U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2001
----------------------------------------
SALEM COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Virginia 31-1736845
- --------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 East Main Street
Salem, Virginia 24153
- ------------------------------------ ------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number, including area code) (540) 387-0223
---------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
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State the number of shares outstanding of each of the issuer's class of common
equity, as of the latest practicable date.
Class Outstanding at August 10, 2001
- --------------------------- ------------------------------
COMMON STOCK, NO PAR VALUE 1,497,356
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One): Yes No X
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(This report contains 19 pages)
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements 3
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000. 4
Consolidated Statements of Income and Comprehensive Income,
Three Months Ended June 30, 2001 and 2000. 5
Consolidated Statements of Income and Comprehensive Income,
Six Months Ended June 30, 2001 and 2000. 6
Consolidated Statements of Changes In Stockholders'
Equity, Six Months Ended June 30, 2001 and 2000 7
Consolidated Statements of Cash Flows,
Six Months Ended June, 2001 and 2000. 8
Notes to Consolidated Financial Statements. 9 - 12
Item 2. Management's Discussion And Analysis
of Financial Condition and Results of Operations 13 - 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes In Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 5. Other Information 18
Item 6. Exhibits And Reports On Form 8-K 18
SIGNATURES 19
2
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
The following is the unaudited consolidated balance sheet of Salem Community
Bankshares, Inc. and subsidiary (the Company) as of June 30, 2001, and the
related unaudited consolidated statements of income and comprehensive income for
the three-month and six-month periods ended June 30, 2001 and 2000, and the
unaudited consolidated statements of changes in stockholders' equity, and cash
flows, for the six-month periods ended June 30, 2001 and 2000. The consolidated
balance sheet presented as of December 31, 2000 has been derived from the
consolidated financial statements that have been audited by Company's
independent auditors.
3
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share data)
6/30/01 12/31/00
ASSETS (Unaudited) (Audited)
- ------ ------------------ ----------------------
Cash and due from banks $ 9,565 8,283
Federal funds sold and securities purchased
under resale agreements 18,600 12,310
Securities:
Available-for-sale, at fair value 13,181 9,019
Held-to-maturity, at amortized cost
(fair value of $38,644 at June 30, 2001
and $38,634 at December 31, 2000) 38,605 39,434
Mortgage loans held for sale 2,261 139
Loans, less unearned income 152,610 139,577
Less allowance for loan losses -1,608 -1,529
------------------ ----------------------
Loans, net 151,002 138,048
------------------ ----------------------
Bank premises and equipment, net 2,007 2,107
Accrued interest receivable 1,681 1,805
Foreclosed properties 92 160
Other assets 2,085 1,077
------------------ ----------------------
Total assets $239,079 212,382
================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits 22,667 21,680
Interest-bearing demand deposits 53,476 41,429
Savings deposits 6,210 6,170
Time deposits 125,071 111,704
------------------ ----------------------
Total deposits 207,424 180,983
Federal Home Loan Bank long-term debt 10,000 10,000
Accrued interest payable 1,345 1,486
Other liabilities 488 154
------------------ ----------------------
Total liabilities 219,257 192,623
------------------ ----------------------
Stockholders' equity:
Common stock and surplus, no par value. Authorized
10,000,000 shares; issued and outstanding 1,497,356 shares
in 2001 and 1,596,873 shares in 2000. 15,715 17,079
Retained earnings 4,100 2,766
Accumulated other comprehensive gain (loss) 7 -86
------------------ ----------------------
Total stockholders' equity 19,822 19,759
------------------ ----------------------
Commitments and contingent liabilities
Total liabilities and stockholders' equity $239,079 212,382
================== ======================
See accompanying notes to unaudited consolidated financial statements.
