<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
----------------------------------
SALEM COMMUNITY BANKSHARES, INC.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Virginia 31-1736845
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 East Main Street
Salem, Virginia 24153
----------------------- --------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number, including area code) (540) 387-0223
---------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
-------- ------
State the number of shares outstanding of each of the issuer's class of common
equity, as of the latest practicable date.
Class Outstanding at October 27, 2000
----------------------------- --------------------------------
COMMON STOCK, $5.00 PAR VALUE 1,535,986
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One): Yes No X
------ --------
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
FORM 10-QSB
SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 4
Consolidated Statements of Income and Comprehensive Income for the
three month periods ended September 30, 2000 and 1999 5
Consolidated Statements of Income and Comprehensive Income for the
nine month periods ended September 30, 2000 and 1999 6
Consolidated Statements of Changes in Stockholders'
Equity for the nine month periods ended September 30, 2000 and 1999 7
Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 2000 and 1999 8
Notes to Consolidated Financial Statements 9 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Result of Operations 13 - 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following is the unaudited consolidated balance sheet of Salem Community
Bankshares, Inc. and subsidiary (the Company) as of September 30, 2000 and the
related unaudited consolidated statements of income and comprehensive income for
the three-month and nine-month periods ended September 30, 2000 and 1999, and
the unaudited consolidated statements of changes in stockholders' equity, and
cash flows, for the nine- month periods ended September 30, 2000 and 1999. The
consolidated balance sheet presented as of December 31, 1999 has been derived
from the consolidated financial statements that have been audited by the
Company's independent auditors.
3
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share data)
<TABLE>
<CAPTION>
9/30/2000 12/31/1999
Assets (Unaudited) (Audited)
-------------- ------------
<S> <C> <C>
Cash and due from banks $ 8,787 $ 8,959
Federal funds sold and securities purchased
under resale agreements 8,610 -
Securities:
Available-for-sale, at fair value 8,750 9,376
Held-to-maturity, at amortized cost
(fair value of $39,149 at September 30, 2000
and $38,555 at December 31, 1999) 41,337 41,456
Mortgage loans held for sale 567 346
Loans, less unearned income 136,112 116,997
Less allowance for loan losses (1,469) (1,404)
-------- --------
Loans, net 134,643 115,593
-------- --------
Bank premises and equipment, net 2,139 2,147
Accrued interest receivable 1,800 1,369
Foreclosed properties 101 216
Other assets 1,513 814
-------- --------
Total assets $208,247 $180,276
======== ========
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $ 21,709 $ 20,128
Interest-bearing demand deposits 43,289 36,735
Savings deposits 6,241 6,079
Time deposits 105,812 93,922
-------- --------
Total deposits 177,051 156,864
Federal funds purchased and securities sold
under resale agreements - 145
Notes payable to Federal Home Loan Bank 10,000 4,100
Accrued interest payable 1,125 941
Other liabilities 338 389
-------- --------
Total liabilities 188,514 162,439
-------- --------
Stockholders' equity:
Common stock, par value $5.00 per share. Authorized 10,000,000 shares at
September 30, 2000 and 2,000,000 shares at December 31, 1999; issued and
outstanding 1,535,986 shares
at September 30, 2000 and 1,526,067 at December 31, 1999 7,680 7,630
Surplus 8,484 8,447
Undivided profits 3,836 1,970
Accumulated other comprehensive loss (267) (210)
-------- --------
Total stockholders' equity 19,733 17,837
-------- --------
Commitments and contingent liabilities
Total liabilities and stockholders' equity $208,247 $180,276
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Three Month Periods Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans $ 3,312 $ 2,525
Interest on federal funds sold and securities
purchased under resale agreements 163 219
Interest on deposit with banks 47 1
Interest on securities - taxable 791 760
Interest on securities - nontaxable 57 66
