SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
X
- ------- QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 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.
610,139 shares of common stock, no par value, as of October 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 - September 30, 2004 and December 31, 2003..................................3
Condensed Consolidated Statements of Income - Nine months ended September 30, 2004 and 2003
and Three months ended September 30, 2004 and 2003.............................................................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Nine months ended September 30, 2004 and 2003....................................................................5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2004 and 2003...................6
Notes to Condensed Consolidated Financial Statements...........................................................7-10
Item 2. Management's Discussion and Analysis or Plan of Operation.............................................11-16
Item 3. Controls and Procedures..........................................................................................17
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......................................................18
Item 6. Exhibits.........................................................................................................18
Exhibits....................................................................................................18
2
DEKALB BANKSHARES, INC.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
September 30, December 31,
2004 2003
---- ----
(Unaudited)
Assets:
Cash and cash equivalents:
Cash and due from banks ............................................................... $ 1,270,725 $ 867,695
Federal funds sold .................................................................... 2,638,000 1,402,000
------------ ------------
Total cash and cash equivalents ..................................................... 3,908,725 2,269,695
------------ ------------
Time deposits with other banks ............................................................. 313,494 310,078
Securities available-for-sale .............................................................. 10,010,763 6,938,632
Nonmarketable equity securities ............................................................ 418,212 220,000
------------ ------------
10,428,975 7,158,632
Loans receivable ........................................................................... 24,986,964 21,624,149
Less allowance for loan losses .......................................................... (236,302) (305,000)
------------ ------------
Loans, net .......................................................................... 24,750,662 21,319,149
Premises and equipment, net ................................................................ 1,366,827 1,410,202
Accrued interest receivable ................................................................ 137,121 111,817
Other assets ............................................................................... 446,360 455,844
------------ ------------
Total assets ........................................................................ $ 41,352,164 $ 33,035,417
============ ============
Liabilities
Deposits:
Noninterest-bearing transaction accounts ................................................ $ 2,894,396 $ 2,314,452
Interest-bearing transaction accounts ................................................... 4,046,976 2,901,206
Savings ................................................................................. 4,130,429 3,702,360
Time deposits $100,000 and over ......................................................... 11,998,940 10,085,481
Other time deposits ..................................................................... 5,063,507 4,843,043
------------ ------------
28,134,248 23,846,542
Securities sold under agreements to repurchase ............................................. 3,000,000 -
Advances from Federal Home Loan Bank ....................................................... 4,900,000 4,000,000
Accrued interest payable ................................................................... 49,380 37,793
Other liabilities .......................................................................... 81,285 39,236
------------ ------------
Total liabilities ................................................................... 36,164,913 27,923,571
------------ ------------
Shareholders' equity
Common stock, no par value; 20,000,000 shares authorized, 610,139 and 609,060
shares issued and outstanding at September 30, 2004 and
December 31, 2003, respectively ......................................................... 5,877,597 5,866,807
Retained earnings (deficit) ................................................................ (665,660) (732,329)
Accumulated other comprehensive loss ....................................................... (24,686) (22,632)
------------ ------------
Total shareholders' equity .......................................................... 5,187,251 5,111,846
------------ ------------
Total liabilities and shareholders' equity .......................................... $ 41,352,164 $ 33,035,417
============ ============
See notes to condensed consolidated financial statements.
