class
Core deposit intangible ............................ $3,698 $ 861 $3,698 $ 615
====== ====== ====== ======
Estimated amounts of amortization expense to be recognized in each of the next
five succeeding years are:
December 31,
------------
2005 2004
---- ----
Year (Dollars in thousands)
----
2005 $ - $ 246
2006 246 246
2007 246 246
2008 246 246
2009 246 246
2010 246 NA
NOTE 9 - DEPOSITS
At December 31, 2005, the scheduled maturities of certificates of deposit and
other time deposits are as follows:
Year Amount
---- ------
(Dollars in thousands)
2006 $ 192,194
2007 33,441
2008 6,666
2009 2,210
2010 970
Thereafter 7
---------
Total $ 235,488
=========
Deposits of directors and officers and their related business interests totaled
approximately $8,629,000 and $4,739,000 at December 31, 2005 and 2004,
respectively.
NOTE 10 - SHORT-TERM BORROWINGS
The Corporation's short-term borrowings generally consist of federal funds
purchased and securities sold under agreements to repurchase. Federal funds
purchased and securities sold under agreements with customers to repurchase
71
generally mature within one to four days from the transaction date. Securities
sold under agreements to repurchase are reflected at the amount of cash received
in connection with the transaction. The Corporation monitors the fair value of
the underlying securities on a daily basis and it is the Banks' policy to
maintain a collateral value greater than the principal and accrued interest of
the transaction. All securities underlying these agreements are
institution-owned securities.
Short-term borrowings are summarized as follows:
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Securities sold under agreements to repurchase ......... $5,372 $4,979
Federal funds purchased ................................ 421 1,683
Warehouse lines of credit .............................. 1,182 -
Other short-term debt .................................. 2,000 -
------ ------
Total ............................................. $8,975 $6,662
====== ======
The following table summarizes information about short-term borrowings during
each of the periods presented:
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Balance outstanding at end of year ....................... $ 8,975 $ 6,662
Weighted average interest rate at end of the period ...... 4.26% 1.54%
Interest expense ......................................... $ 198 $ 205
Maximum outstanding at any month end during the period ... $ 8,975 $17,940
Average outstanding during the period .................... $ 8,584 $10,309
Weighted average interest rate during the period ......... 2.31% 1.99%
As of December 31, 2005, the Banks had unused credit availabilities under
federal funds lines established with unrelated correspondent banks totaling
$39,879,000.
NOTE 11 - LONG-TERM DEBT
Long-term debt is summarized as follows:
72
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Advances from Federal Home Loan Bank of Atlanta to
subsidiary banks, varying maturities to 2023 with interest
rates from 2.00% to 6.21% ........................................................................ $21,886 $20,263
Junior Subordinated Debt to Unconsolidated Trust (1),
dated April 7, 2004, maturing April 7, 2034, with variable interest rate based
on 3-month LIBOR ................................................................................. 10,310 10,310
------- -------
Total long-term debt ................................................ $32,196 $30,573
======= =======
-------
(1) Securities qualify as Tier 1 capital under the regulatory risk-based capital
guidelines, subject to certain limitations.
Collateral for the Advances from Federal Home Loan Bank of Atlanta consists of
blanket liens on the Banks' one-to-four family first lien residential mortgage
loans and the indebted Banks' stock in the FHLB. Such collateral was carried in
the consolidated balance sheet at approximately $66,500,000 and $71,462,000 at
December 31, 2005 and 2004, respectively.
Under the blanket lien agreements, the Banks collectively have the ability to
borrow additional funds approximating $28,406,000 from the FHLB as of December
31, 2005. Any such borrowings would be subject to the FHLB's normal approval
process and would be subject to interest rates established by the FHLB at the
time of each such transaction. The FHLB may terminate the availability at any
time.
On March 8, 2004, the Corporation sponsored the creation of a Delaware trust,
SCB Capital Trust I (the "Trust"), and is the sole owner of the common
securities issued by the Trust. The Trust is a variable interest entity under
FIN 46R, but is not subject to consolidation by the Corporation since
substantially all risk of loss has been transferred to other entities through
the Trust's March 10, 2004 issuance of $10,000,000 in floating rate capital
securities. The proceeds of this issuance, and the amount of CBI's capital
investment, were used to acquire $10,310,000 principal amount of CBI's floating
rate junior subordinated deferrable interest debt securities ("Debentures") due
April 7, 2034, which securities, and the accrued interest thereon, now
constitute the Trust's sole assets. The interest rate associated with the debt
securities, and the distribution rate on the common securities of the Trust, was
established initially at 3.91% and is adjustable quarterly at 3 month LIBOR plus
280 basis points. The index rate (LIBOR) may not be lower than 1.11%. As of
December 31, 2005, the interest rate associated with the debt was 6.95%. CBI may
defer interest payments on the Debentures for up to twenty consecutive quarters,
but not beyond the stated maturity date of the Debentures. In the event that
such interest payments are deferred by CBI, the Trust may defer distributions on
the common securities. In such an event, CBI would be restricted in its ability
to pay dividends on its common stock and perform under other obligations that
are not senior to the junior subordinated Debentures.
The Debentures are redeemable at par at the option of CBI, in whole or in part,
on any interest payment date on or after April 7, 2009. Prior to that date, the
Debentures are redeemable at 105% of par upon the occurrence of certain events
that would have a negative effect on the Trust or that would cause it to be
required to be registered as an investment company under the Investment Company
Act of 1940 or that would cause trust preferred securities not to be eligible to
be treated as Tier 1 capital by the Federal Reserve Board. Upon repayment or
redemption of the Debentures, the Trust will use the proceeds of the transaction
73
to redeem an equivalent amount of trust preferred securities and trust common
securities. The Trust's obligations under the trust preferred securities are
unconditionally guaranteed by CBI.
The Company's investment in the Trust is carried at cost in other assets and the
debentures are included in long-term debt in the consolidated balance sheet.
