U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
----------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from to
-------------- ----------------
Commission file number 333-86993
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Smith River Bankshares, Inc.
-------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Virginia 54-1956616
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 12, Patrick Henry Mall
730 East Church Street, Martinsville, Virginia 24112
-------------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (540) 632-8092
-----------------------------------------------------
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:689,368 shares as of October 31, 2000.
--------------------------------------
Transitional Small Business Disclosure Format: (Check one): Yes No X
----- -----
<PAGE>
SMITH RIVER BANKSHARES, INC.
Form 10-QSB
Index
PART I FINANCIAL INFORMATION
Page No.
-------
Item 1 Financial Statements 3 - 17
Item 2 Management's Plan of Operation 17 - 21
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 22
Item 5 Other Information 22
Item 6 Signatures 23
Index to Exhibits 24
2
<PAGE>
SMITH RIVER BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements filed as part of Item 1 of Part I are as follows:
1. Balance Sheet as of September 30, 2000 (unaudited)
2. Statements of Loss for the quarter and year-to-date periods ended
September 30, 2000 and for the quarter and year-to-date periods ended
September 30, 1999 (unaudited)
3. Statements of Cash Flows for the year-to-date period ended September
30, 2000 and for the year-to-date period ended September 30, 1999
(unaudited)
3
<PAGE>
SMITH RIVER BANKSHARES, INC.
Consolidated Balance Sheet
(Unaudited)
September 30, 2000
ASSETS
Cash and due from banks $ 319,567
Interest-bearing deposits in other banks 223,687
Federal funds sold 3,705,000
Securities available for sale 1,460,853
Loans:
Commercial loans 2,326,115
Residential real estate loans 1,440,274
Consumer loans 798,356
-----------
Total Gross Loans 4,564,745
Less: Allowance for loan losses (54,800)
-----------
Net Loans 4,509,945
Furniture, fixtures and equipment 386,595
Accrued interest receivable 30,581
Other assets 21,323
-----------
Total Assets $10,657,551
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing demand deposits $ 376,150
Interest checking deposits 276,468
Money market deposits 482,006
Savings deposits 77,574
Certificate of deposits > $100,000 1,742,958
Other time deposits 1,753,989
-----------
Total Deposits 4,709,145
Accrued interest payable and other liabilities 32,717
-----------
Total Liabilities 4,741,862
-----------
Shareholders' Equity:
Preferred stock, no par value, authorized ---
10,000,000 shares; none issued
Common stock, no par value, authorized 10,000,000
shares; issued and outstanding 689,368 shares 6,708,162
Accumulated deficit (792,456)
Accumulated other comprehensive loss (17)
-----------
Total Shareholders' Equity 5,915,689
-----------
Total Liabilities and Shareholders' Equity $10,657,551
===========
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
SMITH RIVER BANKSHARES, INC.
Statements of Loss
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 61,513 $ ---
Interest on interest-bearing deposits 17,487 562
Interest on federal funds sold 61,822 ---
Interest on securities available for sale 3,420 ---
--------- ---------
Total Interest Income 144,242 562
--------- ---------
Interest Expense:
Interest on certificates of deposit
> $100,000 12,590 ---
Interest on other deposits 15,949 ---
--------- ---------
Total Interest Expense 28,539 ---
--------- ---------
Net Interest Income 115,703 562
Provision for loan losses 54,800 ---
Net Interest Income After Provision
for Loan Losses 60,903 562
Noninterest Income:
Service charges on deposit accounts 640 ---
Other fee income and miscellaneous
income 2,234 ---
--------- ---------
Total Noninterest Income 2,874 ---
Noninterest Expense:
Salaries and employee benefits 149,801 37,818
Occupancy and equipment expense 29,931 14,643
Professional fees 23,383 6,475
Other expenses 59,954 3,238
--------- ---------
Total Noninterest Expense 263,069 62,174
--------- ---------
Net Loss $(199,292) $ (61,612)
========= =========
Per Share:
Basic:
Net Loss Per Share $ ( .39) $ (5,134)
========= =========
Average Shares
Outstanding 517,029 12
Fully Diluted:
Net Loss Per Share $ (.39) $ (5,134)
========= =========
Average Shares
Outstanding 517,029 12
See accompanying notes to financial statements.
</TABLE>
5
<PAGE>
<TABLE>
SMITH RIVER BANKSHARES, INC.