3
DEKALB BANKSHARES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Loans, including fees ................................... $1,106,222 $ 995,777 $ 395,051 $ 348,978
Investment securities, taxable .......................... 257,502 103,702 90,438 32,954
FHLB interest and dividends ............................. 7,938 9,607 3,498 2,422
Federal funds sold ...................................... 14,621 9,324 5,481 2,028
Time deposits with other banks .......................... 5,153 3,986 1,538 1,322
---------- ---------- ---------- ----------
Total ............................................... 1,391,436 1,122,396 496,006 387,704
---------- ---------- ---------- ----------
Interest expense:
Time deposits $100,000 and over ......................... 144,251 102,297 54,293 39,639
Other deposits .......................................... 126,226 154,245 44,079 46,477
Other interest expense .................................. 133,507 64,693 50,922 20,071
---------- ---------- ---------- ----------
Total ............................................... 403,984 321,235 149,294 106,187
---------- ---------- ---------- ----------
Net interest income ........................................ 987,452 801,161 346,712 281,517
Provision for loan losses .................................. 76,000 80,000 37,000 29,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ............................................. 911,452 721,161 309,712 252,517
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts ..................... 107,914 87,072 34,080 32,568
Gain on sales of securities available for
sale .................................................. - 41,249 - 17,230
Residential mortgage origination fees ................... 64,104 126,310 21,455 58,461
Other service charges, commissions
and fees .............................................. 22,180 18,045 7,816 5,646
---------- ---------- ---------- ----------
Total ............................................... 194,198 272,676 63,351 113,905
---------- ---------- ---------- ----------
Noninterest expenses:
Salaries and employee benefits .......................... 517,394 472,296 173,493 157,503
Occupancy expense ....................................... 61,834 58,461 21,045 19,623
Furniture and equipment expense ......................... 35,069 37,409 12,041 13,361
Other operating expenses ................................ 385,164 378,334 131,556 138,381
---------- ---------- ---------- ----------
Total ............................................... 999,461 946,500 338,135 328,868
---------- ---------- ---------- ----------
Income before income taxes ................................. 106,189 47,337 34,928 37,554
Income tax expense ......................................... 39,520 17,751 13,100 14,083
---------- ---------- ---------- ----------
Net income ................................................. $ 66,669 $ 29,586 $ 21,828 $ 23,471
========== ========== ========== ==========
Earnings per share
Basic earnings per share ................................... $ .11 $ .05 $ .04 $ .04
Diluted earnings per share ................................. $ .11 $ .05 $ .04 $ .04
See notes to condensed consolidated financial statements.
4
DEKALB BANKSHARES, INC.
Condensed Consolidated Statements
of Shareholders' Equity and Comprehensive Income
For the nine months ending September 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 ......................... 29,586 29,586
Other comprehensive
income, net of tax $53,992 ............. (91,933) (91,933)
-----------
Comprehensive Income (loss) ............... (62,347)
------- ----------- ----------- ----------- -----------
Balance,
September 30, 2003 ..................... 609,060 $ 5,866,807 $ (752,826) $ (40,867) $ 5,073,114
======= =========== =========== =========== ===========
Balance,
December 31, 2003 ...................... 609,060 $ 5,866,807 $ (732,329) $ (22,632) $ 5,111,846
Net income
for the period ......................... 66,669 66,669
Other comprehensive
income, net of tax $1,206 .............. (2,054) (2,054)
-----------
Comprehensive income ...................... 64,615
Exercise of stock options ................. 1,079 10,790 10,790
------- ----------- ----------- ----------- -----------
Balance,
September 30, 2004 ..................... 610,139 $ 5,877,597 $ (665,660) $ (24,686) $ 5,187,251
======= =========== =========== =========== ===========
See notes to condensed consolidated financial statements.
