U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
------- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
-------
THE SECURITIES EXCHANGE ACT OF 1934
FDIC Certificate Number: 26588-8
DARLINGTON COUNTY BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0805621
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
202 CASHUA STREET
DARLINGTON, SOUTH CAROLINA 29532
(Address of principal executive
offices, including zip code)
(843) 656-5000
(Issuer's telephone number, including area code)
------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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.
158,000 SHARES OF COMMON STOCK, $0.01 PAR VALUE, AS OF OCTOBER 31, 2003
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
DARLINGTON COUNTY BANCSHARES, INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2003 and December 31, 2002.................................3
Condensed Consolidated Statements of Operations -
Nine months ended September 30, 2003 and 2002 and three months ended September 30, 2003 and 2002...............4
Condensed Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income -
Nine months ended September 30, 2003 and 2002..................................................................5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2003 and 2002..................6
Notes to Condensed Consolidated Financial Statements.............................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................8-13
Item 3. Controls and Procedures.........................................................................................13
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................................14
(a) Exhibits...................................................................................................14
(b) Reports....................................................................................................14
DARLINGTON COUNTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- -------------
(Dollars in thousands) (UNAUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 1,386 $ 1,144
Federal funds sold 4,805 2,386
-------------- -------------
Total cash and cash equivalents 6,191 3,530
-------------- -------------
Securities available-for-sale 8,350 5,905
Securities held-to-maturity 86 641
Nonmarketable equity securities 50 50
-------------- -------------
Total investment securities 8,486 6,596
-------------- -------------
Loans 20,656 19,015
Less allowance for loan losses 196 206
-------------- -------------
Loans, net 20,460 18,809
Premises and equipment, net 959 1,003
Accrued interest receivable 243 282
Other assets 92 47
-------------- -------------
Total assets $ 36,431 $ 30,267
============== =============
LIABILITIES
Deposits
Demand $ 5,345 $ 4,607
Savings and NOW 21,114 15,252
Other time deposits 6,052 6,345
-------------- -------------
Total deposits 32,511 26,204
Accrued interest payable 25 29
Other liabilities 97 87
-------------- -------------
Total Liabilities 32,633 26,320
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 1,000,000 shares authorized, 158,000 shares issued
and outstanding at September 30, 2003
and December 31, 2002 2 2
Capital in excess of par value of stock 1,618 1,618
Retained earnings 2,290 2,260
Accumulated other comprehensive income (loss) (112) 67
-------------- -------------
Total stockholders' equity 3,798 3,947
-------------- -------------
Total liabilities and stockholders' equity $ 36,431 $ 30,267
============== =============
See notes to consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
(Dollars in thousands) SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ---------- ----------- -----------
INTEREST INCOME:
Loans, including fees $ 1,090 $ 1,055 $ 377 $ 363
Investment securities:
Taxable 184 272 63 78
Nontaxable 20 22 7 7
Nonmarketable equity securities - 1 - -
Federal funds sold 27 22 7 6
----------- ---------- ----------- -----------
Total interest income 1,321 1,372 454 454
----------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits 284 361 98 110
----------- ---------- ----------- -----------
Total interest expense 284 361 98 110
----------- ---------- ----------- -----------
NET INTEREST INCOME 1,037 1,011 356 344
Provision for loan losses 72 52 30 18
----------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 965 959 326 326
----------- ---------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 240 268 78 94
Gains on sales of securities available-for-sale 20 - - -
Other service charges, commissions and fees 17 20 6 12
----------- ---------- ----------- -----------
Total 277 288 84 106
----------- ---------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 539 486 183 165
Net occupancy expense 62 55 21 19
Furniture and equipment expense 83 62 29 22
Other operating expenses 276 314 94 92
----------- ---------- ----------- -----------
Total 960 917 327 298
----------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 282 330 83 134
Income tax provision 94 109 29 37
----------- ---------- ----------- -----------