Statements of Loss
(Unaudited)
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 61,513 $ ---
Interest on interest-bearing deposits 75,803 2,148
Interest on federal funds sold 61,822 ---
Interest on securities available for sale 3,420 ---
--------- ----------
Total Interest Income 202,558 2,148
--------- ----------
Interest Expense:
Interest on certificates of deposit
> $100,000 12,590 ---
Interest on other deposits 15,949 ---
--------- ----------
Total Interest Expense 28,539 ---
--------- ----------
Net Interest Income 174,019 2,148
Provision for loan losses 54,800 ---
Net Interest Income After Provision
for Loan Losses 119,219 2,148
Noninterest Income:
Service charges on deposit accounts 640 ---
Other fee income and miscellaneous
income 9,884 ---
--------- ----------
Total Noninterest Income 10,524 ---
Noninterest Expense:
Salaries and employee benefits 344,966 91,024
Occupancy and equipment expense 60,511 17,592
Professional fees 67,501 68,595
Other expenses 111,562 26,406
--------- ----------
Total Noninterest Expense 584,540 203,617
--------- ----------
Net Loss $(454,797) $ (201,469)
========= ==========
Per Share:
Basic:
Net Loss Per Share $ (2.62) $ (16,789)
========= =========
Average Shares
Outstanding 173,609 12
Fully Diluted:
Net Loss Per Share $ (2.62) $ (16,789)
========= =========
Average Shares
Outstanding 173,609 12
See accompanying notes to financial statements.
</TABLE>
6
<PAGE>
<TABLE>
SMITH RIVER BANKSHARES, INC.
Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 2000 September 30, 1999
------------------ ------------------
Cash Flows From Operating Activities
<S> <C> <C>
Net loss $ (454,797) $ (201,469)
Provision for loan losses 54,800 ---
Depreciation 10,000 ---
Amortization (accretion) of premiums and discounts (17) ---
Increase in accrued interest receivable (30,581) ---
Increase in other assets (14,527) (2,187)
Increase (decrease) in accrued interest payable
and other liabilities (94,420) 37,000
------------ ----------
Net cash used by operating activities (529,542) (166,656)
------------ ----------
Cash Flows From Investing Activities
(Increase) decrease in interest-bearing deposits (74,480) 14,876
Increase in federal funds sold (3,705,000) ---
Purchase of furniture, fixtures, and equipment (365,113) (3,375)
Purchases of securities available for sale (1,460,853) ---
Increase in loans (4,564,745) ---
------------ ----------
Net cash used by investing activities (10,170,191) 11,501
------------ ----------
Cash Flows From Financing Activities
Increase in time deposits greater than $100,000 1,742,958 ---
Increase in other time deposits 1,753,989 ---
Proceeds payments on advances from related parties (515,000) 225,000
Proceeds from issuance of common stock 6,708,150 12
Costs of stock issuance 114,422 (62,868)
Increase in other deposits 1,212,198 ---
------------ ----------
Net cash provided by financing activities 11,016,717 162,144
------------ ----------
Net increase (decrease) in cash 316,984 6,989
Cash and due from banks at beginning of period $ 2,583 $ ---
------------ ----------
Cash and due from banks at end of period $ 319,567 $ 6,989
============ ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 28,231 $ ---
============ ==========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Note 1 - Summary of Accounting Policies
(a) General
The accompanying consolidated financial statements of Smith River Bankshares,
Inc. are unaudited. However, in the opinion of management, all adjustments
necessary for a fair presentation of the financial statements have been
included. All adjustments were of a normal recurring nature, except as otherwise
disclosed herein. The consolidated financial statements conform to generally
accepted accounting principles and general banking industry practices.
Smith River Bankshares, Inc. (the "Corporation" or "Bankshares") was a
development stage enterprise until July 24, 2000, incorporated as a Virginia
corporation effective January 14, 1999. The Corporation was primarily organized
to serve as a bank holding company for Smith River Community Bank, N.A. (the
"Bank"). The Bank opened for business on July 24, 2000 and began its operations
as a full service commercial bank. Prior to the organization of the Corporation,
the Corporation's directors, who were also the Organizers, formed FCNB LLC, a
limited liability company, to organize the Corporation and the Bank and provide
for financing of organizational, offering, and other pre-opening costs. The
corporation's year-end is December 31.
The Corporation raised $6,893,680 through a sale of its common stock and units.
The Corporation filed a registration statement on Form SB-2 to register the
stock, which was declared effective by the Securities and Exchange Commission on
November 4, 1999. Proceeds from the sale of the stock were primarily used to
acquire all of the stock of the Bank on July 24, 2000. Since the opening of the
Bank, the Corporation's operations have been conducted through the Bank.
In conjunction with the offering, the Organizers purchased units instead of
shares only. Each unit contained one share of common stock and one common stock
warrant attached. The warrants will vest over a three-year period. Each warrant
entitles the holder to purchase one share of common stock for $10.
Based on current facts and circumstances, the Organizers believe that the
proceeds received from the offering, $6,893,680, will permit the Bank to conduct
its initial operations to invest in loans, securities, and other earning assets.