4
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended June 30, 2001 and 2000
2001 2000
---- ----
Interest income:
Interest and fees on loans $3,634 $3,071
Interest on federal funds sold and securities
purchased under resale agreements 159 66
Interest on deposits with banks 31 8
Interest on securities - taxable 758 793
Interest on securities - nontaxable 41 58
-------------- ----------
Total interest income 4,623 3,996
-------------- ----------
Interest expense:
Interest on certificates of deposit
of $100 or more 398 258
Interest on other deposits 1,810 1,599
Interest on federal funds purchased and securities sold
under repurchase agreements - 6
Interest on Federal Home Loan Bank borrowings 171 -
-------------- ----------
Total interest expense 2,379 1,863
-------------- ----------
Net interest income 2,244 2,133
Provision for loan losses 200 67
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Net interest income after provision
for loan losses 2,044 2,066
-------------- ----------
Noninterest income:
Service charges on deposit accounts 178 144
Other service charges, commissions and fees 97 69
Other income 3 13
Realized securities gains, net 8 -
-------------- ----------
Total noninterest income 286 226
-------------- ----------
Noninterest expense:
Salaries and employee benefits 819 713
Occupancy expense of bank premises 82 75
Furniture, fixtures and equipment 133 124
Stationery, printing and supplies 39 38
Write-downs and gains and losses, net, on foreclosed properties -11 28
Other expenses 334 444
-------------- ----------
Total noninterest expense 1,396 1,422
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Income before income tax expense 934 870
Income tax expense 304 281
-------------- ----------
Net income 630 589
Other comprehensive income (loss), net of income tax expense (benefit):
Net unrealized gains (losses) on available-for-sale securities 17 (41)
-------------- ----------
Comprehensive income $ 647 $ 548
============== ==========
Net income per share
Basic net income per share $ 0.41 $ 0.37
============== ==========
Diluted net income per share $ 0.40 $ 0.37
============== ==========
See accompanying notes to unaudited consolidated financial statements.
5
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Six Months Ended June 30, 2001 and 2000
2001 2000
---- ----
Interest income:
Interest and fees on loans $7,104 5,881
Interest on federal funds sold and securities
purchased under resale agreements 351 72
Interest on deposits with banks 70 10
Interest on securities - taxable 1,497 1,589
Interest on securities - nontaxable 89 116
------------------- -------------
Total interest income 9,111 7,668
------------------- -------------
Interest expense:
Interest on time certificates of deposit
of $100,000 or more 750 495
Interest on other deposits 3,663 3,067
Interest on federal funds purchased and securities sold
under repurchase agreements - 11
Interest on Federal Home Loan Bank borrowings 340 -
------------------- -------------
Total interest expense 4,753 3,573
------------------- -------------
Net interest income 4,358 4,095
Provision for loan losses 255 144
------------------- -------------
Net interest income after provision
for loan losses 4,103 3,951
------------------- -------------
Noninterest income:
Service charges on deposit accounts 329 270
Other service charges, commissions and fees 193 154
Other income 23 27
Realized securities gains, net 1 -
------------------- -------------
Total noninterest income 546 451
------------------- -------------
Noninterest expense:
Salaries and employee benefits 1,575 1,403
Occupancy expense of bank premises 162 143
Furniture, fixtures and equipment 257 239
Stationery, printing and supplies 61 69
Write-downs and gains and losses, net, on foreclosed properties -11 34
Other expenses 624 718
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Total noninterest expense 2,668 2,606
------------------- -------------
Income before income tax expense 1,981 1,796
Income tax expense 647 580
------------------- -------------
Net income 1,334 1,216
Other comprehensive income (loss), net of income tax expense (benefit):
Net unrealized gains (losses) on available-for-sale securities 93 -53
------------------- -------------
Comprehensive income $1,427 1,163
=================== =============
Net income per share
Basic net income per share $ 0.85 0.77
=================== =============
Diluted net income per share $ 0.84 0.76
=================== =============
See accompanying notes to unaudited consolidated financial statements.