------- -------
Total interest income 4,370 3,571
------- -------
Interest expense:
Interest on time certificates of deposit
of $100 or more 293 229
Interest on other deposits 1,835 1,474
Interest on notes payable to Federal Home Loan Bank 181 -
------- -------
Total interest expense 2,309 1,703
------- -------
Net interest income 2,061 1,868
Provision for loan losses 52 45
------- -------
Net interest income after provision
for loan losses 2,009 1,823
------- -------
Noninterest income:
Service charges on deposit accounts 147 123
Other service charges, commissions and fees 70 52
Other income 20 19
Realized securities gains, net - 3
------- -------
Total noninterest income 237 197
------- -------
Noninterest expense:
Salaries and employee benefits 728 683
Occupancy expense of bank premises 80 67
Furniture, fixtures and equipment 120 118
Stationery, printing and supplies 41 33
Write-downs and losses, net, on foreclosed properties (1) 17
Other expenses 300 272
------- -------
Total noninterest expense 1,268 1,190
------- -------
Income before income tax expense 978 830
Income tax expense 328 264
------- -------
Net income 650 566
Other comprehensive loss, net of income tax benefit:
Net unrealized losses on available-for-sale securities (4) (104)
------- -------
Comprehensive income $ 646 $ 462
======= =======
Net income per share
Net income per share $ 0.43 $ 0.37
======= =======
Net income per share - assuming dilution $ 0.42 $ 0.37
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Nine Month Periods Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans $ 9,193 $ 7,427
Interest on federal funds sold and securities
purchased under resale agreements 235 491
Interest on deposit with banks 57 2
Interest on securities - taxable 2,380 2,061
Interest on securities - nontaxable 173 209
-------- --------
Total interest income 12,038 10,190
-------- --------
Interest expense:
Interest on time certificates of deposit
of $100 or more 788 656
Interest on other deposits 4,902 4,182
Interest on notes payable to Federal Home Loan Bank 347 -
Interest on federal funds purchased and securities sold
under repurchase agreements 11 -
-------- --------
Total interest expense 6,048 4,838
-------- --------
Net interest income 5,990 5,352
Provision for loan losses 196 181
-------- --------
Net interest income after provision
for loan losses 5,794 5,171
-------- --------
Noninterest income:
Service charges on deposit accounts 417 349
Other service charges, commissions and fees 224 178
Other income 47 67
Realized securities gains, net - 8
-------- --------
Total noninterest income 688 602
-------- --------
Noninterest expense:
Salaries and employee benefits 2,131 1,940
Occupancy expense of bank premises 223 195
Furniture, fixtures and equipment 359 322
Stationery, printing and supplies 110 72
Write-downs and losses, net, on foreclosed properties 33 24
Other expenses 852 784
-------- --------
Total noninterest expense 3,708 3,337
-------- --------
Income before income tax expense 2,774 2,436
Income tax expense 908 770
-------- --------
Net income 1,866 1,666
Other comprehensive loss, net of income tax benefit:
Net unrealized losses on available-for-sale securities (57) (111)
-------- --------
Comprehensive income $ 1,809 $ 1,555
======== ========
Net income per share
Net income per share $ 1.22 $ 1.10
======== ========
Net income per share - assuming dilution $ 1.21 $ 1.08
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except shares and per share data)
Nine Month Periods Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Accumulated
Other
Common Undivided Comprehensive
Stock Surplus Profits Loss Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $ 7,291 $ 7,769 $ 1,278 $ (46) $16,292
Net income - - 1,666 - 1,666
Stock options exercised (9,477 shares) 47 38 - - 85
Change in net unrealized
losses on available-for-sale
securities, net of income tax benefit - - - (111) (111)
-----------------------------------------------------------------
Balances at September 30, 1999 $ 7,338 $ 7,807 $ 2,944 $ (157) $17,932
======= ======= ======= ======= =======
Balances at December 31, 1999 $ 7,630 $ 8,447 $ 1,970 ($ 210) $17,837
Net income - - 1,866 - 1,866
Stock options exercised (9,919 shares) 50 37 - - 87
Change in net unrealized
losses on available-for-
sale securities, net of income tax benefit - - - (57) (57)
-----------------------------------------------------------------
