U.S. SECURITIES AND EXCHANGECOMMISSION
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, 2005
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 July 31, 2005
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, 2005 and December 31, 2004......................................3
Condensed Consolidated Statements of Income - Six months ended June 30, 2005 and June 30, 2004
and Three months ended June 30, 2005 and 2004..................................................................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Six months ended June 30, 2005 and June 30, 2004...............................................................5
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2005 and June 30, 2004...............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.........................................................................................16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................................................17
Item 6. Exhibits .......................................................................................................17
DEKALB BANKSHARES, INC.
Condensed Consolidated Balance Sheets
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
June 30, December 31,
2005 2004
---- ----
(Unaudited)
Assets:
Cash and cash equivalents:
Cash and due from banks ................................................... $ 644,664 $ 567,773
Federal funds sold ........................................................ 1,795,000 3,175,000
Other interest bearing deposits ........................................... 987,986 61,793
------------ ------------
Total cash and cash equivalents ......................................... 3,427,650 3,804,566
------------ ------------
Time deposits with other banks ................................................. 113,494 313,494
Investment securities:
Securities available-for-sale ............................................... 10,131,497 9,594,385
Nonmarketable equity securities ............................................. 572,194 474,813
------------ ------------
Total investment securities ............................................. 10,703,691 10,069,198
Loans receivable ............................................................... 27,922,930 26,643,037
Less allowance for loan losses .............................................. (291,790) (266,478)
------------ ------------
Loans, net .............................................................. 27,631,140 26,376,559
Premises and equipment, net .................................................... 1,409,771 1,411,412
Accrued interest receivable .................................................... 166,999 150,875
Other assets ................................................................... 484,589 433,673
------------ ------------
Total assets ............................................................ $ 43,937,334 $ 42,559,777
============ ============
Liabilities:
Deposits:
Noninterest-bearing transaction accounts .................................. $ 2,942,886 $ 2,788,768
Interest-bearing transaction accounts ..................................... 4,387,129 3,449,845
Savings ................................................................... 3,211,480 3,812,952
Time deposits $100,000 and over ........................................... 11,855,433 12,771,447
Other time deposits ....................................................... 5,657,078 5,487,366
------------ ------------
Total deposits .......................................................... 28,054,006 28,310,378
Advances from Federal Home Loan Bank ........................................... 7,500,000 5,900,000
Securities sold under agreements to repurchase ................................. 3,000,000 3,000,000
Accrued interest payable ....................................................... 81,953 120,117
Other liabilities .............................................................. 92,588 36,887
------------ ------------
Total liabilities ....................................................... 38,728,547 37,367,382
------------ ------------
Shareholders' equity
Common stock, no par value; 20,000,000 shares
authorized, 610,139 shares issued and outstanding ........................... 5,877,597 5,877,597
Retained earnings (deficit) .................................................... (585,946) (644,608)
Accumulated other comprehensive income (loss) .................................. (82,864) (40,594)
------------ ------------
Total shareholders' equity .............................................. 5,208,787 5,192,395
------------ ------------
Total liabilities and shareholders' equity .............................. $ 43,937,334 $ 42,559,777
============ ============
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,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Interest income:
Loans, including fees ................................... $ 900,582 $ 711,171 $ 454,638 $ 368,367
Investment securities, taxable .......................... 181,885 167,064 89,808 82,153
FHLB and CFS interest and dividends ..................... 9,181 4,440 5,116 2,286
Federal funds sold ...................................... 25,167 9,140 14,045 4,836
Time deposits with other banks .......................... 2,496 3,615 869 1,616
---------- ---------- ---------- ----------
Total ............................................... 1,119,311 895,430 564,476 459,258
---------- ---------- ---------- ----------
Interest expense:
Time deposits $100,000 and over ......................... 157,463 89,958 81,282 45,815
Other deposits .......................................... 101,140 82,147 51,608 41,136
Other interest expense .................................. 136,576 82,585 71,491 43,560
---------- ---------- ---------- ----------
Total ............................................... 395,179 254,690 204,381 130,511
---------- ---------- ---------- ----------
Net interest income ........................................ 724,132 640,740 360,095 328,747
Provision for loan losses .................................. 37,502 39,000 15,002 21,500
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ............................................. 686,630 601,740 345,093 307,247
---------- ---------- ---------- ----------
Other operating income:
Service charges on deposit accounts ..................... 70,550 73,834 39,445 41,919
Residential mortgage loan origination fees .............. 123,624 42,649 67,465 24,317
Other service charges, commissions
and fees .............................................. 19,845 14,364 9,149 7,304
---------- ---------- ---------- ----------
Total ............................................... 214,019 130,847 116,059 73,540
---------- ---------- ---------- ----------