NET INCOME $ 188 $ 221 $ 54 $ 97
=========== ========== =========== ===========
PER SHARE
AVERAGE SHARES OUTSTANDING 158,000 158,000 158,000 158,000
=========== ========== =========== ===========
NET INCOME $ 1.19 $ 1.40 $ 0.34 $ 0.61
=========== ========== =========== ===========
DIVIDENDS PAID $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== ========== =========== ===========
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
ACCUMULATED
OTHER
COMPRE-
COMMON STOCK ADDITIONAL HENSIVE
------------------------- PAID-IN RETAINED INCOME
(Dollars in thousands) SHARES AMOUNT CAPITAL EARNINGS (LOSS) TOTAL
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 158,000 $ 2 $ 1,618 $ 2,096 $ (22) $ 3,694
Net income for the period 221 221
Comprehensive income, net of tax 95 95
-----------
Comprehensive income 316
-----------
Cash dividend ($1.00 per share) (158) (158)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2002 158,000 $ 2 $ 1,618 $ 2,159 $ 73 $ 3,852
=========== =========== =========== =========== =========== ===========
BALANCE, DECEMBER 31, 2002 158,000 $ 2 $ 1,618 $ 2,260 $ 67 $ 3,947
Net income for the period 188 188
Comprehensive income, net of tax (179) (179)
-----------
Comprehensive income 9
-----------
Cash dividend ($1.00 per share) (158) (158)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2003 158,000 $ 2 $ 1,618 $ 2,290 $ (112) $ 3,798
=========== =========== =========== =========== =========== ===========
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
(Dollars in thousands) 2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 188 $ 221
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 61 53
Provision for loan losses 72 52
Amortization less accretion on investments 31 -
Gain on sales of securities available-for-sale (16) -
(Increase) decrease in other assets (103) 54
Increase (decrease) in other liabilities 75 90
------------- -------------
Net cash provided by operating activities 308 470
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in federal funds sold (2,419) 2,146
Proceeds from maturities of securities held-to-maturity 560 77
Proceeds from sales of investment securities available-for-sale 835 -
Proceeds from calls and maturities of securities available-for-sale 3,794 894
Purchase of investment securities available-for-sale (7,245) (3,602)
Net increase in loans (1,723) 1,502
Purchase of equipment (17) 45
------------- -------------
Net cash provided (used) by investing activities (6,215) 1,062
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 6,307 (778)
Cash dividends paid (158) (158)
------------- -------------
Net cash provided (used) for financing activities 6,149 (936)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 242 596
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,144 315
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,386 $ 911
============= =============
CASH PAID FOR
Interest $ 288 $ 361
============= =============
Income taxes $ 113 $ 109
============= =============
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B of
the Securities and Exchange Commission. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
NOTE 2 - NET INCOME PER SHARE
Net income per share is computed on the basis of the weighted average number of
common shares outstanding in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share." The Company does not have any
instruments which are dilutive; therefore, only basic net income per share of
common stock is presented.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes appearing in the 2002 Annual Report of
Darlington County Bancshares, Inc. Results of operations for the nine months
ending September 30, 2003 are not necessarily indicative of the results to be
attained for any other period. The following information may contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements.
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 the beliefs of our management, as well as assumptions made by and
information currently available to our management. The words "expect,"
"estimate," "anticipate," 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. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order to comply with terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performances, development and results of the Company's business
include, but are not limited to, the following: risks from changes in economic
and industry conditions; changes in interest rates; risks inherent in making
loans including repayment risks and value of collateral; dependence on senior
management; and recently-enacted or proposed legislation. Statements contained
in this filing regarding the demand for the Company's products and services,
changing economic conditions, interest rates, consumer spending and numerous
other factors may be forward-looking statements and are subject to uncertainties
and risks. When relying on forward-looking statements to make decisions with
respect to the Company, investors and others are cautioned to consider these and
other risks and uncertainties.