6
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except shares and per share data)
Six Months Ended June 30, 2001 and 2000
Accumulated
Common Other
Stock Retained Comprehensive
and Surplus Earnings Gain (Loss) Total
-------------------------------------------------------------
Balances at December 31, 1999 $16,077 1,970 -210 17,837
Net income - 1,216 - 1,216
Change in net unrealized
losses on available-for-sale
securities, net of income tax benefit - - (53) (53)
-------------------------------------------------------------
Balances at June 30, 2000 $16,077 3,186 (263) 19,000
====== ====== ==== ======
Balances at December 31, 2000 $17,079 2,766 (86) 19,759
Net income - 1,334 - 1,334
Issuance of common stock (82 shares) 1 - - 1
Purchase of common stock outstanding (99,599 shares) -1,365 _ - (1,365)
Change in net unrealized
losses on available-for-
sale securities, net of income tax expense - - 93 93
-------------------------------------------------------------
Balances at June 30, 2001 $15,715 4,100 7 19,822
====== ====== ==== ======
See accompanying notes to unaudited consolidated financial statements.
7
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended June, 2001 and 2000
(In thousands) 2001 2000
---- ----
Cash flows from operating activities:
Net income 1,334 1,216
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 255 144
Depreciation and amortization of bank premises
and equipment 163 149
Gain on calls of securities -1 -
Amortization of premiums and accretion
of discounts, net -6 3
Write-downs and (gains) and losses on sales
of foreclosed properties, net (11) 34
(Increase) decrease in:
Mortage loans held for sale (2,122) 106
Accrued interest receivable 124 (40)
Other assets (1,056) (561)
Increase (decrease) in:
Accrued interest payable (141) (5)
Other liabilities 335 9
------------- -------------
Net cash provided by (used in) operating activities (1,126) 1,055
------------- -------------
Cash flows from investing activities:
Net increase in federal funds sold and
securities purchased under resale agreements (6,290) (13,900)
Proceeds from maturities and calls of securities 5,815 543
Purchase of securities (9,000) -
Net increase in loans made to customers (13,331) (15,527)
Recoveries on loans previously charged off 30 32
Proceeds from sales of foreclosed properties 171 117
Purchases of bank premises and equipment (63) (130)
------------- -------------
Net cash used in investing activities (22,668) (28,865)
------------- -------------
Cash flows from financing activities:
Net increase in time deposits 13,367 9,643
Net increase in demand and savings deposits 13,074 14,036
Purchase of common stock outstanding (1,365) -
Net decrease in federal funds purchased and securities
sold under resale agreements - (145)
Proceeds from notes payable from Federal Home Loan Bank - 5,900
Principal payments on capital lease obligations - (26)
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Net cash provided by financing activities 25,076 29,408
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Net increase in cash and due from banks 1,282 1,598
Cash and due from banks at beginning of period 8,283 8,959
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Cash and due from banks at end of period 9,565 $10,557
============= =============
For the six-month periods ended June 30, 2001 and 2000, the Company paid
interest expense of $4,894 and $3,578, respectively. For the six-month periods
ended June 30, 2001 and 2000, the Company paid income taxes of $670 and $915.
See accompanying notes to unaudited consolidated financial statements.
8
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2001 and 2000
(Unaudited)
(In thousands, except shares and per share data)
(1) General
The consolidated financial statements include the accounts of Salem Community
Bankshares, Inc. and its wholly-owned subsidiary, Salem Bank and Trust, N.A.
(the Bank), (collectively the Company). All material intercompany accounts and
transactions have been eliminated. The consolidated financial statements conform
to accounting principles generally accepted in the United States of America and
to general banking industry practices. In the opinion of the Company's
management, the accompanying unaudited consolidated financial statements contain
all adjustments of a normal recurring nature, necessary to present fairly the
financial position as of June 30, 2001 and the results of operations and cash
flows for the three-month and six-month periods ended June 30, 2001 and 2000.
These interim period consolidated financial statements and financial information
should be read in conjunction with the consolidated financial statements and
notes thereto included in Salem Community Bankshares, Inc. 2000 Annual Report
and additional information supplied in the 2000 Form 10-KSB.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year ending December 31, 2001.
