U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
---- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________to_________
Commission File no. 000-50466
DEKALB BANKSHARES, INC.
(Exact name of small business issuer as specified in its charter)
South Carolina 61-1444253
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
631 West DeKalb Street
Camden, South Carolina 29020
(Address of principal executive offices)
(803) 432-7575
(Issuer's telephone number, including area code)
------------------------------------------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date.
609,060 shares of common stock, no par value, as of July 31, 2004
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DEKALB BANKSHARES, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2004 and December 31, 2003......................................3
Condensed Consolidated Statements of Income - Six months ended June 30, 2004 and June 30, 2003
and Three months ended June 30, 2004 and 2003..................................................................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Six months ended June 30, 2004 and June 30, 2003...............................................................5
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2004 and June 30, 2003...............6
Notes to Condensed Consolidated Financial Statements..........................................................7-10
Item 2. Management's Discussion and Analysis or Plan of Operation.....................................................10-15
Item 3. Controls and Procedures..........................................................................................15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................................................16
(a) Exhibits....................................................................................................17
(b) Reports on Form 8-K.........................................................................................17
2
DEKALB BANKSHARES, INC.
Condensed Consolidated Balance Sheets
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
June 30, December 31,
2004 2003
---- ----
(Unaudited)
Assets:
Cash and cash equivalents:
Cash and due from banks ................................................... $ 583,216 $ 867,695
Federal funds sold ........................................................ 1,136,000 1,402,000
------------ ------------
Total cash and cash equivalents ......................................... 1,719,216 2,269,695
------------ ------------
Time deposits with other banks ................................................. 313,494 310,078
Securities available-for-sale .................................................. 9,446,555 6,938,632
Nonmarketable equity securities ................................................ 343,212 220,000
------------ ------------
9,789,767 7,158,632
Loans receivable ............................................................... 23,945,738 21,624,149
Less allowance for loan losses .............................................. (325,208) (305,000)
------------ ------------
Loans, net .............................................................. 23,620,530 21,319,149
Premises and equipment, net .................................................... 1,377,486 1,410,202
Accrued interest receivable .................................................... 120,425 111,817
Other assets ................................................................... 539,445 455,844
------------ ------------
Total assets ............................................................ $ 37,480,363 $ 33,035,417
============ ============
Liabilities
Deposits:
Noninterest-bearing transaction accounts .................................... $ 2,186,945 $ 2,314,452
Interest-bearing transaction accounts ....................................... 3,285,204 2,901,206
Savings ..................................................................... 4,403,058 3,702,360
Time deposits $100,000 and over ............................................. 10,633,227 10,085,481
Other time deposits ......................................................... 4,826,159 4,843,043
------------ ------------
25,334,593 23,846,542
Advances from Federal Home Loan Bank ........................................... 4,000,000 4,000,000
Securities sold under agreements to repurchase ................................. 3,000,000 -
Accrued interest payable ....................................................... 35,223 37,793
Other liabilities .............................................................. 80,707 39,236
------------ ------------
Total liabilities ....................................................... 32,450,523 27,923,571
------------ ------------
Shareholders' equity
Common stock, no par value; 20,000,000 shares
authorized, 609,060 shares issued and outstanding ........................... 5,866,807 5,866,807
Retained earnings (deficit) .................................................... (687,487) (732,329)
Accumulated other comprehensive income (loss) .................................. (149,480) (22,632)
------------ ------------
Total shareholders' equity .............................................. 5,029,840 5,111,846
------------ ------------
Total liabilities and shareholders' equity .............................. $ 37,480,363 $ 33,035,417
============ ============
See notes to condensed financial statements.