Balances at September 30, 2000 $ 7,680 $ 8,484 $ 3,836 $ (267) $19,733
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Month Periods Ended September, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income 1,866 1,666
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 196 181
Depreciation and amortization of bank premises
and equipment 227 198
Amortization of premiums and accretion
of discounts, net 4 2
Write-downs and losses on sales
of foreclosed properties, net 33 24
Gains on calls of securities - (8)
(Increase) decrease in:
Mortage loans held for sale (221) 1,760
Accrued interest receivable (431) (452)
Other assets (669) (367)
Increase (decrease) in:
Accrued interest payable 184 81
Other liabilities (25) 76
-------- --------
Net cash provided by operating activities 1,164 3,161
-------- --------
Cash flows from investing activities:
Net (increase) decrease in federal funds sold and
securities purchased under resale agreements (8,610) 115
Proceeds from maturities and calls of securities 654 4,335
Purchase of securities - (13,991)
Net increase in loans made to customers (19,408) (9,434)
Recoveries on loans previously charged off 61 70
Proceeds from sales of foreclosed properties 183 540
Purchases of bank premises and equipment (219) (87)
-------- --------
Net cash used in investing activities (27,339) (18,452)
-------- --------
Cash flows from financing activities:
Net increase in time deposits 11,890 10,988
Net increase in demand and savings deposits 8,297 2,860
Net decrease in federal funds purchased and securities
sold under resale agreements (145) -
Proceeds from notes payable from Federal Home Loan Bank 5,900 -
Principle payments on capital lease obligations (26) (55)
Proceeds from issuance of common stock 87 85
-------- --------
Net cash provided by financing activities 26,003 13,878
-------- --------
Net decrease in cash and due from banks (172) (1,413)
Cash and due from banks at beginning of period 8,959 5,925
-------- --------
Cash and due from banks at end of period $ 8,787 $ 4,512
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
(In thousands, except shares and per share data)
(1) General
The consolidated financial statements include the accounts of Salem Community
Bankshares, Inc. and its wholly-owned subsidiary, Salem Bank and Trust, N.A.
(the Bank), (collectively the Company). All material intercompany accounts and
transactions have been eliminated. The consolidated financial statements
conform to accounting principles generally accepted in the United States of
America and to general banking industry practices. In the opinion of the
Company's management, the accompanying unaudited consolidated financial
statements contain all adjustments of a normal recurring nature, necessary to
present fairly the financial position as of September 30, 2000, the results of
operations for the three-month and nine-month periods ended September 30, 2000
and 1999, and cash flows for the nine-month periods ended September 30, 2000 and
1999.
These interim period consolidated financial statements and financial information
should be read in conjunction with the consolidated financial statements and
notes thereto included in Salem Bank and Trust, N.A. 's 1999 Annual Report and
additional information supplied in the 1999 Form 10-KSB.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year ending December 31, 2000.
(2) Securities
The amortized costs, gross unrealized holding gains, gross unrealized holding
losses, and fair values for available-for-sale and held-to-maturity securities
by major security type are as follows:
September 30, 2000
-----------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Costs Gains Losses Values
----------------------------------------------
Available-for-sale
------------------
U.S. Government agencies
and corporations $ 6,992 - (326) 6,666
Mortgage-backed securities 1,130 - (79) 1,051
Other securities 1,033 - - 1,033
------- ------- ------- ------
Totals $ 9,155 - (405) 8,750
======= ======= ======= ======
Held-to-maturity
----------------------------
U.S. Government agencies
and corporations $36,963 - (2,233) 34,730
Mortgage-backed securities 263 - - 263
Obligations of state and
political subdivisions 4,111 45 - 4,156
------- ------- ------- ------
Totals $41,337 45 (2,233) 39,149
======= ======= ======= ======
As of September 30, 2000, securities with amortized costs of $33,457 were
pledged to secure public deposits and for other purposes required by law.