(2) Securities
The amortized costs, gross unrealized holding gains, gross unrealized holding
losses and approximate fair values for available-for-sale and held-to-maturity
securities by major security type are as follows:
June 30, 2001
--------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Costs Gains Losses Values
--------------------------------------------------------------------
Available-for-sale
- ------------------
U.S. Government agencies
and corporations $10,988 23 - 11,011
Mortgage-backed securities 1,119 - ( 12) 1,107
Other securities 1,063 - - 1,063
------- -- --------- ------
Totals $13,170 23 ( 12) 13,181
======= == ======== ======
Held-to-maturity
- ----------------
U.S. Government agencies
and corporations $35,299 - ( 37) 35,262
Mortgage-backed securities 210 3 - 213
Obligations of state and
political subdivisions 3,096 73 - 3,169
------- -- --------- ------
Totals $38,605 76 ( 37) 38,644
======= == ======== ======
As of June 30, 2001, securities with amoritized costs of $30,064 were pledged to
secure public deposits and for other purposes required by law.
9
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2001 and 2000
(Unaudited)
(In thousands, except shares and per share data)
(3) Loans
A summary of loans outstanding is as follows:
June 31, 2001 December 31, 2000
------------- -----------------
Commercial $ 13,276 13,527
Consumer, principally installment 40,331 34,520
Real estate - mortgage 83,088 76,481
Real estate - construction 17,094 16,285
--------- ---------
Total loans 153,789 140,813
Less unearned income ( 1,179) ( 1,236)
-------- ---------
Total loans, less unearned income $ 152,610 139,577
======== =========
(4) Nonperforming Assets, Impaired Loans and Allowance for Loan Losses
Nonperforming assets consist of the following:
June 30, 2001 December 31, 2000
------------- -----------------
Nonaccrual loans $ 595 $ 583
Foreclosed properties 92 160
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Total nonperforming assets $ 687 $ 743
============= ============
There were no commitments to lend additional funds to customers whose loans were
classified as nonperforming at June 30, 2001. Included in nonaccrual loans as of
June 30, 2001 is a restructured loan, restructed during 2000, approximating
$307.
The following table shows the pro forma interest that would have been earned on
nonaccrual loans if they had been current in accordance with their original
terms and the recorded interest that was earned and included in income on these
loans:
Six Months Ended June 30,
-------------------------
2001 2000
---- ----
Pro forma interest on nonaccrual loans $ 26 33
===== =====
Recorded interest on nonaccrual loans $ 7 29
===== =====
At June 30, 2001, the recorded investment in loans that have been identified as
impaired loans, in accordance with Statement 114 and which includes nonaccrual,
restructured and certain watch list loans, totaled $694. Of this amount $236
related to loans with no valuation allowance, and $458 related to loans with a
corresponding valuation allowance of $90.
10
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2001 and 2000
(Unaudited)
(In thousands, except shares and per share data)
A summary of the activity in the allowance for loan losses follows:
Six Months Ended June 30,
-------------------------
2001 2000
---- ----
Balances, beginning of period $ 1,529 1,404
Provision for loan losses 255 144
Loans charged off ( 206) ( 141)
Loan recoveries 30 32
-------- -------
Balances, end of period $ 1,608 1,439
======== =======
(5) Time Deposits and Other Deposits
Included in time deposits are certificates of deposit and other time deposits of
$100 or more in the aggregate amount of $30,975 at June 30, 2001.