3
DEKALB BANKSHARES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Loans, including fees ........................................... $711,171 $646,799 $368,367 $335,595
Investment securities, taxable .................................. 167,064 70,748 82,153 29,563
FHLB interest and dividends ..................................... 4,440 7,185 2,286 6,402
Federal funds sold .............................................. 9,140 7,297 4,836 3,870
Time deposits with other banks .................................. 3,615 2,663 1,616 1,288
-------- -------- -------- --------
Total ....................................................... 895,430 734,692 459,258 376,718
-------- -------- -------- --------
Interest expense:
Time deposits $100,000 and over ................................. 89,958 62,658 45,815 27,117
Other deposits .................................................. 82,147 107,768 41,136 57,493
Other interest expense .......................................... 82,585 44,623 43,560 21,490
-------- -------- -------- --------
Total ....................................................... 254,690 215,049 130,511 106,100
-------- -------- -------- --------
Net interest income ................................................ 640,740 519,643 328,747 270,618
Provision for loan losses .......................................... 39,000 51,000 21,500 23,500
-------- -------- -------- --------
Net interest income after provision for
loan losses ..................................................... 601,740 468,643 307,247 247,118
-------- -------- -------- --------
Other operating income:
Service charges on deposit accounts ............................. 73,834 54,504 41,919 28,429
Gain on sales of securities available for sale .................. - 24,019 - -
Residential mortgage origination fees ........................... 42,649 67,850 24,317 43,108
Other service charges, commissions and fees ..................... 14,364 12,399 7,304 7,288
-------- -------- -------- --------
Total ....................................................... 130,847 158,772 73,540 78,825
-------- -------- -------- --------
Other operating expenses:
Salaries and employee benefits .................................. 343,901 314,792 182,072 144,701
Occupancy expense ............................................... 40,789 38,838 20,030 20,007
Furniture and equipment expense ................................. 23,028 24,048 11,547 11,854
Other operating expenses ........................................ 253,607 239,954 125,645 126,654
-------- -------- -------- --------
Total ....................................................... 661,325 617,632 339,294 303,216
-------- -------- -------- --------
Income before income taxes ......................................... 71,262 9,783 41,493 22,727
Income tax expense ................................................. 26,420 3,778 15,158 8,523
-------- -------- -------- --------
Net income ......................................................... $ 44,842 $ 6,005 $ 26,335 $ 14,204
======== ======== ======== ========
Earnings per share
Basic earnings per share ........................................... $ .07 $ .01 $ .04 $ .02
Diluted earnings per share ......................................... $ .07 $ .01 $ .04 $ .02
See notes to condensed financial statements.
4
DEKALB BANKSHARES, INC.
Condensed Consolidated Statements of Shareholders' Equity
and Comprehensive Income
For the Six months ended June 30, 2004 and 2003
(Unaudited)
Accumulated
Common Stock Retained Other
------------ Earnings Comprehensive
Shares Amount (Deficit) Income Total
------ ------ --------- ------ -----
Balance, December 31, 2002 ................ 609,060 $ 5,866,807 $ (782,412) $ 51,066 $ 5,135,461
Net income for the period ................. 6,005 6,005
Other comprehensive
income, net of tax $(11,090) ........... (18,883) (18,883)
-----------
Comprehensive Income ...................... (12,878)
------------ ----------- ----------- ----------- -----------
Balance, June 30, 2003 .................... 609,060 $ 5,866,807 $ (776,407) $ 32,183 $ 5,122,583
=========== =========== =========== =========== ===========
Balance, December 31, 2003 ................ 609,060 5,866,807 (732,329) (22,632) $ 5,111,846
Net income for the period ................. 44,842 44,842
Other comprehensive
income, net of tax $74,498 ............. (126,848) (126,848)
-----------
Comprehensive Income ...................... (82,006)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2004 ..................... 609,060 $ 5,866,807 $ (687,487) $ (149,480) $ 5,029,840
=========== =========== =========== =========== ===========
See notes to condensed financial statements.
