<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___.
Commission file number 0-29837
FIRST SHARES BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
INDIANA 35-1948962
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
996 South State Road 135, Greenwood, IN 46143
(Address of principal executive offices) (Zip Code)
(317) 882-4790
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1994 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 ( ) No ( X )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at August 14, 2000
Common Stock, with $.01 par 664,512 shares
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX
Page
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations and Comprehensive Loss --
Six Months Ended June 30, 2000 and 1999 4
Consolidate Statements of Operations and Comprehensive Loss --
Three Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements - June 30, 2000 7
2.
<PAGE> 3
FIRST SHARES BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,410 $ 2,460
Interest-bearing deposits 1,100 100
Federal funds sold - 89
--------- ---------
Cash and cash equivalents 7,510 2,649
Securities available for sale (at market) 17,881 16,875
Securities held to maturity (market values of
$604 and $616 in 2000 and 1999) 605 617
FHLB stock, at cost 670 129
Loans held for sale 710 601
Loans 68,214 45,545
Less: Allowance for loan losses (763) (549)
--------- ---------
Loans, net 67,451 44,996
Premises and equipment, net 1,936 1,696
Intangible assets, net 185 206
Cash surrender value of life insurance 2,137 438
Accrued interest receivable and other assets 1,321 463
--------- ---------
$ 100,406 $ 68,670
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 9,249 $ 6,990
Interest-bearing deposits 70,328 55,997
--------- ---------
Total deposits 79,577 62,987
Federal funds purchased 1,400 -
Federal Home Loan Bank advances 13,400 800
Note Payable 1,750 -
Accrued interest payable and other liabilities 465 286
--------- ---------
96,592 64,073
Shareholders' equity
Common stock, $.01 par value: 10,000,000 shares authorized,
664,512 shares issued and outstanding 7 7
Additional paid in capital 1,993 1,988
Retained earnings 2,014 2,749
Accumulated other comprehensive loss (200) (147)
--------- ---------
3,814 4,597
--------- ---------
$ 100,406 $ 68,670
========= =========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes.
3.
<PAGE> 4
FIRST SHARES BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Six months ended June 30, 2000 and 1999
(Unaudited)
(Dollar amounts in thousands, except per share data)
--------------------------------------------------------------------------------
2000 1999
---- ----
Interest income
Loans, including related fees $ 2,666 $ 1,294
Taxable securities 555 212
Nontaxable securities 26 51
Other 51 57
------- -------
Total Interest Income 3,298 1,614
Interest expense
Deposits 1,794 743
Other 68 -
------- -------
Total Interest Expense 1,862 743
NET INTEREST INCOME 1,436 871
Provision for loan losses 290 18
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,146 853
Noninterest income
Service charges on deposit accounts 79 55
Other 150 49
------- -------
Total Noninterest Income 229 104
Noninterest expenses
Salaries and employee benefits 1,173 579
Occupancy 194 48
Equipment and data processing 203 102
Legal/Accounting/Professional Services 42 34
Core deposit amortization 22 22
Postage 35 15
Advertising 74 14
Stationary and office supplies 65 19
Telephone 67 21
Committee and director fees 23 28
Other 213 112
------- -------
Total Noninterest Expense 2,111 994
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (736) (37)
Income tax expense (benefit) - (13)
------- -------
NET INCOME (LOSS) $ (736) $ (24)
======= =======
Comprehensive Loss $ (789) $ (122)
======= =======
Per share data
Earnings/(loss) per share $ (1.11) $ (.04)
Earnings/(loss) per share, assuming dilution (1.11) (.04)
--------------------------------------------------------------------------------
See accompanying notes.
4.