Required future principal reductions of the Corporation's long-term debt are
summarized as follows:
Year Amount
---- ------
(Dollars in thousands)
2006 $ 500
2007 1,000
2008 2,500
2009 5,000
2010 7,200
Thereafter 15,996
--------
Total $ 32,196
========
NOTE 12 - STOCK OPTIONS AND DIVIDEND REINVESTMENT SHARES
Under the Corporation's Dividend Reinvestment Plan, shareholders may reinvest
all or part of their cash dividends in shares of common stock and also purchase
additional shares of common stock. During the three-year period ended December
31, 2005 all shares purchased under this plan were purchased in the market, not
issued by the Corporation. At December 31, 2005, 624,665 common shares were
reserved for issuance pursuant to the dividend reinvestment and additional stock
purchase plan.
During 2001, the Corporation amended its 1997 Stock Option Plan (the "Plan") to
increase by 200,000 shares the number of shares reserved for issuance upon
exercise of options and to permit participation in the plan by non-employee
directors. During 2003, the Corporation amended the Plan to increase by 300,000
shares the number of shares reserved for issuance upon exercise of employee
incentive stock options. Under the Plan, as amended, up to 785,600 shares of
common stock were authorized to be granted to selected officers, other
employees, and non-employee directors of the Corporation and/or its subsidiaries
pursuant to exercise of incentive and nonqualified stock options. Of such
shares, 590,050 were reserved for issuance pursuant to exercise of incentive
stock options and 195,550 were reserved for issuance pursuant to exercise of
nonqualified stock options. At December 31, 2005, 257,283 of the Corporation's
authorized common shares remained reserved for future grant pursuant to the
Plan.
The exercise price of any incentive option granted is equal to the fair value of
the common stock on the date the option is granted. Nonqualified options can be
issued for less than fair value; however, the Corporation has not elected to
issue these options for less than fair value at the date of the grant.
A summary of the status of options issued pursuant to the Plan is presented
below:
74
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year ............ 482,817 $ 14.14 543,991 $ 13.85 384,667 $ 11.26
Granted ..................................... 45,500 $ 17.34 27,000 $ 17.74 195,750 $ 18.85
Exercised ................................... (12,744) $ 11.44 (59,324) $ 10.80 (27,076) $ 11.57
Forfeited or expired ........................ (3,500) $ 18.50 (28,850) $ 18.85 (9,350) $ 18.85
-------- ------- -------
Outstanding at end of year .................. 512,073 $ 14.46 482,817 $ 14.14 543,991 $ 13.85
======== ======= =======
Options exercisable at year end ............. 512,073 $ 14.46 455,817 $ 13.93 543,991 $ 11.24
The weighted average fair values of options granted each year are computed using
the Black-Scholes option pricing model using the assumptions detailed below:
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Weighted average fair value of options
granted during the year ............... $ 2.33 $ 4.74 $ 4.33
Risk-free interest rate .................... 3.80% 3.74% 3.72%
Expected life (years) ...................... 3.00 7.00 6.01
Expected volatility ........................ 18.75% 26.15% 24.01%
Yield ...................................... 2.60% 2.18% 2.00%
The following table summarizes information about the options outstanding:
December 31, 2005
-----------------
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Outstanding Price
------------------------ ----------- ------- ----- ----------- -----
$ 7.62 to $ 11.00 175,440 4.5 $ 10.38 175,440 $ 10.38
$ 12.83 $ 18.85 336,633 5.9 $ 16.59 336,633 $ 16.59
------- -------
512,073 5.4 $ 14.46 512,073 $ 14.46
======= =======
Until January 1, 2006, the Corporation applied APB Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans.
Accordingly, no compensation cost has previously been recognized. Effective
January 1, 2006, the Corporation has adopted the provisions of SFAS No. 123(R),
which will change the cost recognition accounting methodology. See Note 2,
"Accounting Changes - Share-Based Payment."
75
NOTE 13 - INCOME TAXES
The Corporation files consolidated federal income tax returns on a calendar-year
basis.
The provision for income taxes consists of the following:
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Current
Federal ................................. $ 3,396 $ 1,367 $ 2,820
State ................................... 202 117 280
------- ------- -------
Total current ................ 3,598 1,484 3,100
------- ------- -------
Deferred ..................................... (2,833) 287 47
------- ------- -------
Total income tax expense ..... $ 765 $ 1,771 $ 3,147
======= ======= =======
The provision for income taxes differs from that computed by applying federal
statutory rates at 34% to income before income tax expense as indicated in the
following summary:
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Tax expense at statutory rate .............. $ 603 $ 1,693 $ 2,986
State income tax, net of federal
income tax benefit .................... 134 184 174
Tax-exempt interest income ................. (87) (133) (136)
Amortization of organization costs and
core deposit intangibles .............. 84 84 63
Other, net ................................. 31 (57) 60
------- ------- -------
Total ...................... $ 765 $ 1,771 $ 3,147
======= ======= =======
Temporary differences, which give rise to deferred tax assets and liabilities,
are as follows:
76
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Deferred tax assets
Allowance for loan losses ....................... $ 3,624 $ 1,073
Unrealized net holding losses on
available-for-sale securities ................. 299 50
State net operating loss ........................ 109 70
Other ........................................... 155 67
------- -------
Gross deferred tax assets ............ 4,187 1,260
Valuation allowance ............................. (109) (70)
------- -------
Total ................................ 4,078 1,190
------- -------
Deferred tax liabilities
Accelerated depreciation ........................ 363 486
Accretion ....................................... 12 8
Purchase adjustments - securities ............... 24 44
Purchase adjustments - loans .................... 24 44
Other ........................................... - 9
------- -------
Gross deferred tax liabilities ....... 423 591
------- -------
Net deferred income tax assets ....................... $ 3,655 $ 599
======= =======
At December 31, 2005, and December 31, 2004 valuation allowances of $109,000 and
$70,000 were established to offset deferred tax assets arising from state net
operating loss carryforwards of the Corporation (parent company only) and CRM
which management does not consider likely to be realizable. The Corporation had
no available carrybacks, and realization of the remainder of the net operating
loss deductions is dependent upon the Corporation (parent company only) and CRM
having aggregate future taxable income. The nature of the Corporation's (parent
company only) operations are that management fees are charged to the
subsidiaries at levels approximately equal to the costs of providing services.