9
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
(In thousands, except shares and per share data)
(3) Loans
A summary of loans outstanding is as follows:
September 30, 2000 December 31, 1999
----------------- -----------------
Commercial $ 12,963 $ 9,058
Consumer, principally installment 32,664 22,183
Real estate - mortgage 77,535 71,914
Real estate - construction 14,215 14,881
--------- ---------
Total loans 137,377 118,036
Less unearned income (1,265) (1,039)
--------- ---------
Total loans, less unearned income $ 136,112 $ 116,997
========= =========
(4) Nonperforming Assets, Impaired Loans and Allowance for Loan Losses
Nonperforming assets consist of the following:
September 30, 2000 December 31, 1999
------------------ -----------------
Nonaccrual loans $687 $ 810
Foreclosed properties 101 216
---- ------
Total nonperforming assets $788 $1,026
==== ======
There were no commitments to lend additional funds to customers whose loans were
classified as nonperforming at September 30, 2000. Included in nonaccrual
loans as of September 30, 2000 is a restructured loan approximating $302.
The following table shows the pro forma interest that would have been earned on
nonaccrual loans if they had been current in accordance with their original
terms and the recorded interest that was earned and included in income on these
loans:
Nine Months Ended September 30,
--------------------------------
2000 1999
---- ----
Pro forma interest on nonaccrual loans $ 47 51
===== ==
Recorded interest on nonaccrual loans $ 29 43
===== ==
10
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
(In thousands, except shares and per share data)
At September 30, 2000, the recorded investment in loans that have been
identified as impaired loans, in accordance with Statement 114 and which
includes nonaccrual, restructured and certain watch list loans, totaled $758.
Of this amount $248 related to loans with no valuation allowance, and $510
related to loans with a corresponding valuation allowance of $91.
A summary of the activity in the allowance for loan losses follows:
Nine Months Ended September 30,
--------------------------------
2000 1999
------ -----
Balances, beginning of period $1,404 1,284
Provision for loan losses 196 181
Loans charged off (192) (161)
Loan recoveries 61 70
------ -----
Balances, end of period $1,469 1,374
====== =====
(5) Time Deposits and Other Deposits
Included in time deposits are certificates of deposit and other time deposits of
$100 or more in the aggregate amount of $20,469 at September 30, 2000.
(6) Net Income Per Share
Net income per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Net income per share-assuming dilution reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or vested into common stock or resulted in the
issuance of common stock that they shared in the earnings of the entity.
The following is a reconciliation of the numerators and denominators of the net
income per share and net income per share - assuming dilution computations for
the periods indicated:
Net Income Shares Per Share
Three Months Ended September 30, 2000 (Numerator) (Denominator) Amount
------------------------------------- ----------- ------------- ---------
Net income per share $650 1,531,027 $.43
----
Effect of dilutive stock options - 12,660
---- ---------
Net income per share - assuming dilution $650 1,543,687 $.42
==== ========= ----
Net Income Shares Per Share
Three Months Ended September 30, 1999 (Numerator) (Denominator) Amount
------------------------------------- ---------- ------------ ---------
Net income per share $566 1,522,853 $.37
Effect of dilutive stock options - 23,137 =======
---- ---------
Net income per share - assuming dilution $566 1,545,990 $.37
==== ========= =======
11
<PAGE>
SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
(In thousands, except shares and per share data)
(6) Net Income Per Share (cont.)