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three months ended June 30, 2000 and 1999
(Unaudited)
(Dollar amounts in thousands, except per share data)
--------------------------------------------------------------------------------
2000 1999
---- ----
Interest income
Loans, including related fees $ 1,498 $ 661
Taxable securities 311 106
Nontaxable securities 13 24
Other 20 37
------- -------
Total Interest Income 1,842 828
Interest expense
Deposits 994 384
Other 51 -
------- -------
Total Interest Expense 1,045 384
NET INTEREST INCOME 797 444
Provision for loan losses 170 9
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 627 435
Noninterest income
Service charges on deposit accounts 36 29
Other 108 37
------- -------
Total Noninterest Income 144 66
Noninterest expenses
Salaries and employee benefits 609 377
Occupancy 98 28
Equipment and data processing 119 59
Legal/Accounting/Professional Services 21 19
Core deposit amortization 12 11
Postage 20 10
Advertising 43 10
Stationary and office supplies 33 14
Telephone 28 13
Committee and director fees 12 16
Other 114 68
------- -------
Total Noninterest Expense 1,109 625
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (338) (124)
Income tax expense (benefit) - (49)
------- -------
NET INCOME (LOSS) $ (338) $ (75)
======= =======
Comprehensive Loss $ (327) $ (146)
======= =======
Per share data
Earnings/(loss) per share $ (.51) $ (.11)
Earnings/(loss) per share, assuming dilution (.51) (.11)
--------------------------------------------------------------------------------
See accompanying notes.
5.
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2000 and 1999
(Unaudited)
(Dollar amounts in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (736) $ (24)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 158 61
Provision for loan losses 290 18
Stock option compensation expense 5 6
Discount (accretion) and premium amortization (31) (4)
Amortization of intangible asset 2 22
Changes in assets and liabilities:
Loans held for sale (109) (184)
Interest receivable and other assets (2,523) (65)
Interest payable and other liabilities 179 50
-------- --------
Net cash from operating activities (2,745) (120)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available for sale 10,317 1,360
Proceeds from maturities of securities held to maturity 11 630
Purchases of securities available for sale (11,378) (2,644)
Purchase of FHLB stock (541) (3)
Loans made to customers net of payments received (22,745) (3,510)
Premises and equipment purchases (398) (318)
-------- --------
Net cash from investing activities (24,734) (4,485)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposit accounts 16,590 4,604
Proceeds from Federal Home Loan Bank advances 12,600 -
Federal Funds Purchased 1,400 -
Proceeds from Note Payable 1,750 -
Dividends paid - (55)
Issuance of common stock - 997
Net purchase/reissue of treasury stock - (23)
-------- --------
Net cash from financing activities 32,340 5,523
-------- --------
Net change in cash and cash equivalents 4,861 918
Cash and cash equivalents at beginning of year 2,649 4,674
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,510 $ 5,592
======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,846 $ 745
Income taxes - 24
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes.
6.
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000
(Dollar amounts in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of First
Shares Bancorp, Inc. (the Company) and its wholly owned subsidiary, First Bank
(the Bank). The significant accounting policies followed for interim financial
reporting are consistent with the policies followed for annual reporting. The
consolidated interim financial statements have been prepared according to
Generally Accepted Accounting Principles and in accordance with the instructions
for Form 10-QSB. The interim statements may not include all information and
footnotes normally disclosed for the full annual financial statements. It is the
opinion of management that all adjustments necessary for a fair presentation of
the results for the reporting period have been included in the accompanying
unaudited consolidated financial statements and all adjustments are of a normal
recurring nature. Certain prior period information may be reclassified to
conform to the 2000 presentation.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities at June 30, 2000 and December
31, 1999 are as follows:
<TABLE>
<CAPTION>
------------------------June 30, 2000-------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
------------------