It could also provide for additional branch openings.
The Corporation reports its activities as a single business segment. In
determining the appropriateness of segment definition, the Corporation
considered components of the business about which financial information is
available and will evaluate it regularly relative to resource allocation and
performance assessment.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Smith River
Bankshares, Inc. and its subsidiary, Smith River Community Bank, N.A. All
significant intercompany accounts and transactions have been eliminated.
8
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
(c) Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks.
(d) Securities
Bankshares classifies and accounts for its investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Securities are classified at
purchase date under the specific identification method. Amortization and
accretion of premiums and discounts are included in income over the contractual
life of the securities.
(e) Loans
Loans are stated at the amount of loans disbursed. Interest on loans is computed
by methods which generally result in level rates of return on principal amounts
outstanding.
(f) Loan Fees and Cost
Bankshares adopted Statement of Financial Accounting Standards No. 91,
"Accounting for Nonrefundable Fees and Costs Associated With Originating or
Acquiring Loans and Initial Direct Costs of Leases". Currently, there is no
substantial difference between fees and costs. A regular review will be
conducted as experience with our lending processes increases.
(g) Allowance for Loan Losses
An allowance for loan losses is maintained in order to provide for losses in
collection of loans that can be currently estimated. The level of the allowance
of loan losses is based upon the quality of the loan portfolio as determined by
management after consideration of diversification as to the type of loans in the
portfolios, the amount of collateralized as compared to uncollateralized loans,
banking industry standards and averages, and general economic conditions.
(h) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are charged to
expense on a straight-line basis over the estimated us
(i) Organizational Costs
The American Institute of CPA's has issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities." In general, the SOP requires
that organizational and similar start-up costs be expensed. Examples of such
costs that have been incurred by the Corporation are legal fees, consulting
fees, and regulatory application fees. Prior to the effective date of the SOP,
generally accepted accounting principles permitted such costs to be capitalized
and amortized to expense. The Corporation adopted the requirements of the SOP
from its inception and has accordingly expensed all organizational costs.
9
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
(j) Income Taxes
The Corporation is subject to federal and state income taxes. However, no taxes
have been accrued or paid because of operating losses incurred during the
development stage included as pre-opening and organizational costs. Deferred tax
assets have been fully offset by a valuation allowance pursuant to Statement of
Financial Accounting Standards No. 109.
(k) Income Per Share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Accounting for Earnings Per Shares" which
required dual presentation of basic and diluted earnings per share on the face
of the statements of income and requires a reconciliation of the numerators and
denominators of the basic and diluted earnings per share calculation. Stock
options and warrants outstanding have been considered as common stock
equivalents.
(l) Use of Estimates
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 - Securities
The carrying values, unrealized gains and losses and approximate market values
of investment securities at September 30, 2000 are shown in the table below. The
entire investment portfolio is classified as available-for-sale to preserve
maximum liquidity for funding needs.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
---- ---- ------ ------------
<S> <C> <C> <C> <C>
U.S. Government Agencies $1,277,270 $--- $ (17) $1,277,253
Federal Reserve Stock 183,600 --- --- 183,600
---------- ---- ----- ----------
Total Securities Available for Sale $1,460,870 $--- $ (17) $1,460,853
========== ==== ===== ==========
</TABLE>
10
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Note 3 - Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
Balance at January 1, 2000 $ ---
Provision for loan losses 54,800
Recoveries ---
Charge-offs ---
--------
Balance at September 30, 2000 $ 54,800
========
Note 4 - Income Per Share
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
------------------------------------
Income Shares Per Share
Numerator Denominator Amount
--------- ----------- ------
Basic EPS
<S> <C> <C> <C>
Income available to common shareholders $(454,797) 173,609 $(2.62)
Diluted EPS
Income available to common shareholders $(454,797) 173,609 $(2.62)
<CAPTION>
Nine Months Ended September 30, 1999
------------------------------------
Income Shares Per Share
Numerator Denominator Amount
--------- ----------- ------
Basic EPS
Income available to common shareholders $(201,469) 12 $(16,789)
Diluted EPS
Income available to common shareholders $(201,469) 12 $(16,789)
</TABLE>
11
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Note 5 - Comprehensive Income
Upon opening of the Bank on July 24, 2000, certain investments were purchased
during this first quarter of business. Bankshares adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This statement
established standards for reporting and presentation of comprehensive income and
its components. The following table discloses the reclassifications related to
securities available-for sale that are included in accumulated other
comprehensive loss on the balance sheet as of September 30, 2000.