(6) Net Income Per Share
Net income per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Net income per share-assuming dilution reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or vested into common stock or resulted in the
issuance of common stock that they shared in the earnings of the entity. The
following is a reconciliation of the numerators and denominators of the net
income per share and net income per share - assuming dilution computations for
the periods indicated:
Net Income Shares Per Share
Three Months Ended June 30, 2001 (Numerator) (Denominator) Amount
- -------------------------------- ----------- ------------- ----------
Basic net income per share $630 1,554,902 $ .41
----------
Effect of dilutive stock options - 9,099
----------- ------------- ----------
Diluted net income per share $630 1,564,001 $ .40
----------- ------------- ----------
Net Income Shares Per Share
Three Months Ended June 30, 2000 (Numerator) (Denominator) Amount
- -------------------------------- ----------- ------------- ----------
Basic net income per share $589 1,587,110 $ .37
----------
Effect of dilutive stock options - 13,544
----------- -------------
Diluted net income per share $589 1,600,654 $ .37
----------- ------------- ----------
11
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2001 and 2000
(Unaudited)
(In thousands, except shares and per share data)
Net Income Shares Per Share
Six Months Ended June 30, 2001 (Numerator) (Denominator) Amount
- ------------------------------ ----------- ------------- -----------
Basic net income per share $1,334 1,575,906 $ .85
Effect of dilutive stock options - 7,964 ==========
----------- -------------
Diluted net income per share 1,334 1,583,870 $ .84
----------- ============= ==========
Six Months Ended June 30, 2000
Basic net income per share $1,216 1,587,110 $ .77
Effect of dilutive stock options - 14,067 ==========
----------- -------------
Diluted net income per share $1,216 1,601,177 $ .76
----------- ============= ==========
(7) Repurchase of Common Stock
On May 25, 2001, the Company repurchased 99,599 shares of its common stock
outstanding at a total cost of $1,365. This repurchase of stock has been
recorded in the unaudited consolidated financial statements as a reduction of
common stock and surplus.
(8) Pending Merger
On July 31, 2001, the Company's Board of Directors approved an agreement to
merge the Company into FNB Corporation, headquartered in Christiansburg,
Virginia. Under the terms of the agreement, shareholders of the Company will
receive consideration valued at $26.49 for each share of common stock, in the
form of cash, stock of FNB Corporation, or a combination of both. The merger is
subject to approval by shareholders of the Company and FNB Corporation as well
as regulatory authorities. The transaction is anticipated to close in the fourth
quarter of 2001.
12
Item 2. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
(Amounts in thousands, except per share data and ratios)
The following is a discussion of the factors which significantly affected the
financial condition and results of operations of Salem Community Bankshares,
Inc. and subsidiary at June 30, 2001 and for the three-month and six-month
periods ended June 30, 2001. This discussion should be read in conjunction with
the unaudited consolidated financial statements and notes presented herein, and
with the Bank's audited consolidated financial statements and notes thereto for
the year ended December 31, 2000.
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in the forward-looking statements.
On May 31, 2000, shareholders approved the proposed reorganization of the Bank
into a holding company structure. On September 11, 2000, this proposed
reorganization was completed with 1,535,986 shares of Salem Bank and Trust, N.A.
common stock being exchanged one-for-one for 1,535,986 shares of Salem Community
Bankshares, Inc. common stock. As a result of this reorganization, the Bank
became a wholly-owned subsidiary of Salem Community Bankshares, Inc.
PENDING MERGER
On July 31, 2001, the Company's Board of Directors approved an agreement to
merge the Company into FNB Corporation, headquartered in Christiansburg,
Virginia. Under the terms of the agreement, shareholders of the Company will
receive consideration valued at $26.49 for each share of common stock, in the
form of cash, stock of FNB Corporation, or a combination of both. The merger is
subject to approval by shareholders of the Company and FNB Corporation as well
as regulatory authorities. The transaction is anticipated to close in the fourth
quarter of 2001.
BALANCE SHEET
Total assets of the Company at June 30, 2001 exceeded total assets at December
31, 2000 by $26,697 or 12.6 percent. This increase was due primarily to an
increase of $6,290 in federal funds sold and securities purchased under resale
agreements and loan portfolio growth. The increase in fed funds sold resulted
from the Company not investing in long-term security products during the current
national environment of declining interest rates. Loans, net of unearned at June
30, 2001 compared to December 31, 2000 showed an increase of $13,033, or 9.3
percent. Higher loan volumes resulted from increased customer demand, especially
in indirect dealer loan products.