However, debt service is not charged to the subsidiaries and, consequently, the
Corporation (parent company only) operates at a deficit. Operating results of
CRM have historically fluctuated significantly along with changing conditions in
the home mortgage market. Accordingly, realization of the deferred tax assets is
not currently believed to be more likely than not. The state net operating loss
carryforwards at December 31, 2005 total $2,170,000 and expire as follows: 2024
- $1,407,000; and 2025 - $763,000.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Corporation provides a defined contribution plan qualified under Internal
Revenue Code Section 401(k). All employees who have completed 500 hours of
service during a six-month period and have attained age 21 may participate in
the plan.
A participant may elect to make tax deferred contributions up to a maximum of
$14,000 (plus $4,000 catch-up contributions if they were at least 50 years old)
in the 2005 plan year. The Corporation will make matching contributions on
behalf of each participant for 100% of the elective deferral, up to 3% of the
participant's compensation. The Corporation may also make additional
contributions determined at the discretion of the Board of Directors.
77
The Corporation's contributions for 401(k) related profit sharing for the years
ended December 31, 2005, 2004, and 2003 totaled approximately $479,000,
$285,000, and $170,000, respectively. Since 2001, the senior officers of the
Corporation have not participated in this profit sharing program.
The Bank of Ridgeway maintains a defined benefit pension plan covering the
majority of its employees. This plan was in place prior to the Corporation's
acquisition of Ridgeway Bancshares, Inc. in 2002. Because there are no such
plans for the Corporation's other subsidiaries, and there are no intentions to
establish any other such plans, the Corporation froze benefit accruals and
discontinued additional participation and voluntary contributions in the plan
during 2003. Management has no immediate plans to formally terminate the plan
and distribute its assets. The changes in the pension plan have been accounted
for as curtailments in accordance with the provisions of SFAS No. 88. The
following table shows the activity and status of that plan:
As of December 31,
------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Change in Benefit Obligation
Benefit obligation as of January 1 ............. $ 752 $ 710 $ 796
Service cost ................................... - - 11
Interest cost .................................. 46 46 50
Curtailments ................................... - - (169)
Actuarial (gain) loss .......................... 42 106 27
Acquisition .................................... - - -
Benefits paid .................................. (9) (110) (5)
----- ----- -----
Benefit obligation as of December 31 ........... 831 752 710
----- ----- -----
Change in Plan Assets
Fair value of plan assets as of January 1 ...... 694 656 632
Actual return (loss) on plan assets ............ 50 88 (27)
Acquisition .................................... - - -
Employer contributions ......................... 60 60 56
Benefits paid .................................. (9) (110) (5)
----- ----- -----
Fair value of plan assets as of December 31 .... 795 694 656
----- ----- -----
Funded Status of the Plan ........................ (36) (58) (54)
Unrecognized transition obligation ............. - - -
Unrecognized net loss .......................... 142 101 38
----- ----- -----
Prepaid (accrued) benefit liability ............ $ 106 $ 43 $ (16)
===== ===== =====
Amount Recognized in the Consolidated
Balance Sheets consists of:
Prepaid (accrued) benefit cost .............. $ 106 $ 43 $ (16)
===== ===== =====
The actuarial assumptions used to determine the benefit obligation as of
December 31, 2005, 2004 and 2003 were as follows:
December 31,
------------
2005 2004 2003
---- ---- ----
Pension Benefits Weighted Average Assumptions
Discount rate ..................................... 6.00% 6.25% 7.25%
Rate of compensation increase ..................... 3.00% 3.00% 5.00%
78
The components of net periodic pension cost were as follows:
Year Ended December 31,
-----------------------
2005 2004 2003
---- ---- ----
Components of Net Periodic Benefit Cost (Dollars in Thousands)
Service cost ................................ $ - $ - $ 11
Interest cost ............................... 46 46 50
Expected return on plan assets .............. (51) (47) (41)
Recognized net actuarial loss (gain) ........ - - 169
Amortization of transition obligation ....... - - -
Amortization of unrecognized net loss ....... 2 2 1
Curtailment (gain) loss ..................... - - (169)
----- ----- -----
Net periodic benefit cost ................. $ (3) $ 1 $ 21
===== ===== =====
For the years ended December 31, 2005, 2004 and 2003, the assumptions used to
determine net periodic pension cost were as follows:
Year Ended December 31,
-----------------------
2005 2004 2003
---- ---- ----
Pension Cost Weighted Average Assumptions
Discount rate ..................................... 6.25% 6.25% 7.25%
Expected long-term rate of return on plan asets ... 7.25% 7.25% 7.25%
Rate of compensation increase ..................... 3.00% 3.00% 5.00%
As of December 31, 2005 and 2004, pension plan assets consisted primarily of the
following:
Percentage of Plan Assets
at December 31,
---------------
Asset Category 2005 2004
---- ----
Equities ................................... 51% 53%
Bonds ...................................... 24% 24%
Cash ....................................... 0% 0%
Stable value instruments ................... 25% 23%
--- ---
Total ........................ 100% 100%
=== ===
The plan did not hold any direct investment in the Corporation's common stock.
The Bank of Ridgeway expects to contribute $60,000 to the pension plan in 2006.
Estimated future benefit payments are as follows:
79
Year Amount
---- ------
(Dollars in thousands)
2006 $ 214
2007 15
2008 15
2009 29
2010 29
Years 2011 through 2015 235
The Corporation maintains no other post-retirement or post-employment benefit
plans.