5
DEKALB BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
2004 2003
---- ----
Cash flows from operating activities:
Net income ........................................................................ $ 44,842 $ 6,005
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ....................................................... 39,000 51,000
Depreciation and amortization expense ........................................... 55,340 63,341
Gain on sale of securities ...................................................... - (24,019)
Accretion and premium amortization .............................................. 8,230 8,794
Deferred income tax provision (benefit) ......................................... (50,410) 2,349
(Increase) decrease in interest receivable ...................................... (8,608) 3,075
Decrease in interest payable .................................................... (2,570) (4,111)
Increase in other assets ........................................................ (33,191) (8,289)
Increase (decrease) in other liabilities ........................................ 41,471 (14,041)
----------- -----------
Net cash provided by operating activities ..................................... 94,104 84,104
----------- -----------
Cash flows from investing activities:
Net increase in loans made to customers ........................................... (2,340,381) (3,669,361)
Purchases of securities available-for-sale ........................................ (4,814,984) (1,025,938)
Sale, calls or maturities of securities available-for-sale ........................ 1,074,498 1,456,539
Payments received on mortgage backed securities ................................... 1,097,485 487,726
Sale (Purchase) of Federal Home Loan Bank stock ................................... 20,000 (50,000)
Purchase of The Bankers Bank stock ................................................ (143,212) -
Purchases of premises and equipment ............................................... (22,624) -
Maturities (purchases) of time deposits with other banks .......................... (3,416) 3,267
----------- -----------
Net cash used by investing activities ......................................... (5,132,634) (2,797,767)
----------- -----------
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts ....................................... 957,189 440,400
Net increase in certificates of deposit and other time deposits ................... 530,862 1,344,776
Increase in securities sold under agreements to repurchase ........................ 3,000,000 -
Increase in advances from the Federal Home Loan Bank .............................. - 1,000,000
----------- -----------
Net cash provided by financing activities ................................... (4,488,051) 2,785,176
----------- -----------
Net increase (decrease) in cash and cash equivalents ................................. (550,479) 71,513
Cash and cash equivalents, beginning ................................................. 2,269,695 2,758,871
----------- -----------
Cash and cash equivalents, end ....................................................... $ 1,719,216 $ 2,830,384
=========== ===========
Cash paid during the period for:
Interest .......................................................................... $ 257,260 $ 219,160
=========== ===========
See notes to condensed financial statements.
6
DEKALB BANKSHARES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements have been prepared in accordance with the
requirements for interim financial statements and, accordingly, they are
consolidated and omit disclosures, which would substantially duplicate those
contained in our Annual Report on Form 10-KSB. The financial statements as of
June 30, 2004 and for the interim periods ended June 30, 2004 and 2003 are
unaudited and, in our opinion, include all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. The
financial information as of December 31, 2003, has been derived from the audited
financial statements as of that date. For further information, refer to the
financial statements and the notes included in DeKalb Bankshares, Inc.'s Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission.
Note 2 - Recently Issued Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that affect
accounting, reporting, and disclosure of financial information by the Company:
In March 2004, the FASB issued an exposure draft on "Share-Based Payment". The
proposed Statement addresses the accounting for transactions in which an
enterprise receives employee services in exchange for a) equity instruments of
the enterprise or b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. This proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require instead
that such transactions be accounted for using a fair-value-based method. This
Statement, if approved, will be effective for awards that are granted, modified,
or settled in fiscal years beginning after a) December 15, 2004 for public
entities and nonpublic entities that used the fair-value-based method of
accounting under the original provisions of Statement 123 for recognition or pro
forma disclosure purposes and b) December 15, 2005 for all other nonpublic
entities. Earlier application is encouraged provided that financial statements
for those earlier years have not yet been issued. Retrospective application of
this Statement is not permitted. The adoption of this Statement, if approved,
could have an impact on the Company's financial position or results of
operations.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
Note 3 - Earnings Per Share
A reconciliation of the numerators and denominators used to calculate basic and
diluted earnings per share for the six month periods ended June 30, 2004 and
2003, and the three month periods ended June 30, 2004 and 2003 are as follows:
Six Months Ended June 30, 2004