Other operating expenses:
Salaries and employee benefits .......................... 440,729 343,901 225,071 182,072
Occupancy expense ....................................... 41,128 40,789 19,895 20,030
Furniture and equipment expense ......................... 25,062 23,028 12,633 11,547
Other operating expenses ................................ 299,708 253,607 149,102 125,645
---------- ---------- ---------- ----------
Total ............................................... 806,627 661,325 406,701 339,294
---------- ---------- ---------- ----------
Income before income taxes ................................. 94,022 71,262 54,451 41,493
Income tax expense ......................................... 35,360 26,420 20,458 15,158
---------- ---------- ---------- ----------
Net income ................................................. $ 58,662 $ 44,842 $ 33,993 $ 26,335
========== ========== ========== ==========
Earnings per share
Basic earnings per share ................................... $ .10 $ .07 $ .06 $ .04
Diluted earnings per share ................................. $ .10 $ .07 $ .06 $ .04
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, 2005 and 2004
(Unaudited)
Accumulated
Retained Other
Common Stock Earnings Comprehensive
Shares Amount (Deficit) Income Total
------ ------ --------- ------ -----
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 loss,
net of tax benefit of $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
======= =========== =========== =========== ===========
Balance,
December 31, 2004 ...................... 610,139 $ 5,877,597 $ (644,608) $ (40,594) $ 5,192,395
Net income
for the period ......................... 58,662 58,662
Other comprehensive loss,
net of tax benefit of $24,825 ............ (42,270) (42,270)
-----------
Comprehensive
income ................................. 16,392
------- ----------- ----------- ----------- -----------
Balance,
June 30, 2005 .......................... 610,139 $ 5,877,597 $ (585,946) $ (82,864) $ 5,208,787
======= =========== =========== =========== ===========
See notes to condensed financial statements.
5
DEKALB BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
2005 2004
---- ----
Cash flows from operating activities:
Net income .............................................................................. $ 58,662 $ 44,842
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ........................................................... 37,502 39,000
Depreciation and amortization expense ............................................... 59,333 55,340
Accretion and premium amortization .................................................. 8,881 8,230
Deferred income tax provision (benefit) ............................................. 31,821 (50,410)
(Increase) decrease in interest receivable .......................................... (16,124) (8,608)
Decrease in interest payable ........................................................ (38,164) (2,570)
Increase in other assets ............................................................ (82,737) (33,191)
Increase (decrease) in other liabilities ............................................ 55,701 41,471
----------- -----------
Net cash provided by operating activities ......................................... 114,875 94,104
----------- -----------
Cash flows from investing activities:
Net increase in loans made to customers ................................................. (1,292,083) (2,340,381)
Purchases of securities available-for-sale .............................................. (1,490,141) (4,814,984)
Sale, calls or maturities of securities available-for-sale .............................. - 1,074,498
Payments received on mortgage backed securities ......................................... 901,878 1,097,485
Sale (Purchase) of Federal Home Loan Bank stock ......................................... (91,100) 20,000
Purchase of Community Financial Services, Inc. stock .................................... (6,281) (143,212)
Purchases of premises and equipment ..................................................... (57,692) (22,624)
Maturities (purchases) of time deposits with other banks ................................ 200,000 (3,416)
----------- -----------
Net cash used by investing activities ............................................... (1,835,419) (5,132,634)
----------- -----------
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts ............................................. 489,930 957,189
Net increase (decrease) in certificates of deposit and other time deposits .............. (746,302) 530,862
Increase in securities sold under agreements to repurchase .............................. - 3,000,000
Increase in advances from the Federal Home Loan Bank .................................... 1,600,000 -
----------- -----------
Net cash provided by financing activities ......................................... 1,343,628 4,488,051
----------- -----------
Net increase (decrease) in cash and cash equivalents ....................................... (376,916) (550,479)
----------- -----------
Cash and cash equivalents, beginning ....................................................... 3,804,566 2,269,695
----------- -----------
Cash and cash equivalents, end ............................................................. $ 3,427,650 $ 1,719,216
=========== ===========
Cash paid during the period for:
Interest ................................................................................ $ 433,343 $ 257,260
=========== ===========
Taxes ................................................................................... $ 3,518 $ 1,897
=========== ===========
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 2004 Annual Report on Form 10-KSB. The financial statements as
of June 30, 2005 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, 2004 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 the DeKalb
Bankshares, Inc. Annual Report on Form 10-KSB for the year ended December 31,
2004 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 December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123(R)"). Statement No.123(R) covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No. 123(R) will require companies to measure
all employee stock-based compensation awards using a fair value method and
record such expense in its financial statements. In addition, the adoption of
SFAS No. 123(R) requires additional accounting and disclosure related to the
income tax and cash flow effects resulting from share-based payment
arrangements. SFAS No. 123(R) is effective for small business issuers beginning
with the first interim or annual reporting period of a company's first fiscal
year beginning on or after December 15, 2005.