Net unrealized losses on securities available for sale:
Net unrealized holding losses during the year $ (17)
Less reclassification adjustments for gains (losses)
included in net income ---
Income Tax Benefit ---
-----
Accumulated Other Comprehensive Loss $ (17)
=====
Note 6 - Employee Benefit Plans
Smith River Bankshares, Inc. funds certain costs for medical benefits in amounts
determined at the discretion of management. There are no post retirement
benefits at this time. Bankshares has a 401-k plan which provides for
contributions by employees. Bankshares currently does not have a matching
contribution.
Note 7 - Leases and Commitments
The Corporation has entered into a lease for administrative office space with a
term beginning May 1, 1999 and expiring in 39 months. Rent paid for the first
three months was $750 per month, and thereafter increased to $1,000 per month.
The Corporation may cancel the lease with 90 days notice.
The Corporation has also entered into separate leases for property to be used as
bank branches. One lease has a term of 36 months commencing August 1, 1999, and
requires a monthly rental of $2,500. The other lease has a term of 36 months
beginning when the branch begins operations. At that point, the monthly rental
will be $2,500. Prior to that date, interim monthly rent of $500 is being paid
beginning June 1999.
The Corporation has entered into an employment agreement with its President and
Chief Executive Officer. The agreement has a three-year term and is
automatically extended by one year if not terminated at least 90 days prior to
each anniversary date. Additionally, after operations began, 30,000 stock
options were granted to the officer. Under the terms of the agreement, the
individual will continue in a consulting capacity after the end of the period of
employment.
12
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Note 8 - Stock Options and Warrants
On the opening date of Smith River Community Bank, N.A., July 24, 2000, C. R.
McCullar (President and CEO) was granted 30,000 options at the then fair market
value of $10.00. The options will be exercisable by Mr. McCullar if he is
employed as President and CEO of Smith River Bankshares, Inc. and the bank on
the first anniversary of the day the bank opened for business (the first 10,000
options) and on each of the next two anniversaries (for each of the next two
10,000 option grants). Each of the options will have a ten-year term from the
date they become exercisable and will expire 30 days after employment is
terminated.
Each organizer/director was granted one warrant for each share of stock that
they purchased in the original offering. These warrants were granted on July 24,
2000 and totaled 87,500 warrants. Each warrant will entitle the
organizer/director to purchase, at anytime within ten years from the date of
grant, an additional share at $10.00 per share. The warrants are not immediately
exercisable. The right to exercise the warrants will vest for one-third (1/3) of
the shares covered by the warrants on each of the first three anniversaries of
the date the Bank opened for business, so long as the organizer/director has
served continuously as a director of Smith River Bankshares, Inc. and Smith
River Community Bank, N.A. from its opening until the particular anniversary and
has attended a minimum of 75% of the Board of Directors meetings during the
period. However, all the warrants will become vested upon the change in control
of Smith River Bankshares, Inc. or a sale by the company of all or substantially
all its assets. The warrants are detachable and the shares with which they were
originally issued as a unit may be separately transferred. The warrants are
generally not transferable except by operation of law. Bankshares has the right,
upon notice from any regulatory authority, to require immediate exercise or
forfeiture of the warrants if the exercise is reasonably necessary in order to
inject additional capital into the Bank.
Note 9 - Regulatory Requirements and Restrictions
Under the applicable federal laws, the Comptroller of the Currency restricts the
total dividend payments of any calendar year, without prior approval, to the net
profits of that year as defined, combined with retained net profits for the two
preceding years. Bankshares will not be paying dividends until they become
profitable and it is deemed appropriate by management.
The Bank is a member of the Federal Reserve System; however, it processes daily
through a correspondent bank, Community Bankers Bank. Smith River Community
Bank, N.A. must currently maintain a reserve balance of $50,000 with the
correspondent bank.
13
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Bankshares and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital ratios can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a material
effect on the consolidated financial statements. Quantitative measures
established by regulations to ensure capital adequacy require Bankshares and the
Bank to maintain minimum capital ratios. At September 30, 2000, Bankshares and
the Bank are well above capital adequacy requirements to which they are subject.