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ........................... $44,842 609,060 $.07
====
Effect of dilutive securities
Stock options ..................................................... - -
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ........................................ $44,482 609,060 $.07
======= ======= ====
7
DEKALB BANKSHARES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note 3 - Earnings Per Share - continued
Six Months Ended June 30, 2003
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ........................... $ 6,005 609,060 $.01
====
Effect of dilutive securities
Stock options ..................................................... - -
------- --------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $ 6,005 609,060 $.01
======= ======= ====
Three Months Ended June 30, 2004
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ........................... $26,335 609,060 $.04
====
Effect of dilutive securities
Stock options ..................................................... - -
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $26,335 609,060 $.04
======= ======= ====
Three Months Ended June 30, 2003
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ........................... $14,204 609,060 $.02
====
Effect of dilutive securities
Stock options ..................................................... - -
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $14,204 609,060 $.02
======= ======= ====
Note 4 - Comprehensive Income
Comprehensive income includes net income and other comprehensive income, which
is defined as nonowner related transactions in equity. The following table sets
forth the amounts of other comprehensive income included in equity along with
the related tax effect for the six month periods ended June 30, 2004 and 2003
and for the three month periods ended June 30, 2004 and 2003:
8
DEKALB BANKSHARES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note 4 - Comprehensive Income- continued
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Six-Months Ended June 30, 2004:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ............. $(201,347) $ 74,499 $(126,848)
Plus: reclassification adjustment for gains (losses)
realized in net income .................................................. - - -
--------- --------- ---------
Net unrealized gains (losses) on securities ............................. (201,347) 74,499 (126,848)
--------- --------- ---------
Other comprehensive income (loss) .......................................... $(201,347) $ 74,499 $(126,848)
========= ========= =========
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Six-Months Ended June 30, 2003
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................ $ (5,954) $ 2,203 $ (3,751)
Plus: reclassification adjustment for gains (losses)
realized in net income ..................................................... (24,019) 8,887 (15,132)
-------- -------- --------
Net unrealized gains (losses) on securities ................................ (29,973) 11,090 (18,883)
-------- -------- --------
Other comprehensive income (loss) ............................................. $(29,973) $ 11,090 $(18,883)
======== ======== ========
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Three Months Ended June 30, 2004
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ............. $(283,010) $ 104,714 $(178,296)
Plus: reclassification adjustment for gains (losses)
realized in net income .................................................. - - -
--------- --------- ---------
Net unrealized gains (losses) on securities ........................... (283,010) 104,714 (178,296)
--------- --------- ---------
Other comprehensive income (loss) .......................................... $(283,010) $ 104,714 $(178,296)
========= ========= =========
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Three Months Ended June 30, 2003
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ............... $ 31 $(11) $ 20
Plus: reclassification adjustment for gains (losses)
realized in net income .................................................... - - -
---- ---- ----
Net unrealized gains (losses) on securities ............................. 31 (11) 20
---- ---- ----
Other comprehensive income ................................................... $ 31 $(11) $ 20
==== ==== ====
9
DEKALB BANKSHARES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note 4 - Comprehensive Income- continued
Accumulated other comprehensive income consists solely of the unrealized gain on
securities available-for-sale, net of the deferred tax effects.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following is a discussion of our financial condition as of June 30, 2004
compared to December 31, 2003, and the results of operations for the three and
six months ended June 30, 2004 and 2003. This discussion should be read in
conjunction with our consolidated financial statements and accompanying notes
appearing in this report and in conjunction with the financial statements and
related notes and disclosures in our 2003 Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission. This report contains
"forward-looking statements" relating to, without limitation, future economic
performance, plans and objectives of management for future operations, and
projections of revenues and other financial items that are based on our beliefs,
as well as assumptions made by and information currently available to us. The
words "expect," "estimate," "anticipate," "plan," and "believe," as well as
similar expressions, are intended to identify forward-looking statements. Our
actual results may differ materially from the results discussed in the
forward-looking statements, and the our operating performance each quarter is
subject to various risks and uncertainties that are discussed in detail in our
filings with the Securities and Exchange Commission.