Net Income Shares Per Share
Nine Months Ended September 30, 2000 (Numerator) (Denominator) Amount
------------------------------------ ----------- ------------- ---------
Net income per share $1,866 1,527,732 $1.22
Effect of dilutive stock options - 13,862 =====
------ ---------
Net income per share - assuming dilution 1,866 1,541,594 $1.21
====== ========= =====
Net Income Shares Per Share
Nine Months Ended September 30, 1999 (Numerator) (Denominator) Amount
------------------------------------ ---------- ------------ ---------
Net income per share $1,666 1,518,662 $1.10
Effect of dilutive stock options - 24,326 =====
------ ---------
Net income per share - assuming dilution $1,666 1,542,988 $1.08
====== ========= =====
(7) Reorganization
On May 31, 2000, shareholders approved the proposed reorganization of the Bank
into a holding company structure. On September 11, 2000, this proposed
reorganization was completed with 1,535,986 shares of Salem Bank and Trust, N.A.
common stock being exchanged one-for-one for 1,535,986 shares of Salem Community
Bankshares, Inc. common stock. As a result of this reorganization, the Bank
became a wholly-owned subsidiary of Salem Community Bankshares, Inc.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Amounts in thousands, except per share data and ratios)
The following is a discussion of the factors which significantly affected the
financial condition and results of operations of Salem Community Banshares, Inc.
and subsidiary at September 30, 2000 and for the nine-month and three-month
periods ended September 30, 2000. This discussion should be read in conjunction
with the unaudited consolidated financial statements and notes presented herein,
and with the Company's audited consolidated financial statements and notes
thereto for the year ended December 31, 1999.
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in the forward-looking statements.
On May 31, 2000, shareholders approved the proposed reoganization of the Bank
into a holding company structure. On September 11, 2000, this proposed
reorganization was completed with 1,535,986 shares of Salem Bank and Trust, N.A.
common stock being exchanged one-for-one for 1,535,986 shares of Salem Community
Bankshares, Inc. common stock. As a result of this reorganization, the Bank
became a wholly-owned subsidiary of Salem Community Bankshares, Inc.
BALANCE SHEET
Total assets of the Company at September 30, 2000 exceeded total assets at
December 31, 1999 by $27,971 or 15.5 percent. This increase was due primarily
to an increase of $8,610 in federal funds sold and securities purchased under
resale agreements, the source of which were the uninvested portion of the notes
from the Federal Home Loan Bank of Atlanta, and loan portfolio growth. Net
loans outstanding at September 30, 2000 compared to December 31, 1999 showed an
increase of $19,050, or 16.5 percent, and resulted from increased customer
demand, especially in indirect dealer loan products.
Total deposits increased by $20,187, or 12.9 percent, due mostly to increases in
interest-bearing demand deposits and time deposits. Interest-bearing demand
deposits increased $6,554, or 17.8 percent and time deposits increased $11,890,
or 12.7 percent, due to the Company offering more attractive depository products
than area competition.
ALLOWANCE FOR LOAN LOSSES, NONPERFORMING ASSETS AND IMPAIRED LOANS
The provision for loan losses was $196 for the nine months ended September 30,
2000 compared to $181 for the same period in 1999, an increase of $15. The
provision for loan losses was $52 for the three months ended September 30, 2000
compared to $45 for the same period in 1999, an increase of $7. The Company's
considers the allowance to be adequate based on the current loan portfolio. An
ongoing evaluation of the allowance for loan losses is made to ensure that the
allowance for loan losses is at a sufficient level to absorb estimated losses in
the Bank's loan portfolio. As of September 30, 2000, the ratio of the allowance
for loan losses to loans, net of unearned income, was 1.08 percent. While
management uses available information to recognize loan losses, future additions
to the allowance may be necessary based on changes in economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. The agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available at the time of their examination.
13
<PAGE>
Foreclosed properties decreased to $101 at September 30, 2000 from $216 at
December 31, 1999. This decrease resulted from the sale of properties and
increased efforts by management to minimize the amount of such properties held.
There were also $33 in net write-downs and losses on these properties for the
nine months ended September 30, 2000, although a $1 net gain was recognized
during the third quarter of 2000.
