<PAGE> 1
FIRST SHARES BANCORP, INC.
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 SEPTEMBER 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 ( X ) No ( )
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 October 06, 2000
Common Stock, with $.01 par 1,052,779 shares
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FIRST SHARES BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999
Consolidated Statements of Operations and Comprehensive Loss -- Nine
Months Ended September 30, 2000 and 1999
Consolidated Statements of Operations and Comprehensive Loss- Three
Months Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2000 and 1999
Notes to Consolidated Financial Statements - September 30, 2000
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 2.
Changes in Securities and Use of Proceeds
Item 6.
Exhibits and Reports on Form 8-K
SIGNATURES
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FIRST SHARES BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,349 $ 2,460
Interest-bearing deposits - 100
Federal funds sold - 89
-------- --------
Cash and cash equivalents 3,349 2,649
Securities available for sale (at market) 14,947
16,875
Securities held to maturity (market values of
$606 and $616 in 2000 and 1999) 605 617
FHLB stock, at cost 670 129
Loans held for sale 172 601
Loans 74,185 45,545
Less: Allowance for loan losses (828) (549)
-------- --------
Loans, net 73,357 44,996
Premises and equipment, net 1,967 1,696
Intangible assets, net 173 206
Cash surrender value of life insurance 2,163 438
Accrued interest receivable and other assets 845 463
-------- --------
$ 98,248 $ 68,670
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 10,062 $ 6,990
Interest-bearing deposits 76,300 55,997
-------- --------
Total deposits 86,362 62,987
Federal funds purchased 2,600 -
Federal Home Loan Bank advances 800 800
Note Payable 1,750 -
Accrued interest payable and other liabilities 269 286
-------- --------
91,781 64,073
Shareholders' equity
Common stock, $.01 par value: 10,000,000 shares authorized,
1,043,517 and 664,512 shares issued and outstanding 10 7
Additional paid in capital 4,616 1,988
Retained Earnings 1,962 2,749
Accumulated other comprehensive loss (121) (147)
-------- --------
6,467 4,597
-------- --------
$ 98,248 $ 68,670
======== ========
</TABLE>
----------------------------------------------------------------------------
See accompanying notes.
3
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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Nine months ended September 30, 2000 and 1999
(Unaudited)
(Dollar amounts in thousands, except per share data)
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Interest income
Loans, including related fees $ 4,411 $ 2,042
Taxable securities 844 386
Nontaxable securities 38 64
Other 74 83
------- -------
Total Interest Income 5,367 2,575
Interest expense
Deposits 2,795 1,202
Other 303 4
------- -------
Total Interest Expense 3,098 1,206
------- -------
NET INTEREST INCOME 2,269 1,369
Provision for loan losses 335 133
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,934 1,236
Noninterest income
Service charges on deposit accounts 123 79
Mortgage banking activity 76 1
Other 190 88
------- -------
Total Noninterest Income 389 168
Noninterest expenses
Salaries and employee benefits 1,748 956
Occupancy 294 84
Equipment and data processing 276 165
Legal/Accounting/Professional Services 72 49
Core deposit amortization 33 33
Postage 51 35
Advertising 99 38
Stationery and office supplies 82 33
Telephone 96 36
Committee and director fees 34 43
Other 325 166
------- -------
Total Noninterest Expense 3,110 1,638
------- -------
LOSS BEFORE INCOME TAXES (787) (234)
Income tax benefit - (73)
------- -------
NET LOSS $ (787) $ (161)
======= =======
Comprehensive Loss $ (761) $ (302)
======= =======
Per share data
Loss per share $ (1.11) $ (.26)
Loss per share, assuming dilution (1.11) (.26)
</TABLE>
----------------------------------------------------------------------------
See accompanying notes.
4
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FIRST SHARES BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) Three months
ended September 30, 2000 and 1999
(Unaudited)
(Dollar amounts in thousands, except per share data)
----------------------------------------------------------------------------
2000 1999
---- ----
[S] [C] [C]
Interest income
Loans, including related fees $ 1,745 $ 748
Taxable securities 288 173
Nontaxable securities 13 13
Other 23 26
------- -------
Total Interest Income 2,069 960
Interest expense
Deposits 1,001 459
Other 235 4
------- -------
Total Interest Expense 1,236 463
------- -------
NET INTEREST INCOME 833 497
Provision for loan losses 45 115
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 788 382
Noninterest income
Service charges on deposit accounts 48 28
Mortgage banking activity 32 1
Other 79 37
------- -------
Total Noninterest Income 159 66
Noninterest expenses
Salaries and employee benefits 574 377
Occupancy 100 36
Equipment and data processing 73 62
Legal/Accounting/Professional Services 30 15
Core deposit amortization 11 11
Postage 16 20
Advertising 26 24
Stationery and office supplies 17 15
Telephone 29 15
Committee and director fees 11 16
Other 112 54
------- -------
Total Noninterest Expense 999 645
------- -------
LOSS BEFORE INCOME TAXES (52) (197)
Income tax benefit - (60)
------- -------
NET LOSS $ (52) $ (137)
======= =======
Comprehensive Income/(Loss) $ 27 $ (180)
======= =======
Per share data
Loss per share $ (.07) $ (.21)
Loss per share, assuming dilution (.07) (.21)
----------------------------------------------------------------------------
See accompanying notes.