Such forward-looking statements speak only as of the date on which such
statements are made. We undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made to reflect the occurrence of unanticipated events. In
addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, in press releases and in oral and written
statements made by or with the approval of the Company which are not statements
of historical fact constitute forward-looking statements.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2003
The Company's net income for the nine months ended September 30, 2003 was
$188,000 or $1.19 per share as compared to $221,000 or $1.40 per share for the
nine months ended September 30, 2002.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on earning
assets and the interest paid for funds acquired to support those assets. Net
interest income, the principal source of the Bank's earnings, was $1,037,000 and
$1,011,000 for the nine months ended September 30, 2003 and 2002, respectively.
The increase was attributable to an increase in the volume of earning assets.
Changes that affect net interest income are changes in the average rate earned
on interest-earning assets, changes in the average rate paid on interest-bearing
liabilities, and changes in the volume of interest-earning assets and
interest-bearing liabilities.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Average interest-earning assets during the nine months ended September 30, 2003
increased by 1,826,919 or 6.45% over the same period in 2002, while average
interest-bearing liabilities increased by $1,440,056 or 6.52% comparing the nine
months of 2003 with the nine months of 2002.
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------
AVERAGE INCOME/ ANNUALIZED
BALANCE EXPENSE YIELD/RATE
--------------- --------------- --------------
Federal funds sold $ 3,343,217 $ 27,000 1.08%
Investment securities 7,248,599 204,000 3.73%
Loans 19,557,982 1,090,000 7.43%
--------------- ---------------
Total earning assets $ 30,149,798 1,321,000 5.83%
===============
Total interest bearing liabilities $ 23,541,398 284,000 1.61%
=============== --------------- --------------
Net interest spread 4.22%
Net interest income/margin $ 1,037,000 4.25%
=============== ==============
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
NINE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------
AVERAGE INCOME/ ANNUALIZED
BALANCE EXPENSE YIELD/RATE
--------------- --------------- -------------
Federal funds sold $ 1,738,432 $ 22,000 1.69%
Investment securities 8,590,285 295,000 4.56%
Loans 17,994,162 1,055,000 7.82%
--------------- ---------------
Total earning assets $ 28,322,879 1,372,000 6.45%
===============
Total interest bearing liabilities $ 22,101,342 361,000 1.63%
=============== --------------- --------------
Net interest spread 4.82%
Net interest income/margin $ 1,011,000 4.75%
=============== ==============
As reflected above, for the nine months of 2003 the average yield on earning
assets amounts amounted to 5.83%, while the average cost of interest-bearing
liabilities was 1.61%. For the same period of 2002, the average yield on earning
assets was 6.45% and the average cost of interest-bearing liabilities was 1.63%.
The decrease in the yield on earning assets is attributable to a decrease in the
yield on all interest earning assets. The net interest margin is computed by
subtracting interest expense from interest income and dividing the resulting
figure by average interest-earning assets. The net interest margin for the
period ended September 30, 2003 was, 4.25% and for 2002 was 4.75%.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 2003 and 2002 was
$277,000 and $288,000, respectively. Service charges on deposit accounts
decreased $28,000 or 10.45% to $240,000 when comparing the nine months ended
September 30, 2003 to 2002. Other service charges, commissions and fees also
decreased $3,000 or 15.0% when comparing the nine months ended September 30,
2003 to 2002. These decreases were offset by gains on sales of securities
available for sale that totaled $20,000 for the nine months ended September 30,
2003. There were no gains on sales of securities during the nine months ended
September 30, 2002.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
NONINTEREST EXPENSES
Noninterest expenses for the nine months ended September 30, 2003 and 2002 was
$960,000 and $917,000, respectively. Noninterest expenses increased due to
increases in salaries and employee benefits expense, occupancy expense and
furniture and fixtures expense net of a decrease in other operating expenses.
These increases were due to the normal growth of the Bank.
PROVISION FOR LOAN LOSSES
The allowance for loan losses was 0.95% of loans, as of September 30, 2003
compared to 1.08% at December 31, 2002. The provision for loan losses was
$72,000 and $52,000 for the nine months ended September 30, 2003 and 2002,
respectively. Management reviews the adequacy of the allowance on an ongoing
basis and believes the allowance is adequate.