Actual capital amounts and ratios as of September 30, 2000 are presented in the
following table:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assts) $5,970,489 101.69% $452,000 8.0% $565,000 10.0%
Tier I Capital (to Risk Weighted Assts) 5,915,689 100.72 226,000 4.0 $339,000 6.0
Tier I Capital (Leverage) 5,915,689 53.38 429,000 4.0 $536,000 5.0
</TABLE>
Note 10 - Parent Company Financials
Condensed Balance Sheet
-----------------------
September 30, 2000
------------------
Assets:
Cash $ 2,690
Interest-bearing deposits in other banks 223,687
Investments in subsidiary bank 5,689,312
-----------
Total Assets $ 5,915,689
===========
Liabilities and Shareholders' Equity
Common shareholders' equity 5,915,689
-----------
Total Liabilities and Shareholders' Equity $ 5,915,689
===========
14
<PAGE>
<TABLE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
CONDENSED STATEMENT OF INCOME
-----------------------------
<CAPTION>
Period Ended
September 30, 2000
------------------
Revenue:
<S> <C>
Equity in undistributed income of subsidiary bank $ (447,316)
Interest income 75,803
-----------
(371,513)
Expenses:
Salaries and employee benefits (61,691)
Professional fees (21,593)
-----------
Income (Loss) Before Income Tax Benefit (454,797)
-----------
Income Tax Benefit ---
-----------
Net Income $ (454,797)
===========
CONDENSED STATEMENT OF CASH FLOWS
---------------------------------
Period Ended
September 30, 2000
------------------
Cash Flows From Operating Activities:
Net Income $ (454,797)
Adjustments to reconcile net income to net cash
Amortization (accretion) of premiums (discounts) (17)
Equity in undistributed income of subsidiary bank 447,316
Net decrease in other assets 6,796
Net decrease in other liabilities 127,137)
----------
Net Cash Provided by Operating Activities (127,839)
Cash Flows From Investing Activities:
Net increase in interest-bearing deposits (74,480)
Purchases of furniture and equipment (44,209)
Capital contributed to subsidiary bank (6,321,840)
Sale of furniture, fixtures, and equipment 75,691
Proceeds from reimbursement from bank 185,212
-----------
Net Cash Used in Investing Activities (6,179,626)
Cash Flows from Financing Activities:
Proceeds payments on advances from related parties (515,000)
Proceeds from issuance of common stock 6,708,150
Costs of stock issuance 114,422
-----------
Net Cash Provided By (Used in) Financing Activities 6,307,572
Net Increase in Cash 107
Cash at Beginning of Year 2,583
-----------
Cash at End of Year $ 2,690
===========
</TABLE>
16
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Note 11 - Financial Instruments With Off-Balance-Sheet Risk
In the normal course of business to meet the financing needs of its customers,
Bankshares is a party to financial instruments with off-balance-sheet risk.
These financial instruments involve commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the consolidated balance sheets.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual amount of those instruments. The same credit
policy is used in making commitments as is used for on-balance-sheet risk. At
September 30, 2000, outstanding commitments to extend credit were $1,018,841.
Commitments to extend credit are agreements to lend to a customer as long as
there is no breach of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments may expire without ever being drawn
upon, therefore, the total commitment amounts do not necessarily represent
future cash outlays for the Corporation.
Note 12 - Concentrations of Credit Risk
All of the Corporation's activity is with customers located in the southwestern
region of Virginia. Accordingly, operation results are closely correlated with
the economic trends within this region and influenced by the significant
industries within the region including furniture, pre-built housing, textile,
and others. At September 30, 2000, the commercial portfolio is diversified with
no significant concentration of credit.
Note 13 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
(a.) Short-Term Financial Instruments
--------------------------------
The carrying values of short-term financial instruments including cash
and cash equivalents, federal funds sold, interest-bearing deposits in
domestic banks and short-terms borrowings approximate the fair value of
these instruments. These financial instruments generally expose the
Corporation to limited credit risk and have no stated maturity or have an
average maturity of 30-45 days and carry interest rates which approximate
market value.
(b.) Securities Available for Sale
-----------------------------
The fair value of investment is estimated based on bid prices published
in financial newspaper or bid quotations received from securities
dealers.
(c.) Loans
-----
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real
estate - commercial, real estate - construction, real- estate - mortgage
and other consumer. Each loan category is further segmented into fixed
and adjustable rate interest terms and by performing and nonperforming
categories.
16
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the loan
as well as estimates for operating expenses and prepayments. The estimate
of maturity is based on management's assumptions with repayment for each
loan classification, modified, as required, by an estimate of the effect
of current economic and lending conditions.
(d.) Deposits
--------
The fair value of demand, interest checking, savings and money market
deposits is the amount payable on demand. The fair value of fixed
maturity time deposits and certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities and
repayment characteristics.
At September 30, 2000 management believes the estimated fair values of the
Corporation's financial instruments are substantially the same as the recorded
values due to the same rates being in effect for the period the Bank has been
open.
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Corporation's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Corporation's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. Fair value estimates
are based on existing on-and-off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Note 14 - Contingenies and Other Matters
The Corporation currently is not involved in any litigation or similar adverse
legal or regulatory matters.