Results of Operations
Net Interest Income
For the six months ended June 30, 2004, net interest income, the major component
of our net income was $640,740, compared to $519,643 for the six months ended
June 30, 2003, an increase of $121,097. For the three months ended June 30,
2004, net interest income was $328,747 compared to $270,618 for the comparable
period of 2003. The improvements in the 2004 periods were primarily attributable
to increased volume as we continued to build our loan portfolio. The average
rate realized on interest earning assets decreased from 6.07% for the six months
ended June 30, 2003 to 5.27% for the 2004 period. The average rate paid on
interest bearing liabilities decreased from 2.21% to 1.77% during this same
period. The net interest spread and net interest margin were 3.50% and 3.77%,
respectively, for the six month period ended June 30, 2004, compared to 3.86%
and 4.29% for the six months ended June 30, 2003. The net interest spread and
net interest margin were 3.53% and 3.79%, respectively, for the three month
period ended June 30, 2004, compared to 3.97% and 4.35% for the three months
ended June 30, 2003.
Provision and Allowance for Loan Losses
The provision for loan losses is the charge to operating earnings that in
management's judgment is necessary to maintain the allowance for loan losses at
an adequate level. For the six months ended June 30, 2004 and 2003, the
provision was $39,000 and $51,000, respectively. For the three months ended June
30, 2004 and 2003, the provision for loans losses was $21,500 and $23,500,
respectively. There were $154,725 in nonperforming loans at June 30, 2004 and
$151,509 in nonperforming loans at June 30, 2003. There were $173,824 in
classified loans as of June 30, 2004 compared to $151,509 as of June 30, 2003.
Based on present information, we believe the allowance for loan losses is
adequate at June 30, 2004 to meet probable losses inherent in the loan
portfolio. The allowance for loan losses was 1.36% of total loans at June 30,
2004. There are risks inherent in making all loans, including risks with respect
to the period of time over which loans may be repaid, risks resulting from
changes in economic and industry conditions, risks inherent in dealing with
individual borrowers, and, in the case of a collateralized loan, risks resulting
from uncertainties about the future value of the collateral. We maintain an
allowance for loan losses based on, among other things, historical experience,
including management's experience at other institutions, an evaluation of
economic conditions, and regular reviews of delinquencies and loan portfolio
quality. Our judgment about the adequacy of the allowance is based upon a number
of assumptions about future events, which we believe to be reasonable, but which
may not prove to be accurate. Thus, there is a risk that charge-offs in future
periods could exceed the allowance for loan losses or that substantial
additional increases in the allowance for loan losses could be required.
Additions to the allowance for loan losses would result in a decrease of the
Bank's net income and, possibly, its capital.
10
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion And Analysis or Plan of Operation - continued
Noninterest Income
Total noninterest income for the six months ended June 30, 2004 was $130,847, a
decrease of $27,925, compared to $158,772 for the six months ended June 30,
2003. There were no gains on sales of securities during the six months ended
June 30, 2004 as compared to $24,019 for the same period in 2003. Total
noninterest income for the quarter ended June 30, 2004 was $73,540 compared to
$78,825 for the comparable period of 2003. Service charges on deposit accounts
increased from $28,429 for the three months ended June 30, 2003 to $41,919 for
the three months ended June 30, 2004. Service charges on deposit accounts
increased from $54,504 for the six months ended June 30, 2003 to $73,834 for the
six months ended June 30, 2004. The increase during these comparable periods is
due to an in increase in deposit accounts. Residential mortgage origination fees
decreased from $43,108 for the three months ended June 30, 2003 to $24,317 for
the comparable 2004 period. Residential mortgage origination fees were down due
to a smaller amount of new loan originations during the six months ended June
30, 2004 when compared to the six months ended June 30, 2003.