U.S. Treasury and government
agency securities $ 15,901 $ - $ (241) $ 15,660
Obligations of states and
political subdivisions 739 - (42) 697
Other securities 881 - (30) 851
Mortgage backed securities 691 - (18) 673
------------ ------------ ------------ ------------
$ 18,212 $ - $ (331) $ 17,881
============ ============ ============ ============
HELD TO MATURITY
----------------
U.S. Treasury and government
agency securities $ 250 $ - $ (1) $ 249
Obligations of states and
political subdivisions 355 - - 355
Mortgage backed securities - - - -
------------ ------------ ------------ ------------
$ 605 $ - $ (1) $ 604
============ ============ ============ ============
</TABLE>
7.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
----------------------December 31, 1999 ----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
------------------
U.S. Treasury and government
agency securities $ 7,270 $ - $ (151) $ 7,119
Obligations of states and
political subdivisions 749 - (41) 708
Other securities 8,336 3 (32) 8,307
Mortgage backed securities 763 - (22) 741
------------ ------------ ------------- ------------
$ 17,118 $ 3 $ (246) $ 16,875
============ ============ ============ ============
HELD TO MATURITY
----------------
U.S. Treasury and government
agency securities $ 251 $ - $ (3) $ 248
Obligations of states and
political subdivisions 355 2 - 357
Mortgage backed securities 11 - - 11
------------ ------------ ------------ ------------
$ 617 $ 2 $ (3) $ 616
============ ============ ============ ============
</TABLE>
NOTE 3 - LOANS
Total loans are comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Commercial $ 14,426 $ 10,917
Commercial Real Estate 6,011 5,566
Residential Real Estate 19,031 13,779
Construction 8,242 4,921
Consumer 20,504 10,362
------------ ------------
$ 68,214 $ 45,545
============ ============
</TABLE>
8.
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
Balance, January 1 $ 549 $ 346
Provision charged to operations 290 18
Loans charged off (92) (7)
Recoveries 16 52
------------ ------------
Balance, June 30 $ 763 $ 409
============ ============
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Land $ 26 $ 26
Buildings and improvements 615 540
Leasehold improvements 573 466
Furniture and equipment 1,723 1,507
------------ ------------
Total 2,937 2,539
Accumulated depreciation (1,001) (843)
------------ ------------
$ 1,936 $ 1,696
============ ============
</TABLE>
NOTE 6 - BORROWINGS
The Bank has advances from the Federal Home Loan Bank. The advances at June 30,
2000 have variable interest rates ranging from 6.08% to 6.90% with maturity
dates ranging from July 6, 2000 to September 10, 2001. The advances are
collateralized by eligible securities and first mortgage loans under a blanket
lien arrangement.
During the second quarter of 2000, the Company obtained a $2,000 line of credit
which had an outstanding balance of $1,750 at quarter end. The line has a
maturity date of June 30, 2001 and a variable interest rate, which was 9.00% at
quarter end.
9.
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000
NOTE 7 - EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average shares outstanding during the period. Diluted earnings per share is the
same as basic, as outstanding stock options are currently anti-dilutive.
June 30, June 30,
2000 1999
---- ----
EARNINGS (LOSS) PER SHARE
Net income (loss) $ (736) $ (24)
========== ===========
Weighted average shares
outstanding 664,512 589,206
========== ==========
EARNINGS (LOSS) PER SHARE $ (1.11) $ (.04)
========== ==========
NOTE 8 - BRANCH ACQUISITION
During February 2000, the Bank signed a definitive agreement to acquire a branch
located in Nashville, Indiana. Under the terms of the agreement, the Bank will
acquire the deposits totaling approximately $14,000, selected loans totaling
approximately $5,500, and all physical facilities. Intangibles associated with
this purchase will be approximately $1,200. Consummation of the transaction is
subject to regulatory approval. See discussion under the Capital section in
Management's Discussion and Analysis regarding regulatory approval.
10.
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this section constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of First Shares to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
RESULTS OF OPERATIONS FOR THE QUARTERS AND PERIODS ENDED JUNE 30, 2000 AND 1999
Net Income
During the first half of 2000, we have continued focusing on growth as outlined
in our strategic plan. Banking offices total six, with the opening of the
Bargersville location in January 2000.