5
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FIRST SHARES BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2000 and 1999
(Unaudited)
(Dollar amounts in thousands)
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (787) $ (161)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 236 97
Provision for loan losses 335 133
Stock option compensation expense - 7
Discount (accretion) and premium amortization (33) (17)
Amortization of intangible asset 33 33
Changes in assets and liabilities:
Loans held for sale 429 (509)
Interest receivable and other assets (382) (10)
Interest payable and other liabilities (34) (94)
-------- --------
Net cash from operating activities (203) (521)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available for sale 16,049 2,404
Proceeds from maturities and prepayments of securities held to maturity 11 672
Purchases of securities available for sale (14,044) (6,394)
Purchase of FHLB stock (541) (3)
Loans made to customers net of payments received (28,696) (11,091)
Premises and equipment purchases (507) (627)
Purchase of life insurance contract (1,725) -
-------- --------
Net cash from investing activities (29,453) (15,039)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposit accounts 23,375 11,423
Proceeds from Federal Home Loan Bank advances - 800
Federal Funds Purchased 2,600 1,300
Proceeds from Note Payable 1,750 -
Dividends paid - (55)
Issuance of common stock 2,631 998
Net purchase/reissue of treasury stock - (23)
-------- --------
Net cash from financing activities 30,356 14,443
-------- --------
Net change in cash and cash equivalents 700 (1,117)
Cash and cash equivalents at beginning of period 2,649 4,674
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,349 $ 3,557
======== ========
</TABLE>
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See accompanying notes.
6
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FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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.
The Company received the initial proceeds from its public offering in closings
held on September 29, 2000 and thereafter. The offering was terminated on
October 6, 2000. The offering was on a best efforts basis, with a 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. Through September 30, 2000, 379,005 shares have been
sold with net proceeds of $2.6 million received, all of which were downstreamed
to the Bank. At termination, 388,267 shares had been sold with net proceeds of
approximately $2.7 million. Costs totaling approximately $610,000 have been
netted against proceeds from the offering.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities at September 30, 2000 and
December 31, 1999 are as follows:
-------------September 30, 2000------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
AVAILABLE FOR SALE
------------------
U.S. Treasury and government
agency securities $ 12,544 $ 3 $ (134) $ 12,413
Obligations of states and
political subdivisions 739 - (32) 707
Other securities 1,219 1 (24) 1,196
Mortgage backed securities 645 - (14) 631
-------- -------- -------- --------
$ 15,147 $ 4 $ (204) $ 14,947
======== ======== ======== ========
HELD TO MATURITY
----------------
U.S. Treasury and government
agency securities $ 25 $ - $ - $ 250
Obligations of states and
political subdivisions 355 1 - 356
Mortgage backed securities - - - -
-------- -------- -------- --------
$ 605 $ 1 $ - $ 606
======== ======== ======== ========
7
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FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2000
NOTE 2 - SECURITIES (Continued)
--------------December 31, 1999------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
AVAILABLE FOR SALE
------------------
U.S. Treasury and government
agency securities $ 7,27 $ - $ (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 $ 25 $ - $ (3) $ 248
Obligations of states and
political subdivisions 355 2 - 357
Mortgage backed securities 11 - - 11
-------- -------- -------- --------
$ 617 $ 2 $ (3) $ 616
======== ======== ======== ========
NOTE 3 - LOANS
Total loans are comprised of the following:
September 30, December 31,
2000 1999
---- ----
[S] [C] [C]
Commercial $15,455 $10,917
Commercial Real Estate 6,786 5,566
Residential Real Estate 20,300 13,779
Construction 9,319 4,921
Consumer 22,325 10,362
------- -------
$74,185 $45,545
======= =======
8
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FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2000
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
September 30, September 30,
2000 1999
---- ----
Balance, January 1 $ 549 $ 346
Provision charged to operations 335 133
Loans charged off (99) (21)
Recoveries 43 61
----- -----
Balance, September 30 $ 828 $ 519
===== =====
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
September 30, December 31,
2000 1999
---- ----
Land $ 26 $ 26
Buildings and improvements 682 540
Leasehold improvements 573 466
Furniture and equipment 1,695 1,507
------- -------
Total 2,976 2,539
Accumulated depreciation (1,009) (843)
------- -------
$ 1,967 $ 1,696
======= =======
NOTE 6 - BORROWINGS
The Bank has an advance from the Federal Home Loan Bank. The advance at
September 30, 2000 had a variable interest rate of 6.75% with a maturity date of
September 10, 2001. The advance is 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
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FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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.