In April 2005, the Securities and Exchange Commission's Office of the Chief
Accountant and its Division of Corporation Finance released Staff Accounting
Bulletin (SAB) No.107 to provide guidance regarding the application of FASB
Statement No.123 (revised 2004), Share-Based Payment. SAB 107 provides
interpretive guidance related to the interaction between Statement No.123(R) and
certain SEC rules and regulations, as well as the staff's views regarding the
valuation of share-based payment arrangements for public companies. SAB 107 also
reminds public companies of the importance of including disclosures within
filings made with the SEC relating to the accounting for share-based payment
transactions, particularly during the transition to Statement No.123(R). The
Company is currently evaluating the impact that the adoption of SFAS No. 123(R)
will have on its financial position, results of operations and cash flows. The
cumulative effect of adoption, if any, will be measured and recognized in the
statement of income on the date of adoption.
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 the 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 on quantitative and
qualitative disclosures. The disclosure requirements of EITF No. 03-1 are
effective for annual financial statements for fiscal years ending after June 15,
2004. The effective date for the measurement and recognition guidance of EITF
No. 03-1 has been delayed. The FASB staff has issued a proposed Board-directed
FASB Staff Position ("FSP"), FSP EITF 03-1-a, "Implementation Guidance for the
Application of Paragraph 16 of Issue No. 03-1." The proposed FSP would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under the measurement and recognition
requirements of EITF No. 03-1. The delay of the effective date for the
measurement and recognition requirements of EITF No. 03-1 will be superseded
concurrent with the final issuance of FSP EITF 03-1-a. Adopting the disclosure
provisions of EITF No. 03-1 did not have any 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 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, 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 and earnings per common
share as if the Company had applied the fair value recognition provisions of
FASB SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation.
Six Months Ended June 30,
-------------------------
2005 2004
---- ----
Net income, as reported .................................................... $ 58,662 $ 44,842
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects ............................... 3,154 -
------------ ----------
Pro forma net income ....................................................... $ 55,508 $ 44,842
============ ==========
Earnings per share:
Basic - as reported ...................................................... $ .10 $ .07
============ ==========
Basic - pro forma ........................................................ $ .09 $ .07
============ ==========
Diluted - as reported .................................................... $ .10 $ .07
============ ==========
Diluted - pro forma ...................................................... $ .09 $ .07
============ ==========
Three Months Ended June 30,
---------------------------
2005 2004
---- ----
Net income, as reported .................................................... $ 33,993 $ 26,335
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects ............................... 3,154 -
------------ ----------
Pro forma net income ....................................................... $ 30,839 $ 26,335
============ ==========
Earnings per share:
Basic - as reported ...................................................... $ .06 $ .04
============ ==========
Basic - pro forma ........................................................ $ .05 $ .04
============ ==========
Diluted - as reported .................................................... $ .06 $ .04
============ ==========
Diluted - pro forma ...................................................... $ .05 $ .04
============ ==========
8
DEKALB BANKSHARES, INC.