Noninterest Expense
Total noninterest expense for the first six months of 2004 was $661,325, an
increase of $43,693, when compared to the six months ended June 30, 2003. For
the quarter ended June 30, 2004, noninterest expense was $339,294, an increase
of $36,078 over the comparable period of 2003.
The primary component of noninterest expense is salaries and benefits, which
were $343,901 and $314,792 for the six months ended June 30, 2004 and 2003,
respectively. Salaries and benefit expense totaled $182,072 and $144,701 for the
three months ended June 30, 2004 and 2003, respectively. Other operating expense
increased from $239,954 for the six months ended June 30, 2003 to $253,607 for
the six months ended June 30, 2004, due to the overall growth in the Bank. Other
operating expenses for the three month periods ended June 30, 2004 and 2003
totaled $125,645 and $126,654 respectively.
Net Income
Net income for the six months ended June 30, 2004 totaled $44,842 compared to
$6,005 for the comparable 2003 period. The net earnings are after the
recognition of an income tax expense of $26,420 and $3,778 for the six months
ended June 30, 2004 and 2003, respectively. The net earnings for the quarter
ended June 30, 2004 were $26,335 compared to $14,204 for the quarter ended June
30, 2003. The net earnings were after the recognition of income tax expense in
the amount of $15,158 and $8,523 for the three months ended June 30, 2004 and
2003, respectively.
Assets and Liabilities
During the first six months of 2004, total assets increased $4,444,946, or
13.46%, when compared to December 31, 2003. The primary growth in assets was
composed of an increase in securities available for sale of $2,507,923, or
36.14%. Loans receivable increased by $2,321,589 when compared to December 31,
2003. Deposits increased $1,488,051 during the first six months of 2004. During
the first quarter of 2004, we entered into a leveraged transaction with The
Bankers Bank to borrow funds through securities sold under agreements to
repurchase totaling $3,000,000. We then invested these funds in a
mortgage-backed security.
Investment Securities
Investment securities totaled $9,789,767 as of June 30, 2004, compared to
$7,158,632 at December 31, 2003. All investments in the portfolio were
designated as available-for-sale except for nonmarketable equity securities,
consisting of stock in the Federal Home Loan Bank of Atlanta, which totaled
$200,000, and stock in The Bankers Bank, which totaled $143,212 as of June 30,
2004. As discussed earlier we purchased a $3,000,000 security as part of a
leveraged transaction during the first quarter of 2004.
11
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion And Analysis or Plan of Operation - continued
Loans
Gross loans increased $2,321,589 during the six months ended June 30, 2004. The
largest increase in loans was in real estate mortgage loans which increased
$918,816 to $9,768,623 as of June 30, 2004. Balances within the major loans
receivable categories as of June 30, 2004 and December 31, 2003 are as follows:
June 30, December 31,
2004 2003
---- ----
Mortgage loans on real estate:
Real estate 1- 4 family ................. $ 9,768,623 $ 8,849,807
Commercial .............................. 7,187,270 7,038,179
Construction ............................ 1,610,353 1,162,574
Second mortgages ........................ 102,744 105,743
Equity lines of credit .................. 1,583,076 1,359,870
----------- -----------
Total mortgage loans ................ 20,252,066 18,516,173
Commercial and industrial .................. 2,741,641 1,831,844
Consumer and other ......................... 952,030 1,276,132
----------- -----------
Total gross loans ................... $23,945,738 $21,624,149
=========== ===========
Risk Elements in the Loan Portfolio
The following is a summary of the risk elements in the loan portfolio:
June 30, June 30,
2004 2003
---- ----
Loans: Non-accrual ................................... $154,725 $134,156
Accruing loans more than 90 days past due ............ $ - $ 17,353
Loans identified by internal review mechanism:
Criticized ........................................ $ 19,098 $ -
Classified ........................................ $173,823 $151,509
Activity in the Allowance for Loan Losses is as follows:
June 30, June 30,
2004 2003
---- ----
Balance, January 1, .............................. $ 305,000 $ 245,000
Provision for loan losses for the period ......... 39,000 51,000
Net loans (charged-off) recovered for the period.. (18,792) -
----------- -----------
Balance, end of period ........................... $ 325,208 $ 296,000
=========== ===========
Gross loans outstanding, end of period ........... $23,945,737 $20,289,156
=========== ===========
Allowance for loan losses to loans outstanding ... 1.36% 1.46%
Deposits
Total deposits increased $1,488,051, or 6.24%, from December 31, 2003 to
$25,334,593 at June 30, 2004. The largest increase was in savings accounts,
which increased $700,698, or 18.93%, to $4,403,058 at June 30, 2004. Expressed
in percentages, noninterest-bearing deposits decreased 5.5% and all other
interest-bearing deposits increased 7.50%.