Growth and expansion opportunities have had an adverse impact on profits in the
short term, with a net loss of $(736,000) or $(1.11) per share for the 6 months
ended 2000 compared to a net loss of $(24,000) or $(.04) per share for the same
six months in 1999. Return on average assets (ROA) for 2000 was (1.77)% compared
to (.11)% for 1999 on an annualized basis, while return on average equity (ROE)
was (35.26)% compared to (1.01)% for the same period last year, also on an
annualized basis.
Net Interest Income
Net interest income is the difference between interest and fees realized on
interest earning assets and interest paid on interest bearing liabilities. The
net interest margin is this difference expressed as a percentage of average
earning assets.
For the first half of 2000, net interest income totaled $1.4 million,
representing a $565,000 or 64.9% increase over the first half of 1999. This
increase in net interest margin is the result of our continued growth in earning
assets, as we expanded our branch network into new markets and continued to gain
market share in existing markets. Interest income through June 30, 2000 was $3.3
million, compared to $1.6 million in 1999, an increase of $1.7 million or more
than double from last year.
While modest growth has occurred in the investment portfolio from June 30, 1999
to June 30, 2000, most of the improvement in interest income is attributed to
growth in the loan portfolio. Average investments, including securities and
federal funds sold, were $19.4 million in 2000, up by $6.3 million from 1999's
$13.0 million level, an increase of 48.6%. The average loan balance showed even
stronger growth, increasing from $27.8 million in 1999 to $57.0 million in 2000,
an increase of $29.2 million or 105.0 %. The increased volume of earning assets
has been the key contributor to growth in interest income, although average
yields, on a fully tax equivalent basis, increased moderately, rising to 8.68%
in 2000 from 8.04% in 1999. This represents an improvement over first quarter
2000 results as well, when the tax equivalent average yield was 8.44%.
Interest expense reflects similar growth trends, with deposits and other
borrowings funding asset growth. Interest expense for 2000 increased $1.1
million, or 150.5%, compared to 1999.
11.
<PAGE> 12
The increase is volume driven, as average deposits increased, in nearly all
categories, by a total of $33.5 million, or 100.7%, compared to 1999. Time
deposits increased the most, with the average balance rising by $27.8 million.
The average cost of interest bearing deposits reflects the current increases in
interest rates made by the Federal Reserve Bank, and was 5.34% in the first six
months of 2000 compared to 4.48% in the first six months of 1999.
The effect of the cost of liabilities rising faster than the yield on earning
assets was a tightening of the net interest margin. Through June 30, 2000, the
net interest margin was 3.80%, compared to 4.38% for the first six months of
1999. A portion of this margin compression can be attributed to growth. During
the year 2000, to date, average noninterest bearing liabilities and equity
supported 16.6% of average earning assets while that figure was 26.1% for the
first half of 1999.
For the quarters ended June 30, 2000 and 1999, interest income increased from
$828,000 to $1.8 million, with the increase in loan interest being the primary
contributor due to the growth in the loan portfolio. Interest expense
experienced similar increases, with expense reaching $1.0 million for the second
quarter of 2000 compared to $384,000 for the same period last year. Net interest
income was $797,000 for the second quarter of 2000, compared to $444,000 in the
second quarter of 1999, an increase of $353,000 or 79.5%.
Provision for Loan Losses and Asset Quality
The provision for loan losses represents charges made to earnings to maintain an
adequate allowance for loan losses. The allowance is maintained at an amount
that we believe to be sufficient to absorb losses inherent in the loan
portfolio. We conduct, on a quarterly basis, a detailed evaluation of the
adequacy of the allowance.
The provision for loan losses was $290,000 for the first half of 2000 compared
to only $18,000 in the first half of 1999. The 2000 provision and relative
increase in the allowance was in recognition of the strong loan growth, rather
than a response to significant charge-off activity. Net charge offs through the
first half of 2000 were only $76,000, representing .11% of the total loan
portfolio. The allowance for loan losses at the end of the first half 2000 was
$763,000, or 1.12% of total loans, compared to $409,000, or 1.35% of total loans
at June 30, 1999.