NOTE 15 - OFF-BALANCE-SHEET COMMITMENTS
The Banks are parties to credit-related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Banks' exposure to credit loss is represented by the contractual notional
amount of these commitments. The Banks generally use the same credit policies in
making these commitments as they do for on-balance-sheet instruments.
At December 31, 2005 and 2004, the following financial instruments were
outstanding whose contract amounts represent credit risk:
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Loan commitments ................................... $13,386 $11,644
Unfunded commitments under lines of credit ......... 42,974 43,312
Standby letters of credit .......................... 2,024 2,919
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies but may include personal
residences, accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support private borrowing arrangements. All
letters of credit are short-term guarantees. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
80
facilities to customers. The Banks generally hold collateral supporting those
commitments if deemed necessary. Since many of the standby letters of credit are
expected to expire without being drawn upon, the total letter of credit amounts
do not necessarily represent future cash requirements. To reduce credit risk
related to the use of credit-related financial instruments, the Bank might deem
it necessary to obtain collateral. The amount and nature of the collateral
obtained is based on the Banks' credit evaluation of the customer. Collateral
held varies but may include cash, securities, accounts receivable, inventory,
property, plant and equipment and real estate.
From time to time, the Corporation enters into commitments related to the normal
conduct of its business. In June 2005 the Corporation entered into an agreement
with Jack Henry and Associates related to the conversion of its management
information system to Jack Henry's Silverlake product. The initial aggregate
value of this commitment and its related software and hardware was approximately
$902,000. At December 31, 2005, the remaining obligation under this agreement
was approximately $584,000. Management anticipates initial implementation of the
new management information system during the second quarter and complete
implementation by year end of 2006.
The Corporation's Ridgeway bank entered into a lease agreement in December 2005
related to a building under construction. The Ridgeway bank is planning to
relocate its existing Blythewood office to a new location at 720 University
Village Drive by late second quarter 2006. The Bank will lease approximately
7,500 square feet in the building, which will be approximately 13,500 square
feet. The Bank's lease obligation in years 1 through 5 will be $138,750 annually
and, in years 6 through 10 the obligation will be $146,250 annually. The Bank
will have the option to renew for up to three additional terms of 5 years each
upon expiration of the original term.
NOTE 16 - EARNINGS PER SHARE
Basic earnings per share represent income available to common shareholders
divided by the weighted-average number of shares outstanding during the year.
Diluted earnings per share reflect additional common shares that would have been
outstanding if all dilutive potential stock options were exercised at the
beginning of each year and the proceeds used to purchase shares of the
Corporation's common stock at the average market price during the year. Dilutive
potential common shares that may be issued by the Corporation relate solely to
outstanding stock options.
Earnings per common share were computed based on the following:
81
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands, except per share)
Net income per share, basic
Numerator - net income .................................................. $ 1,011 $ 3,209 $ 5,635
========== ========== ==========
Denominator
Weighted average common shares issued and outstanding ................. 4,401,718 4,357,919 4,313,437
========== ========== ==========
Net income per share, basic .............................. $ .23 $ .74 $ 1.31
========== ========== ==========
Net income per share, assuming dilution
Numerator - net income .................................................. $ 1,011 $ 3,209 $ 5,635
========== ========== ==========
Denominator
Weighted average common shares issued and outstanding ................. 4,401,718 4,357,919 4,313,437
Effect of dilutive stock options ...................................... 100,017 114,500 113,966
---------- ---------- ----------
Total shares ............................................. 4,501,735 4,472,419 4,427,403
========== ========== ==========
Net income per share, assuming dilution .................. $ .22 $ .72 $ 1.27
========== ========== ==========
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," as amended, excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate fair values.
Interest-bearing deposits with other banks. The carrying amounts of
interest-bearing deposits with banks approximate their fair values.
Securities available-for-sale and held-to-maturity. Fair values for
securities are based on quoted market prices. The market values of state
and local government securities are established with the assistance of an
independent pricing service. The values are based on data which often
reflect transactions of relatively small size and are not necessarily
indicative of the value of the securities when traded in large volumes.
Other investments. Fair values of other investments, consisting of
restricted securities, approximate the carrying amounts and are based on
the redemption provisions of the issuers.
82
Loans held for sale. The carrying amounts approximate their fair values.
Loans. Fair values for performing loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
non-performing loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Accrued interest. The carrying amounts of accrued interest receivable and
payable approximate fair value.
Deposits. The fair values disclosed for demand deposits are equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). Fair values for certificates of deposit and other time deposits
are estimated using a discounted cash flow calculation that applies
interest rates currently offered on certificates to a schedule of
aggregated expected monthly maturities of time deposits.
Short-term borrowings. The carrying amounts of federal funds purchased and
borrowings under repurchase agreements approximate their fair values
because of the associated variable interest rates.
Long-term debt. The fair value of fixed-rate long-term debt is estimated
using discounted cash flow analyses based on the Corporation's current
incremental borrowing rates for similar types of borrowing arrangements.
The fair value of variable-rate long-term debt is estimated at the carrying
amount of the debt.
Off-balance-sheet commitments. Fair values for off-balance-sheet
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standings. The vast majority of loan commitments
do not involve the charging of a fee, and costs associated with outstanding
letters of credit are not material. For loan commitments and standby
letters of credit, the committed interest rates are either variable or
approximate current interest rates offered for similar commitments.
Therefore, the estimated fair values of these off-balance-sheet commitments
are nominal.