12
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion And Analysis or Plan of Operation - continued
Balances within the major deposit categories as of June 30, 2004 and December
31, 2003 are as follows:
June 30, December 31,
2004 2003
---- ----
Noninterest-bearing transaction accounts ....... $ 2,186,945 $ 2,314,452
Interest-bearing transaction accounts .......... 3,285,204 2,901,206
Savings ........................................ 4,403,058 3,702,360
Time deposits $100,000 and over ................ 10,633,227 10,085,481
Other time deposits ............................ 4,826,159 4,843,043
----------- -----------
Total deposits .......................... $25,334,593 $23,846,542
=========== ===========
Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank totaled $4,000,000 at June 30, 2004,
and December 31, 2003. One of the advances totaling $500,000 is a ten year
convertible advance with a one year call. It currently has a fixed interest rate
of 3.23% and matures on September 6, 2011. Another advance of $1,000,000 was
entered into on July 23, 2002 with an interest rate of 3.87% and a maturity date
of July 23, 2012. This advance has a "knockout" provision beginning on July 23,
2003, that allows the Federal Home Loan Bank of Atlanta to convert the advance
to an adjustable rate advance if the 3 Month LIBOR rate exceeds 7.00%. Another
advance totaling $400,000 has an adjustable interest rate of 1.47% as of June
30, 2004. We also borrowed $2,100,000 under the daily rate credit program with a
rate of 1.70% as of June 30, 2004 that is subject to change daily.
Securities Sold Under Agreements to Repurchase
We obtained securities sold under agreements to repurchase during the first
quarter of 2004 totaling $3,000,000. The agreement has an interest rate of 2.95%
and matures January 20, 2007.
Liquidity
Our Company meets its liquidity needs through cash and short-term investments,
and scheduled maturities of loans on the asset side and through pricing policies
on the liability side for interest-bearing deposit accounts. As of June 30,
2004, our Company's primary sources of liquidity included federal funds sold
totaling $1,136,000 and securities available-for-sale totaling $9,446,555. The
Company also has lines of credit available with correspondent banks to purchase
federal funds totaling $1,400,000 at June 30, 2004. In addition, the Company
also has borrowing capacity available through the Federal Home Loan Bank. At
June 30, 2004, the Company's ability to borrow funds from the Federal Home Loan
Bank totaled $7,495,200, of which the Company had borrowed $4,000,000 as of June
30, 2004.
Critical Accounting Policies
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Our significant accounting policies are described
in the notes to the consolidated financial statements at December 31, 2003 as
filed in our Annual Report on Form on Form 10-KSB. Certain accounting policies
involve significant judgments and assumptions by us which have a material impact
on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgments and
assumptions we use are based on historical experience and other factors, which
we believe to be reasonable under the circumstances. Because of the nature of
the judgments and assumptions we make, actual results could differ from these
judgments and estimates which could have a material impact on our carrying
values of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates
used in preparation of our consolidated financial statements. Refer to the
portions of this discussion and the discussion in our 2003 Annual Report on Form
10-KSB that addresses our allowance for loan losses for a description of our
processes and methodology for determining our allowance for loan losses.
