U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] 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: 0-25859
1ST STATE BANCORP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
VIRGINIA 56-2130744
------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
445 S. MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
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(Address of Principal Executive Offices) (Zip Code)
Registrant' s Telephone Number, Including Area Code (336) 227-8861
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N/A
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of July 31, 2001, the issuer had 3,289,607 shares of common stock issued
and outstanding.
CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 (unaudited)
and September 30, 2000.............................................1
Consolidated Statements of Income for the Three Months Ended
June 30, 2001 and 2000 (unaudited).................................2
Consolidated Statements of Income for the Nine Months Ended
June 30, 2001 and 2000 (unaudited).................................3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Nine Months Ended June 30,
2001 and 2000 (unaudited)..........................................4
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2001 and 2000 (unaudited).................................5
Notes to Consolidated Financial Statements...........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........16
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings...................................................17
Item 2. Changes in Securities and Use of Proceeds...........................17
Item 3. Defaults Upon Senior Securities.....................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K....................................17
SIGNATURES...................................................................18
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND SEPTEMBER 30, 2000
(IN THOUSANDS)
AT AT
JUNE 30, SEPTEMBER 30,
2001 2000
------------ -------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 23,371 33,107
Investment securities:
Held to maturity (fair value of $25,852 and $65,173
at June 30, 2001 and September 30, 2000, respectively) 25,660 67,232
Available for sale (cost of $54,399 and $10,019
at June 30, 2001 and September 30, 2000, respectively) 54,330 9,752
Loans held for sale, at lower of cost or fair value 3,251 5,533
Loans receivable (net of allowance for loan losses of $3,553
and $3,536 at June 30, 2001 and September 30, 2000,
respectively) 222,493 223,595
Real estate owned 1,981 --
Federal Home Loan Bank stock, at cost 1,650 1,650
Premises and equipment 8,552 8,453
Accrued interest receivable 2,231 2,653
Other assets 3,221 3,552
-------- --------
Total assets $346,740 355,527
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts 258,843 254,405
Advances from Federal Home Loan Bank 20,000 20,000
Advance payments by borrowers for property taxes and insurance 684 151
Dividend payable 263 17,270
Other liabilities 4,789 4,492
-------- --------
Total liabilities 284,579 296,318
-------- --------
Stockholders' Equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized;
none issued -- --
Common stock, $0.01 par value, 7,000,000 shares authorized;
3,289,607 shares issued and outstanding 33 33
Additional paid-in capital 35,581 35,587
Unearned ESOP shares (4,541) (4,950)
Unearned compensation - management recognition plan (713) (1,296)
Deferred compensation 4,025 2,679
Treasury stock for deferred compensation (4,025) (2,679)
Retained income - substantially restricted 31,843 29,999
Accumulated other comprehensive loss - net unrealized
loss on investment securities available for sale (42) (164)
-------- --------
Total stockholders' equity 62,161 59,209
-------- --------
Total liabilities and stockholders' equity $346,740 355,527
======== ========
See accompanying notes to the consolidated financial statements.
1
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
JUNE 30,
2001 2000
---------- -------
Interest income:
Interest and fees on loans $ 4,625 4,722
Interest and dividends on investments 1,182 1,380
Overnight deposits 230 178
---------- -------
Total interest income 6,037 6,280
---------- -------
Interest expense:
Deposit accounts 2,725 2,564
Borrowings 273 391
---------- -------
Total interest expense 2,998 2,955
---------- -------
Net interest income 3,039 3,325
Provision for loan losses 60 60
---------- -------
Net interest income after provision for loan losses 2,979 3,265
---------- -------
Other income:
Service fees on loans sold 21 23
Customer service fees 204 149
Commissions from sales of annuities and mutual funds 240 128
Mortgage banking income, net 338 80
Other 57 51
---------- -------
Total other income 860 431
---------- -------
Operating expenses:
Compensation and related benefits 1,616 2,075
Occupancy and equipment 336 263
Deposit insurance premiums 12 12
Real estate operations, net 30 (149)
Other expenses 455 408
---------- -------
Total operating expenses 2,449 2,609
---------- -------
Income before income taxes 1,390 1,087
Income taxes 497 380
---------- -------
Net income $ 893 707
========== ========
Earnings per share:
Basic $ 0.29 $ 0.24
Diluted $ 0.28 $ 0.24
See accompanying notes to the consolidated financial statements.
