Community Bankshares Inc. (SCB)
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Bankshares with banks that are profitable, locally focused and managed by local
directors and officers in South Carolina
Mr. Traynham: The company was founded in 1987 as Orangeburg National Bank; a stand-alone community bank. We formed Community Bankshares a few years later in 1992 as a holding company for the bank. Four years later in 1996, we were looking for growth opportunities and we helped start another community bank; Sumter National Bank. That transaction doubled the number of shareholders we had in the company and later that year we listed our common stock on the American Stock Exchange. A few years later we were looking for another growth opportunity so we helped start another de novo, Florence National Bank, in Florence South Carolina, which is in the PeeDee part of the state. In 2001, we acquired our mortgage company, Community Resource Mortgage Inc. and in 2002, we acquired the Bank of Ridgeway, which is the oldest chartered bank in South Carolina. We have been in business for over seventeen years and have grown from a stand-alone, single community bank to a four-bank holding company with a mortgage company. We were about $466 million in assets as of the end of 2003 and last year we earned $5.6 million dollars.
CEOCFOinterviews: How have you been affected by the ups-and-downs of the economy?
Mr. Traynham: South Carolina is somewhat insulated from the trends of the national economy; our state doesnt boom quite to the same extent as the rest of the country. We also dont fall quite as far when times slow down. The major macro-economic factor that we had to deal with in the last year has been the decline in the demand for mortgage loan refinancing. We bought a mortgage company in late 2001, just in time to enjoy the boom because of low interest rates. That was terrific while it lasted but in the fall of 2003, things started slowing down dramatically and that has had negative impact on non-interest income. It is beginning to bounce back a little bit, but not to the same extent that we enjoyed through the fall of last year.
CEOCFOinterviews: That wasnt totally unexpected, was it?
Mr. Traynham: No, its a feast or famine type mortgage industry. Interest rates have been at historical lows for quite some time but it seems like everybody has refinanced at least once and some of our customers have refinanced two or three times over the last few years. We have enjoyed it. We are trying to compensate for the volatility in this area by expanding the marketplace opportunities for the mortgage company and we are seeking ways to reduce our costs. That is part of the normal business cycle. As far as the overall economy in South Carolina is concerned, we are spread out in different marketplaces, so it mitigates our geographic risk somewhat.
CEOCFOinterviews: You are a holding company for several banks, why are they independent as opposed to under one broad name?
Mr. Traynham: Our business model is different; in South Carolina people like a direct connection with their bankers. They like to know the bankers they are dealing with and who is on the bank board. They also like to see the name of their community in the bank name. It is difficult for a Bank of America or a Wachovia to give them a personal connection. We try to synthesize the advantage of size and keep the character of local community banking alive and well through a multi-bank holding company business model. We have four banks and a mortgage company, each with their own officers and their own directors. At the corporate level, we provide general guidance but mostly we provide technical services, such as data processing, item processing, internal auditing, compliance and shareholder services. We take care of the banks so that the banks can take care of the local customers. It has worked well for us and it gives us a much better marketing strategy than our larger competitors because our customers want a direct personal connection to their local bank and banker. Our other big advantage is that we have some tremendous talent on our individual bank boards, which would be hard to come by if we were simply a standalone community bank.
CEOCFOinterviews: How are each of the individual banks growing and what is your role in that?
Mr. Traynham: Mostly they make their own strategic decisions but it is in the context of the overall corporate strategic plan. Our corporate strategic goal is to become a billion-dollar asset institution within the next five years. We are in several different markets each of which has a different potential for growth. Each of the banks is represented on our corporate board so they get an opportunity to tell their local story at the corporate level and hear what the corporation wants to happen. The Chairman and I are on the board of each of the subsidiaries. Two of our banks have particularly strong growth opportunities. The Bank of Ridgeway is adjacent to North East Columbia area, which is Interstate 77 corridor north toward Charlotte, which is a tremendous area for growth and we think that over the next few years we will have some great opportunities to grow the Ridgeway Bank there. Florence National Bank is in another part of the state where there is a lot of competition, but there is also a lot of growth potential. We are in the process right now of buying property for a second bank office in Florence. The Sumter and Orangeburg banks also have potential for growth, but not to the same extent as the other two banks.
CEOCFOinterviews: What do you look for when you look for acquisitions or when you look to go into a new area and start de novo?