The estimated fair values and related carrying or notional amounts of the
Corporation's financial instruments at December 31, 2005 and 2004, are as
follows:
83
December 31,
------------
2005 2004
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
of Assets of Assets of Assets of Assets
(Liabilities) (Liabilities) (Liabilities) (Liabilities)
------------- ------------- ------------- -------------
(Dollars in thousands)
Cash and cash equivalents .................................. $ 51,991 $ 51,991 $ 26,968 $ 26,968
Interest bearing deposits with other banks ................. 1,038 1,038 852 852
Securities available-for-sale .............................. 58,701 58,701 55,471 55,471
Securities held-to-maturity ................................ 1,850 1,820 1,925 1,907
Other investments .......................................... 2,980 2,980 2,642 2,642
Loans held for sale ........................................ 12,447 12,447 15,090 15,090
Loans, net ................................................. 402,343 394,544 389,302 383,625
Accrued interest receivable ................................ 3,134 3,134 2,419 2,419
Deposits ................................................... (464,209) (464,673) (423,458) (424,623)
Short-term borrowings ...................................... (8,975) (8,975) (6,662) (6,662)
Long-term debt ............................................. (32,196) (34,110) (30,573) (31,486)
Accrued interest payable ................................... (1,212) (1,212) (691) (691)
Off-balance-sheet commitments
Loan commitments ......................................... $ (13,386) $ - $ (11,644) $ -
Unfunded commitments under lines of credit ............... (42,974) - (43,312) -
Standby letters of credit ................................ (2,024) - (2,919) -
NOTE 18 - CONTINGENCIES
The Corporation is subject at times to claims and lawsuits arising out of the
normal course of business. As of December 31, 2005, no claims or lawsuits were
pending or threatened which, in the opinion of management, are likely to have a
material effect on the Corporation's consolidated financial statements.
NOTE 19 - REGULATORY MATTERS
The Banks are subject to dividend restrictions set forth by various banking
regulators. Under such restrictions, the national banks may not, without prior
approval, declare dividends in excess of the sum of the current year's earnings
(as defined) plus the retained earnings (as defined) from the prior two years
and the state bank may not declare dividends in excess of the current year's
earnings. In addition, dividends paid by the Banks to the Corporation would be
prohibited if the effect thereof would cause the Banks' capital to be reduced
below applicable minimum capital requirements. At December 31, 2005, the
dividends that the Banks could declare without the approval of their respective
primary bank regulators amounted to approximately $5,747,000. The Banks are also
restricted by law as to the amount they may lend to any non-depository
affiliate, including the Corporation and CRM. Such loans are subject to the
requirements of Section 23A of the Federal Reserve Act including a general
limitation to not more than 10% of capital and specified ratios of the fair
market value of allowable collateral to loan amounts. There were no such loans
outstanding during 2005.
84
The Corporation (on a consolidated basis) and the Banks are each subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material adverse effect on the Corporation's and
the Banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Banks
must meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 2005 and
2004, that the Corporation and the Banks met all capital adequacy requirements
to which they are subject.
As of December 31, 2005, for ONB, for SNB, for FNB, and for BOR, the most recent
notifications from the FDIC categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since the notifications that management believes have
changed the Banks' categories. The Corporation's and the Banks' actual capital
amounts and ratios are presented in the following table.
85
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2005 (Dollars in thousands)
Tier I Capital (to Average Assets)
Consolidated ..................................... $52,370 9.6% $21,880 4.0% NA NA
ONB .............................................. 18,008 8.2% 8,784 4.0% 10,979 5.0%
SNB .............................................. 10,060 7.1% 5,700 4.0% 7,125 5.0%
FNB .............................................. 7,155 8.9% 3,210 4.0% 4,012 5.0%
BOR .............................................. 7,721 8.2% 3,784 4.0% 4,729 5.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated ..................................... $52,370 12.7% $16,438 4.0% NA NA
ONB .............................................. 18,008 11.1% 6,499 4.0% 9,749 6.0%
SNB .............................................. 10,060 9.1% 4,416 4.0% 6,624 6.0%
FNB .............................................. 7,155 10.1% 2,829 4.0% 4,243 6.0%
BOR .............................................. 7,721 12.4% 2,488 4.0% 3,733 6.0%
Total Capital (to Risk Weighted Assets)
Consolidated ..................................... $57,592 14.0% $32,877 8.0% NA NA
ONB .............................................. 19,974 12.3% 12,999 8.0% 16,248 10.0%
SNB .............................................. 11,518 10.4% 8,831 8.0% 11,039 10.0%
FNB .............................................. 8,040 11.4% 5,657 8.0% 7,071 10.0%
BOR .............................................. 8,501 13.7% 4,977 8.0% 6,221 10.0%
December 31, 2004
Tier I Capital (to Average Assets)
Consolidated ..................................... $52,713 10.7% $19,720 4.0% NA NA
ONB .............................................. 18,037 8.9% 8,118 4.0% 10,148 5.0%
SNB .............................................. 10,540 7.8% 5,379 4.0% 6,723 5.0%
FNB .............................................. 6,202 8.6% 2,872 4.0% 3,590 5.0%
BOR .............................................. 7,426 8.7% 3,413 4.0% 4,267 5.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated ..................................... $52,713 13.7% $15,408 4.0% NA NA
ONB .............................................. 18,037 12.0% 6,037 4.0% 9,055 6.0%
SNB .............................................. 10,540 9.5% 4,459 4.0% 6,688 6.0%
FNB .............................................. 6,202 9.6% 2,573 4.0% 3,859 6.0%
BOR .............................................. 7,426 13.0% 2,292 4.0% 3,437 6.0%
Total Capital (to Risk Weighted Assets)
Consolidated ..................................... $57,060 14.8% $20,816 8.0% NA NA
ONB .............................................. 19,763 13.1% 12,074 8.0% 15,092 10.0%
SNB .............................................. 11,714 10.5% 8,917 8.0% 11,146 10.0%
FNB .............................................. 6,781 10.5% 5,146 8.0% 6,432 10.0%
BOR .............................................. 7,914 13.8% 4,583 8.0% 5,729 10.0%
CRM is subject to a minimum regulatory adjusted net worth requirement to
maintain its certification as a HUD-approved Title II Loan Correspondent.