Note 4 - 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, 2005 and
2004, and the three month periods ended June 30, 2005 and 2004 are as follows:
Six Months Ended June 30, 2005
------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ........................... $58,662 610,139 $.10
====
Effect of dilutive securities
Stock options ..................................................... - 4,814
------- ------- ----
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ........................................ $58,662 614,953 $ 10
======= ======= ====
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 ........................................ $44,842 609,060 $.07
======= ======= ====
Three Months Ended June 30, 2005
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ........................... $33,993 610,139 $.06
====
Effect of dilutive securities
Stock options ..................................................... 5,659
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ......................................... $33,993 615,798 $.06
======= ======= ====
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
======= ======= ====
9
DEKALB BANKSHARES, INC.
Notes to Condensed 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 six month periods ended June 30, 2005 and 2004
and for the three month periods ended June 30, 2005 and 2004:
Six Months Ended June 30, 2005
------------------------------
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................ $(67,095) $ 24,825 $(42,270)
Plus: reclassification adjustment for gains (losses)
realized in net income ..................................................... - - -
-------- -------- --------
Net unrealized gains (losses) on securities ................................ (67,095) 24,825 (42,270)
-------- -------- --------
Other comprehensive income (loss) ............................................. $(67,095) $ 24,825 $(42,270)
======== ======== ========
Six Months Ended June 30, 2004
------------------------------
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
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)
========= ========= =========
Three Months Ended June 30, 2005
--------------------------------
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period ................. $ 44,992 $(16,646) $ 28,346
Plus: reclassification adjustment for gains (losses)
realized in net income ...................................................... - - -
-------- -------- --------
Net unrealized gains (losses) on securities ................................. 44,992 (16,646) 28,346
-------- -------- --------
Other comprehensive income (loss) .............................................. $ 44,992 $(16,646) $ 28,346
======== ======== ========
Three Months Ended June 30, 2004
--------------------------------
Pre-Tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
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)
========= ========= =========
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 June 30, 2005
compared to December 31, 2004, and the results of operations for the three and
six months ended June 30, 2005 and 2004. 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 2004 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, 2005, net interest income, the major component
of our net income was $724,132, compared to $640,740 for the six months ended
June 30, 2004, an increase of $83,392. For the three months ended June 30, 2005,
net interest income was $360,095 compared to $328,747 for the comparable period
of 2004. The improvements in the 2005 periods were primarily attributable to
increased volume as we continued to build our loan portfolio. The average rate
realized on interest earning assets increased from 5.27% for the six months
ended June 30, 2004 to 5.54% for the 2005 period. The average rate paid on
interest bearing liabilities increased from 1.77% to 2.29% during this same
period. The net interest spread and net interest margin were 3.25% and 3.59%,
respectively, for the six month period ended June 30, 2005, compared to 3.50%
and 3.77% for the six months ended June 30, 2004. The net interest spread and
net interest margin were 3.21% and 3.56%, respectively, for the three month
period ended June 30, 2005, compared to 3.53% and 3.79% for the three months
ended June 30, 2004.
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, 2005 and 2004, the
provision was $37,502 and $39,000, respectively. For the three months ended June
30, 2005 and 2004, the provision for loan losses was $15,002 and $21,500,
respectively. There were no nonperforming loans at June 30, 2005 and $154,725 in
nonperforming loans at June 30, 2004. There were no classified loans as of June
30, 2005 compared to $173,824 as of June 30, 2004. Based on present information,
we believe the allowance for loan losses is adequate at June 30, 2005 to meet
probable losses inherent in the loan portfolio. The allowance for loan losses
was 1.04% of total loans at June 30, 2005. 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.
11
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, 2005 was $214,019, an
increase of $83,172, compared to $130,847 for the six months ended June 30,
2004. Total noninterest income for the quarter ended June 30, 2005 was $116,059
compared to $73,540 for the comparable period of 2004. Service charges on
deposit accounts decreased from $41,919 for the three months ended June 30, 2004
to $39,445 for the three months ended June 30, 2005. Service charges on deposit
accounts decreased from $73,834 for the six months ended June 30, 2004 to
$70,550 for the six months ended June 30, 2005. Residential mortgage loan
origination fees increased from $24,317 for the three months ended June 30, 2004
to $67,465 for the comparable 2005 period. For the six months ended June 30,
2005, residential mortgage loan origination fees totaled $123,624, compared to
$42,649 for the same period in 2004. The increase of $80,975 is attributable to
an increase in new residential loan volume during the period due to a favorable
interest rate market and a more aggressive marketing strategy.