2
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
JUNE 30,
2001 2000
----------- ----------
Interest income:
Interest and fees on loans $ 14,642 13,556
Interest and dividends on investments 3,517 4,284
Overnight deposits 629 384
----------- ----------
Total interest income 18,788 18,224
----------- ----------
Interest expense:
Deposit accounts 8,715 7,334
Borrowings 853 1,112
----------- ----------
Total interest expense 9,568 8,446
----------- ----------
Net interest income 9,220 9,778
Provision for loan losses 180 180
----------- ----------
Net interest income after provision for loan losses 9,040 9,598
----------- ----------
Other income:
Service fees on loans sold 63 67
Customer service fees 522 431
Commissions from sales of annuities and mutual funds 459 323
Mortgage banking income, net 658 22
Other 141 136
----------- ----------
Total other income 1,843 979
----------- ----------
Operating expenses:
Compensation and related benefits 4,589 4,359
Occupancy and equipment 944 764
Deposit insurance premiums 37 58
Real estate operations, net 36 (149)
Other expenses 1,292 1,066
----------- ----------
Total operating expenses 6,898 6,098
----------- ----------
Income before income taxes 3,985 4,479
Income taxes 1,416 1,565
----------- ----------
Net income $ 2,569 2,914
=========== ==========
Earnings per share:
Basic $ 0.85 $ 0.99
Diluted $ 0.81 $ 0.98
See accompanying notes to the consolidated financial statements
3
1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
(IN THOUSANDS)
ADDITIONAL UNEARNED UNEARNED
COMMON PAID-IN ESOP COMPENSATION DEFERRED
STOCK CAPITAL SHARES MRP COMPENSATION
----- ------- ------ --- ------------
Balance at September 30, 1999 $ 32 49,216 (4,470) -- 2,373
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive income-unrealized
loss on securities available-for-sale
net of income taxes of $61 -- -- -- -- --
Total comprehensive income
Shares issued for MRP 1 2,331 -- (2,332) --
Release of ESOP shares -- (11) 423 -- --
Deferred compensation -- -- -- -- 230
Treasury stock held for deferred
compensation -- -- -- -- --
Vesting of MRP shares -- -- -- 842 --
Cash dividend declared -- -- -- -- --
Cash dividend on unallocated ESOP shares -- -- -- -- --
--------- ---------- ----------- ------------ ------------
Balance at June 30, 2000 $ 33 51,536 (4,047) (1,490) 2,603
========= ========== =========== ============= ============
Balance at September 30, 2000 $ 33 35,587 (4,950) (1,296) 2,679
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive income-unrealized
gain on securities available-for-sale
net of income taxes of $76 -- -- -- -- --
Total comprehensive income
Release of ESOP shares -- (6) 409 -- --
Deferred compensation -- -- -- -- 1,346
Treasury stock held for deferred
compensation -- -- -- -- --
MRP share amortization -- -- -- 583 --
Cash dividend declared -- -- -- -- --
Cash dividend on unallocated ESOP shares -- -- -- -- --
--------- ---------- ----------- ------------ ------------
Balance at June 30, 2001 $ 33 35,581 (4,541) (713) 4,025
========= ========== =========== ============ ============
TREASURY ACCUMULATED
STOCK FOR OTHER TOTAL
DEFERRED RETAINED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION INCOME INCOME (LOSS) EQUITY
------------ ------ ------------- ------
Balance at September 30, 1999 (2,373) 26,960 (123) 71,615
Comprehensive income:
Net income -- 2,914 -- 2,914
Other comprehensive income-unrealized
loss on securities available-for-sale
net of income taxes of $61 -- -- (100) (100)
--------
Total comprehensive income 2,814
Shares issued for MRP -- -- -- --
Release of ESOP shares -- -- -- 412
Deferred compensation -- -- -- 230
Treasury stock held for deferred
compensation (230) -- -- (230)
Vesting of MRP shares -- -- -- 842
Cash dividend declared -- (769) -- (769)
Cash dividend on unallocated ESOP shares -- 62 -- 62
------------ -------------- ------------- --------
Balance at June 30, 2000 (2,603) 29,167 (223) 74,976
============ ============== ============= ========
Balance at September 30, 2000 (2,679) 29,999 (164) 59,209
Comprehensive income:
Net income -- 2,569 -- 2,569
Other comprehensive income-unrealized
gain on securities available-for-sale
net of income taxes of $76 -- -- 122 122
--------
Total comprehensive income 2,691
Release of ESOP shares -- -- -- 403
Deferred compensation -- -- -- 1,346
Treasury stock held for deferred
compensation (1,346) -- -- (1,346)
MRP share amortization -- -- -- 583
Cash dividend declared -- (789) -- (789)
Cash dividend on unallocated ESOP shares -- 64 -- 64
------------ -------------- ------------ --------
Balance at June 30, 2001 (4,025) 31,843 (42) 62,161
============ ============== ============ ========
See accompanying notes to the consolidated financial statements.