Certain investor and warehouse credit line agreements require that CRM maintain
its HUD certification. Accordingly, failure to maintain the minimum regulatory
adjusted net worth could result in a significant limitation of CRM's ability to
originate, fund or sell loans, and therefore could have a direct, material
adverse effect on its business and the Corporation's consolidated financial
statements.
86
CRM's actual regulatory adjusted net worth and the minimum amount required by
HUD were as follows:
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Actual adjusted net worth .................... $1,487 $1,161
Minimum required ............................. 63 63
HUD regulations require that 20%, up to a maximum of $100,000, of the adjusted
net worth amount be held in liquid assets. CRM's liquid assets for regulatory
purposes totaled $2,018,000 and $1,331,000, respectively, as of December, 31,
2005 and 2004.
NOTE 20 - CONDENSED FINANCIAL STATEMENTS
Presented below are the condensed financial statements for Community Bankshares,
Inc. (Parent Company only):
COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY)
December 31,
------------
2005 2004
---- ----
(Dollars in thousands)
Condensed Balance Sheets
Assets
Cash ............................................... $ 1,364 $ 3,991
Investment in banking subsidiaries ................. 48,646 48,598
Investment in nonbanking subsidiaries .............. 1,797 1,471
Securities available-for-sale, at fair value ....... 96 96
Loans to nonbanking subsidiary ..................... 3,813 4,883
Premises and equipment - net ....................... 3,263 1,037
Goodwill ........................................... 921 921
Other assets ....................................... 2,167 96
------- -------
Total assets .................................. $62,067 $61,093
======= =======
Liabilities
Short-term borrowings .............................. $ 2,000 $ -
Long-term debt ..................................... 10,310 10,310
Other liabilities .................................. 765 756
Shareholders' equity ................................... 48,992 50,027
------- -------
Total liabilities and shareholders' equity .... $62,067 $61,093
======= =======
87
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Condensed Statements of Income
Income
Management fees from subsidiaries ........................................... $ 3,086 $ 2,286 $ 2,066
Dividends received from banking subsidiaries ................................ 4,266 2,679 1,741
Interest income ............................................................. 428 180 17
Other income ................................................................ 4 16 11
------- ------- -------
Total income ........................................................... 7,784 5,161 3,835
------- ------- -------
Expenses
Salaries and employee benefits .............................................. 1,868 1,397 1,373
Premises and equipment ...................................................... 683 628 435
Supplies .................................................................... 80 109 92
Directors' fees ............................................................. 62 53 49
Interest expense ............................................................ 675 408 9
Other expenses .............................................................. 1,447 918 701
------- ------- -------
Total expenses ......................................................... 4,815 3,513 2,659
------- ------- -------
Income before income taxes and equity in
undistributed earnings of subsidiaries ...................................... 2,969 1,648 1,176
Income tax (benefit) ............................................................ (441) (364) (192)
Equity in undistributed (loss) earnings of banking subsidiaries ................. (2,507) 1,664 3,725
Equity in undistributed earnings (loss) of nonbanking subsidiary ................ 108 (467) 542
------- ------- -------
Net income ...................................................................... $ 1,011 $ 3,209 $ 5,635
======= ======= =======
88
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Condensed Statements of Cash Flows
Operating activities
Net income ................................................................ $ 1,011 $ 3,209 $ 5,635
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed loss (earnings)
of subsidiaries ............................................. 2,399 (1,197) (4,267)
Depreciation and amortization ................................. 354 332 205
Loss on disposal of premises and equipment .................... - - 9
(Increase) decrease in other assets ........................... (2,071) 83 225
Increase in other liabilities ................................. 9 332 268
-------- -------- --------
Net cash provided by
operating activities ..................................... 1,702 2,759 2,075
-------- -------- --------
Investing activities
Purchase of securities available-for-sale ................................ - - (46)
Net decrease (increase) in loans to nonbanking subsidiaries .............. 1,070 (4,883) -
Investment in SCB Capital Trust .......................................... - (310) -
Investments in banking subsidiaries ...................................... (3,000) (3,000) -
Investment in nonbanking subsidiary ...................................... (218) (126) -
Purchases of premises and equipment ...................................... (2,580) (360) (794)
-------- -------- --------
Net cash used by investing activities .................... (4,728) (8,679) (840)
-------- -------- --------
Financing activities
Increase (decrease) in short-term borrowings, net ........................ 2,000 (635) 635
Proceeds of issuing long-term debt ....................................... - 10,310 -
Sale of common stock ..................................................... 14 - -
Exercise of stock options ................................................ 146 640 312
Cash dividends paid ...................................................... (1,761) (1,744) (1,554)
-------- -------- --------
Net cash provided (used) by financing activities ......... 399 8,571 (607)
-------- -------- --------
(Decrease) increase in cash and cash equivalents ............................ (2,627) 2,651 628
Cash and cash equivalents, beginning ........................................ 3,991 1,340 712
-------- -------- --------
Cash and cash equivalents, ending ........................................... $ 1,364 $ 3,991 $ 1,340
======== ======== ========
89
NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Years Ended December 31,
------------------------
2005 2004
---- ----
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands, except per share)
Interest and dividend income .................. $ 8,464 $ 8,295 $ 7,696 $ 7,151 $ 6,785 $ 6,253 $ 5,928 $ 5,908
Interest expense .............................. 3,157 2,929 2,503 2,216 1,972 1,757 1,662 1,640
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ........................... 5,307 5,366 5,193 4,935 4,813 4,496 4,266 4,268
Provision for loan losses ..................... 6,302 2,300 585 450 2,963 1,648 258 233
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision ........... (995) 3,066 4,608 4,485 1,850 2,848 4,008 4,035
Noninterest income ............................ 1,897 2,295 2,044 1,777 1,581 1,839 1,932 1,850
Gains (losses) on sales of securities ......... - - - (10) 71 10 (1) (4)
Noninterest expense ........................... 4,598 4,449 4,225 4,119 3,705 3,826 3,775 3,733
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes ............. (3,696) 912 2,427 2,133 (203) 871 2,164 2,148
Provision for income taxes .................... (1,214) 330 876 773 (67) 306 769 763
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ............................. $(2,482) $ 582 $ 1,551 $ 1,360 $ (136) $ 565 $ 1,395 $ 1,385
======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) per share
Basic ....................................... $ (0.56) $ 0.13 $ 0.35 $ 0.31 $ (0.03) $ 0.13 $ 0.32 $ 0.32
Diluted ..................................... (0.56) 0.13 0.35 0.30 (0.03) 0.12 0.31 0.31
During the third and fourth quarter of 2004 management became aware of certain
credit quality concerns relative to its loan portfolio. Consequently, during
that period significant increases were recorded in the Corporation's loan loss
provision.
