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 March 31, 2006
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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
YES [ ] NO [X]
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 April 30, 2006
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 - March 31, 2006 and December 31, 2005.....................................3
Condensed Consolidated Statements of Income - Three months ended March 31, 2006 and 2005.........................4
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Three months ended March 31, 2006 and 2005.....................................................................5
Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2006 and 2005.....................6
Notes to Condensed Consolidated Financial Statements....................................................................7-9
Item 2. Management's Discussion and Analysis or Plan of Operation.....................................................9-14
Item 3. Controls and Procedures..........................................................................................14
PART II - OTHER INFORMATION
Item 6. Exhibits .......................................................................................................15
DEKALB BANKSHARES, INC.
Condensed Consolidated Balance Sheets
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
March 31, December 31,
2006 2005
---- ----
(Unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks ................................................... $ 1,431,652 $ 589,136
Federal funds sold ........................................................ 1,239,000 1,330,000
Securities purchased under agreements to resell ........................... 507,092 501,576
Other interest bearing deposits ........................................... 67,117 51,826
------------ ------------
Total cash and cash equivalents ......................................... 3,244,861 2,472,538
------------ ------------
Time deposits with other banks ............................................ -
Investment securities:
Securities available-for-sale ............................................... 9,930,161 11,031,973
Nonmarketable equity securities ............................................. 462,694 576,695
------------ ------------
Total investment securities ............................................. 10,392,855 11,608,668
------------ ------------
Loans held for sale ............................................................ 149,000 626,223
Loans receivable ............................................................... 27,958,297 29,905,856
Less allowance for loan losses .............................................. (317,500) (305,000)
------------ ------------
Loans, net .............................................................. 27,640,797 29,600,856
Premises and equipment, net ................................................. 1,318,608 1,344,362
Accrued interest receivable ................................................. 164,240 194,422
Other assets ................................................................ 453,261 479,183
------------ ------------
Total assets ............................................................ $ 43,363,622 $ 46,326,252
============ ============
Liabilities
Deposits
Noninterest-bearing transaction accounts .................................. $ 4,346,424 $ 2,979,405
Interest-bearing transaction accounts ..................................... 4,929,507 4,177,455
Savings ................................................................... 2,949,492 3,135,976
Time deposits $100,000 and over ........................................... 13,743,971 14,249,513
Other time deposits ....................................................... 5,537,915 5,758,276
------------ ------------
Total deposits .......................................................... 31,507,309 30,300,625
Securities sold under agreements to repurchase .............................. 3,000,000 3,000,000
Advances from Federal Home Loan Bank ........................................ 3,500,000 7,600,000
Accrued interest payable .................................................... 112,678 204,556
Other liabilities ........................................................... 103,908 63,544
------------ ------------
Total liabilities ....................................................... 38,223,895 41,168,725
------------ ------------
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) ................................................. (546,127) (538,897)
Accumulated other comprehensive income (loss) ............................... (191,743) (181,173)
------------ ------------
Total shareholders' equity .............................................. 5,139,727 5,157,527
------------ ------------
Total liabilities and shareholders' equity .............................. $ 43,363,622 $ 46,326,252
============ ============
See notes to consolidated financial statements.