Item 2. Management's Plan of Operations
General
Smith River Bankshares, Inc. was incorporated on January 14, 1999 in the
Commonwealth of Virginia as First Community National BanCorp., Inc. On July 8,
1999, Restated Articles of Incorporation became effective changing the name to
Smith River Bankshares, Inc. The Corporation was formed for the primary reason
of becoming a bank holding company for Smith River Community Bank, N.A. The
Corporation filed a registration statement on Form SB-2 with the Securities and
Exchange Commission, (the "Commission"), to register the stock for a public
offering. The registration statement was declared effective by the Commission on
November 4, 1999. Smith River Bankshares, Inc. raised $6,893,680 through its
initial public offering. Upon the formation of Smith River Community Bank, N.A.,
the Corporation bought all the stock of the Bank from the proceeds of the
offering. The business of the Corporation is being conducted through the Bank.
Smith River Bankshares, Inc. received approval from the Federal Reserve Bank of
Richmond on December 10, 1999 and from the State Corporation Commission on
December 18, 1999 to acquire Smith River Community Bank, N.A. Smith River
17
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Bankshares, Inc. successfully completed the offering of its common shares of
stock in July 2000 and capitalized Smith River Community Bank, N.A. The Bank
received its final approvals from the Office of the Comptroller of the Currency
and the Federal Deposit Insurance Corporation in July 2000 and opened for
business on July 24, 2000.
Smith River Community Bank was organized under the National Bank Act as a
nationally chartered commercial bank and member of the Federal Reserve, whose
deposits are insured by the FDIC. The Bank applied for both the charter and
deposit insurance on March 31, 1999. Preliminary charter approval was received
from the Comptroller of the Currency on August 4, 1999 and preliminary approval
was received from the FDIC on September 14, 1999. As previously mentioned, the
Bank received final approvals from the Comptroller of the Currency and the
Federal Deposit Insurance Corporation on July 21, 2000 with permission to open
on July 24, 2000. The Bank has begun to accept deposits and make commercial,
real estate, and consumer loans. For the initial years, the Bank anticipates
that it will rely on local advertising and personal contacts of its directors,
employees, and shareholders to attract customers and business to the Bank. The
Bank plans to operate as a locally owned and operated commercial bank
emphasizing personal customer service and other advantages of banking with a
locally owned community bank.
The primary source of funds for the Corporation, prior to the opening of the
Bank, came from the Organizers who are also the Corporation's directors. The
Organizers formed FCNB LLC, a limited liability company, to organize the
Corporation and the Bank and to provide for financing of organization,
pre-opening, and offering expenses. The Organizers continued to make advances
for expenses until the completion of the offering. The Corporation repaid the
LLC for the advances with funds received from the offering. Management believes
the remaining funds will be sufficient to provide for the planned capital
expenditures and operating costs.
Overview
--------
Total assets at September 30, 2000 were $10,657,551. The main components of
these assets were net loans a $4,509,945, federal funds sold at $3,705,000 and
securities available-for-sale at $1,460,853.
Total shareholders' equity at September 30, 2000 was $5,915,689. This increase
of $6,253,336 over year-end equity, was from the proceeds of the stock offering,
net of pre-opening/organizational costs and offering expenses.
The Corporation's net loss for the nine months ended September 30, 2000 was
$(454,797) compared to $(201,469) for the comparable period ended September 30,
1999. The net loss for the three months ended September 30, 2000 was $(199,292)
compared to $(61,612) for the same three months in 1999. The increases in 2000
are attributed to the opening of the Bank. Additional employees were hired along
with the purchase of additional supplies, services, etc.
Results of Operation
--------------------
Net interest income is the difference between total interest income and total
interest expense. The amount of net interest income is determined by the volume
of interest-earning assets, the level of interest rates earned on those assets
and the cost of supporting funds. The difference between rates earned on
interest-earning assets and the cost of supporting funds is measured by the net
interest margin.
18
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Net interest income was $174,019 for the nine months ended September 30, 2000
and $115,703 for the three months ended September 30, 2000. The net interest
margin at September 30, 2000 was 6.52% and 7.65% for the year-to-date and
quarter-to-date periods, respectively. In 1999, the Corporation only had
interest income on interest-bearing deposits and no interest expense. Total
interest earned was $2,148 and $562 for the year ending September 30, 1999 and
for the quarter ending September 30, 1999, respectively.
Provision for Loan Losses
-------------------------
A provision for loan losses is charged to earnings for the purpose of
establishing an allowance for loan losses. Losses are, in turn, charged to this
allowance rather than being reported as a direct expense. For the year-to-date
and quarter-to-date periods, the provision for loan losses was $54,800. This
reserve is 1.20% of gross loans. No assurance can be given that unforeseen
adverse economic conditions or other circumstances will not result in increased
provisions in the future.