Risks are 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, 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, charge-offs in future
periods could exceed the allowance for loan losses, or 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. Based on present information, we believe the allowance
for loan losses is adequate at September 30, 2003 to meet presently known and
inherent risks in the loan portfolio.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2003
The Company's net income for the third quarter of 2003 was $54,000 or $0.34 per
share compared to $97,000 or $0.61 per share for the third quarter of 2002.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on earning
assets and the interest paid for funds acquired to support those assets. Net
interest income, the principal source of the Bank's earnings, was $356,000 and
$344,000 for the quarters ended September 30, 2003 and 2002, respectively.
NONINTEREST INCOME
Noninterest income for the three months ended September 30, 2003 and 2002 were
$84,000 and $106,000, respectively. Noninterest income decreased due to a
decrease in service charges on deposit accounts from $94,000 for the three
months ended September 30, 2002 to $78,000 for the same period in 2003 and a
$6,000 decrease in other service charges, commissions and fees.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended September 30, 2003 and 2002 were
$327,000 and $298,000, respectively. Noninterest expenses increased due to
increased salaries and employee benefits expense, occupancy expense, furniture
and fixtures expense and other operating expenses. These increases were due to
the normal growth of the Bank.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $30,000 and $18,000 for the three months ended
September 30, 2003 and 2002, respectively. Management increased its provision
during the quarter due to the declining economy.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
FINANCIAL CONDITION
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of liabilities.
The Company manages both assets and liabilities to achieve appropriate levels of
liquidity. Cash and short-term investments are the Company's primary sources of
asset liquidity. These funds provide a cushion against short-term fluctuations
in cash flow from both deposits and loans. The investment portfolio is the
Bank's principal source of secondary asset liquidity. However, the availability
of this source of funds is influenced by market conditions. Management believes
that the Company's liquidity sources are adequate to meet its operating needs.
However, we have approximately $2,500,000 of unused lines of credit to purchase
federal funds should additional funding sources be needed.
OFF-BALANCE SHEET RISK
Through the operations of our bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At September 30,
2003, we had issued commitments to extend credit of $4,446,000 through various
types of commercial lending arrangements. We evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by us upon extension of credit, is based on our credit evaluation of
the borrower. Collateral varies but may include accounts receivable, inventory,
property, plant and equipment, commercial and residential real estate. We manage
the credit risk on these commitments by subjecting them to normal underwriting
and risk management processes.
INVESTMENT SECURITIES
Total investment securities increased $1,890,000 during the first nine months of
2003. This increase was due to an increase in securities available for sale of
$2,445,000, net of a decrease in securities held-to-maturity of $555,000. A
portion of excess funds generated from deposit growth were invested in
securities available for sale.
LOANS
Loans increased slightly during the first nine months of 2003. Net loans
increased $1,641,000, or 8.63%, during the period. As shown below, the main
components of growth in the loan portfolio were consumer and other loans which
increased 11.04%, or $523,000, and real estate-construction which increased
$531,000, or 72.54%, from December 31, 2002 to September 30, 2003. Balances
within the major loans receivable categories as of September 30, 2003 and
December 31, 2002 are as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
Real estate - construction $ 1,263,000 $ 732,000
Real estate - mortgage 8,892,000 8,714,000
Commercial and industrial 4,227,000 3,797,000
Agriculture 1,013,000 1,034,000
Consumer and other 5,261,000 4,738,000
--------------- ---------------
$ 20,656,000 $ 19,015,000
=============== ===============
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
DEPOSITS
Total deposits increased $6,307,000 or 24.07% to $32,511,000 during the first
nine months of 2003. The largest increase was in money market accounts which
increased $3,179,000 to $9,403,000 at September 30, 2003. We offer a higher
interest rate on money market accounts than do our competitors.
CAPITAL RESOURCES
The capital base for the Company decreased by $149,000 during the first nine
months of 2003. This net change includes an increase to equity for net income of
$188,000 offset by a decrease in unrealized gains on investment securities of
$179,000 and cash dividends paid of $158,000.
The Federal Deposit Insurance Corporation has issued guidelines for risk-based
capital requirements. As of September 30, 2003, the Bank exceeds the capital
requirement levels that are to be maintained.