3
DEKALB BANKSHARES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
For the three months ended
March 31,
---------
2006 2005
---- ----
Interest income
Loans, including fees .......................................................... $ 521,313 $ 445,944
Investment securities, taxable ................................................. 108,047 92,077
FHLB interest and dividends .................................................... 6,430 4,065
Federal funds sold ............................................................. 15,383 11,122
Securities purchased under agreements to resell ................................ 5,517 -
Time deposits with other banks ................................................. - 1,627
--------- ---------
Total ...................................................................... 656,690 554,835
--------- ---------
Interest expense
Time deposits $100,000 and over ................................................ 141,541 76,181
Other deposits ................................................................. 66,384 49,532
Other interest expense ......................................................... 90,887 65,085
--------- ---------
Total ...................................................................... 298,812 190,798
--------- ---------
Net interest income ............................................................... 357,878 364,037
Provision for loan losses ......................................................... 12,500 22,500
--------- ---------
Net interest income after provision for loan losses ............................... 345,378 341,537
--------- ---------
Other operating income
Service charges on deposit accounts ............................................ 33,242 31,105
Gain (loss) on sale of investments ............................................. (13,750) -
Residential mortgage origination fees .......................................... 34,133 56,159
Other service charges, commissions and fees .................................... 46,277 10,696
--------- ---------
Total ...................................................................... 99,902 97,960
--------- ---------
Other operating expenses
Salaries and employee benefits ................................................. 207,691 215,658
Occupancy expense .............................................................. 22,347 21,233
Furniture and equipment expense ................................................ 10,195 12,429
Other operating expenses ....................................................... 216,001 150,606
--------- ---------
Total ...................................................................... 456,234 399,926
--------- ---------
Income before income taxes ........................................................ (10,954) 39,571
Income tax expense ................................................................ (3,724) 14,902
--------- ---------
Net income ........................................................................ $ (7,230) $ 24,669
========= =========
Earnings per share
Basic earnings per share .......................................................... $ (.01) $ .04
See notes to consolidated financial statements.
4
DEKALB BANKSHARES, INC.
Condensed Consolidated Statement of Shareholders' Equity and
Comprehensive Income For the three months ended March 31, 2006 and 2005
(Unaudited)
Accumulated
Common Stock Retained Other
------------ Earnings Comprehensive
Shares Amount (Deficit) Income Total
------ ------ --------- ------ -----
Balance,
December 31, 2004 .................. 610,139 $ 5,877,597 $ (644,608) $ (40,594) $ 5,192,395
Net income ........................... 24,669 24,669
for the period
Other
comprehensive
income (loss),
net of tax of $41,472 .............. (70,615) (70,615)
-----------
Comprehensive
income (loss) ...................... (45,946)
------- ----------- ----------- ----------- -----------
Balance,
March 31, 2005 ..................... 610,139 5,877,597 (619,939) (111,209) 5,146,449
Balance,
December 31, 2005 .................. 610,139 5,877,597 (538,897) (181,173) 5,157,527
Net income ........................... (7,230) (7,230)
for the period
Other
comprehensive
income (loss),
net of tax of $6,207 ............... (10,570) (10,570)
-----------
Comprehensive
income (loss) ...................... (17,800)
------- ----------- ----------- ----------- -----------
Balance,
March 31, 2006 ..................... 610,139 $ 5,877,597 $ (546,127) $ (191,743) $ 5,139,727
======= =========== =========== =========== ===========
See notes to consolidated financial statements.
5
DEKALB BANKSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended
March 31,
---------
2006 2005
---- ----
Cash flows from operating activities
Net income .............................................................................. $ (7,230) $ 24,669
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Provision for loan losses ........................................................... 12,500 22,500
Depreciation and amortization expense ............................................... 27,390 29,414
(Gain) Loss on sale of securities ................................................... 13,750 -
Accretion and premium amortization .................................................. 2,708 4,781
Deferred income tax provision (benefit) ............................................. 61,762 13,487
(Increase) decrease in interest receivable .......................................... 30,182 1,125
Increase (decrease) in interest payable ............................................. (91,878) (56,542)
Increase in other assets ............................................................ 39,217 (88,292)
Increase (decrease) in other liabilities ............................................ (34,692) 30,895
----------- -----------
Net cash provided (used) by operating activities .................................. 53,709 (17,963)
----------- -----------
Cash flows from investing activities
Net (increase) decrease in loans made to customers ...................................... 2,424,782 (2,787,346)
Purchases of securities available-for-sale .............................................. (249,174) (745,298)
Sales/calls or maturities of securities available-for-sale .............................. 986,250 -
Payments received on mortgage backed securities ......................................... 337,707 550,537
Redemption (purchase) of non-marketable equity securities ............................... 114,001 (52,381)
Purchases of premises and equipment ..................................................... (1,636) (15,553)
----------- -----------
Net cash (used) provided by investing activities .................................. 3,611,930 (3,050,041)
----------- -----------
Cash flows from financing activities
Net increase (decrease) in demand deposits, interest-bearing transaction
accounts and savings accounts ......................................................... 1,932,587 1,414,199
Net increase (decrease) in certificates of deposit and other time deposits .............. (725,903) (585,461)
Increase (decrease) in advances from the Federal Home Loan Bank ......................... (4,100,000) 600,000
----------- -----------
Net cash (used) provided by financing activities .................................. (2,893,316) 1,428,738
----------- -----------
Net increase (decrease) in cash and cash equivalents ....................................... 772,323 (1,639,266)
Cash and cash equivalents, beginning ....................................................... 2,472,538 3,804,566
----------- -----------
Cash and cash equivalents, end ............................................................. $ 3,244,861 $ 2,165,300
=========== ===========
Cash paid during the period for:
Interest ................................................................................ $ 129,832 $ 247,340
Income taxes ............................................................................ - 2,509
See notes to consolidated financial statements.
