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 September 30, 2001
----------------------------------------
SALEM COMMUNITY BANKSHARES, INC.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Virginia 31-1736845
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(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
------------- --------------
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 October 29, 2001
------------------------------------ -------------------------------
COMMON STOCK, NO PAR VALUE 1,508,484
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 September 30, 2001
and December 31, 2000. 4
Consolidated Statements of Income and Comprehensive Income,
Three Months Ended September 30, 2001 and 2000. 5
Consolidated Statements of Income and Comprehensive Income,
Nine Months Ended September 30, 2001 and 2000. 6
Consolidated Statements of Changes In Stockholders'
Equity, Nine Months Ended September 30, 2001 and 2000 7
Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 2001 and 2000 8
Notes to Consolidated Financial Statements 9 - 12
Item 2. Management's Discussion and Analysis
of Financial Condition and Result 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 September 30, 2001, and the
related unaudited consolidated statements of income and comprehensive income for
the three-month and nine-month periods ended September 30, 2001 and 2000, and
the unaudited consolidated statements of changes in stockholders' equity, and
cash flows, for the nine-month periods ended September 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 the
Company's independent auditors.
3
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share data)
ASSETS 9/30/01 12/31/00
------ (Unaudited) (Audited)
--------------------- -----------------------
Cash and due from banks $8,884 8,283
Federal funds sold and securities purchased
under resale agreements 25,810 12,310
Securities:
Available-for-sale, at fair value 15,214 9,019
Held-to-maturity, at amortized cost
(fair value of $21,999 at September 30, 2001
and $38,634 at December 31, 2000) 21,854 39,434
Mortgage loans held for sale 1,065 139
Loans, less unearned income 160,343 139,577
Less allowance for loan losses (1,722) (1,529)
--------------------- -----------------------
Loans, net 158,621 138,048
--------------------- -----------------------
Bank premises and equipment, net 2,069 2,107
Accrued interest receivable 1,520 1,805
Foreclosed properties 394 160
Other assets 1,986 1,077
--------------------- -----------------------
Total assets $237,417 212,382
===================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits 24,302 21,680
Interest-bearing demand deposits 47,233 41,429
Savings deposits 6,409 6,170
Time deposits 127,117 111,704
--------------------- -----------------------
Total deposits 205,061 180,983
Federal Home Loan Bank long-term debt 10,000 10,000
Accrued interest payable 1,502 1,486
Other liabilities 367 154
--------------------- -----------------------
Total liabilities 216,930 192,623
--------------------- -----------------------
Stockholders' equity:
Common stock and surplus, no par value. Authorized
10,000,000 shares; issued and outstanding 1,508,484 shares
in 2001 and 1,596,873 shares in 2000. 15,818 17,079
Retained earnings 4,633 2,766
Accumulated other comprehensive gain (loss) 36 (86)
--------------------- -----------------------
Total stockholders' equity 20,487 19,759
--------------------- -----------------------
Commitments and contingent liabilities
Total liabilities and stockholders' equity $237,417 212,382
===================== =======================
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 September 30, 2001 and 2000
2001 2000
---- ----
Interest income:
Interest and fees on loans $3,662 $3,312
Interest on federal funds sold and securities
purchased under resale agreements 222 163
Interest on deposits with banks 22 47
Interest on securities - taxable 662 791
Interest on securities - nontaxable 41 57
-------------- -----------
Total interest income 4,609 4,370
-------------- -----------
Interest expense:
Interest on certificates of deposit
of $100 or more 371 293
Interest on other deposits 1,853 1,835
Interest on Federal Home Loan Bank borrowings 172 181
-------------- -----------
Total interest expense 2,396 2,309
-------------- -----------
Net interest income 2,213 2,061
Provision for loan losses 296 52
-------------- -----------
Net interest income after provision
for loan losses 1,917 2,009
-------------- -----------
Noninterest income:
Service charges on deposit accounts 177 147
Other service charges, commissions and fees 58 70
Other income 52 20
Realized securities gains, net 2 -
-------------- -----------
Total noninterest income 289 237
-------------- -----------
Noninterest expense:
Salaries and employee benefits 829 728
Occupancy expense of bank premises 85 80
Furniture, fixtures and equipment 138 120
Stationery, printing and supplies 41 41
Write-downs and (gains) and losses, net, on foreclosed properties (4) (1)
Other expenses 324 300
-------------- -----------
Total noninterest expense 1,413 1,268
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Income before income tax expense 793 978
Income tax expense 260 328
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Net income 533 650
Other comprehensive income (loss), net of income tax expense (benefit):
Net unrealized gains (losses) on available-for-sale securities 29 (4)
-------------- -----------
Comprehensive income $562 $646
============== ===========
Net income per share:
Basic net income per share $0.35 $0.41
============== ===========