5
DEKALB BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2004 2003
---- ----
Cash flows from operating activities:
Net income ........................................................................ $ 66,669 $ 29,586
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ....................................................... 76,000 80,000
Depreciation and amortization expense ........................................... 81,461 95,141
Gain on sale of securities ...................................................... - (41,249)
Accretion and premium amortization .............................................. 12,678 5,162
Deferred income tax provision ................................................... 34,660 16,044
(Increase) decrease in interest receivable ...................................... (25,303) 1,305
Increase (decrease) in interest payable ......................................... 11,587 (3,466)
Increase in other assets ........................................................ (25,178) (27,425)
Increase in other liabilities ................................................... 42,050 4,959
----------- -----------
Net cash provided by operating activities ..................................... 274,624 160,057
----------- -----------
Cash flows from investing activities:
Net increase in loans made to customers ........................................... (3,507,513) (4,601,250)
Purchases of securities available-for-sale ........................................ (6,076,919) (5,075,763)
Sale, calls or maturities of securities available-for-sale ........................ 1,501,206 3,059,066
Payments received on mortgage backed securities ................................... 1,488,850 871,506
Sale of Federal Home Loan Bank stock .............................................. (55,000) (50,000)
Sale of The Bankers Bank stock .................................................... (143,212) -
Purchases of premises and equipment ............................................... (38,086) (5,871)
Maturities (purchases) of time deposits with other banks .......................... (3,416) 3,267
----------- -----------
Net cash used by investing activities ......................................... (6,834,090) (5,799,045)
----------- -----------
Cash flows from financing activities:
Exercise of stock options ......................................................... 10,790 -
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts ....................................... 2,153,783 1,402,371
Net increase in certificates of deposit and other time deposits ................... 2,133,923 4,007,354
Increase in securities sold under agreements to repurchase ........................ 3,000,000 -
Increase in advances from the Federal Home Loan Bank .............................. 900,000 800,000
----------- -----------
Net cash provided by financing activities ....................................... 8,198,496 6,209,725
----------- -----------
Net increase in cash and cash equivalents ............................................ 1,639,030 570,737
Cash and cash equivalents, beginning ................................................. 2,269,695 2,758,871
----------- -----------
Cash and cash equivalents, end ....................................................... $ 3,908,725 $ 3,329,608
=========== ===========
Cash paid during the period for:
Interest .......................................................................... $ 392,397 $ 324,701
=========== ===========
Taxes ............................................................................. $ 1,920 $ 540
=========== ===========
See notes to condensed consolidated financial statements.
6
DEKALB BANKSHARES, INC.
Notes to Condensed Consolidated 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 DeKalb Bankshares, Inc.'s 2003 Annual Report on Form 10-KSB. The
financial statements as of September 30, 2004 and for the interim periods ended
September 30, 2004 and 2003 are unaudited and, in the opinion of management,
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.
Note 2 - Recently Issued Accounting Pronouncements
No recent authoritative pronouncements that affect accounting, reporting, and
disclosure of financial information by us have occurred during the quarter
ending September 30, 2004, other than the items described below.
In November 2003, the Emerging Issues Task Force ("EITF") reached a consensus
that certain quantitative and qualitative disclosures should be required for
debt and marketable equity securities classified as available for sale or held
to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance
sheet date but for which other-than-temporary impairment has not been
recognized. Accordingly EITF issued EITF No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
This issue addresses the meaning of other-than-temporary impairment and its
application to investments classified as either available for sale or held to
maturity under SFAS No. 115 and provides guidance determining the amount of
impairment and additional quantitative and qualitative disclosures. The guidance
for determining the amount of impairment was scheduled to be effective for
periods ending after September 15, 2004, but has been delayed indefinitely
pending implementation guidance by the FASB. The disclosure provisions of EITF
No. 03-1 were effective for fiscal years ending after December 15, 2003.
Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on
the Company's financial position or results of operations.
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, was scheduled to 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. On October 16, 2004, the FASB delayed the effective
date of this proposal by six months and anticipates it will be effective for by
the third quarter of 2005. 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.
7
DEKALB BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Stock-Based Compensation
The Company has a stock-based employee compensation plan which is accounted for
under the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation cost is reflected in the
net income (loss), as all stock options granted under these plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income (loss)
and earnings (losses) per common share as if the Company had applied the fair
value recognition provisions of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation.