4
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
JUNE 30,
2001 2000
-------- -------
Cash flows from operating activities:
Net income $ 2,569 2,914
Adjustment to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 180 180
Depreciation 469 360
Deferred income tax (101) 84
Gain on sale of real estate owned -- 149
Amortization of premiums and discounts, net (18) (23)
Release of ESOP shares 403 412
Vesting of MRP shares 583 842
Loan origination fees and unearned discounts
deferred, net of current amortization 6 56
Net loss on sale of loans 205 425
Proceeds from loans held for sale 37,260 14,324
Originations of loans held for sale (35,183) (13,364)
Decrease (increase) in other assets 356 (787)
Decrease in accrued interest receivable 422 215
Increase (decrease) in other liabilities 297 (578)
-------- -------
Net cash provided by operating activities 7,448 5,209
-------- -------
Cash flows provided by (used in) investing activities:
Purchase of FHLB stock -- (681)
Redemption of FHLB stock -- 290
Purchases of investment securities held to maturity (661) (3,996)
Purchase of investment securities available for sale (50,528) --
Proceeds from maturities of investment securities available for sale 6,148 2,081
Proceeds from maturities of investment securities
held to maturity 42,251 19,113
Proceeds from sale of real estate owned -- (149)
Net increase in loans receivable (1,065) (22,489)
Purchases of premises and equipment (568) (265)
-------- -------
Net cash used in investing activities (4,423) (6,096)
-------- -------
(Continued)
5
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
-------- -------
Cash flows from financing activities:
Net increase in deposits $ 4,438 $ 9,730
Advances from the Federal Home Loan Bank 5,000 36,000
Repayments of advances from Federal Home Loan Bank (5,000) (28,000)
Return of capital dividend payment (17,007) --
Dividends paid on common stock (725) (707)
Increase in advance payments by borrowers for
property taxes and insurance 533 525
-------- --------
Net cash (used in) provided by financing activities (12,761) 17,548
-------- --------
Net (decrease) increase in cash and cash equivalents (9,736) 16,661
Cash and cash equivalents at beginning of period 33,107 15,657
-------- --------
Cash and cash equivalents at end of period $ 23,371 $ 32,318
======== ========
Payments are shown below for the following:
Interest $ 9,446 $ 8,404
======== ========
Income taxes $ 1,100 $ 2,112
======== ========
Noncash investing and financing activities:
Deferred compensation to be settled in Company's stock $ 1,346 $ 230
======== ========
Unrealized gains (losses) on investment securities
available for sale $ 198 $ (161)
======== ========
Cash dividends declared but not paid $ 244 $ 238
======== ========
Cash dividends on unallocated ESOP shares, used to repay the
Company's loan to ESOP, and on unallocated MRP shares $ 64 $ 62
======== ========
Transfer from loans held for sale to loans receivable $ 686 $ 5,099
======== ========
Transfer of land from other assets to premises and equipment $ -- $ 545
======== ========
Transfer from loans to real estate acquired in settlement of loans $ 1,981 $ --
======== ========
See accompanying notes to consolidated financial statements.
6
1ST STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 (UNAUDITED) AND SEPTEMBER 30, 2000
NOTE 1. NATURE OF BUSINESS
1st State Bancorp, Inc. (the "Company") was incorporated under the laws of
the Commonwealth of Virginia for the purpose of becoming the holding company for
1st State Bank (the "Bank") in connection with the Bank's conversion from a
North Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank (the "Converted Bank") pursuant to its Plan of Conversion (the
"Stock Conversion"). Upon completion of the Stock Conversion, the Converted Bank
converted from a North Carolina-chartered stock savings bank to a North Carolina
commercial bank (the "Bank Conversion"), retaining the name 1st State Bank (the
"Commercial Bank"), and the Commercial Bank succeeded to all of the assets and
liabilities of the Converted Bank. The Stock Conversion and the Bank Conversion
were consummated on April 23, 1999. The common stock of the Company began
trading on the Nasdaq National Market System under the symbol "FSBC" on April
26, 1999.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements (which are unaudited,
except for the consolidated balance sheet at September 30, 2000, which is
derived from the September 30, 2000 audited consolidated financial statements)
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(none of which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included.
The results of operations for the three and nine month periods ended June
30, 2001 are not necessarily indicative of the results of operations that may be
expected for the year ended September 30, 2001. The preparation of consolidated
financial statements in accordance with generally accepted accounting principles
requires management to make certain estimates. These amounts may be revised in
future periods because of changes in the facts and circumstances underlying
their estimation.