Nonperforming loans have increased $173,000 to $314,000 since year end, as one
loan totaling approximately $185,000 was placed on non-accrual status. While
nonperforming loans have increased since year end, as a percentage of the total
loan portfolio, the amount of nonperforming loans remains modest (.46% at June
30, 2000 compared to .31% at year end 1999).
We designate certain loans for internal monitoring purposes on a watch list.
Loans may be placed on the watch list as a result of delinquent status, concern
about the borrower's financial condition or the value of the collateral securing
the loan, substandard classification during regulatory examinations, or simply
as a result of our desire to monitor more closely a borrower's financial
condition and performance.
For the quarters ended June 30, 2000 and 1999, provision expense increased to
$170,000 from $9,000. As noted above, this increase was primarily in response to
loan growth rather than a replenishment of the allowance from significant
charge-off activity.
12.
<PAGE> 13
Noninterest Income and Expense
Noninterest income increased $125,000, or 120.2% to $229,000 for 2000 compared
to $104,000 in the first six months of 1999. The increase is attributed to the
larger number of deposit accounts and a change in fee structure on those
accounts, which increased service charge income by 50%. Other noninterest income
in 2000 includes $35,000 in income from mortgage banking activities and a
$17,000 increase in ATM fees.
Noninterest expense increased $1.1 million or 112.4%, to just over $2 million
for the first half of 2000.
The largest contributor to the increase in noninterest expense is employee
salaries and benefits. Three branches opened in the second half of 1999, and
another one was opened in January 2000. A mortgage banking division was formed
in the second quarter of 1999. With the expansion in the bank branch network and
addition of a new division, staffing levels increased from 39 at June 30, 1999
to 60 at June 30, 2000.
Salary and employee benefits expense reflects the growth in staff, as expense
increased from $579,000 for the first half of 1999 to $1.2 million for the first
half 2000, an increase of $594,000 or 102.6%. This increase reflects not only
the higher staffing levels, but also that those positions were in place for the
full six months ended June 30, 2000. While the increase in salary and employee
benefits has had an adverse impact on profits, we believe that it is critical to
have bank operations properly staffed to allow us to maintain proper controls
and better serve our customers. We believe current staffing levels are
sufficient to support our growth strategy through the next several years, and
expect that expenditures in this area will level off.
Six month comparisons for 1999 and 2000 reflect the four new branches that were
fully operational during the six months ended June 30, 2000. Premises and
equipment expense increased from $150,000 in 1999 to $397,000 in 2000, an
increase of $247,000. Approximately $55,000 of this increase was attributable to
rental expense, as we entered into operating leases for the four new branch
locations. Depreciation expense, which is included in premises and equipment
expense, rose significantly as well, increasing from $61,000 in 1999 to $158,000
in 2000, an increase of $97,000 or 159.0% Advertising expense increased to
$74,000 compared to $14,000 in 1999, as we continued our marketing program in
our new and existing markets. We believe that our marketing efforts in the past
year have effectively established our institution in the market place, and we
plan to curtail advertising for the balance of 2000.
For the quarters ended June 30, 2000 and 1999, noninterest income increased from
$66,000 to $144,000, a change of $78,000 or 118.2%. Much of this increase is
attributable to the increased mortgage banking activity. Noninterest expense
increased from $625,000 to $1.1 million, an increase of $484,000 or 77.4%.
Salary and employee benefits accounted for nearly half of the increase.
Income Taxes
No tax benefit has been recorded in 2000. We have a net operating loss
carryforward of approximately $1.2 million.
13.
<PAGE> 14
FINANCIAL CONDITION
Total assets reached $100.4 million at June 30, 2000 compared to $68.7 million
at year end 1999, an increase of $31.7 million or 46.1%. Increased loan totals
were funded almost equally by increased deposits and also by short-term
borrowings.