Nine Months Ended September 30,
-------------------------------
2004 2003
---- ----
Net income, as reported .................................................... $ 66,669 $ 29,586
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects ............................... (7,858) -
---------- ----------
Pro forma net income ....................................................... $ 58,811 $ 29,586
========== ==========
Earnings per share:
Basic - as reported ...................................................... $ .11 $ .05
========== ==========
Basic - pro forma ........................................................ $ .10 $ .05
========== ==========
Diluted - as reported .................................................... $ .11 $ .05
========== ==========
Diluted - pro forma ...................................................... $ .10 $ .05
========== ==========
Three Months Ended September 30,
--------------------------------
2004 2003
---- ----
Net income, as reported .................................................... $ 21,828 $ 23,471
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects ............................... - -
---------- ----------
Pro forma net income ....................................................... $ 21,828 $ 23,471
========== ==========
Earnings per share:
Basic - as reported ...................................................... $ .04 $ .04
========== ==========
Basic - pro forma ........................................................ $ .04 $ .04
========== ==========
Diluted - as reported ................................................... $ .04 $ .04
========== ==========
Diluted - pro forma ..................................................... $ .04 $ .04
========== ==========
8
DEKALB BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Earnings Per Share
A reconciliation of the numerators and denominators used to calculate basic and
diluted earnings per share for the nine months ended September 30, 2004 and
2003, and the three months ended September 30, 2004 and 2003 are as follows:
Nine Months Ended September 30, 2004
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ........................... $66,669 609,095 $.11
====
Effect of dilutive securities
Stock options ..................................................... 1,038
------- ------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ........................................ $66,669 610,133 $.11
======= ======= ====
Nine Months Ended September 30, 2003
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............................. $29,586 609,060 $0.05
=====
Effect of dilutive securities
Stock options ....................................................... - -
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions .......................................... $29,586 609,060 $0.05
======= ======= =====
Three Months Ended September 30, 2004
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ........................... $21,828 609,166 $.04
====
Effect of dilutive securities
Stock options ..................................................... - 2,441
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ........................................ $21,828 611,607 $.04
======= ======= ====
Three Months Ended September 30, 2003
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ............................. $23,471 609,060 $0.04
=====
Effect of dilutive securities
Stock options ....................................................... - -
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions .......................................... $23,471 609,060 $0.04
======= ======= =====
9
DEKALB BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 - 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 nine month periods ended September 30, 2004 and
2003, and for the three months ended September 30, 2004 and 2003:
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Nine Months Ended September 30, 2004:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................... $(3,260) $ 1,206 $(2,054)
Plus: reclassification adjustment for gains (losses)
realized in net income ........................................................ - - -
------- ------- -------
Net unrealized gains (losses) on securities ................................... (3,260) 1,206 (2,054)
------- ------- -------
Other comprehensive income (loss) ................................................ $(3,260) $ 1,206 $(2,054)
======= ======= =======
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Nine Months Ended September 30, 2003:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ............. $(104,676) $ 38,730 $ (65,946)
Plus: reclassification adjustment for gains (losses)
realized in net income .................................................. (41,249) 15,262 (25,987)
--------- --------- ---------
Net unrealized gains (losses) on securities ............................. (145,925) 53,992 (91,933)
--------- --------- ---------
Other comprehensive income (loss) .......................................... $(145,925) $ 53,992 $ (91,933)
========= ========= =========
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Three Months Ended September 30, 2004:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................. $198,086 $(73,292) $124,794
Plus: reclassification adjustment for gains (losses)
realized in net income ...................................................... - - -
-------- -------- --------
Net unrealized gains (losses) on securities ................................. 198,086 (73,292) 124,794
-------- -------- --------
Other comprehensive income (loss) .............................................. $198,086 $(73,292) $124,794
======== ======== ========
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Three Months Ended September 30, 2003:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ............. $ (98,721) $ 36,527 $ (62,194)
Plus: reclassification adjustment for gains (losses)
realized in net income .................................................. (17,230) 6,375 (10,855)
--------- --------- ---------
Net unrealized gains (losses) on securities ............................. (115,951) 42,902 (73,049)
--------- --------- ---------
Other comprehensive income (loss) .......................................... $(115,951) $ 42,902 $ (73,049)
========= ========= =========
Accumulated other comprehensive income consists solely of the unrealized gain on
securities available-for-sale, net of the deferred tax effects.