Diluted net income per share $0.35 $0.41
============== ===========
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)
Nine Months Ended September 30, 2001 and 2000
2001 2000
---- ----
Interest income:
Interest and fees on loans $10,766 9,193
Interest on federal funds sold and securities
purchased under resale agreements 573 235
Interest on deposits with banks 92 57
Interest on securities - taxable 2,159 2,380
Interest on securities - nontaxable 130 173
------------------ -------------
Total interest income 13,720 12,038
------------------ -------------
Interest expense:
Interest on time certificates of deposit
of $100,000 or more 1,121 788
Interest on other deposits 5,516 4,902
Interest on federal funds purchased and securities sold
under repurchase agreements - 11
Interest on Federal Home Loan Bank borrowings 512 347
------------------ -------------
Total interest expense 7,149 6,048
------------------ -------------
Net interest income 6,571 5,990
Provision for loan losses 551 196
------------------ -------------
Net interest income after provision
for loan losses 6,020 5,794
------------------ -------------
Noninterest income:
Service charges on deposit accounts 506 417
Other service charges, commissions and fees 251 224
Other income 75 47
Realized securities gains, net 3 -
------------------ -------------
Total noninterest income 835 688
------------------ -------------
Noninterest expense:
Salaries and employee benefits 2,404 2,131
Occupancy expense of bank premises 247 223
Furniture, fixtures and equipment 395 359
Stationery, printing and supplies 102 110
Write-downs and (gains) and losses, net, on foreclosed properties (15) 33
Other expenses 948 852
------------------ -------------
Total noninterest expense 4,081 3,708
------------------ -------------
Income before income tax expense 2,774 2,774
Income tax expense 907 908
------------------ -------------
Net income 1,867 1,866
Other comprehensive income (loss), net of income tax expense (benefit):
Net unrealized gains (losses) on available-for-sale securities 122 (57)
------------------ -------------
Comprehensive income $1,989 1,809
================== =============
Net income per share:
Basic net income per share $1.20 $1.17
================== =============
Diluted net income per share $1.19 $1.16
================== =============
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)
Nine Months Ended September 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 - 1,866 - 1,866
Stock options exercised (9,919 shares) 87 - - 87
Change in net unrealized
losses on available-for-sale
securities, net of income tax benefit - - (57) (57)
----------------------------------------------------------------
Balances at September 30, 2000 $16,164 3,836 (267) 19,733
====== ====== ====== ======
Balances at December 31, 2000 $17,079 2,766 -86 19,759
Net income - 1,867 - 1,867
Issuance of common stock (82 shares) 1 - - 1
Stock options exercised (11,128 shares) 103 - - 103
Purchase of common stock outstanding (99,599 shares) (1,365) - - (1,365)
Change in net unrealized gains
(losses) on available-for-sale
securities, net of income tax expense - - 122 122
----------------------------------------------------------------
Balances at September 30, 2001 $15,818 4,633 36 20,487
====== ====== ====== ======
See accompanying notes to unaudited consolidated financial statements.
7
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September, 2001 and 2000
2001 2000
---- ----
Cash flows from operating activities:
Net income $1,867 $1,866
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 551 196
Depreciation and amortization of bank premises
and equipment 251 227
Gains on calls of securities, net (3) -
Amortization of premiums and accretion
of discounts, net 10 4
Write-downs and (gains) and losses on sales
of foreclosed properties, net (15) 33
(Increase) decrease in:
Mortage loans held for sale (926) (221)
Accrued interest receivable 285 (431)
Other assets (972) (669)
Increase (decrease) in:
Accrued interest payable 16 184
Other liabilities 213 (25)
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Net cash provided by operating activities 1,277 1,164
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Cash flows from investing activities:
Net increase in federal funds sold and
securities purchased under resale agreements (13,500) (8,610)
Proceeds from maturities and calls of securities 30,557 654
Purchase of securities (19,000) -
Net increase in loans made to customers (21,609) (19,408)
Recoveries on loans previously charged off 63 61
Proceeds from sales of foreclosed properties 203 183
Purchases of bank premises and equipment (213) (219)
------------- -------------
Net cash used in investing activities (23,493) (27,339)
------------- -------------
Cash flows from financing activities:
Net increase in time deposits 15,413 11,890
Net increase in demand and savings deposits 8,665 8,297
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 4 (26)
Proceeds from issuance of common stock 103 87
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Net cash provided by financing activities 22,817 26,003
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Net increase (decrease) in cash and due from banks 601 (172)
Cash and due from banks at beginning of period 8,283 8,959
------------- -------------
Cash and due from banks at end of period $8,884 $8,787
============= =============
For the nine-month periods ended September 30, 2001 and 2000, the Company paid
interest expense of $7,133 and $5,864, respectively. For the nine-month periods
ended September 30, 2001 and 2000, the Company paid income taxes of $940 and
$800.