In early 2005 management hired a Chief Credit Officer, enhanced its loan
administration process and engaged the services of a new external loan review
firm. The new loan review firm's initial series of reviews were completed during
the second and third quarter of 2005. Based on those reviews, and further work
conducted by management, significant increases were recorded in the
Corporation's loan loss provision during the last two quarters of 2005.
NOTE 22 - SUBSEQUENT EVENT
During the first quarter of 2006 the corporate board concluded that the
multi-bank holding company concept was not in the best long range interest of
its shareholders, customers or employees. The board directed management to plan
for a transition to a single bank charter, to be implemented by year-end 2006,
contingent on all required legal and regulatory approvals.
90
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with or changes in accountants.
Item 9A. Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Corporation's disclosure controls and procedures (as
defined in 17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Corporation's
chief executive officer and chief financial officer concluded that such controls
and procedures, as of the end of the period covered by this annual report, were
effective.
No disclosure is required under 17 C.F.R. Section 229.308(a) or (b).
There has been no change in the Corporation's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
Item 9B. Other Information
No information required to be disclosed in a report on Form 8-K during the
fourth quarter of 2005 was not so disclosed.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the captions "Management - Directors,"
"Management - Executive Officers," "Governance Matters - Committees of the Board
of Directors - Audit Committee" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement to be used in conjunction with the
2006 Annual Meeting of Shareholders (the "Proxy Statement"), which will be filed
within 120 days of the Corporation's fiscal year end, is incorporated herein by
reference.
Audit Committee Financial Expert
The Corporation's board of directors has determined that the
Corporation does not have an "audit committee financial expert," as that term is
defined by Item 401(h) of Regulation S-K promulgated by the Securities and
Exchange Commission, serving on its audit committee. The Corporation's audit
committee is a committee of directors who are independent of the Corporation and
its management. After reviewing the experience and training of all of the
Corporation's independent directors, the board of directors has concluded that
no independent director meets the SEC's very demanding definition. Therefore, it
would be necessary to find a qualified individual willing to serve as both a
director and member of the audit committee and have that person elected by the
shareholders in order to have an "audit committee financial expert" serving on
the Corporation's audit committee. The Corporation's audit committee is,
however, authorized to use consultants to provide financial accounting expertise
in any instance where members of the committee believe such assistance would be
useful. Accordingly, the Corporation does not believe that it needs to have an
"audit committee financial expert" on its audit committee.
91
Code of Ethics
The Corporation has adopted a code of ethics (as defined by C.F.R.
229.406) that applies to its principal executive officer and principal financial
officer. The code of ethics is posted on the Corporation's website at
www.communitybanksharesinc.com.
Item 11. Executive Compensation
With the exception of the information set forth under the captions
"Board Report on Executive Officer Compensation" and "Shareholder Return
Performance Graph", which information is not incorporated herein by reference,
the information set forth under the caption "Management Compensation" in the
Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
Equity Compensation Plan Information. The following table sets forth
aggregated information as of December 31, 2005 about all of the Corporation's
compensation plans (including individual compensation arrangements) under which
equity securities of the Corporation are authorized for issuance.
Number of securities
remaining available for
Number of securities to be Weighted average future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Stock option plan (a) (b) (c)
-------------------------------------- ------------------- ------------------- ------------------------
Equity compensation plans
approved by security holders ............ 512,073 $ 14.46 273,527
Equity compensation plans not
approved by security holders ............ N/A N/A N/A
------- ------ -------
Total .................................... 512,073 $ 14.46 273,527
======= ====== =======
The Corporation's 1997 Stock Option Plan, and issuance of up to 785,600 shares
under that plan, have previously been approved by shareholders.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
92
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Independent Public
Accountants - Fees Billed by Independent Auditors" and "- Audit Committee
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors" in the Proxy Statement is incorporated herein by reference.
93
Item 15. Exhibits and Financial Statement Schedules
(a) (1) All financial statements:
Consolidated Balance Sheets, December 31, 2005 and 2004
Consolidated Statements of Income, Years Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Changes in Shareholders' Equity, Years Ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows, Years Ended December 31, 2005, 2004
and 2003
Notes to Consolidated Financial Statements
(2) Financial statement schedules:
Quarterly Data for 2005 and 2004
(3)
Exhibit No. Description
(from item 601 of
S-K)
3.1 Articles of Incorporation, as amended (incorporated by reference to
exhibits filed in the Registrant's Form 10-QSB for the quarter ended
September 30, 1997).
3.2 Bylaws, as amended (incorporated by reference to Registrant's Form 8-K,
filed February 4, 2005).
4 Stock certificate (incorporated by reference to exhibits filed in the
Registrant's Registration Statement on Form S-2, filed September 11,
1995, Commission File No. 33-96746).
10.1 1997 Stock Option Plan, as amended (incorporated by reference to exhibits
to Registrant's Form S-8 (File No. 333-118119)).