10
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following is a discussion of our financial condition as of September 30,
2004 compared to December 31, 2003, and the results of operations for the three
and nine months ended September 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, adequacy
of our allowance for loan losses 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," "intend," "project," 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 nine months ended September 30, 2004, net interest income, the major
component of the Company's net income was $987,452, compared to $801,161 for the
same period in 2003, an increase of $186,291. For the three months ended
September 30, 2004, net interest income was $346,712 compared to $281,517 for
the comparable period of 2003. The improvements in the 2004 periods were
primarily attributable to increased loan volume as the Company continued to
build its loan portfolio, and to an increase in the investment portfolio. The
average rate realized on interest-earning assets decreased from 6.04% for the
nine months ended September 30, 2003 to 5.29% for the 2004 period. The average
rate paid on interest-bearing liabilities decreased from 2.10% to 1.80% during
this same period. The net interest spread and net interest margin were 3.48% and
3.75%, respectively for the nine months ended September 30, 2004, compared to
3.94% and 4.31% for the nine months ended September 30, 2003. The net interest
spread and net interest margin were 3.44% and 3.72% for the three months ended
September 30, 2004, compared to 3.85% and 4.19% for the three months ended
September 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 nine months ended September 30, 2004 and 2003, the
provision was $76,000 and $80,000, respectively. For the three months ended
September 30, 2004 and 2003, the provision for loans losses was $37,000 and
$29,000, respectively. There were no nonperforming loans at September 30, 2004
and $161,765 in nonperforming loans at September 30, 2003. $25,646 in loans have
been criticized or classified as of September 30, 2004. Based on present
information, management believes the allowance for loan losses is adequate at
September 30, 2004 to meet presently known and inherent losses in the loan
portfolio. The allowance for loan losses is 0.95% of total loans at September
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. The Company
maintains 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. Management's judgment about the adequacy of the allowance is
based upon a number of assumptions about future events, which it believes 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 Company's net income and, possibly, its capital.
11
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Noninterest Income
Total noninterest income for the nine months ended September 30, 2004 was
$194,198 compared to $272,676 for the comparable period in 2003, a decrease of
$78,478. The decrease is attributable to a reduction in residential mortgage
origination fees when compared to the previous period, and the absence of gains
on the sale of securities available for sale. For the nine months ended
September 30, 2004, fees on residential mortgage loan originations totaled
$64,104, compared to $126,310 for the comparable period in 2003. This decrease
is the result of a reduction in refinance activity. For the nine months ended
September 30, 2004, there were no gains on the sale of securities available for
sale compared to gains of $41,249 for the comparable 2003 period. Total
noninterest income for the three months ended September 30, 2004 was $63,351,
compared to $113,905 for the 2003 period. The decrease is attributable to a
$37,006 reduction in residential mortgage origination fees and a $17,230
one-time gain on the sale of securities during the 2003 quarter.
Noninterest Expense
Total noninterest expense for the nine months ended September 30, 2004 was
$999,461 compared to $946,500 for the nine months ended September 30, 2003, an
increase of $52,961. For the quarter ended September 30, 2004, noninterest
expense was $338,135 an increase of $9,267, over the comparable period of 2003.
The primary component of noninterest expense is salaries and benefits, which
were $517,394 for the nine months ended September 30, 2004 compared to $472,296
for the same period in 2003. Salaries and benefits expense totaled $173,493 and
$157,503 for the three months ended September 30, 2004 and 2003, respectively.
Other operating expenses were $385,164 for the nine months ended September 30,
2004, compared to $378,334 for the nine months ended September 30, 2003. This
increase is the result of various increases in expenses necessary to support the
growth of the Company. Other operating expenses were $131,556 for the quarter
ended September 30, 2004, compared to $138,381 for the same period in 2003.
Net Income
The Company's net income for the nine months ended September 30, 2004 totaled
$66,669 compared to $29,586 for the comparable 2003 period. The net earnings are
after the recognition of an income tax expense of $39,520 and $17,751 for the
nine months ended September 30, 2004 and 2003, respectively. The net earnings
for the quarter ended September 30, 2004 were $21,828 compared to $23,471 for
the quarter ended September 30, 2003. The net earnings were after the
recognition of income tax expense in the amount of $13,100 and $14,083 for the
three months ended September 30, 2004 and 2003, respectively.