Noninterest Income
------------------
Noninterest income for the nine months and three months ending September 30,
2000 was $10,524 and $2,874, respectively. This income was primarily income
related to checkbook charges and credit life insurance. There was no noninterest
income for the comparable periods in 1999.
Noninterest Expense
-------------------
Total noninterest expense for the period ending September 30, 2000 and September
30, 1999 were $584,540 and $203,617, respectively. The increase in noninterest
expense is attributed to the opening of the Bank on July 24, 2000 which incurred
additional expenses along with the hiring of additional personnel. Salaries and
employee benefits increased $253,942 or 278.98%, for the period ending September
30, 2000 in comparison to the same period in 1999. Occupancy and equipment
expense was $60,511 and $17,592 at September 30, 2000 and September 30, 1999,
respectively, an increase of 243.97%. Other expenses increased $85,156 in
September 30, 2000 over the comparable period in 1999. This increase was
primarily due to date processing fees, supplies, advertising, and insurance.
Total noninterest expense for the quarter-to-date periods ending September 30,
2000 and September 30, 1999 were $263,069 and $62,174, respectively. The
increases in the expenses were due to the opening of the Bank in the third
quarter of 2000.
Income Taxes
------------
The Corporation is subject to both federal and state income taxes. The Bank,
however, is subject to federal income taxes but not state income taxes. A bank
in Virginia is required to pay a franchise tax that is based on the capital of
the entity. Management does not believe that the Bank will be profitable until
at least the third full year of operations. Because of this and the start up
costs associated with the Bank, a substantial net loss may accumulate before
becoming profitable. Under current Federal tax laws, these net operating losses
will be available to offset future taxable profits. A net operating loss may be
carried forward for a period of up to 20 years to offset taxable income in those
years. This could reduce taxes in the initial years of profitability. If the
Bank should not become profitable, then it is unlikely that these tax benefits
will be realized; therefore, no tax benefit or provision has been recorded for
the year-to-date or quarter-to-date periods ended September 30, 2000.
19
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Year 2000 Readiness
-------------------
The Year 2000 issue was not a problem for the Corporation. All equipment
purchased was Year 2000 compliant. Contracts have been signed with outside
vendors for software and data processing. These vendors experienced minimal
problems with the onset of the Year 2000. Management will continue to have
conversations with its vendors and service providers concerning this issue.
Also, with the opening of the Bank, management is having dialogue with customers
for assurances of their Year 2000 issues. The Corporation does not believe that
the Year 2000 will have any material impact on current operation.
BALANCE SHEET
-------------
Investment Portfolio
--------------------
The Corporation's investment portfolio is used for several purposes as follows:
1) To maintain sufficient liquidity to cover deposit fluctuations and loan
demand.
2) To use securities to fulfill pledging collateral requirements.
3) To utilize the maturity/repricing mix of portfolio securities to help
balance the overall interest rate risk position of the balance sheet.
4) To make a reasonable return on investments.
Funds not utilized for capital expenditures or lending are invested in
securities of the U.S. Government and its agencies, mortgage-backed securities,
municipal bonds, and certain equity securities. Currently, the Corporation has
invested in U.S. Agencies and Federal Reserve Bank Stock. The Corporation's
policy is not to invest in derivatives or other high-risk instruments. The
entire securities portfolio is categorized as available-for-sale at September
30, 2000.
Loan Portfolio
--------------
Bankshares has established a credit policy detailing the credit process and
collateral in loan originations. Loans to purchase real estate and personal
property are generally collateralized by the related property with loan amounts
established based on certain percentage limitations of the property's total
stated or appraised value. Credit approval is primarily a function of the credit
worthiness of the individual borrower or project based on pertinent financial
information, the amount to be financed, and collateral. At September 30, 2000
the loan portfolio was as follows:
Commercial $2,326,115 50.96%
Residential real estate 1,440,274 31.55
Consumer 798,356 17.49
---------- ------
Total $4,564,745 100.00%
========== ======
20
<PAGE>
SMITH RIVER BANKSHARES, INC.
Notes to Financial statements
(Unaudited)
September 30, 2000
Deposits
--------
Total deposits at September 30, 2000 were $4,709,145. The deposit mix was as
follows:
Demand $ 376,150 7.99%
Interest checking 276,468 5.87
Money markets 482,006 10.23
Savings 77,574 1.65
Certificates of deposit > $100,000 1,742,958 37.01
Other time deposits 1,753,989 37.25
---------- ------
Total $4,709,145 100.00%
========== =======
The levels and mix of deposits are influenced by such factors as customer
service, interest rates paid, service charges, and the convenience of banking
locations. Competition is fierce from other depository institutions in our
market. Management attempts to identify and implement the pricing and marketing
strategies that will help control the overall cost of deposits and to maintain a
stable deposit mix.