6
DEKALB BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Pending merger with First Community Corporation
On January 19, 2006, Dekalb Bankshares, Inc. ("DeKalb") entered into an
agreement and plan of merger with First Community Corporation ("First
Community"), the parent holding company for First Community Bank in Lexington,
South Carolina. Pursuant to the agreement, DeKalb will be merged with and into
First Community and The Bank of Camden will be merged with and into First
Community Bank. Each share of DeKalb common stock will be converted into the
right to receive $3.875 in cash and 0.60705 shares of First Community common
stock. The boards of directors of both companies have approved the merger
agreement. The agreement is subject to the approval of shareholders of DeKalb
and regulatory authorities. The transaction is expected to close during the
second quarter of 2006.
Note 2 - 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 2005 Annual Report on Form 10-KSB. The financial statements as
of March 31, 2006 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, 2005 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,
2005 filed with the Securities and Exchange Commission.
Note 3 - Recent Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that could
impact the accounting, reporting, and / or disclosure of financial information
by the Company.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments--an amendment of FASB Statements No. 133 and 140." This
Statement amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This Statement resolves
issues addressed in SFAS No. 133 Implementation Issue No. D1, "Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The Company does not believe that the adoption of SFAS No. 155 will have a
material impact on its financial position, results of operations and cash flows.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," with respect to the accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial
adoption, permits a one-time reclassification of available-for-sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value; and requires separate presentation of servicing assets
and servicing liabilities subsequently measured at fair value in the statement
of financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. An entity should adopt SFAS No. 156
as of the beginning of its first fiscal year that begins after September 15,
2006. The Company does not believe the adoption of SFAS No. 156 will have a
material impact on its financial position, results of operations and cash flows.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations and cash flows.
7
DEKALB BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Stock-Based Compensation
On January 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123(R), Accounting for Stock-Based Compensation, to
account for compensation costs under its stock option plans. The Company
previously utilized the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (as amended) ("APB
25"). Under the intrinsic value method prescribed by APB 25, no compensation
costs were recognized for the Company's stock options because the option
exercise price in its plans equals the market price on the date of grant. Prior
to January 1, 2006, the Company only disclosed the pro forma effects on net
income and earnings per share as if the fair value recognition provisions of
SFAS 123(R) had been utilized.
In adopting SFAS No. 123, the Company elected to use the modified prospective
method to account for the transition from the intrinsic value method to the fair
value recognition method. Under the modified prospective method, compensation
cost is recognized from the adoption date forward for all new stock options
granted and for any outstanding unvested awards as if the fair value method had
been applied to those awards as of the date of grant. The Company allows 100%
vesting rights for stock options within 6 months of issuance. As of December 31,
2005, there were no unvested options and there were no options issued during the
first three months of 2006.