13
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion And Analysis or Plan of Operation - continued
Capital Resources
Total shareholders' equity decreased $82,006 to $5,029,840 at June 30, 2004.
This is the result of net earnings for the period of $44,842, which was
partially offset by a negative adjustment of $126,848 for the unrealized gain on
securities available for sale.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Quantitative measures established
by regulation to ensure capital adequacy require the Bank to maintain minimum
ratios of Tier 1 and total capital as a percentage of assets and
off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%.
Tier 1 capital of the Bank consists of common stockholders' equity, excluding
the unrealized gain or loss on securities available-for-sale, minus certain
intangible assets. Tier 2 capital consists of the allowance for loan losses
subject to certain limitations. Total capital for purposes of computing the
capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory
minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.
We are also required to maintain capital at a minimum level based on adjusted
quarterly average assets, which is known as the leverage ratio. The Federal
Reserve applies its guidelines on a bank only basis for bank holding companies
with less than $150 million in consolidated assets. Only the strongest banks are
allowed to maintain capital at the minimum requirement of 3%. All others are
subject to maintaining ratios 1% to 2% above the minimum.
The following table summarizes the Company's risk-based capital at June 30,
2004:
Shareholders' equity .......................................... $ 5,022,885
Less: unrealized losses on available-for-sale securities ...... (149,480)
------------
Tier 1 capital ................................................ 5,172,365
Plus: allowance for loan loss includable in Tier 2 capital(1) . 304,000
------------
Total risk-based capital ...................................... $ 5,476,365
============
Risk-weighted assets .......................................... $ 24,321,000
============
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ................... 21.27%
Total risk-based capital (to risk-weighted assets) ......... 22.52%
Tier 1 capital (to total average assets) ................... 13.89%
(1) Limited to 1.25% of risk-weighted assets
Off-Balance Sheet Risk
Through its operations, the Company has made contractual commitments to extend
credit in the ordinary course of its business activities. These commitments are
legally binding agreements to lend money to the Bank's customers at
predetermined interest rates for a specified period of time. At June 30, 2004,
the Company had issued commitments to extend credit of $4,418,363 and standby
letters of credit of $150,000 through various types of lending arrangements.
Approximately $2,347,000 of these commitments to extend credit had variable
rates.
14
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion And Analysis or Plan of Operation - continued
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at June 30, 2004.
After One After Three
Within Through Through Greater
One Three Twelve Within Than
(Dollars in thousands) Month Months Months One Year One Year Total
----- ------ ------ -------- -------- -----
Unused commitments
to extend credit ...................... $ - $ 531 $ 504 $ 1035 $ 3,383 $ 4,418
Standby letters of credit ............... - - 118 118 32 150
---------- ----------- ----------- ---------- ----------- -----------
Total ............................... $ - $ 531 $ 622 $ 1,153 $ 3,415 $ 4,568
========== =========== =========== ========== =========== ===========
Based on historical experience, many of the commitments and letters of credit
will expire unfunded. Accordingly, the amounts shown in the table above do not
necessarily reflect the Company's need for funds in the periods shown.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on its credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate.
Item 3. 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 Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that the effectiveness
of such controls and procedures, as of the end of the period covered by this
quarterly report, was adequate.
No disclosure is required under 17 C.F.R. Section 228.308(c).
15
DEKALB BANKSHARES, INC.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31 - Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 - Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This
exhibit is not "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934 but is instead furnished as provided by applicable
rules of the Securities and Exchange Commission.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter
ended June 30, 2004
16
DEKALB BANKSHARES, INC.
SIGNATURE
In accordance with the requirements 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.
s/William C. Bochette, III
By: -----------------------------------------
William C. Bochette, III
Chief Executive Officer, President, and
Chief Financial Officer
Date: August 10, 2004
17
DEKALB BANKSHARES, INC.
Exhibit Index
31 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is
not "filed" for purposes of Section 18 of the Securities Exchange Act of
1934 but is instead furnished as provided by applicable rules of the
Securities and Exchange Commission.
18