Weighted average shares outstanding for the nine months ended September 30, 2000
and 1999 were 707,015 and 614,860, respectively. Weighted average shares
outstanding for the three months ended September 2000 and 1999 were 791,096 and
664,512, respectively.
NOTE 8 - BRANCH ACQUISITION
During February 2000, the Bank signed a definitive agreement to acquire a branch
located in Nashville, IN. Consummation of the transaction was subject to
regulatory approval. During August 2000, the Bank withdrew its application to
acquire the branch located in Nashville, Indiana.
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENT
Beginning January 1, 2001 a new accounting standard will require all derivatives
to be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. Adoption of this pronouncement will not have a material
effect on the Company's financial results, but the effect will depend on
derivative holdings when this standard is adopted.
10
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FIRST SHARES BANCORP, INC.
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.
Such risks could include: increases in competitive pressure from other financial
institutions in our markets, unexpected increases in loan losses, changes in
market interest rates, unanticipated changes in our level of growth or our
ability to manage the growth, changes in economic conditions in our markets, or
legislation or regulatory changes.
RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2000 AND 1999
Net Income
During the current year, we have focused on growth as outlined in our strategic
plan. Banking offices total 6, 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 $(787,000) or $(1.11) per share reported for the
9 months ended September 30, 2000 compared to a net loss of $(161,000) or $(.26)
per share for the same 9 months in 1999. Return on average assets (ROA) for 2000
was (1.20)% compared to (.46)% for 1999 on an annualized basis, while return on
average equity (ROE) was (22.81)% compared to (4.35)% 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 9 months ended September 30, 2000, net interest income totaled $2.3
million, representing a $900,000 or 65.7% increase over the same period for
1999. This increase in net interest margin is the result of our continued growth
in earning assets, with our expanded branch network and continued gains in
market share in existing markets.
Interest income through September 30, 2000 was $5.4 million, compared to $2.6
million in 1999, an increase of $2.8 million or more than double from last year.
While the investment portfolio has maintained a higher average balance through
September 30, 2000 than September 30, 1999, most of the improvement in interest
income is attributed to growth in the loan
11
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FIRST SHARES BANCORP
portfolio. Average investments, including securities and federal funds sold,
were $18.8 million in 2000, up by $5.1 million from 1999's $13.7 million level,
an increase of 36.4%. The average loan balance showed even stronger growth,
increasing from $29.8 million in 1999 to $61.9 million in 2000, an increase of
$32.1 million or 107.6 %. 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 8.87% in 2000 from
7.99% in 1999.
Interest expense reflects similar growth trends, with deposits and other
borrowings funding asset growth. Interest expense year to date in 2000 increased
$1.9 million, or 156.9%, compared to 1999. The increase is volume driven, as
average deposits increased by a total of $32.6 million, or 91.4%, compared to
1999. Time deposits comprised most of the increase, with the average balance
rising by $26.2 million. Average other liabilities increased from $171,000 for
year to date 1999 to $5.8 million for 2000. These borrowings consist primarily
of short-term federal funds purchased and bore an average cost of 6.98% in 2000.
The average cost of interest bearing liabilities reflects the current increases
in interest rates made by the Federal Reserve Bank, and was 5.58% in 2000
compared to 4.48% in 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 September 30, 2000,
the net interest margin was 3.77%, compared to 4.30% for 1999. A portion of this
margin compression can be attributed to growth. Year to date for 2000, the
average noninterest bearing liabilities and equity supported 16.6% of average
earning assets while that figure was 25.6% for the same period in 1999.
For the quarters ended September 30, 2000 and 1999, interest income increased
from $1.0 million to $2.1 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 $1.2 million for the second
quarter of 2000 compared to $463,000 for the same period last year. Net interest
income was $833,000 for the third quarter of 2000, compared to $497,000 in 1999,
an increase of $336,000 or 67.6%.