Noninterest Expense
Total noninterest expense for the first six months of 2005 was $806,627, an
increase of $145,302, when compared to the six months ended June 30, 2004. For
the quarter ended June 30, 2005, noninterest expense was $406,701, an increase
of $67,407 over the comparable period of 2004.
The primary component of noninterest expense is salaries and benefits, which
were $ 440,729 and $343,901 for the six months ended June 30, 2005 and 2004,
respectively. Salaries and benefit expense totaled $225,071 and $182,072 for the
three months ended June 30, 2005 and 2004, respectively. The increase in
salaries and benefit expense is primarily the result of staffing additions to
support the growth of the bank. Other operating expenses increased from $253,607
for the six months ended June 30, 2004 to $299,708 for the six months ended June
30, 2005, also due to the overall growth of the Bank. Other operating expenses
for the three month periods ended June 30, 2005 and 2004 totaled $149,102 and
$125,645, respectively.
Net Income
Net income for the six months ended June 30, 2005 totaled $58,662 compared to
$44,842 for the comparable 2004 period. The net earnings are after the
recognition of an income tax expense of $35,360 and $26,420 for the six months
ended June 30, 2005 and 2004, respectively. The net earnings for the quarter
ended June 30, 2005 were $33,993 compared to $26,335 for the quarter ended June
30, 2004. The net earnings were after the recognition of income tax expense in
the amount of $20,458 and $15,158 for the three months ended June 30, 2005 and
2004, respectively.
Assets and Liabilities
During the first six months of 2005, total assets increased $1,377,557, or
3.24%, when compared to December 31, 2004. The primary growth in assets was
composed of an increase in loans receivable of $1,279,893 or 4.80% when compared
to December 31, 2004. Securities available for sale increased by $537,112, or
5.60% when compared to December 31, 2004. Deposits decreased $256,372 during the
first six months of 2005 and advances from the Federal Home Loan Bank of Atlanta
("Federal Home Loan Bank") increased $1,600,000.
Investment Securities
Investment securities totaled $10,703,691 as of June 30, 2005, compared to
$10,069,198 at December 31, 2004. 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, which totaled $422,700 and
stock in Community Financial Services, Inc., which totaled $149,494 as of June
30, 2005.
12
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion And Analysis or Plan of Operation - continued
Loans
Gross loans increased $1,279,893 during the six months ended June 30, 2005. The
largest increase in loans was in construction loans which increased $2,519,028
to $4,945,237 as of June 30, 2005. Balances within the major loans receivable
categories as of June 30, 2005 and December 31, 2004 are as follows:
June 30, December 31,
2005 2004
---- ----
Mortgage loans on real estate:
Real estate 1- 4 family ................. $10,541,000 $10,029,077
Commercial .............................. 7,972,161 7,699,603
Construction ............................ 4,945,237 2,426,209
Second mortgages ........................ 116,236 99,595
Equity lines of credit .................. 2,252,651 1,880,511
----------- -----------
Total mortgage loans ................ 25,827,285 22,134,995
Commercial and industrial .................. 1,027,635 3,278,822
Consumer and other ......................... 1,068,010 1,229,220
----------- -----------
Total gross loans ................... $27,922,930 $26,643,037
=========== ===========
Risk Elements in the Loan Portfolio
The following is a summary of the risk elements in the loan portfolio:
June 30, June 30,
2005 2004
---- ----
Loans: Non-accrual .................................$ - $154,725
Accruing loans more than 90 days past due ............ - -
Loans identified by internal review mechanism:
Criticized ........................................ 17,299 19,098
Classified ........................................ - 173,823
Activity in the Allowance for Loan Losses is as follows:
June 30, June 30,
2005 2004
---- ----
Balance, January 1, 2004 and 2005, respectively $ 266,478 $ 305,000
Provision for loan losses for the period ....... 37,502 39,000
Net loans (charged-off) recovered for the period (12,190) (18,792)
------------ ------------
Balance, end of period ......................... $ 291,790 $ 325,208
============ ============
Gross loans outstanding, end of period ......... $ 27,922,930 $ 23,945,738
============ ============
Allowance for loan losses to loans outstanding . 1.04% 1.36%
13
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion And Analysis or Plan of Operation - continued
Deposits
Total deposits decreased $256,372, or 0.91%, from December 31, 2004 to
$28,054,006 at June 30, 2005. The largest decrease was in time deposits $100,000
and over, which decreased $916,014, or 7.17% to $11,855,433. The largest
increase was in interest bearing transaction accounts, which increased $937,284,
or 27.17.