See accompanying notes to unaudited consolidated financial statements.
8
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 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 September 30, 2001 and the results of operations and
cash flows for the three-month and nine-month periods ended September 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:
September 30, 2001
------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Costs Gains Losses Values
------------------------------------------------------------------
Available-for-sale
------------------
U.S. Government agencies
and corporations $13,000 54 - 13,054
Mortgage-backed securities 1,096 1 - 1,097
Other securities 1,063 - - 1,063
--------- --------- --------- ---------
Totals $15,159 55 - 15,214
========= ========= ========= =========
Held-to-maturity
----------------
U.S. Government agencies
and corporations $18,568 61 - 18,629
Mortgage-backed securities 200 3 - 203
Obligations of state and
political subdivisions 3,086 81 - 3,167
--------- --------- --------- ---------
Totals $21,854 145 - 21,999
========= ========= ========= =========
As of September 30, 2001, securities with amoritized costs of $26,057 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
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
(In thousands, except shares and per share data)
(3) Loans
A summary of loans outstanding is as follows:
September 30, 2001 December 31, 2000
------------------ -----------------
Commercial $ 13,503 13,527
Consumer, principally installment 45,148 34,520
Real estate - mortgage 87,370 76,481
Real estate - construction 15,444 16,285
--------- ---------
Total loans 161,465 140,813
Less unearned income (1,122) (1,236)
--------- ---------
Total loans, less unearned income $ 160,343 139,577
========= =========
(4) Nonperforming Assets, Impaired Loans and Allowance for Loan Losses
Nonperforming assets consist of the following:
September 30, 2001 December 31, 2000
------------------ -----------------
Nonaccrual loans $ 444 $ 583
Foreclosed properties 394 160
-------- --------
Total nonperforming assets $ 838 $ 743
======== ========
There were no commitments to lend additional funds to customers whose loans were
classified as nonperforming at September 30, 2001. Included in nonaccrual loans
as of September 30, 2001 is a restructured loan, restructed during 2000,
approximating $305.
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:
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
Pro forma interest on nonaccrual loans $ 29 47
====== ======
Recorded interest on nonaccrual loans $ 29 29
====== ======
At September 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 $531. Of
this amount $124 related to loans with no valuation allowance, and $407 related
to loans with a corresponding valuation allowance of $70.
10
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 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:
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
Balances, beginning of period $ 1,529 1,404
Provision for loan losses 551 196
Loans charged off (421) (192)
Loan recoveries 63 61
-------- -------
Balances, end of period $ 1,722 1,469
======== =======
(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 $28,388 at September 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 September 30, 2001 (Numerator) (Denominator) Amount
------------------------------------- ----------- ------------- ----------
Basic net income per share $533 1,504,775 $ .35
---------
Effect of dilutive stock options - 18,082
--------- ---------
Diluted net income per share $533 1,522,857 $ .35
--------- --------- ---------
Net Income Shares Per Share
Three Months Ended September 30, 2000 (Numerator) (Denominator) Amount
------------------------------------- ----------- ------------- --------
Basic net income per share $650 1,592,268 $ .41
---------
Effect of dilutive stock options - 13,166
--------- ---------
Diluted net income per share $650 1,605,434 $ .41
--------- --------- ---------
11
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
(In thousands, except shares and per share data)
Net Income Shares Per Share
Nine Months Ended September 30, 2001 (Numerator) (Denominator) Amount
------------------------------------ ----------- ------------- ---------
Basic net income per share $ 1,867 1,551,633 $ 1.20
=========
Effect of dilutive stock options - 12,396
--------- ---------
Diluted net income per share 1,867 1,564,029 $ 1.19
--------- ========= =========
Nine Months Ended September 30, 2000
Basic net income per share $1,866 1,588,841 $ 1.17
=========
Effect of dilutive stock options - 14,417
--------- ---------
Diluted net income per share $1,866 1,603,258 $ 1.16
--------- ========= =========
(7) 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 September 30, 2001 and for the three-month and nine-month
periods ended September 30, 2001. This discussion should be read in conjunction
with the unaudited consolidated financial statements and notes presented herein,
and with the Company'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 September 30, 2001 exceeded total assets at
December 31, 2000 by $25,035 or 11.8 percent. This increase was due primarily to
an increase of $13,500 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 interest, at September 30, 2001 compared to December 31, 2000 showed an
increase of $20,766, or 14.9 percent. Higher loan volumes resulted from
increased customer demand, especially in indirect dealer loan products.
Total deposits increased by $24,078, or 13.3 percent, due mostly to increases in
time and interest-bearing demand deposits. Time deposits increased $15,413, or
13.8 percent, and interest-bearing demand deposits increased $5,804, or 14.0,
percent due to the Company offering more attractive depository products than
area competition.