Nonaccrual loans were $687 and $810 at September 30, 2000 and at December 31,
1999, respectively. Loans are generally placed in nonaccrual status when the
collection of principal and interest is 90 days or more past due, unless the
obligation is both well-secured and in the process of collection. Impaired
loans approximated $758 at September 30, 2000 and $1,032 at December 31, 1999.
See note 4 to the Company's unaudited consolidated financial statements for a
summary of the changes in the Company's allowance for loan losses and a summary
of nonperforming assets.
CAPITAL RESOURCES
Stockholders' equity increased by $1,896, or 10.6 percent, as of September 30,
2000 to $19,733 compared to stockholders' equity of $17,837 at December 31,
1999. The increase was primarily due to net earnings which were retained and
the exercise of 9,919 stock options by employees and directors during the third
quarter of 2000. Stockholders' equity at September 30, 2000 has been reduced by
$267 which represents the excess of amortized costs over the fair value of
available-for-sale securities, net of taxes, held by the Company. This sole
component of comprehensive income has been recorded as a separate component of
stockholders' equity and will continue to be subject to change in future periods
due to fluctuations in market value, sales, purchases, maturities and calls of
securities classified as available-for-sale.
The Bank is in compliance with minimum Tier 1 and total capital ratios of 4
percent and 8 percent, respectively, as of September 30, 2000 and December 31,
1999. The Bank's leverage ratios at September 30, 2000 and December 31, 1999
were also in excess of the 4 percent minimum.
There are no material commitments for capital expenditures as of September 30,
2000. In addition, there are no expected material changes in the mix or
relative cost of capital resources.
NET INTEREST INCOME
The principal source of earnings for the Company is net interest income. Net
interest income is the net amount of interest earned on the Company's interest-
bearing assets less the amount of interest paid on the Company's deposits and
other interest-bearing liabilities. Net interest income before the provision
for loan losses was $5,990 for the nine months ended September 30, 2000 compared
with $5,352 for the nine months ended September 30, 1999, an increase of $638 or
11.9 percent. Net interest income before the provision for loan losses was
$2,061 for the three months ended September 30, 2000 compared with $1,868 for
the three months ended September 30, 1999, an increase of $193 or 10.3 percent.
Total interest income increased from $10,190 for the nine months ended September
30, 1999 to $12,038 for the same period in 2000, an 18.1 percent increase. This
increase was mostly due to increased interest and fees on loans which resulted
from a larger loan portfolio. Interest expense increased from $4,838 for the
nine months ended September 30, 1999 to $6,048 for the same period in 2000, a
25.0 percent increase. Interest expense increased from $1,703 for three months
ended September 30, 1999 to $2,309 for the same period in 2000, a 35.6 percent
increase. This increase in interest expense was due mainly to an increase in
interest-bearing demand and time deposits.
14
<PAGE>
NONINTEREST INCOME
Noninterest income consists of earnings generated primarily from service charges
on deposit accounts, securities gains and other service charges, commissions and
fees. The Company's noninterest income increased from $602 for the first nine
months in 1999 to $688 for the same period in 2000, an increase of 14.3 percent.
The Company's noninterest income increased from $197 for the third quarter in
1999 to $237 for the same period in 2000, an increase of 20.3 percent. This
trend resulted from increases in service charges on deposit accounts and other
services charges and fees which resulted from a greater volume of deposits and
fewer such fees and charges being waived by management.
NONINTEREST EXPENSE
The Company's noninterest expense increased from $3,337 for the first nine
months in 1999 to $3,708 or 11.1 percent for the same period in 2000. The
Company's noninterest expense increased from $1,190 for the third quarter in
1999 to $1,268 or 6.6 percent for the same period in 2000. The overall
increase was due primarily to increase in salaries and employee benefits along
with increases in occupancy expense and other expenses. Such increases resulted
primarily from the second quarter 2000 opening of the Brandon Oaks branch as
well as certain renovations being made to Company property.