Assets and Liabilities
During the nine month period ended September 30, 2004, total assets increased
$8,316,747, or 25.18%, when compared to December 31, 2003. During this period,
gross loans increased $3,362,815 and total investments increased $3,270,343.
This increase in assets was funded by a $4,287,706 increase in deposits and a
$3,900,000 increase in advances and other borrowed money.
Investment Securities
Investment securities totaled $10,428,975 as of September 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
$275,000, and stock in Community Financial Services, Inc., which totaled
$143,212 as of September 30, 2004.
12
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Loans
Gross loans increased $3,362,815 during the nine months ended September 30,
2004. The largest increase in loans was in real estate 1-4 family which
increased $1,239,515 to $10,089,322 as of September 30, 2004. Balances within
the major loans receivable categories as of September 30, 2004 and December 31,
2003 are as follows:
September 30, December 31,
2004 2003
---- ----
Mortgage loans on real estate:
Real estate 1- 4 family ............................................. $10,089,322 $ 8,849,807
Commercial .......................................................... 7,178,825 7,038,179
Construction ........................................................ 2,157,469 1,162,574
Second mortgages .................................................... 101,167 105,743
Equity lines of credit .............................................. 1,635,968 1,359,870
----------- -----------
Total mortgage loans ............................................ 21,162,751 18,516,173
Commercial and industrial .............................................. 2,782,703 1,831,844
Consumer and other ..................................................... 1,041,510 1,276,132
----------- -----------
Total gross loans ............................................... $24,986,944 $21,624,149
=========== ===========
Risk Elements in the Loan Portfolio
The following is a summary of the risk elements in the loan portfolio:
September 30, December 31,
2004 2003
---- ----
Loans: Non-accrual ............................................................... $ - $126,765
Accruing loans more than 90 days past due ........................................ $ - $ -
Loans identified by internal review mechanism:
Criticized .................................................................... $ 25,646 $ -
Classified .................................................................... $ - $ 9,850
Criticized loans have potential weaknesses that deserve close attention and
could, if uncorrected, result in deterioration of the prospects for repayment or
the Company's credit position at a future date. Classified loans are
inadequately protected by the sound worth and paying capacity of the borrower or
any collateral and there is a distinct possibility or probability that the
Company will sustain a loss if the deficiencies are not corrected.
Activity in the Allowance for Loan Losses is as follows:
September 30, September 30,
2004 2003
---- ----
Balance, January 1, ......................................................... $ 305,000 $ 245,000
Provision for loan losses for the period .................................... 76,000 80,000
Net loans (charged-off) recovered for the period ............................ (144,698) -
------------ ------------
Balance, end of period ...................................................... $ 236,302 $ 325,000
============ ============
Gross loans outstanding, end of period ...................................... $ 24,986,964 $ 21,221,045
============ ============
Allowance for loan losses to loans outstanding .............................. 0.95% 1.53%
13
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Deposits
Total deposits increased $4,287,706 or 17.98%, from December 31, 2003 to
$28,134,248 at September 30, 2004. The largest increase was in time deposits
$100,000 and over which increased $1,913,459, or 18.97%, to $11,998,940 at
September 30, 2004. These deposits are generally more sensitive to changes in
interest rates and are, therefore, considered less stable than core deposits.
Noninterest-bearing deposits increased 25.06% to $2,894,396 as of September 30,
2004.