Note 5 - Earnings Per Share
There were no dilutive common share equivalents outstanding during the first
three months of 2006 due to the net loss; therefore, basic and dilutive loss per
share were the same. A reconciliation of the numerators and denominators used to
calculate basic and diluted earnings per share for the three months ended March
31, 2006 and 2005 are as follows:
Three Months Ended March 31, 2006
---------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Loss to common shareholders .................................. $(7,230) 610,139 $ (.01)
=======
Effect of dilutive securities
Stock options ................................................ - -
------- -------
Diluted earnings per share
Loss to common shareholders
plus assumed conversions ................................... $(7,230) 610,139 $ (.01)
======= ======= =======
Three Months Ended March 31, 2005
---------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common shareholders ........................... $24,669 610,139 $ .04
=======
Effect of dilutive securities
Stock options ..................................................... 4,000
------- -------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions ........................................ $24,669 614,139 $ .04
======= ======= =======
8
DEKALB BANKSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 - 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 three month periods ended March 31, 2006 and
2005:
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Three Months Ended March 31, 2006
Unrealized gains (losses) on securities
available-for-sale .............................................. $(30,527) $ 11,296 $(19,231)
Plus - reclassification adjustment for gains
(losses) realized in net income ................................. 13,750 (5,089) 8,661
-------- -------- --------
Net unrealized gains (losses) on securities ....................... (16,777) 6,207 (10,570)
-------- -------- --------
Other comprehensive income ........................................ $(16,777) $ 6,207 $(10,570)
======== ======== ========
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------ ------- ------
For the Three Months Ended March 31, 2005
Unrealized gains (losses) on securities
available-for-sale .............................................. $(112,087) $ 41,472 $ (70,615)
Plus - reclassification adjustment for gains
(losses) realized in net income ................................. - - -
--------- --------- ---------
Net unrealized gains (losses) on securities ....................... (112,087) 41,472 (70,615)
--------- --------- ---------
Other comprehensive income ........................................ $(112,087) $ 41,472 $ (70,615)
========= ========= =========
9
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 March 31, 2006
compared to December 31, 2005, and the results of operations for the three
months ended March 31, 2006 and 2005. 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 2005 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 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 three months ended March 31, 2006, net interest income, the major
component of our net income, was $357,878, as compared to $364,037 for the same
period in 2005, a decrease of $6,159. The decrease in net interest income was
the result of a 1.04% increase in the cost of interest-bearing liabilities with
only a 0.64% increase in the rate realized on interest-bearing assets. The
average rate paid on interest-bearing liabilities increased from 2.22% for the
three months ended March 31, 2005 to 3.26% for the three months ended March 31,
2006, while the average rate realized on interest-earning assets increased from
5.49% to 6.13%, for the same periods.
The net interest spread and net interest margin were 2.87% and 3.34%,
respectively, for the three month period ended March 31, 2006, compared to 3.27%
and 3.60% for the three month period ended March 31, 2005.
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 three months ended March 31, 2006 and the same period
in 2005, the provision was $12,500 and $22,500, respectively. There were no
nonperforming loans at March 31, 2006 or 2005. No loans have been criticized or
classified as of March 31, 2006. Based on present information, management
believes the allowance for loan losses is adequate at March 31, 2006 to meet
presently known and inherent losses in the loan portfolio. The allowance for
loan losses was 1.14% of total loans at March 31, 2006. 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 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 our net
income and, possibly, our capital.
Noninterest Income
Total noninterest income for the quarter ended March 31, 2006 was $99,902, an
increase of $1,942, compared to $97,960 for the same period in 2005. In March of
2006, two low-yielding securities, totaling $750,000, held in the available for
sale category, were sold for a total loss of $13,750. At the same time, a
$1,000,000 convertible advance from the Federal Home Loan Bank of Atlanta was
repaid prior to maturity resulting in a gain of $34,871. This non-recurring
activity was partially offset by a decrease of $22,026 in residential mortgage
origination fees during the quarter ended March 31, 2006 compared to the quarter
ended March 31, 2005.
10
DEKALB BANKSHARES, INC.
Item 2 - Management's Discussion And Analysis or Plan of Operation - continued
Noninterest Expense
Total noninterest expense for the three months ended March 31, 2006 was
$456,234, an increase of $56,308, when compared to the same period in 2005. The
primary component of noninterest expense is salaries and benefits, which were
$207,691 and $215,658 for the three months ended March 31, 2006 and 2005,
respectively. Other operating expenses increased from $150,606 for the three
months ended March 31, 2005 to $216,001 for the three months ended March 31,
2006. This increase is the result of $75,012 in merger related costs incurred in
preparation for the pending merger with First Community Corporation.