NOTE 3. EARNINGS PER SHARE
The Company's basic earnings per share were computed by dividing net income
by the weighted average shares outstanding, excluding ESOP and MRP benefit plan
shares not committed to be released or granted. Diluted earnings per share
includes the potentially dilutive effects of the Company's benefit plans. A
reconciliation of the denominators of the basic and diluted EPS computations is
as follows:
Three Months Ended
June 30,
2001 2000
---------- ----------
Average shares issued and outstanding 3,163,125 3,163,125
Add: weighted average vested MRP shares issued 53,620 11,458
Less: weighted average unallocated ESOP shares (184,207) (212,741)
---------- ----------
Average shares for basic earnings per share 3,032,538 2,961,842
Add: weighted average unvested MRP shares 72,862 22,913
Add: potential common stock pursuant to stock
option plan (See Note 7) 86,684 16,312
---------- ----------
Average shares for diluted earnings per share 3,192,084 3,001,067
========== ==========
7
Nine Months Ended
June 30,
2001 2000
---------- ----------
Average shares issued and outstanding 3,163,125 3,163,125
Add: weighted average vested MRP shares issued 46,010 3,833
Less: weighted average unallocated ESOP shares (191,252) (220,007)
--------- ---------
Average shares for basic earnings per share 3,017,883 2,946,951
Add: weighted average unvested MRP shares 80,472 7,665
Add: potential common stock pursuant to stock
option plan (See Note 7) 72,147 16,312
--------- ---------
Average shares for diluted earnings per share 3,170,502 2,970,928
========= =========
NOTE 4. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The Company sponsors an employee stock ownership plan (the "ESOP") whereby
an aggregate number of shares amounting to 253,050 or 8% of the stock issued in
the conversion was purchased for future allocation to employees. The ESOP was
funded by an 11 year term loan from the Company in the amount of $4,899,000. The
loan is secured by the shares of stock purchased by the ESOP. During the three
and nine months ended June 30, 2001, 7,045 and 21,134 shares of stock were
committed to be released and approximately $143,000 and $403,000 of compensation
expense was recognized, respectively. Compensation expense related to the ESOP
for the three and nine months ended June 30, 2000 was $135,000 and $411,000,
respectively.
NOTE 5. DEFERRED COMPENSATION
Directors and certain executive officers participate in a deferred
compensation plan, which was approved by the Board of Directors on September 24,
1997. Each participant is fully vested in his account balance under the plan.
Directors may elect to defer their directors' fees and executive officers may
elect to defer 25% of their salary and 100% of bonus compensation.
Prior to the Conversion, amounts deferred by each participant accumulated
interest at a rate equal to the highest rate of interest paid on the Bank's
one-year certificates of deposit. In connection with the Conversion,
participants in the plan were given the opportunity to prospectively elect to
have their deferred compensation balance earn a rate of return equal to the
total return of the Company's stock. All participants elected this option
concurrent with the Conversion, so the Company purchases its common stock to
fund this obligation as additional amounts are deferred. Refer to the Company's
notes to consolidated financial statements, incorporated by reference in the
Company's 2000 Annual Report on Form 10-K for a discussion of the Company's
accounting policy with respect to this deferred compensation plan and the
related treasury stock purchased by the Company to fund this obligation.
The expense related to this plan for the three and nine months ended June
30, 2001 was $68,000 and $203,000, respectively. This expense is included in
compensation expense.
NOTE 6. MANAGEMENT RECOGNITION PLAN
The Company has a Management Recognition Plan ("MRP") which serves as a
means of providing existing directors and officers of the Bank with an ownership
interest in the Company. On June 6, 2000, restricted stock awards of 126,482
shares were granted. The shares awarded under the MRP were issued from
authorized but unissued shares of common stock at no cost to the recipients. The
shares vest at a rate of 33 1/3% per year with a one-third immediate vest on the
date of the grant and annually thereafter. Compensation expense of $260,000 and
$787,000 associated with the MRP was recorded during the three and nine months
ended June 30, 2001. Compensation expense of $842,000 associated with the MRP
was recorded in the three and nine months ended June 30, 2000.
NOTE 7. STOCK OPTION AND INCENTIVE PLAN
On June 6, 2000 the Company's stockholders approved the 1st State Bancorp,
Inc. 2000 Stock Option and Incentive Plan (the "Plan"). The purpose of this plan
is to advance the interests of the Company through providing select key
employees and directors of the Bank with the opportunity to acquire shares. By
encouraging such stock ownership, the Company seeks to attract, retain and
motivate the best available personnel for positions of substantial
responsibility and to provide incentives to the key employees and directors.
Under the Plan, the Company granted 316,312 options to purchase its $0.01 par
value common stock in fiscal year 2000. The exercise price per share is equal to
the fair market value per share on the date of the grant of the stock.
8
NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities." In June 1999 the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. Changes in the fair values of those derivatives
will be reported in earnings or other comprehensive income depending on the use
of the derivative and whether the derivative qualifies for hedge accounting.
SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all
fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133, as
amended by SFAS No. 138, on October 1, 2000.
On October 1, 2000 and June 30, 2001, the Company had no embedded
derivative instruments requiring separate accounting treatment and had
identified fixed rate conforming loan commitments as its only freestanding
derivative instrument. The Company does not currently engage in hedging
activities. The commitments to originate fixed rate conforming loans totaled
$2,265,000 and $1,114,000 at June 30, 2001 and October 1, 2000, respectively.