Balances within the major deposit categories as of September 30, 2004 and
December 31, 2003 are as follows:
September 30, December 31,
2004 2003
---- ----
Noninterest-bearing transaction accounts ....... $ 2,894,396 $ 2,314,452
Interest-bearing transaction accounts .......... 4,046,976 2,901,206
Savings ........................................ 4,130,429 3,702,360
Time deposits $100,000 and over ................ 11,998,940 10,085,481
Other time deposits ............................ 5,063,507 4,843,043
----------- -----------
Total deposits .......................... $28,134,248 $23,846,542
=========== ===========
Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank totaled $4,900,000 as of September 30,
2004, as compared to $4,000,000 as of 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 1.86% as of September 30, 2004. Another advance
totaling $1,000,000 has a fixed interest rate of 2.47% and matures August 26,
2005. We also borrowed $2,000,000 under the daily rate credit program with a
rate of 2.15% as of September 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
Liquidity needs are met by the Company 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 September 30,
2004, the Company's primary sources of liquidity included federal funds sold
totaling $2,638,000 and un-pledged securities available-for-sale totaling
$350,000 The Company also has lines of credit available with correspondent banks
to purchase federal funds totaling $1,400,000 at September 30, 2004. In
addition, the Company also has borrowing capacity available through the Federal
Home Loan Bank. As of September, 30, 2004 the Company's ability to borrow funds
from the Federal Home Loan Bank totaled $8,270,000 of which the Company had
borrowed $4,900,000 as of September 30, 2004.
14
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
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 financial statements of DeKalb Bankshares, Inc. at December
31, 2003 as filed in our 2003 Annual Report 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 report and our
2003 Annual Report on Form 10-KSB that address our allowance for loan losses for
a description of our processes and methodology for determining our allowance for
loan losses.
Capital Resources
Total shareholders' equity increased $75,404 from December 31, 2003 to
$5,187,250 at September 30, 2004. This is the result of net income for the
period of $66,669, which was offset by a negative adjustment of $2,054 for the
unrealized loss on securities available for sale, and $10,790 in common stock
sale proceeds from the exercise of stock options.
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 includes common stockholders' equity, excluding the
unrealized gain or loss on securities available-for-sale, minus certain
intangible assets. Tier 2 capital includes 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 Bank's risk-based capital at September 30,
2004:
Shareholders' equity .......................................... $ 5,169,570
Less: unrealized losses on available-for-sale securities ...... (24,686)
------------
Tier 1 capital ................................................ 5,194,256
Plus: allowance for loan loss includable in Tier 2 capital(1) . 236,302
------------
Total risk-based capital ...................................... $ 5,430,558
============
Risk-weighted assets .......................................... $ 25,986,000
============
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ................... 19.98%
Total risk-based capital (to risk-weighted assets) ......... 20.89%
Tier 1 capital (to total average assets) ................... 13.13%
(1) Limited to 1.25% of risk-weighted assets
15
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation - continued
Off-Balance Sheet Risk
Through the operations of our Bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for specified periods of time. At September 30,
2004, we had issued commitments to extend credit of $3,369,371 and standby
letters of credit of $149,873 through various types of commercial lending
arrangements. We evaluate each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by us upon
extension of credit, is based on our credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate. Based on historical
experience, many of the commitments and letters of credit will expire unfunded.
Accordingly, the amounts shown in the table below do not necessarily reflect the
Company's needs for funds in the periods shown. Based on historical experience,
many of the commitments and letters of credit will expire unfunded. Accordingly,
the amounts shown in the table below do not necessarily reflect the Company's
needs for funds in the periods shown.
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 .................. $ - $ 275 $ 391 $ 666 $3,369 $4,035
Standby letters of
credit ............................ - - 118 118 32 150
---------- ------ ------ ------ ------ ------
Total ........................... $ - $ 275 $ 509 $ 784 $3,401 $4,185
========== ====== ====== ====== ====== ======
16
DEKALB BANKSHARES, INC.
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 such controls and
procedures, as of the end of the period covered by this quarterly report, were
effective.
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
17
DEKALB BANKSHARES, INC.
Part II - Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the period ended September 30, 2004 the Company issued shares of common
stock to the following classes of persons upon the exercises of options issued
pursuant to the Company's 2001 Stock Option Plan. The securities were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 because the issuance did not involve a public offering.
Number of Shares Aggregate
Date Issued Class of Purchasers Issued Exercise Price
----------- ------------------- ------ --------------
09/21/04 Former Employee 1,079 $ 10,790
Item 6. Exhibits
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.
18
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: November 11, 2004
19
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.
20