Shareholders' Equity
--------------------
Total shareholders equity was $5,915,689 at September 30, 2000. The stock
offering was completed during the third quarter of 2000 with gross proceeds of
$6,893,680. Offering expenses have been netted against equity. All capital
levels are in excess of required regulatory minimums for a well-capitalized
institution. See footnote No. 10 for capital ratios.
Asset Liability Management
--------------------------
Asset liability management functions to maximize profitability within
established guidelines for liquidity, capital adequacy, and interest rate risk.
It also helps to ensure that there is adequate liquidity to meet loan demand or
deposit outflows and interest rate fluctuations. Liquidity is the ability to
meet maturing obligations and commitments, withstand deposit fluctuations, fund
operations, and provide for loan requests. Bankshares' liquidity is provided by
cash and due from banks, federal funds sold, securities available-for-sale, and
loan repayments. The Corporation's ratio of liquid assets to deposits at
September 30, 2000 was 121.23%
Impact of Inflation
-------------------
Most of the Corporation's assets are monetary in nature and therefore are
sensitive to interest rate fluctuations. Management will seek to manage the
relationship between interest-sensitive assets and liabilities.
21
<PAGE>
PART II Other Information
Item 2. Changes in Securities and Use of Proceeds
The Corporation filed a registration statement on Form SB-2 to register the
stock in conjunction with its initial public offering. The registration
statement was declared effective by the Commission on November 4, 1999. Smith
River Bankshares, Inc. began to accept subscriptions for investments in its
stock after the effective date of the registration statement. The subscription
dollars were being held in an escrow account until the successful completion of
the offering pursuant to the escrow agreement. The Corporation accepted
subscriptions for stock through July 31, 2000. The Corporation continued to
incur expenses for organizational, pre-opening, and offering expenses that were
being funded by advances from the Organizers until the successful completion of
the offering. These expenditures are disclosed in the accompanying financial
statements and the notes thereto and in Management's Plan of Operations in this
Form 10-QSB.
Upon the completion of the offering of its common stock shares on July 31, 2000,
Smith River Bankshares, Inc. sold 689,368 shares of common stock for total
proceeds of $6,893,680. The use of proceeds as of September 30, 2000 were as
follows:
Offering Proceeds $6,893,680
==========
Use of Proceeds by Smith River Bankshares, Inc.:
Offering expenses 185,518
Organizational expenses 241,188
Working capital 145,134
Capitalization of Smith River Community
Bank, N.A. through purchase of 100% of
the common stock of the Bank 6,321,840
-----------
Total $6,893,680
==========
Use of Capital by Smith River Community Bank, N.A.:
Organizational and pre-opening expenses $ 461,969
Furniture, fixtures and equipment 76,966
Anticipated purchase of furniture,
fixtures and equipment 553,000
Working capital 5,229,905
----------
Total $6,321,840
==========
Offering, organizational and pre-opening expenses exceeded original amounts
estimated primarily because the length of time taken to complete the offering
was longer than anticipated.
Item 5. Other Information
Smith River Bankshares, Inc. completed its offering of its shares of common
stock to the public on July 31, 2000. Total shares and units sold as of July 31,
2000 were 689,368 for total proceeds of $6,893,680. Prior to July 31, 2000, the
Corporation reached its minimum number of shares sold and was able to capitalize
the Bank. Smith River Community Bank, N.A. received its final approvals from the
Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation on July 21, 2000 granting an opening date of July 24, 2000. The Bank
opened for business on July 24, 2000 and began accepting deposits and making
loans.
22
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMITH RIVER BANKSHARES, INC.
Date November 13, 2000 By /s/ Cecil R. McCullar
---------------------- ------------------------------
Cecil R. McCullar
President and Chief Executive
Officer
Date November 13, 2000 By /s/ Brenda H. Smith
---------------------- ------------------------------
Brenda H. Smith
Senior Vice President and
Chief Financial Officer
23
<PAGE>
Index to Exhibits
Number Description of Exhibit
------ ----------------------
3(i)* Restated Articles of Incorporation of the Corporation, dated
July 8, 1999.
3(ii)* By-laws of the Corporation, dated August 5, 1999.
4.1* Warrant Plan and Certificates as adopted July 27, 1999 and
amended August 26, 1999.
4.2 Provision in Registrant's Articles of Incorporation and Bylaws
defining the Rights of Holders of the Registrant's common stock
(included in Exhibits 3(i) and 3(ii), respectively).
4.3* Form of Shares Subscription Agreement.
4.4* Form of Units Subscription Agreement.
27 Financial Data Schedule.
------------------------------
* (Incorporated by reference to Registration statement #333-86993 on Form SB-2
filed September 13, 1999.)