We were the successful bidder on a branch in Nashville, Indiana. We must receive
regulatory approval for this branch acquisition, and we have received
preliminary indications that such approval will depend upon our ability to
increase our capital ratios as discussed below. If the branch acquisition is
consummated, we will acquire approximately $14 million in deposits, $5.5 million
in loans, and real property. The value of intangibles associated with this
transaction is estimated to be $1.2 million, which will be amortized over a
period not to exceed 25 years. If consummated, deposits acquired will provide
further funding for loan growth, with any excess invested in securities. Based
on June 30, 2000 numbers, the acquisition will increase deposits by
approximately 17.6% and loans by 8.0%. Additional expense would be recognized
through the amortization of goodwill, which will adversely impact earnings.
However, the total cost of operating the branch, including such items as
staffing costs, is not expected to change significantly as this branch will
replace the existing Nashville branch location.
The information in the preceding paragraph contains forward-looking statements.
Although we believe that our expectations in such forward-looking statements are
reasonable, we cannot promise that our expectations will turn out to be correct.
Actual results could be materially different from and worse than our
expectations for various reasons, including a failure to complete the purchase
of the Nashville branch, unanticipated changes in the deposits or loans at the
branch or an unanticipated increase in the number of the employees at the
branch.
Securities
See Note 2 to the financial statements. Securities are designated as either
available for sale or as held to maturity. To provide more flexibility and
better support for our current strategy, held to maturity securities have been
allowed to mature and pay-off, with all security purchases since March 1999
classified as available for sale.
In addition to securities of the U.S. Government and its agencies, we had a
concentration in a corporate security that exceeded 10% of shareholders' equity
at June 30, 2000 as follows (table amounts in thousands):
--------------------------------------------------------------------------------
OBLIGOR NAME AMORTIZED COST FAIR VALUE
--------------------------------------------------------------------------------
Bear Stearns 509 482
--------------------------------------------------------------------------------
Loans
See Note 3 to the financial statements. Total loans increased $22.7 million or
49.8% from year end 1999 to June 30, 2000, as we entered into new market areas
and new lines of business. Loan growth occurred in nearly all categories.
14.
<PAGE> 15
Consumer loan growth remains strong, with consumer loans surpassing residential
real estate loans as comprising the largest segment of the portfolio (29.7% for
consumer loans compared to 28.6% for residential real estate). Consumer loans
totaled $20.5 million at June 30, 2000, increasing $10.1 million or 97.8% from
year end, and comprised 28.2%. The indirect loan market remains robust, with
relationships maintained with local auto and recreational vehicle dealers
providing this segment with strong growth opportunities. Underwriting standards
for indirect loans are consistent with the standards applied to direct loans in
an effort to maintain strong asset quality.
Commercial and commercial real estate loans grew by 24.0% or $4.0 million from
December 31, 1999 to June 30, 2000 and comprised 29.6% of our portfolio at the
period end. Growth in this segment was attributed to the continued strong local
economy, primarily in the Greenwood area, and further penetration in our market
areas. Residential mortgages, including loans held for sale, increased $5.4
million or 37.3% to $19.7 million.
Mortgage banking activity remains strong, providing our customers with a wider
array of mortgage loan products. At June 30, 2000, loans held for sale, which
are carried at the lower of cost or fair value, totaled $710,000. All loans are
sold service released.
Deposits and Other Borrowings
Total deposits increased $16.6 million, or 26.3%, from year end 1999 to June 30,
2000, as we continued to gain market share through advertising campaigns.
Noninterest-bearing deposits increased to $9.2 million from $7.0 million. At
June 30, 2000, $14.8 million or 36.3% of our time deposits had balances of
greater than $100,000. The average balance of time deposits issued in amounts
greater than $100,000 totaled $17.7 million in the first six months of 2000 and
$5.0 million in 1999, representing 40.0% and 22.6% of total average time
deposits in each period.
While deposits have funded a significant portion of our growth, we have also
obtained funding from the Federal Home Loan Bank (FHLB). The advances from the
FHLB have various terms, with rates ranging from 6.08% to 6.90% and maturities
from July 7, 2000 to September 10, 2001. At June 30, 2000, we also had federal
funds purchased, which were obtained to meet the daily reserve requirement as
set by the Federal Reserve Bank. Additionally, we obtained bank financing at the
holding company level, with a significant portion of these proceeds being
contributed to First Bank as capital to support continued growth.