The fair value of these commitments was immaterial on these dates and therefore
the adoption of SFAS 133 on October 1, 2000 as well as the impact of applying
SFAS 133 at June 30, 2001 was not material to the Company's consolidated
financial statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in our market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in our market area,
and competition that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. We wish to
caution you not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. We wish to advise you that the factors
listed above could affect our financial performance and could cause our actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
We do not undertake, and specifically disclaim any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2001 AND SEPTEMBER 30, 2000
Total assets decreased by $8.8 million or 2.5% from $355.5 million at
September 30, 2000 to $346.7 million at June 30, 2001. The decrease was
primarily the result of the $17.0 million return of capital dividend which was
paid to stockholders on October 2, 2000 which was partially offset by asset
growth of $8.2 million during the nine months ended June 30, 2001.
Investment securities available for sale increased $44.5 million from $9.8
million at September 30, 2000 to $54.3 million at June 30, 2001. Investment
securities held to maturity decreased $41.5 million from $67.2 million at
September 30, 2000 to $25.7 million at June 30, 2001. As market interest rates
fell during the nine months ended June 30, 2001, many of the Company's callable
investment securities were called by the issuers. The majority of these
investments had been classified as held to maturity at the time of purchase.
Most of the investments purchased during the nine months ended June 30, 2001
have been classified as available for sale to give the Company more flexibility
in the future.
Loans receivable, net decreased by $1.1 million, or 0.5%, from $223.6
million at September 30, 2000 to $222.5 million at June 30, 2001. Loans held for
sale also decreased $2.2 million from $5.5 million at September 30, 2000 to $3.3
million at June 30, 2001. With the lower interest rate environment, we have
continued to sell most of the long term fixed rate mortgage loans that we
originate. We sold $37.5 million in fixed rate mortgage loans during the nine
months ended June 30, 2001 compared to $14.7 million for the nine months ended
June 30, 2000. We continue to emphasize commercial, commercial real estate,
consumer loans and equity lines of credit that carry variable rates and/or short
term maturities. At June 30, 2001, commercial loans totaled $53.5 million and
account for 23.7% of gross loans compared to $42.9 million and 18.9% at
September 30, 2000. One to four family residential loans at June 30, 2001
totaled $89.8 million or 39.7% of gross loans compared to $97.6 million or 43.0%
at September 30, 2000.
Deposits increased $4.4 million from $254.4 million at September 30, 2000
to $258.8 million at June 30, 2001. Certificates of deposit at June 30, 2001
totaled $166.5 million or 64.3% of total deposits. At September 30, 2000,
certificates of deposit totaled $168.3 million or 66.2% of total deposits. We
continue to emphasize transaction accounts, which carry lower interest rates
than certificates of deposit. Transaction accounts increased $6.1 million during
the nine months ended June 30, 2001 which were offset by certificate of deposit
runoff of $1.7 million.
Stockholders' equity increased by $3.0 million from $59.2 million at
September 30, 2000 to $62.2 million at June 30, 2001 as a result of net income
of $2.6 million, release of ESOP shares of $403,000, vesting of MRP shares of
$583,000, and an increase in unrealized gains on available for sale securities
of $122,000. These increases were offset by dividends declared of $725,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND
2000
Net Income. We recorded net income of $893,000 for the quarter ended June
30, 2001, as compared to $707,000 for the quarter ended June 30, 2000,
representing an increase of $186,000, or 26.3%. For the three months ended June
30, 2001 basic and diluted earnings per share were $0.29 and $0.28,
respectively. The Company reported basic and diluted earnings per share for the
quarter ended June 30, 2000 of $0.24 per share. The increase in net income
resulted primarily from increased other income and decreased operating expenses
that were offset partially by decreased net interest income and increased income
taxes. The decline in net interest income resulted from the decrease in average
earning assets that resulted from the special return of capital dividend of
$17.0 million, which was paid on October 2, 2000 and decreased net interest
margins. The return of capital dividend decreased the ratio of average
interest-earning assets to average interest-bearing liabilities from 127.1% for
the three months ended June 30, 2000 to 121.2% for the three months ended June
30, 2001.
Net Interest Income. Net interest income, the difference between interest
earned on loans and investments and interest paid on interest-bearing
liabilities, decreased by $286,000 or 8.6% for the three months ended June 30,
2001, compared to the same quarter in the prior year. This decrease reflects a
$243,000 decrease in interest income and $43,000 increase in total interest
expense. The average
10
net interest margin decreased 35 basis points from 4.11% for the three months
ended June 30, 2000 to 3.76% for the quarter ended June 30, 2001.
Interest Income. The decrease in interest income for the three months ended
June 30, 2001 was due to a decrease of $805,000 in average interest-earning
assets compared to the same quarter in the prior year and a decrease in yield on
interest-earning assets of 0.28% from 7.76% for the three months ended June 30,
2000 to 7.48% for the three months ended June 30, 2001. The decreased volume of
average interest-earning assets decreased interest income by approximately
$16,000 and the decreased yield decreased interest income by approximately
$227,000. An increase in average loans outstanding of $5.6 million coupled with
an increase in average interest-bearing overnight funds of $9.6 million
increased interest-earning assets for the quarter compared to the prior year.