Net Income
The Company's net loss for the three months ended March 31, 2006 was $7,230
after the recognition of an income tax benefit of $3,724 for the period. The net
income for the same period in 2005 was $24,669 after the recognition of an
income tax expense of $14,902. As mentioned above, the net loss is the result of
$75,012 in merger related costs incurred during the quarter-ended March 31,
2006.
Assets and Liabilities
During the first three months of 2006, total assets decreased $2,962,630 or
6.40%, when compared to December 31, 2005. The primary reduction in assets was a
decrease in loans receivable of $1,947,559, or 6.51%, and a decrease in
investment securities of $1,215,813. The decrease in loans receivable were
primarily due to scheduled maturities of several large residential construction
loans. Deposits increased $1,206,684 and advances from the Federal Home Loan
Bank of Atlanta decreased $4,100,000 during the first three months of 2006.
Investment Securities
Investment securities totaled $10,392,855 at March 31, 2006, compared to
$11,608,668 at December 31, 2005. 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
$313,200 as of March 31, 2006, and stock in Community Financial Services, Inc.
which totaled $149,494 as of March 31, 2006.
Loans
Gross loans decreased $1,947,559 during the three months ended March 31, 2006.
The largest decrease in loans was in residential 1-4 family loans secured by a
real estate mortgage, which decreased $700,214 to $8,960,804 as of March 31,
2006. Balances within the major loans receivable categories as of March 31, 2006
and December 31, 2005 were as follows:
March 31, December 31,
2006 2005
---- ----
Mortgage loans on real estate:
Residential 1-4 family ................... $ 8,960,804 $ 9,661,018
Commercial ............................... 8,805,636 9,320,210
Construction ............................. 4,672,532 5,197,612
Second mortgages ......................... 306,909 307,322
Equity lines of credit ................... 2,480,027 2,292,288
----------- -----------
Total mortgage loans ................... 25,225,908 26,778,450
Commercial and industrial .................. 1,771,190 2,090,227
Consumer and other ......................... 961,199 1,037,179
----------- -----------
Total gross loans ...................... $27,958,297 $29,905,856
=========== ===========
11
DEKALB BANKSHARES, INC.
Item 2 - Management's Discussion And Analysis or Plan of Operation - continued
Risk Elements in the Loan Portfolio
Transactions in the allowance for loan losses for the quarters ended March 31,
2006 and 2005 are summarized below:
March 31, March 31,
2006 2005
---- ----
Balance, January 1 ............................... $ 305,000 $ 266,478
Provision for loan losses for the period ......... 12,500 22,500
Net loans (charged-off) recovered for the period . - 1,019
----------- -----------
Balance, end of period ........................... $ 317,500 $ 289,997
=========== ===========
Gross loans outstanding, end of period ........... $27,958,297 $29,431,402
=========== ===========
Allowance for loan losses to loans outstanding ... 1.14% 0.99%
There were no loans in nonaccrual status at March 31, 2006 and at March 31,2005.
There were no loans past due ninety days or more and still accruing interest and
no restructured loans at March 31, 2006 and March 31,2005.
Deposits
Total deposits increased $1,206,684 or 3.98% from December 31, 2005 to
$31,507,309 at March 31, 2006. The largest increase was in non interest-bearing
deposit accounts, which increased $1,367,019, or 45.88%, to $4,346,424 at March
31, 2006. Expressed in percentages, time deposits over $100,000 decreased 3.55%
and all other interest-bearing deposits decreased 3.83%.
Balances within the major deposit categories as of March 31, 2006 and December
31, 2005 are as follows:
March 31, December 31,
2006 2005
---- ----
Noninterest-bearing transaction accounts ....... $ 4,346,424 $ 2,979,405
Interest-bearing transaction accounts .......... 4,929,507 4,177,455
Savings ........................................ 2,949,492 3,135,976
Time deposits $100,000 and over ................ 13,743,971 14,249,513
Other time deposits ............................ 5,537,915 5,758,276
----------- -----------
Total deposits ............................. $31,507,309 $30,300,625
=========== ===========
Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank totaled $3,500,000 as of March 31,
2006, compared to $7,600,000 as of December 31, 2005. One of the advances
totaling $500,000 is an adjustable rate advance with a current fixed rate of
4.84% and that matures on September 6, 2011. Another advance totaling $2,000,000
has an adjustable interest rate of 3.79% and matures July 22, 2015 but is
callable by the Federal Home Loan Bank of Atlanta on July 22, 2008. We also
borrowed $1,000,000 under the daily rate credit program with a rate of 5.09% as
of March 31, 2006 that is subject to change daily.