INCOME TAXES
The reported income tax expense for the nine months ended September 30, 2000 was
$908 (effective tax rate of 32.7 percent) compared to $770 (effective tax rate
of 31.6 percent) for the same period in 1999. The reported income tax expense
for the three months ended September 30, 2000 was $328 (effective tax rate of
33.5 percent) compared to $264 (effective tax rate of 31.8 percent) for the same
period in 1999. This increase in income tax expense was due to an increase in
net taxable income and a decrease in interest on securities-nontaxable.
NET INCOME
Net income for the nine months ended September 30, 2000 was $1,866 compared to
$1,666 for the same period in 1999. This increase of $200, or 12.0 percent, was
due primarily to the increase in net interest income. The Company achieved a
.90 percent return on average assets, or 1.20 percent annualized, during the
first nine months of 2000, compared to a .92 percent, or 1.23 percent
annualized, return on average assets for the same period in 1999. Net income
for the three months ended September 30, 2000 was $650 compared to $566 for the
same period in 1999.
LIQUIDITY
Liquidity is the ability to generate adequate cash flow to meet financial
commitments and to fund customers' demands for funds, either in terms of loan
requests or deposit withdrawals. Liquidity may be provided by both assets and
liabilities. Asset liquidity is derived from sources such as readily marketable
investments, principal and interest payments on loans, and cash and due from
banks. Liability liquidity is provided by the core deposit growth from the
Company's strong, stable customer base. Management believes the liquidity of
the Company remains adequate, as sufficient assets are maintained on a short-
term basis, as well as certain debt alternatives, to meet the liquidity demands
anticipated. Secondary sources of funds are also available should the need
arise. Management is not aware of any trends, commitments or events that will
result in or that are reasonably likely to result in a material increase or
decrease in liquidity.
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Net cash provided by operating activities of $1,164 for the nine months ended
September 30, 2000 decreased $1,997 from the same period in 1999 and was
primarily attributable to a decrease in the mortgage loans held for sale
category which fluctuates based upon loan demand and the timing of loan sales in
the secondary market. Net cash flows provided by financing activities for the
nine months ended
September 30, 2000 increased $12,125 from the same period in 1999 due to
utilization of $5,900 in advances from the Federal Home Loan Bank and increased
deposits. Cash flows used in investing activities were used primarily to fund
the net increase in loans of $19,408 and the purchase of federal funds sold of
$8,610 for the nine months ended September 30, 2000.
GENERAL
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IMPACT OF INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements and related notes presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike many industrial companies, substantially all of the assets and virtually
all of the liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance than
the general level of inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same magnitude as
inflation.
DERIVATIVES
The Company does not use derivatives or other off-balance sheet transactions
such as future contracts, forward obligations, interest rate swaps, or options.
YEAR 2000
Subsequent to December 31, 1999, the Company has not experienced any significant
disruptions to financial or operating activities caused by failure to
computerized systems resulting from Year 2000 issues. Management does not
expect Year 2000 issues to have a material adverse effect on the Compaany's
operations or financial results in 2000.
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FUTURE ACCOUNTING CONSIDERATIONS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative. Statement 133 was issued to address concerns
over the lack of uniformity in accounting and reporting for derivative
instruments and hedging activities.
Statement 133, as amended by Statement 137, Deferral of the Effective Date of
FASB Statement No. 133 and Statement 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of Statement No. 133,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000, although earlier application is permitted. Retroactive application of
Statement 133 to financial statements of prior periods is not permitted.
Future adoption of Statement 133 is not expected to have any effect on the
consolidated financial position results of operations or liquidity of the
Company. The Company currently does not hold derivative instruments as defined
by Statement 133.
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SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Items 1 - 5. None for the quarter ended September 30, 2000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-B:
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K filed during the nine months ended September 30,
2000.
None.
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SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
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Clark Owen, Jr., President and
Chief Executive Officer
Date:
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Gill R. Roseberry, Secretary and
Chief Financial Officer
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