These increases were offset by a decrease in average investments of $15.9
million. Average investments decreased to provide cash to pay the special return
of capital dividend.
Interest Expense. Interest expense increased in the three months ended June
30, 2001 due to an increase in average interest-bearing liabilities of $11.7
million which was partially offset by a decrease in the cost of interest-bearing
liabilities of 14 basis points from 4.64% for the three months ended June 30,
2000 to 4.50% for the three months ended June 30, 2001. Average deposits
increased by $18.8 million while average FHLB advances decreased $7.1 million
for the three months ended June 30, 2001 compared to the same quarter in the
prior year. The increase in average interest-bearing liabilities increased
interest expense by approximately $136,000 while the decrease in the average
cost of interest-bearing liabilities decreased interest expense by approximately
$94,000.
The following table presents average balances and average rates earned/paid
by the Company for the quarter ended June 30, 2001 compared to the quarter ended
June 30, 2000.
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
DOLLARS IN THOUSANDS
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------ ------- -------- ------
Assets:
Loans receivable (1) 228,239 4,625 8.11% 222,675 4,722 8.48%
Investment securities (2) 73,962 1,182 6.39 89,891 1,380 6.14
Interest-bearing overnight deposits 20,710 230 4.45 11,154 178 6.40
-------- ------ ---- -------- ------ ----
Total interest-earning assets 322,911 6,037 7.48 323,720 6,280 7.76
Non interest-earning assets 23,327 16,570
-------- --------
Total assets 346,238 340,290
Liabilities and stockholders' equity:
Deposits 246,447 2,725 4.42% 227,603 2,564 4.51%
FHLB advances 20,000 273 5.45 27,121 391 5.77
-------- ------ ---- -------- ------ ----
Total interest-earning liabilities 266,447 2,998 4.50 254,724 2,955 4.64
Non interest-earning liabilities 18,040 12,444
-------- --------
Total liabilities 284,487 267,168
Stockholders' equity 61,751 73,122
-------- --------
Total liabilities and stockholders' 346,238 340,290
equity
Net interest income 3,039 3,325
Interest rate spread 2.98% 3.12%
Net interest margin (3) 3.76% 4.11%
Ratio of average interest-earning assets
to average interest-bearing liabilities 121.19% 127.09%
(1) Includes nonaccrual loans and loans held for sale, net of discounts and
allowance for loan losses.
(2) Includes FHLB of Atlanta stock.
(3) Represents net interest income divided by the average balance of
interest-earning assets.
11
Provision for Loan Losses. The provision for loan losses is charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate to absorb estimated probable losses inherent in the loan portfolio
based on existing loan levels and types of loans outstanding, nonperforming
loans, prior loan loss experience, general economic conditions and other
factors. Provisions for loan losses totaled $60,000 for both the three months
ended June 30, 2001 and 2000. See further discussion at "Asset Quality".
Other Income. Other income increased $429,000, or 99.5%, from $431,000 for
the quarter ended June 30, 2000 to $860,000 for the quarter ended June 30, 2001.
Mortgage banking income, net, increased $258,000 from $80,000 for the quarter
ended June 30, 2000 to $338,000 for the quarter ended June 30, 2001. During the
quarter ended June 30, 2001, we sold fixed-rate mortgage loans held for sale of
$19.8 million. Of this total $17.6 million was sold on a servicing released
basis and the Company recognized income of $277,000 on these loans. During the
quarter ended June 30, 2001 we sold fixed rate mortgages held for sale of $2.2
million for which we retained the servicing of these loans. These loan sales
generated income of $61,000. During the quarter ended June 30, 2000, we sold
fixed-rate mortgage loans held for sale of $5.1 million on a servicing released
basis and recognized income of $61,000 from these loans. During the quarter
ended June 30, 2000, the Company was able to record a nominal recovery of
$20,000 on its lower of cost or fair value on loans held for sale. Customer
service fees increased $55,000, or 36.9% from $149,000 for the quarter ended
June 30, 2000 to $204,000 for the quarter ended June 30, 2001. This increase
results primarily from growth in the number of transaction accounts and
increases in the Bank's service charges. In addition, during the quarter ended
June 30, 2001, commissions from sales of annuities and mutual funds increased
$112,000 or 87.5% from $128,000 for the quarter ended June 30, 2000 to $240,000
for the quarter ended June 30, 2001. This increase resulted primarily from
increased sales volumes. Sales of annuity and mutual funds totaled $4.9 million
for the quarter ended June 30, 2001 as compared with $2.4 million for the
previous year.
Operating Expenses. Total operating expenses were $2.5 million for the
quarter ended June 30, 2001, a decrease of $160,000, or 6.13% over the $2.6
million recorded for the three months ended June 30, 2000. Compensation and
related benefits expense decreased $500,000, or 23.8% from $2.1 million for the
quarter ended June 30, 2000 to $1.6 million for the quarter ended June 30, 2001.