Capital
We are subject to various regulatory capital guidelines by federal banking
agencies. These guidelines define the various components of core capital and
assign risk weights to various categories of assets.
Tier 1 capital consists of shareholders' equity net of intangible assets and
excluding unrealized gains and losses on securities available or sale, as
defined by bank regulators. The definition of Tier 2 capital includes the amount
of allowance for loan losses which does not exceed 1.25% of gross risk-weighted
assets. Total capital is the sum of Tier 1 and Tier 2 capital.
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The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
"well-capitalized" institution must achieve a Tier 1 risk-based capital ratio of
at least 6.00% of risk-weighted assets, a total capital ratio of at least 10.00%
of risk weighted assets, a leverage ratio of at least 5.00% and not be under a
capital directive order. Failure to meet capital requirements can result in
regulatory action that could have a direct material effect on our financial
statements. If an institution is only "adequately capitalized", regulatory
approval is required to accept brokered deposits. If undercapitalized, capital
distributions, asset growth, and expansion is limited, in addition to the
institution being required to submit a capital restoration plan.
At June 30, 2000, our Tier 1 risked based capital ratio and leverage ratio for
the Bank were 7.1% and 5.9%, levels which meet the regulatory guidelines of
"well capitalized." However, we have been advised by the Indiana Department of
Financial Institutions and the Federal Deposit Insurance Corporation that due to
our rapid growth, we will be required to maintain a leverage ratio of 7.00% and
that we will be required to calculate this ratio using actual assets on the
calculation date instead of average assets for the period. Calculated on this
basis, our leverage ratio at June 30, 2000 was only 5.87%. Unless we are able to
increase our capital sufficiently, it is unlikely that we will receive
regulatory approval to acquire the Nashville, Indiana branch, and we will be
subject to regulatory restrictions or other regulatory action. Our total risk
based capital ratio was 8.1%, meeting the regulatory guidelines to be designated
as "adequately capitalized."
At December 31, 1999 our total risk based capital ratio was 9.1%, above the 8%
"adequate" requirement but below the 10% level required to be designated as
"well capitalized." The decline in capital is the result of strong growth and
net losses during the year. We have taken action to strengthen our capital
position, including undertaking our initial public offering and obtaining bank
debt, which was contributed to our banking subsidiary as a capital contribution.
Liquidity and Rate Sensitivity
Liquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. We have many
sources of liquid funds, including cash and cash equivalents, payments and
maturities of loans and securities, and growth in deposits. In addition, we have
the ability to sell securities available for sale, and may borrow from the
Federal Reserve and the Federal Home Loan Bank.
We believe we have sufficient liquidity to meet reasonable borrower, depositor,
and creditor needs in the present economic environment. We have not received any
recommendations from regulatory authorities which would materially affect
liquidity, capital resources or operations other than the leverage ratio
requirement as mentioned in the Capital section.
Our interest rate sensitivity position is influenced by the timing of the
maturity or repricing of interest earning assets and interest-bearing
liabilities. One method of gauging sensitivity is by a static gap analysis.
Rate sensitivity gap is defined as the difference between the repricing of
interest earning assets and the repricing of interest bearing liabilities within
certain defined time frames. Rising
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interest rates are likely to increase net interest income in a positive gap
position, while declining rates are likely to be beneficial in a negative gap
position.
At June 30, 2000, we had a negative one year interest rate gap of 40.1% of
interest earning assets. This compares to a negative 25.7% at December 31, 1999.
The increased negative gap is primarily the result of increasing borrowings with
the FHLB to support growth and reinvesting proceeds from commercial paper into
longer term government agency issues.