Securities Sold Under Agreements to Repurchase
We sold securities under an agreement 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.
12
DEKALB BANKSHARES, INC.
Item 2 - Management's Discussion And Analysis or Plan of Operation - continued
Liquidity
The 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 March 31,
2006, the Company's primary sources of liquidity included federal funds sold
totaling $1,239,000 and securities available-for-sale totaling $9,930,161. The
Company also had lines of credit available with correspondent banks to purchase
federal funds totaling $2,200,000 at March 31, 2006. In addition, The Company
also has borrowing capacity available through the Federal Home Loan Bank. The
Company's availability to borrow funds from the Federal Home Loan Bank totaled
$8,672,157 of which the Company had borrowed $3,500,000 at March 31, 2006.
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, 2005 as
filed in our 2005 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 the historical experience of our management in
the banking industry 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 the discussion in
this report on Form 10-QSB and in our 2005 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 decreased $17,800 to $5,139,727 at March 31, 2006.
This is the result of a net loss for the period of $7,230 and a negative
adjustment of $10,570 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 Reserve and the federal banking agencies.
Quantitative measures established by regulation to ensure capital adequacy
require us 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%. For the Company and the Bank, Tier 1 capital consists
of common stockholders' equity, excluding the unrealized gain or loss on
securities available-for-sale, minus certain intangible assets. For the Company
and the Bank, 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.
13
DEKALB BANKSHARES, INC.
Item 2 - Management's Discussion And Analysis or Plan of Operation - continued
Capital Resources - continued
The following table summarizes the Bank's risk-based capital at March 31, 2006:
Shareholders' equity .......................................... $ 5,220,189
Plus - unrealized losses on available-for-sale securities ..... 191,743
-----------
Tier 1 capital ................................................ 5,411,932
Plus - allowance for loan losses(1) ........................... 317,500
-----------
Total capital ................................................. $ 5,729,432
===========
Risk-weighted assets .......................................... $28,847,000
===========
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) .................... 18.76%
Total capital (to risk-weighted assets) ..................... 19.86%
Tier 1 capital (to total average assets) .................... 11.96%
(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 Company's customers at
predetermined interest rates for a specified period of time. At March 31, 2006,
the Company had issued commitments to extend credit of $6,240,370 and standby
letters of credit of $65,657 through various types of commercial lending
arrangements. Approximately $4,492,722 of these commitments to extend credit had
variable rates.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at March 31, 2006.
After One After Three
Within Through Through Within Greater
One Three Twelve One Than
(Dollars in thousands) Month Months Months Year One Year Total
----- ------ ------ ---- -------- -----
Unused commitments to extend credit ............ $ 13,898 $ 886,583 $2,413,426 $3,313,907 $2,926,463 $6,240,370
Standby letters of credit ...................... 15,000 - - 15,000 50,657 65,657
---------- ---------- ---------- ---------- ---------- ----------
Totals ..................................... $ 28,898 $ 886,583 $2,413,426 $3,328,907 $2,977,120 $6,306,027
========== ========== ========== ========== ========== ==========
Based on historical experience, many of the commitments and letters of credit
will expire unfunded. Accordingly, the amounts shown in the table above do not
necessarily reflect the Company's need for funds in the periods shown.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on its credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate.
Item 3. Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that 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.
14
DEKALB BANKSHARES, INC.
Part II - Other Information
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.
15
DEKALB BANKSHARES, INC.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
By:s/William C. Bochette, III
----------------------------------------
William C. Bochette, III
Chief Executive Officer, President, and
Chief Financial Officer
Date: May 15, 2006
16
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.
17