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 $335,000 for the nine months of 2000 compared
to $133,000 in 1999 and the allowance grew to $828,000 at September 30, 2000
from $549,000 at December 31, 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
nine months of 2000 were $56,000, representing .09% of the total loan portfolio.
The allowance for loan losses at the end of the September 2000 was $828,000, or
1.12% of total loans, compared to $524,000, or 1.37% of total loans at September
30, 1999.
Nonperforming loans have increased $146,000, to $287,000 since year-end. While
nonperforming loans have increased since year end, as a percentage of the total
loan portfolio,
12
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FIRST SHARES BANCORP, INC.
the amount of nonperforming loans remains modest (.39% at September 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 September 30, 2000 and 1999, provision expense decreased
to $45,000 from $115,000. The higher level for the third quarter of 1999 was
driven by loan growth during that period and the decline in 2000 reflects slowed
growth and controlled problem loan levels.
Noninterest Income and Expense
Noninterest income increased $221,000, or 131.6% to $389,000 for 2000 compared
to $168,000 in 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 55.7%. Other noninterest income in 2000 includes
$76,000 income from mortgage banking activities (gains on the sale of loans,
service released, to secondary market buyers) and a $37,000 increase in ATM
fees.
Noninterest expense increased $1.5 million or 89.9%, to $3.1 million for the
first 9 months of 2000.
The largest contributor to the increase in noninterest expense is employee
salaries and benefits. Three branches were opened in the second half of 1999,
and another 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 approximately 45 at
September 30, 1999 to approximately 60 at September 30, 2000.
Salary and employee benefits expense reflects the growth in staff, as expense
increased from $956,000 for the 9 months ended September 30, 1999 to $1.7
million for the same 9-month period in 2000, an increase of $792,000 or 82.8%.
This increase reflects not only the higher staffing levels, but also that those
positions were in place for the full 9 months ended September 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.
Nine-month comparisons for 1999 and 2000 reflect the four new branches that were
fully operational during essentially the entire 9 months ended September 30,
2000. Premises and equipment expense increased from $249,000 in 1999 to $570,000
in 2000, an increase of $321,000. Approximately $61,000 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
13
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FIRST SHARES BANCORP, INC.
$97,000 in 1999 to $236,000 in 2000, an increase of $139,000 or 143.3%
Advertising expense increased to $99,000 compared to $38,000 in 1999, as we
expanded 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 plan to curtail advertising for the balance
of 2000.
For the quarters ended September 30, 2000 and 1999, noninterest income increased
from $66,000 to $159,000, a change of $93,000 or 140.9%. Much of this increase
is attributable to the increased mortgage banking activity. Noninterest expense
increased from $645,000 to $999,000, an increase of $454,000 or 54.9%. Salary
and employee benefits accounted for much of the increase.
Income Taxes
No tax benefit has been recorded in 2000. We have a net operating loss
carryforward of approximately $1.4 million.
FINANCIAL CONDITION
Total assets were $98.2 million at September 30, 2000 compared to $68.7 million
at year-end 1999, an increase of $29.6 million or 43.1%. Increased loan totals
were funded primarily by increased deposits, with some short-term borrowings
utilized as well.
We were the successful bidder on a branch in Nashville, IN, the consummation of
which was contingent upon regulatory approval. Given our rapid growth in the
past year and the adverse impact the acquisition would have had on the Bank's
capital ratios, we withdrew our application. We continue to maintain our current
branch facility in the Nashville market, and will explore opportunities to build
or lease a larger, permanent location.
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.
Loans
See Note 3 to the financial statements. Total loans, excluding loans held for
sale, increased $28.6 million or 62.9% from year end 1999 to September 30, 2000,
as we entered into new market areas and new lines of business. Loan growth
occurred in nearly all categories.
Consumer loan growth remains strong, with consumer loans surpassing residential
real estate loans and comprising the largest segment of the portfolio (30.1% for
consumer loans compared
14
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FIRST SHARES BANCORP, INC.
to 27.4% for residential real estate). Consumer loans totaled $22.3 million at
September 30, 2000, increasing $12.0 million or 115.5% from year-end. 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 34.9% or $5.8 million from
December 31, 1999 to September 30, 2000 and comprised 30.0% 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
$6.1 million or 42.3% to $20.5 million.
Mortgage banking provides our customers with a wider array of mortgage loan
products. At period end 2000, loans held for sale, which are carried at the
lower of cost or fair value, totaled $172,000. All loans are sold servicing
released.