Pending Offering
We are in the process of an initial public offering, which was set to expire
August 14, 2000, but was extended through November 14, 2000. The offering is on
a best efforts basis, with the minimum number of shares set at 350,000 and the
maximum number of shares set at 700,000. The per share price is $8.50. Funds
tendered with subscriptions for the shares have been placed in an escrow account
with Huntington National Bank, and will be distributed to us once the minimum
number of share sales has been achieved. Costs of the offering paid through June
30, 2000, totaling $119,000, have been recorded as other assets and will be
netted against proceeds from the offering. If the offering is not consummated,
the costs will be expensed.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Use of proceeds information is being disclosed for the registration
statement (file no. 333-31520) declared effective on June 16, 2000.
The offering is subject to a condition that unless at least 350,000
shares are sold, none will be sold. This condition has not yet been satisfied,
so no shares have been sold and the registrant has not yet received any proceeds
from the offering.
The offering has not been terminated. David A. Noyes & Co. is acting as
sales agent for the offering, which is being conducted on a best-efforts basis.
The only class of securities registered is the registrant's Common Stock, $.01
par value per share. There were no selling security holders. A total of 862,500
shares were registered for sale by the registrant, although the final prospectus
limits the offering to a maximum of 750,000 shares. Such shares are being
offered at a price of $8.50 per share, for a total aggregate offering price of
$6,375,000. As the minimum condition has not yet been satisfied, no shares have
been sold and all subscription agreements and associated payments are being held
in escrow.
For the period from the effective date of the registration statement to
June 30, 2000, the registrant incurred the following expenses:
Underwriting discounts and commissions $ -
Finders' fees -
Expenses paid to or for underwriters -
Other expenses 270,000 (1)
--------
Total expenses $270,000
(1) Reasonable estimate. Amount includes both paid and unpaid expenses.
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None of such expenses were direct or indirect payments to directors, officers,
general partners of the registrant or their associates, to persons owning ten
(10) percent or more of any class of equity securities of the registrant, or to
affiliates of the registrant.
The registrant has as of June 30, 2000 neither received nor used any of
the net proceeds of the offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 14, 2000 the registrant held an annual meeting of
shareholders. Two directors, Gary W. Lewis and Norman D. Stockton, were elected
to three-year terms. The terms of the following other directors continued after
the meeting:
Frank A. Rogers
Jerry R. Engle
Ralph M. Foley
H. Dean Hawkins
R. J. McConnell
William J. Meredith
In addition to the election of directors, shareholders were asked to approve the
registrant's 1996 Stock Option Plan and its Amended and Restated 1999 Stock
Option Plan. The votes were as follows:
Proposal/Nominee For Against/Withheld Abstain
---------------- --- ---------------- -------
Gary W. Lewis 530,274 1,920 -
Norman D. Stockton 530,274 1,920 -
1996 Option Plan 530.274 1,920 -
1999 Option Plan 530,274 1,920 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
3.1 Amended and Restated Articles of Incorporation of First Shares
Bancorp, Inc., incorporated by reference to Exhibit 3.1 to the
registration statement on Form SB-2 of First Shares Bancorp,
Inc. (file no. 333-31520), as amended (the "Registration
Statement").
3.2 Amended and Restated By-Laws of First Shares Bancorp, Inc.,
incorporated by reference to Exhibit 3.2 to the Registration
Statement.
10.1 1999 Amended and Restated Stock Option Plan, incorporated by
reference to Exhibit 10.2 to the Registration Statement.
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10.2 Amendment of Employment Agreement of Jerry R. Engle,
incorporated by reference to Exhibit 10.10 to the Registration
Statement.
27 Financial Data Schedule
b.) Reports on 8-K - No Reports were filed during the period.
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.
FIRST SHARES BANCORP, INC.
Date: August 14, 2000 By: /s/ Jerry R. Engle
---------------------------
Jerry R. Engle
President and Chief Executive
Officer
Date: August 14, 2000 /s/ Kimberly B. Kling
---------------------------
Kimberly B. Kling
Secretary, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19.