Total deposits increased by $26,441, or 14.6 percent, due mostly to increases in
time and interest-bearing demand deposits. Time deposits increased $13,367, or
12.0 percent, and interest-bearing demand deposits increased $12,047 or 29.1
percent due to the Company offering more attractive depository products than
area competition and a build-up of municipal deposits.
ALLOWANCE FOR LOAN LOSSES, NONPERFORMING ASSETS AND IMPAIRED LOANS
The provision for loan losses was $255 for the six-month period ended June 30,
2001 compared to $144 for the same period in 2000, an increase of $111. The
provision for loan losses was $200 for the three-month period ended June 30,
2001, compared to $67 for the same period in 2000, an increase of $133. The
Company considers the allowance to be adequate based on the current loan
portfolio. An ongoing evaluation of the allowance for loan losses is made to
ensure that the allowance for loan losses is at a sufficient level to absorb
estimated losses in the Bank's loan portfolio. As of June 30, 2001, the ratio of
the allowance for loan losses to loans, net of unearned income was 1.05 percent.
While management uses available information to recognize loan losses, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
The agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available at the time of their examination.
13
Foreclosed properties decreased to $92 at June 31, 2001 from $160 at December
31, 2000. This decrease resulted from the net sale of properties as well as
increased efforts by management to minimize the amount of such properties held.
Nonaccrual loans were $595 and $583 at June 30, 2001 and at December 31, 2000,
respectively. Loans are generally placed in nonaccrual status when the
collection of principal and interest is 90 days or more past due, unless the
obligation is both well-secured and in the process of collection. Impaired loans
approximated $694 at June 30, 2001 and $707 at December 31, 2000.
See note 4 to the Company's unaudited consolidated financial statements for a
summary of the changes in the Bank's allowance for loan losses and a summary of
nonperforming assets.
CAPITAL RESOURCES
Stockholders' equity increased by $63 or 0.3 percent, as of June 30, 2001 to
$19,822 compared to stockholders' equity of $19,759 at December 31, 2000. The
increase was due to net earnings which were retained but offset with the
repurchase of 99,599 shares of the Company's common stock for $1,365 during the
current quarter. Stockholders' equity at June 30, 2001 also has been increased
by $7 which represents the excess of the fair values of available-for-sale
securities over their amortized costs, net of taxes, held by the Bank. This sole
component of comprehensive income has been recorded as a separate component of
stockholders' equity and will continue to be subject to change in future periods
due to fluctuations in market value, sales, purchases, maturities and calls of
securities classified as available-for-sale.
The Bank is in compliance with minimum Tier 1 and total capital ratios of 4
percent and 8 percent, respectively, at June 30, 2001 and December 31, 2000. The
Bank's leverage ratios at June 30, 2001 and December 31, 2000 were also in
excess of the 3 percent minimum.
There are no material commitments for capital expenditures as of June 30, 2001.
In addition, there are no expected material changes in the mix or relative cost
of capital resources.
NET INTEREST INCOME
The principal source of earnings for the Bank is net interest income. Net
interest income is the net amount of interest earned on the Company's
interest-bearing assets less the amount of interest paid on the Company's
deposits and other interest-bearing liabilities. Net interest income before the
provision for loan losses was $4,358 for the six months ended June 30, 2001
compared with $4,095 for the six months ended June 30, 2000, an increase of $263
or 6.4 percent. Net interest income before the provision for loan losses was
$2,244 for the three months ended June 30, 2001 compared with $2,133 for the
three months ended June 30, 2000, an increase of $111 or 5.2 percent. Total
interest income increased from $7,668 for the six months ended June 30, 2000 to
$9,111 for the same period in 2001, a 18.8 percent increase. This increase was
mostly due to increased interest and fees on loans which resulted from a larger
loan portfolio. Interest expense increased from $3,573 for the six months ended
June 30, 2000 to $4,753 for the same period in 2001, a 33.0 percent increase.
Interest expense increased from $1,863 for three months ended June 30, 2000 to
$2,379 for the same period in 2001, a 27.7 percent increase. These increases in
interest expense were due mainly to an increase in interest-bearing demand and
time deposits volumes.