ALLOWANCE FOR LOAN LOSSES, NONPERFORMING ASSETS AND IMPAIRED LOANS
The provision for loan losses was $551 for the nine-month period ended September
30, 2001 compared to $196 for the same period in 2000, an increase of $355. The
provision for loan losses was $296 for the three-month period ended September
30, 2001, compared to $52 for the same period in 2000, an increase of $244.
These increases were in response to an increased amount of commercial loan
charge-offs experienced in the third quarter of the current year. The Company
considers the allowance for loan losses 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 September 30, 2001, the
ratio of the allowance for loan losses to loans, net of unearned income, was
1.07 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 increased to $394 at September 30, 2001 from $160 at
December 31, 2000. This increase resulted mostly from the foreclosure of one
piece of commercial property.
Nonaccrual loans were $444 and $583 at September 30, 2001 and 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 $531 at September 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 $728, or 3.7 percent, as of September 30, 2001
to $20,487 compared to stockholders' equity of $19,759 at December 31, 2000. The
increase was due to net earnings which were retained but offset by the
repurchase of 99,599 shares of the Company's common stock for $1,365 during the
previous quarter. Stockholders' equity at September 30, 2001 also has been
increased by $36 which represents the excess of the fair values of
available-for-sale securities over their amortized costs, net of taxes, held by
the Company. 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 September 30, 2001 and December 31,
2000. The Bank's leverage ratios at September 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 September 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 $6,571 for the nine months ended September 30,
2001 compared with $5,990 for the nine months ended September 30, 2000, an
increase of $581 or 9.7 percent. Net interest income before the provision for
loan losses was $2,213 for the three months ended September 30, 2001 compared
with $2,061 for the three months ended September 30, 2000, an increase of $152
or 7.4 percent. Total interest income increased from $12,038 for the nine months
ended September 30, 2000 to $13,720 for the same period in 2001, a 14.0 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
$6,048 for the nine months ended September 30, 2000 to $7,149 for the same
period in 2001, a 18.2 percent increase. Interest expense increased from $2,309
for three months ended September 30, 2000 to $2,396 for the same period in 2001,
a 3.8 percent increase. These increases in interest expense were due mainly to
an increase in interest-bearing demand and time deposit 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 $688 for the first nine
months in 2000 to $835 for the same period in 2001, an increase of 21.4 percent.
The Company's noninterest income increased from $237 for the third quarter in
2000 to $289 for the same period in 2001, an increase of 21.9 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 $3,708 for the first nine
months in 2000 to $4,081 for the same period in 2001, or 10.1 percent increase.
The Company's noninterest expense increased from $1,268 for the third quarter in
2000 to $1,413 or 11.4 percent for the same period in 2001. These fluctuations
were attributable mainly to increases in salaries and employee benefits expense.
INCOME TAXES
The reported income tax expense for the nine months ended September 30, 2001 was
$907 (effective tax rate of 32.7 percent) compared to $908 (effective tax rate
of 32.7 percent) for the same period in 2000. The reported income tax expense
for the three months ended September 30, 2001 was $260 (effective tax rate of
32.8 percent) compared to $328 (effective tax rate of 33.5 percent) for the same
period in 2000. This decrease in income tax expense was due to a decrease in net
taxable income for the quarter.
NET INCOME
Net income for the nine months ended September 30, 2001 was $1,867 compared to
$1,866 for the same period in 2000. The Company achieved a .78 percent return on
average assets, or 1.04 percent annualized, during the first nine months of
2001, compared to a .90 percent, or 1.20 percent annualized, return on average
assets for the same period in 2000. Net income for the three months ended
September 30, 2001 was $533 compared to $650 for the same period in 2000. The
majority of this decrease was due to an increase in the provision for loan
losses.
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 provided by operating activities of $1,277 for the nine months ended
September 30, 2001 was primarily attributable to net income. Net cash flows
provided by financing activities for the nine months ended September 30, 2001
was $22,817 and resulted from increased deposits, offset by the $1,365
repurchase of the Company's common stock. Cash flows used in investing
activities of $23,493 were used primarily to fund the net increase in loans of
$21,609 and the increase in federal funds and securities purchased of $13,500.
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.
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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.
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SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
PART II
OTHER INFORMATION
Items 1 - 5. None for the quarter ended September 30, 2001.
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Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits required by Item 601 of Regulation S-B:
None.
(b) Reports on Form 8-K filed during the nine months ended September 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: November 2, 2001 By: /s/ Clark Owen, Jr.
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Clark Owen, Jr., President and
Chief Executive Officer
Date: November 2, 2001 By: /s/ Gill R. Roseberry
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Gill R. Roseberry, Corporate Secretary and
Chief Financial Officer
19