Mr. Traynham: The whole purpose of a corporation is to make money, so we are looking for opportunities to increase the wealth of our shareholders over time. We have made a deliberate decision to not jump downtown in a major metropolitan area and compete with larger financial institutions. There are many banks out there and competition is fierce. We are concentrating on the smaller and medium sized marketplaces in South Carolina, where large banks, if they have a presence at all, are not actively interested in competing. A lot of our state endures benign neglect from the larger banks. We decided a long time ago that a million dollars in Orangeburg, South Carolina, for example, is just as good as a million dollars earned in Greenville or Charlotte and generally it is a lot less difficult to come by. There are a lot of community banks in South Carolina, banks under a half-a-billion-dollars in assets. A lot of them are publicly traded or at least registered with the SEC. Those banks are facing the same challenges that we face in having to deal with public company regulations in the 21st century. The recent changes mandated by Sarbanes Oxley means it is becoming increasingly difficult to be a small or medium sized public company. Were spending a lot of time, energy, and money making sure that we can comply with these new requirements. These challenges are an opportunity because there are a lot of smaller institutions that may not be able or willing to comply. We can provide them with an alternative to taking their chances or selling to a much larger institution. Our business model gives them an option that will enable them to still be a local bank, but get some advantage of being part of a larger group.
CEOCFOinterviews: It sounds like a win-win situation!
Mr. Traynham: It really is. I dont think the full magnitude of the Sarbanes Oxley law has really dawned on a lot of people yet. We are looking at section 404 compliance as a major project. I am a CPA by background and training and I understand what a challenge it is. In the context of a smaller public entity, a little bank, it could be a really serious problem.
CEOCFOinterviews: Are there services that you dont yet have that you would like to make available?
Mr. Traynham: We probably offer all the services that 98% of our public needs. We do not currently have trust services, and that is something that we have been looking at and at some point in the future we would like to consider. In terms of basic banking services, deposits, mortgage loans, credit and debit cards, Internet banking; we can provide the same sorts of services that any other institution provides, at least as well, and generally better than they do. We think we do it with much more personal attention to the customer.
CEOCFOinterviews: How do you keep in-touch with what is happening on the teller level at these banks?
Mr. Traynham: I serve on the boards of each of the banks and know all of the officers and key players in each of the banks. We talk frequently. CBI is still a small company. We have open communications and back channel communications. I feel that we are aware of what going on out there. If anything significant happens, generally the corporate grapevine works a lot faster than official channels. Also, we have a whistle blower system in place, another Sarbanes Oxley compliance requirement. It is a system where the employees can anonymously report any kind of legal or regulatory concerns they have regarding internal controls or financial reporting.
CEOCFOinterviews: I have seen your five-part long-term strategy and one of the components is maintaining a balance between the interests of shareholders, customers, and employees. What do you need to do to make all of that work?
Mr. Traynham: They are part of the same equation. When I first got into banking, one of the first things I did was go to the LSU Graduate School of Banking. One vivid memory that I have is of one lecture where the lecturer asked, Why is your bank organized and what is your corporate purpose? For the next ten minutes people were talking about serving the public, being an economic motor to their communities. After awhile, he brought the conversation to a close and said the only purpose for any corporation to make money, to improve the wealth of their shareholders. Fundamentally that is what it is all about. How that goal is accomplished is a matter of discussion. Our purpose is to improve the wealth of the shareholders and make more money year-after-year, maintain the quality of the earnings stream and ultimately, I believe, everything else will take care of itself. But, we have to maintain some equilibrium between the interests of the shareholders, the employees and the customers not a perfect balance, but equilibrium. We believe that if we treat our employees well, they will take care of the customers, our customers will continue to do more and more business with us, and that will enable us, corporately, to fulfill our responsibility to the shareholders. Its capitalism 101.
CEOCFOinterviews: Your goal is to have an asset base of a billion dollars by 2008, what are the challenges in doing that and how do you prepare?
Mr. Traynham: I mentioned the difficulties of being a small public company and there are more requirements coming all the time. In order for it to make good economic sense for us to be public, there is a certain minimum size that you have to reach. I dont know what that number is, but I expect its somewhere north of one billion. By getting to that size we will be better able to leverage the financial costs of being a public company. We cant do that by just relying on year to year growth from our four banking subsidiaries. We will eventually get there, but it will take a long time. We are keeping our eyes and ears open for banks that might share our personal, common sense approach to community banking and may want some help in facing some of the regulatory and legal and technological challenges that face us all in the 21st century. Were not seeking growth for the sake of growth, but we are looking to build a larger group of strong community banks for our region.
CEOCFOinterviews: In closing, why should shareholders be interested and what should they know that they might not realize when they first look at the company?
Mr. Traynham: We are fundamentally different than other financial institutions because of our business model as a multi-bank holding company. Our banks are profitable, locally focused and managed by local directors and officers, which is a very good thing in our part of the country. Over time we improved all of our major financial metrics, our assets, deposits, net income and earnings per share. The balance sheet has grown over the last five years from $228 million dollars to $466 million dollars and we have maintained solid asset quality along the way. We have gone from nineteen cents a share in dividends five years ago, to thirty-six cents last year. We think we have a good business model for a bank holding company and we think it will serve us well in the future as it has in the past. We are keeping an open mind on acquisition targets and how we are going to grow the company. I think if we continue to do what we have been doing and keep our minds open to new ideas and opportunities over time we will make this company much more valuable.
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