NONINTEREST INCOME
Noninterest income consists of earnings generated primarily from service charges
on deposit accounts, securities gains and other service charges, commissions and
fees. The Company's noninterest income increased from $451 for the first six
months in 2000 to $546 for the same period in 2001, an increase of 21.1 percent.
The Company's noninterest income increased from $226 for the second quarter in
2000 to $286 for the same period in 2001, an increase of 26.6 percent. This
trend resulted from increases in service charges on deposit accounts which
resulted from a greater volume of deposits and fewer such fees and charges being
waived by management. In addition, noninterest income also increased due to a
greater level of fees being collected on mortgage loans held-for-sale.
14
NONINTEREST EXPENSE
The Company's noninterest expense increased from $2,606 for the first six months
in 2000 to $2,668 for the same period in 2001, or 2.4 percent increase. The
Company's noninterest expense decrease from $1,422 for the second quarter in
2000 to $1,396 or 1.8 percent for the same period in 2001. These minor
fluctuations were attributable to various noninterest expense accounts.
INCOME TAXES
The reported income tax expense for the six months ended June 30, 2001 was $647
(effective tax rate of 32.7 percent) compared to $580 (effective tax rate of
32.3 percent) for the same period in 2000. The reported income tax expense for
the three months ended June 30, 2001 was $304 (effective tax rate of 32.5
percent) compared to $281 (effective tax rate of 32.3 percent) for the same
period in 2000. This increase in income tax expense was due to an increase in
net taxable income.
NET INCOME
Net income for the six months ended June 30, 2001 was $1,334 compared to $1,216
for the same period in 2000. This increase of $118, or 9.7 percent, was due
primarily to the increase in net interest income. The Company achieved a .60
percent return on average assets, or 1.20 percent annualized, during the first
six months of 2001, compared to a .63 percent, or 1.26 percent annualized,
return on average assets for the same period in 2000. Net income for the three
months ended June 30, 2001 was $630 compared to $589 for the same period in
2000.
LIQUIDITY
Liquidity is the ability to generate adequate cash flow to meet financial
commitments and to fund customers' demands for funds, either in terms of loan
requests or deposit withdrawals. Liquidity may be provided by both assets and
liabilities. Asset liquidity is derived from sources such as readily marketable
investments, principal and interest payments on loans, and cash and due from
banks. Liability liquidity is provided by the core deposit growth from the
Bank's strong, stable customer base. Management believes the liquidity of the
Bank remains adequate, as sufficient assets are maintained on a short-term basis
to meet the liquidity demands anticipated. Secondary sources of funds are also
available should the need arise. Management is not aware of any trends,
commitments or events that will result in or that are reasonably likely to
result in a material increase or decrease in liquidity.
Net cash used in operating activities of $1,126 for the six months ended June
30, 2001 was primarily attributable to an increase in the mortgage loans held
for sale category which fluctuates based upon loan demand and the timing of loan
sales in the secondary market. Net cash flows provided by financing activities
for the six months ended June 30, 2001 was $25,076 and resulted from increased
deposits, offset by the $1,365 repurchase of the Company's common stock. Cash
flows used in investing activities of $22,668 were used primarily to fund the
net increase in loans of $13,331 and the purchase of federal funds and
securities sold of $6,290 and $9,000, respectively for the six months ended June
30, 2001.
REPURCHASE OF COMMON STOCK
On May 25, 2001, the Company repurchased 99,599 shares of its common stock
outstanding at a total cost of $1,365. This repurchase of stock has been
recorded in the unaudited consolidated financial statements as a reduction of
common stock and surplus.
15
GENERAL
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IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related notes presented herein have
been prepared in accordance with accounting principles generally accepted in the
United States of America which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and virtually
all of the liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance than
the general level of inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same magnitude as
inflation.
DERIVATIVES
The Company does not use derivatives or other off-balance sheet transactions
such as future contracts, forward obligations, interest rate swaps, or options.