This decrease was primarily the result of the MRP expense of $842,000 for the
quarter ended June 30, 2000. This expense included $777,000 from the immediate
1/3 vest of the shares granted under the MRP that was implemented on June 6,
2000. MRP expense for the quarter ended June 30, 2001 was $260,000. Occupancy
and equipment expense increased $73,000 or 27.8% from $263,000 for the quarter
ended June 30, 2000 to $336,000 for the quarter ended June 30, 2001. Most of
this increase was depreciation expense from the new branch and the check imaging
hardware and software, which were not present in the same quarter in the prior
year. Expenses incurred in operating real estate owned were $30,000 for the
three months ended June 30, 2001 compared to a net gain on sale of real estate
owned of $149,000 for the three months ended June 30, 2000. The increases in
other categories of operating expenses generally are attributable to the growth
of the Company including the operating expenses associated with the Bank's
seventh branch, which opened on September 27, 2000. We expect that other
operating expenses will continue to increase in subsequent periods as a result
of increased cost associated with operating a public company.
Income Tax Expense. Income tax expense increased $117,000 from tax expense
of $380,000 for the quarter ended June 30, 2000 to $497,000 for the quarter
ended June 30, 2001. The increase resulted from a $303,000 increase in income
before income taxes. The effective tax rates were 35.8% and 35.0% for the
quarters ended June 30, 2001 and 2000, respectively.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000
Net Income. We recorded net income of $2.6 million for the nine months
ended June 30, 2001, as compared to $2.9 million for the nine months ended June
30, 2000, representing a decrease of $300,000, or 10.3%. For the nine months
ended June 30, 2001 basic and diluted earnings per share were $0.85 and $0.81,
respectively. The Company reported basic and diluted earnings per share for the
nine months ended June 30, 2000 of $0.99 and $0.98 per share, respectively. The
decrease in net income resulted primarily from decreased net interest income and
increased operating expenses that were offset partially by increased other
income and decreased income taxes. The decline in net interest income resulted
from (i) the decrease in average earning assets that resulted from the special
return on capital dividend of $17.0 million, which was paid on October 2, 2000
and (ii) decreased net interest margins. The return of capital dividend
decreased the ratio of average interest-earning assets to average
interest-bearing liabilities from 126.8% for the nine months ended June 30, 2000
to 120.4% for the nine months ended June 30, 2001.
Net Interest Income. Net interest income, the difference between interest
earned on loans and investments and interest paid on interest-bearing
liabilities, decreased by $558,000 or 5.7% for the nine months ended June 30,
2001, compared to the same nine months in the prior year. This decrease reflects
a $564,000 increase in interest income that was more than offset by the $1.1
million increase in total interest expense. The average net interest margin
decreased 27 basis points from 4.08% for the nine months ended June 30, 2000 to
3.81% for the nine months ended June 30, 2001.
Interest Income. The increase in interest income for the nine months ended
June 30, 2001 was due to an increase of $2.9 million in average interest-earning
assets compared to the same nine months in the prior year and an increase in
yield on interest-earning assets of 16 basis points from 7.61% for the nine
months ended June 30, 2000 to 7.77% for the nine months ended June 30, 2001. The
increased volume of average interest-earning assets increased interest income by
approximately $168,000 and the increased yield increased interest income by
approximately $396,000. An increase in average loans outstanding of $13.7
million
12
coupled with an increase in average interest-bearing overnight funds of $7.1
million increased interest-earning assets for the nine months compared to the
prior year. These increases were offset in part by a decrease in average
investments of $17.9 million. Average investments decreased to provide cash to
pay the special return of capital dividend.
Interest Expense. Interest expense increased in the nine months ended June
30, 2001 due to an increase in average interest-bearing liabilities of $15.8
million and an increase in the cost of interest-bearing liabilities of 29 basis
points from 4.47% for the nine months ended June 30, 2000 to 4.76% for the nine
months ended June 30, 2001. Average deposits increased by $21.4 million while
average FHLB advances decreased $5.6 million for the nine months ended June 30,
2001 compared to the same nine months in the prior year. The increase in average
interest-bearing liabilities increased interest expense by approximately
$529,000 while the increase in the average cost of interest-bearing liabilities
increased interest expense by approximately $593,000.
The following table presents average balances and average rates earned/paid
by the Company for the nine months ended June 30, 2001 compared to the nine
months ended June 30, 2000.