10.2 Leasefor site of Florence National Bank (incorporated by reference to
Registrant's Form 10-K for the year ended December 31, 1999).
10.3 Warehouse Credit and Security Agreement, dated October 5, 2004, between
Community Resource Mortgage, Inc. and Branch Bank and Trust Company
(incorporated by reference to Registrant's Form 10-K for the year
ended December 31, 2004 (the "2004 Form 10-K")).
10.4 Guaranty, dated October 5, 2004, by Registrant of obligations of Community
Resource Mortgage, Inc. to Branch Bank and Trust Company
(incorporated by reference to the 2004 Form 10-K).
10.5 Indenture, dated as of March 1, 2004, between Registrant and Wells Fargo
Bank, National Association (incorporated by reference to exhibits
filed with Registrant's Form 10-Q for the quarter ended March 31,
2004 ("First Quarter 2004 Form 10-Q")).
10.6 Amended and Restated Declaration of Trust, dated March 10, 2004, among the
Trustees and Administrators named therein and SCB Capital Trust I
(incorporated by reference to the First Quarter 2004 Form 10-Q).
10.7 Guaranty Agreement, dated as of March 10, 2004, between Registrant and
Wells Fargo Bank, National Association (incorporated by reference to
the First Quarter 2004 Form 10-Q).
10.8 Form of Employment Agreement between the Corporation and Samuel L. Erwin
(incorporated by reference to the 2004 Form 10-K).
10.9 Form of Employment Agreement between the Corporation and each of William
W. Traynham and Michael A Wolfe (incorporated by reference to the
2004 Form 10-K).
21 Subsidiaries of the registrant (incorporated by reference to the 2004 Form
10-K).
23 Consent of J. W. Hunt and Company, LLP
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial Officer
32 18 U.S.C. Section 1350 Certifications
94
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATED: March 30, 2006
By: s/ Samuel L. Erwin
----------------------------
Samuel L. Erwin
Chief Executive Officer
By s/ William W. Traynham, Jr.
-----------------------------
William W. Traynham, Jr
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
s/ E. J. Ayers, Jr. Date: March 27, 2006
-------------------
E. J. Ayers, Jr., Director
Date: March __, 2006
-------------------------
Alvis J. Bynum, Director
s/ Martha Rose C. Carson Date: March 27, 2006
------------------------
Martha Rose C. Carson, Director
s/ Anna O. Dantzler Date: March 27, 2006
-------------------
Anna O. Dantzler, Director
s/ Thomas B. Edmunds Date: March 27, 2006
--------------------
Thomas B. Edmunds, Director
s/ Samuel L. Erwin Date: March 27, 2006
------------------
Samuel L. Erwin, Director
s/ Charles E. Fienning Date: March 27, 2006
----------------------
Charles E. Fienning, Director
s/ J. M. Guthrie Date: March 27, 2006
----------------
J. M. Guthrie, Director
s/ Richard L. Havekost Date: March 27, 2006
----------------------
Richard L. Havekost, Director
s/ John V. Nicholson, Jr. Date: March 27, 2006
--------------------
John V. Nicholson, Jr., Director
s/ Samuel F. Reid, Jr. Date: March 27, 2006
----------------------
Samuel F. Reid, Jr., Director
Date: March __, 2006
--------------------
J. Otto Warren, Jr., Director
s/ Wm. Reynolds Williams, II Date: March 27, 2006
------------------------
Wm. Reynolds Williams, II, Director
95
EXHIBIT INDEX
Exhibit No. Description
(from item 60 of
S-K)
3.1 Articles of Incorporation, as amended (incorporated by reference to
exhibits filed in the Registrant's Form 10-QSB for the quarter ended
September 30, 1997).
3.2 Bylaws, as amended (incorporated by reference to Registrant's Form 8-K,
filed February 4, 2005).
4 Stock certificate (incorporated by reference to exhibits filed in the
Registrant's Registration Statement on Form S-2, filed September 11,
1995, Commission File No. 33-96746).
10.1 1997 Stock Option Plan, as amended (incorporated by reference to exhibits
to Registrant's Form S-8 (File No. 333-118119)).
10.2 Leasefor site of Florence National Bank (incorporated by reference to
Registrant's Form 10-K for the year ended December 31, 1999).
10.3 Warehouse Credit and Security Agreement, dated October 5, 2004, between
Community Resource Mortgage, Inc. and Branch Bank and Trust Company
(incorporated by reference to Registrant's Form 10-K for the year
ended December 31, 2004 (the "2004 Form 10-K")).
10.4 Guaranty, dated October 5, 2004, by Registrant of obligations of Community
Resource Mortgage, Inc. to Branch Bank and Trust Company
(incorporated by reference to the 2004 Form 10-K).
10.5 Indenture, dated as of March 1, 2004, between Registrant and Wells Fargo
Bank, National Association (incorporated by reference to exhibits
filed with Registrant's Form 10-Q for the quarter ended March 31,
2004 ("First Quarter 2004 Form 10-Q")).
10.6 Amended and Restated Declaration of Trust, dated March 10, 2004, among the
Trustees and Administrators named therein and SCB Capital Trust I
(incorporated by reference to the First Quarter 2004 Form 10-Q).
10.7 Guaranty Agreement, dated as of March 10, 2004, between Registrant and
Wells Fargo Bank, National Association (incorporated by reference to
the First Quarter 2004 Form 10-Q).
10.8 Form of Employment Agreement between the Corporation and Samuel L. Erwin
(incorporated by reference to the 2004 Form 10-K).
10.9 Form of Employment Agreement between the Corporation and each of William
W. Traynham and Michael A Wolfe (incorporated by reference to the
2004 Form 10-K).
21 Subsidiaries of the registrant (incorporated by reference to the 2004 Form
10-K).
23 Consent of J. W. Hunt and Company, LLP
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial Officer
32 18 U.S.C. Section 1350 Certifications
96