FUTURE ACCOUNTING CONSIDERATIONS
SFAS No. 133
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The adoption of SFAS No
133, as amended, as of January 1, 2001, did not have any effect on the financial
position, results of operations or liquidity of the Company.
SFAS No. 141 and SFAS No. 142
On July 20, 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of
the purchase method of accounting for all business combinations. The use of the
pooling-of-interests method is prohibited for business combinations initiated
after June 30, 2000. SFAS No. 142 requires that goodwill and certain intangible
assets would no longer be amortized, but rather be tested for impairment
annually or whenever an event occurs indicating that the asset may be impaired.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001.
Management is currently evaluating the impact of SFAS No. 142 on the financial
position, results of operations and liquidity of the Company, but no significant
effect is expected.
SAB No. 102
On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues. The guidance contained in the SAB is effective
immediately. This SAB expresses the views of the SEC staff regarding the
registrant's development, documentation, and application of a systematic
methodology for determining the allowance for loan and lease losses, as required
by SEC Financial Reporting Release (FRR) No. 28. The guidance in the SAB focuses
on the documentation the SEC staff normally expects registrants to prepare and
maintain in support of the allowance for loan and lease losses.
16
Concurrent with the SEC's issuance of SAB No. 102, the federal banking agencies
(the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the
Federal Reserve System) (FRB), the Office of the Comptroller of the Currency
(OCC), and the Office of Thrift Supervision (OTS) represented by the Federal
Financial Institutions Examination Council issued an interagency policy
statement entitled Allowance for Loan and Lease Losses Methodologies and
Documentation for Banks and Savings Institutions (Policy Statement). The SAB and
Policy Statement were the result of an agreement between the SEC and the federal
banking agencies in March 1999 to provide guidance on allowance for loan and
lease methodologies and supporting documentation.
The guidance contained in the SAB does not prescribe specific allowance
estimation methodologies registrants should employ in estimating their allowance
for loan and lease losses, but rather emphasizes the need for a systematic
methodolgy that is properly designed and implemented by registrants. It is
expected that the SEC staff will utilize the guidance this SAB to challenge
registrants and their auditors regarding the allowance for loan and lease
losses.
17
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
PART II
OTHER INFORMATION
Items 1 - 3. None for the quarter ended June 30, 2001.
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Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
The Annual Shareholders Meeting for Salem Community Bankshares, Inc. was held on
April 24, 2001.
The only matter voted on by the shareholders was the election of the board of
directors. The results are as follows:
Of the 1,596,955 shares of stock outstanding, 1,392,753 were voted. The results
were:
Name of Director Votes Cast "For" Votes Cast "Against"
- ---------------- --------------------- --------------------
Dr. Eugene M. Bane, Jr. 1,392,074 679
Truman R. Dorton 1,386,440 6,313
Morris A. Elam 1,385,812 6,941
H. Morgan Griffith 1,388,236 4,517
Rose M. Hagen 1,379,225 13,528
Carlos B. Hart 1,384,718 8,035
Dr. Walter A. Hunt 1,385,812 6,941
Gladys C. O'Brien 1,386,440 6,313
Clark Owen, Jr. 1,385,545 8,208
Carl E. Tarpley, Jr. 1,390,179 2,574
64 shareholders attended the meeting in person, all of which were represented by
proxy and a total of 367 eligible shareholders voted by proxy. Three guests were
present.
Item 5. None for the quarter ended June 30, 2001.
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Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits required by Item 601 of Regulation S-B:
None.
(b) Reports on Form 8-K filed during the six months ended June 30, 2001.
None.
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SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to 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.
Salem Community Bankshares, Inc.
Date: August 13, 2001 By: /s/ Clark Owen, Jr.
--------------- --------------------------------------------
Clark Owen, Jr., President and
Chief Executive Officer
Date: August 13, 2001 By: /s/ Gill R. Roseberry
--------------- --------------------------------------------
Gill R. Roseberry, Corporate Secretary and
Chief Financial Officer
19