Balances within the major deposit categories as of June 30, 2005 and December
31, 2004 are as follows:
June 30, December 31,
2005 2004
---- ----
Noninterest-bearing transaction accounts ....... $ 2,942,886 $ 2,788,768
Interest-bearing transaction accounts .......... 4,387,129 3,449,845
Savings ........................................ 3,211,480 3,812,952
Time deposits $100,000 and over ................ 11,855,433 12,771,447
Other time deposits ............................ 5,657,078 5,487,366
----------- -----------
Total deposits .......................... $28,054,006 $28,310,378
=========== ===========
Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank totaled $7,500,000 at June 30, 2005,
and $5,900,000 at December 31, 2004. One of the advances totaling $500,000 is a
convertible advance with a call feature. It currently has a fixed interest rate
of 3.23%, matures on September 6, 2011, and can be called on September 6, 2005.
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 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 3.38% as of June 30, 2005. Another advance totaling $1,000,000
has a fixed interest rate of 2.47% and matures August 26, 2005. We also borrowed
$4,600,000 under the daily rate credit program with a rate of 3.63% as of June
30, 2005 that is subject to change daily.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase totaled $3,000,000, with an
interest rate of 2.95% maturing 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,
2005, our Company's primary sources of liquidity included federal funds sold
totaling $1,795,000 and securities available-for-sale totaling $10,131,497. The
Company also has lines of credit available with correspondent banks to purchase
federal funds totaling $1,900,000 at June 30, 2005. In addition, the Company
also has borrowing capacity available through the Federal Home Loan Bank. At
June 30, 2005, the Company's ability to borrow funds from the Federal Home Loan
Bank totaled $8,787,384, of which the Company had borrowed $7,500,000 as of June
30, 2005.
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, 2004 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.
14
DEKALB BANKSHARES, INC.
Item 2. Management's Discussion And Analysis or Plan of Operation - continued
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 2004 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.
Capital Resources
Total shareholders' equity increased $16,392 to $5,208,787 at June 30, 2005.
This is the result of net income for the period of $58,662 and a negative
adjustment of $42,270 for the unrealized loss 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. The Bank's 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. 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
Federal Reserve applies its capital adequacy guidelines on a bank only basis for
bank holding companies with less than $150 million in consolidated assets.
The following table summarizes the Company's risk-based capital at June 30,
2005:
Shareholders' equity ............................................ $ 5,208,787
Plus: unrealized losses on available-for-sale securities ........ 82,864
-----------
Tier 1 capital .................................................. 5,291,651
Plus: allowance for loan losses includable in Tier 2 capital(1) . 291,790
-----------
Total risk-based capital ........................................ $ 5,583,441
===========
Risk-weighted assets ............................................ $29,509,000
===========
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) ..................... 17.93%
Total risk-based capital (to risk-weighted assets) ........... 18.92%
Tier 1 capital (to total average assets) ..................... 12.39%
(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, 2005,
the Company had issued commitments to extend credit of $5,770,756 and standby
letters of credit of $83,030 through various types of lending arrangements.
Approximately $3,451,468 of these commitments to extend credit had variable
rates.
15
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, 2005.
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 .......... $ 20,231 $ 436,803 $ 2,478,152 $2,935,186 $ 2,835,570 $ 5,770,756
Standby letters of
credit .................... - - 15,000 15,000 68,030 83,030
----------- ----------- ----------- ---------- ----------- -----------
Total ................... $ 20,231 $ 436,803 $ 2,493,152 $2,950,186 $ 2,903,600 $ 5,853,786
=========== =========== =========== ========== =========== ===========
Based on historical experience, many of the commitments and letters of credit
will expire not fully funded. 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 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 likely to materially affect the Company's internal control over financial
reporting.
16
DEKALB BANKSHARES, INC.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Incorporated by reference to Item 4, Part II of the Company's Form 10-QSB
for the quarter ended March 31, 2005.
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.
17
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 11, 2005
18
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.
19