WELL CAPITALIZED ADEQUATELY CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
----------------------- ---------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------------- ---------------------- ---------------------
Total capital (to risk-weighted assets) $ 4,056 16.88% $ 2,403 10.00% $ 1,922 8.00%
Tier 1 capital (to risk weighted assets) $ 3,860 16.06% $ 1,442 6.00% $ 961 4.00%
Tier 1 capital (to average assets) $ 3,860 11.38% $ 1,696 5.00% $ 1,357 4.00%
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, 2002 as
filed on our 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 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 major 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 our 2002 Annual
Report on Form 10-KSB and this Form 10-QSB that address our allowance for loan
losses for a description of our processes and methodology for determining our
allowance for loan losses. There have been no significant changes in our
critical accounting policies since December 31, 2002.
EFFECTS OF REGULATORY ACTION
The management of the Company is not aware of any current recommendations by
regulatory authorities, which if they were to be implemented, would have a
material effect on liquidity, capital resources, or operations.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Bank are primarily monetary in nature. Therefore,
interest rates have a more significant impact on the Bank's performance than do
the effects of changes in the general rate of inflation and changes in prices.
In addition, interest rates do not necessarily move in the same magnitude as the
prices of goods and services. As discussed previously, management seeks to
manage the relationships between interest sensitive assets and liabilities in
order to protect against wide rate fluctuations, including those resulting from
inflation.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure", an amendment of FASB Statement No.
123, "Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and Accounting Pronouncement Board ("APB")
Opinion No. 28, "Interim Financial Reporting", to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of APB
Opinion No. 25. The provisions of SFAS No. 148 are effective for annual
financial statements for fiscal years ending after December 15, 2003, and for
financial reports containing condensed financial statements for interim period
beginning after December 15, 2002. We have adopted the disclosure provisions of
SFAS No. 148, which had no impact on our financial condition or operating
results.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and loan commitments that relate to the
origination of mortgage loans held for sale, and for hedging activities under
SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or
modified after September 30, 2003. The adoption of SFAS No. 149 will not have a
material impact on our financial condition or operating results.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is generally effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on our
financial condition or operating results.
In June 2003, the American Institute of Certified Public Accountants (AICPA)
issued an exposure draft of a proposed Statement of Position (SOP), "Allowance
for Credit Losses." The proposed SOP addresses the recognition and measurement
by creditors of the allowance for credit losses related to all loans, as that
term is defined in SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." The proposed SOP provides that the allowance for credit losses reported
on a creditor's balance sheet should consist only of (1) a component for
individual loan impairment recognized and measured pursuant to FASB Statement
No. 114 and (2) one or more components of collective loan impairment recognized
pursuant to FASB Statement No. 5, "Accounting for Contingencies," and measured
in accordance with the guidance in the proposed SOP. The provisions of the
proposed SOP would be effective for financial statements for fiscal years
beginning after December 15, 2003, with earlier application permitted. The
effect of initially applying the provisions of the proposed SOP would be
reported as a change in accounting estimate. Comments on the exposure draft were
due by September 19, 2003. We have not determined the effect on our financial
condition or operating results related to the adoption of this proposed SOP, but
such effect would most likely be material.
ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and our
chief financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and
240.15d-15(e)) as of September 30, 2003, and, based on such evaluation, our
chief executive officer and chief financial officer concluded that such controls
and procedures were effective as of September 30, 2003.
There were no significant changes in our internal controls over financial
reporting that occurred during the fiscal quarter ended September 30, 2003 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on 8-K - No reports on 8-K were filed during the quarter ended
September 30, 2003.
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DARLINGTON COUNTY BANCSHARES, INC.
Name of Bank
By: /s/W. B. McCown, III Date: November 10, 2003
---------------------------------------------
W. B. McCown, III, President and Chief Executive Officer
By: /s/ Henry M. Funderburk Date: November 10, 2003
---------------------------------------------
Henry M. Funderburk
Executive Vice President
and Chief Financial Officer
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