Deposits and Other Borrowings
Total deposits increased $23.4 million or 37.1%, from year-end 1999 to September
30, 2000, as we continue to gain market share. Noninterest-bearing deposits
increased to $10.1 million from $7.0 million. At September 30, 2000, $20.8
million or 41.4% of our time deposits had balances greater than $100,000. The
average balance of time deposits issued in amounts greater than $100,000 totaled
$16.9 million in 2000 and $5.0 million in 1999, representing 37.0% 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 advance from the
FHLB has a variable interest rate, which was 6.75% at September 30, 2000 and
matures September 10, 2001. At September 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 financing at the holding
company level, with a significant portion of these proceeds contributed to First
Bank to support continued growth. We have a $2.0 million line of credit with
$1.75 million drawn at September 30, 2000.
Capital
We are subject to various regulatory capital guidelines as required 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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FIRST SHARES BANCORP, INC.
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%, and a total capital ratio of at least 10.00%, and 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 only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions, asset growth, and expansion are
limited, in addition to the institution being required to submit a capital
restoration plan.
At September 30, 2000, our Tier 1 risked based capital ratio and leverage ratio
for the Bank were 10.0% and 8.2%, levels which meet the regulatory guidelines of
"well capitalized." Our total risk based capital ratio was 11.0%, meeting the
regulatory guidelines to be designated as "well capitalized."
Given our rapid growth rate, the regulatory agencies have suggested we maintain
a Bank leverage ratio of 7%, calculated using actual assets rather than average
assets. At September 30, 2000, this ratio was 8.1%.
At December 31, 1999 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 increase in capital ratios since year-end resulted from
borrowings and equity at the holding company being contributed to the Bank to
offset net operating losses and provide for growth.
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.
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 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.
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FIRST SHARES BANCORP, INC.
At September 30, 2000, we had a negative one-year interest rate gap of 31.7% 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.
Initial Public Offering
The Company received the initial proceeds from its public offering in closings
held on September 29, 2000 and thereafter. The offering was terminated on
October 6, 2000. The offering was on a best efforts basis, with a 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. Through September 30, 2000, 379,005 shares have been
sold with net proceeds of $2.6 million received, all of which were downstreamed
to the Bank. At termination, 388,267 shares had been sold with net proceeds of
approximately $2.7 million. Costs totaling approximately $610,000 have been
netted against proceeds from the offering.
Part II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
(1) Use of proceeds information is being disclosed for the registration
statement (file no. 333-31520) declared effective on June 16, 2000.
(2) The offering was sold on a best efforts basis subject to a condition
that unless at least 350,000 shares were sold, none would be sold. The
offering commenced on June 16, 2000.
(3) The offering was not terminated before any securities were sold.
(4) (i) The offering was terminated following a final closing on October
6, 2000.
(ii) David A. Noyes & Co. acted as sales agent for the offering.
(iii) The only class of securities registered is the registrant's
Common Stock, $.01 par value per share.
(iv) There were no selling security holders
Amount registered: 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.
Aggregate price: $7,331,250 (original registered amount)
$6,375,000 (final prospectus amount)
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FIRST SHARES BANCORP, INC.
Shares sold: 388,267 (379,005 by September 30,2000)
Aggregate offering
price of shares sold: $3,300,269.50 ($3,221,542.50 by
September 30, 2000)
(v) For the period from the effective date of the registration
statement to September 30, 2000, and to the date the offering was
terminated, the registrant incurred the following expenses:
<TABLE>
<CAPTION>
To Total
September 30, 2000 Offering
------------------ --------
<S> <C> <C>
Underwriting discounts and commissions $ 205,049 $ 210,619
Finders' fees - -
Expenses paid to or for underwriters 116,224 117,222
Other expenses 269,602 282,521
---------- ----------
Total expenses $ 509,875 $ 610,362
</TABLE>
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.
(vi) Net offering proceeds: $2,630,667 (To September 30, 2000)
$2,689,908 (Total offering)
(vii) All net offering proceeds (through September 30, 2000 and for the
total offering) were used to increase the registrant's working
capital, which is used primarily to make loans to bank customers.
(viii) The use of proceeds does not represent a material change in the
use of proceeds described in the prospectus.
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.
27. Financial Data Schedule
b.) Reports on 8-K - No Reports were filed.
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FIRST SHARES BANCORP, INC.
SIGNATURES
FIRST SHARES BANCORP, INC.
Date: November 14, 2000 By: /s/ Jerry R. Engle
----------------------------------
Jerry R. Engle
President and Chief Executive
Officer
Date: November 14, 2000 By: /s/ Kimberly B. Kling
----------------------------------
Kimberly B. Kling
Secretary, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