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
DOLLARS IN THOUSANDS
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------ ------- -------- ------
Assets:
Loans receivable (1) 230,603 14,642 8.47% 216,877 13,556 8.33%
Investment securities (2) 76,001 3,517 6.17 93,863 4,284 6.09
Interest-bearing overnight deposits 15,722 629 5.33 8,646 384 5.92
-------- ------- ---- -------- ------- ----
Total interest-earning assets 322,326 18,788 7.77 319,386 18,224 7.61
Non interest-earning assets 23,755 20,904
-------- --------
Total assets 346,081 340,290
Liabilities and stockholders' equity:
Deposits 247,034 8,715 4.70% 225,621 7,334 4.33%
FHLB advances 20,699 853 5.49 26,325 1,112 5.63
-------- ------- ---- -------- ------- ----
Total interest-earning liabilities 267,733 9,568 4.76 251,946 8,446 4.47
Non interest-earning liabilities 17,675 15,222
-------- --------
Total liabilities 285,408 267,168
Stockholders' equity 60,673 73,122
-------- --------
Total liabilities and stockholders' 346,081 340,290
equity
Net interest income 9,220 9,778
Interest rate spread 3.01% 3.14%
Net interest margin (3) 3.81% 4.08%
Ratio of average interest-earning assets
to average interest-bearing liabilities 120.39% 126.77%
(1) Includes nonaccrual loans and loans held for sale, net of discounts and
allowance for loan losses.
(2) Includes FHLB of Atlanta stock.
(3) Represents net interest income divided by the average balance of
interest-earning assets.
13
Provision for Loan Losses. The provision for loan losses is charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate to absorb estimated probable losses inherent in the loan portfolio
based on existing loan levels and types of loans outstanding, nonperforming
loans, prior loan loss experience, general economic conditions and other
factors. Provisions for loan losses totaled $180,000 for both the nine months
ended June 30, 2001 and 2000. During the fiscal 2001 we foreclosed on a $2.1
million loan resulting in an increase to real estate owned. The fair value of
the collateral for the loan, less costs to sell, was determined to be
approximately $125,000 less than the balance of the loan, thus we charged
$125,000 to the allowance for loan losses during the quarter ended June 30,
2001. See further discussion at "Asset Quality".
Other Income. Other income increased $800,000, or 80.0%, from $1.0 million
for the nine months ended June 30, 2000 to $1.8 million for the nine months
ended June 30, 2001. Mortgage banking income, net increased $636,000 from
$22,000 for the nine months ended June 30, 2000 to income of $658,000 for the
nine months ended June 30, 2001. During the nine months ended June 30, 2001, we
sold fixed-rate mortgage loans held for sale of $37.5 million and recognized
income of $638,000 on the sale as well as a recovery of $20,000 from previous
lower of cost or fair value adjustments on loans held for sale. During the nine
months ended June 30, 2000, we sold fixed-rate mortgage loans held for sale of
$14.7 million and recognized income of $179,000 from the sale of these loans;
however, the increase in interest rates during this nine months required a
$157,000 charge to earnings to record the loans held for sale at the lower of
cost or fair value. Customer service fees increased $91,000, or 21.1% from
$431,000 for the nine months ended June 30, 2000 to $522,000 for the nine months
ended June 30, 2001. This increase results primarily from growth in the number
of transaction accounts and increased service charges. In addition, during the
nine months ended June 30, 2001, commissions from sales of annuities and mutual
funds increased $136,000 or 42.1% from $323,000 for the nine months ended June
30, 2000 to $459,000 for the nine months ended June 30, 2001. The increase
resulted from an increase in sales volume. Sales of annuity and mutual funds
were $8.0 million for the nine months ended June 30, 2001 compared with $5.6
million in the same period of the prior year.
Operating Expenses. Total operating expenses were $6.9 million for the nine
months ended June 30, 2001, an increase of $800,000, or 13.1% over the $6.1
million recorded for the nine months ended June 30, 2000. Compensation and
related benefits expense increased $200,000, or 4.5% from $4.4 million for the
nine months ended June 30, 2000 to $4.6 million for the nine months ended June
30, 2001. This increase was primarily the result of increases in salaries and
benefits as well as additional employees. Occupancy and equipment expense
increased $180,000 or 23.6% from $764,000 for the nine months ended June 30,
2000 to $944,000 for the nine months ended June 30, 2001. Most of this increase
was depreciation expense from the new branch and the check imaging hardware and
software, which were not present in the same nine months in the prior year.
Expenses incurred in operating the real estate owned were $36,000 for the nine
months ended June 30, 2001 compared to a net gain on sale of real estate owned
of $149,000 for the nine months ended June 30, 2000. The increases in other
categories of operating expenses generally are attributable to the growth of the
Company including the operating expenses associated with the Bank's seventh
branch, which opened on September 27, 2000. We expect that other operating
expenses will continue to increase in subsequent periods as a result of
increased cost associated with operating a public company.
Income Tax Expense. Income tax expense decreased $200,000 from tax expense
of $1.6 million for the nine months ended June 30, 2000 to $1.4 million for the
nine months ended June 30, 2001. The decrease resulted from a $494,000 decrease
in income before income taxes. The effective tax rates were 35.5% and 34.9% for
the nine months ended June 30, 2001 and 2000, respectively. The higher effective
tax rate results from the losses at the holding company level for which no state
tax benefit is received.
ASSET QUALITY
At June 30, 2001, the Company's non-performing assets (nonaccrual loans and
real estate owned) were $3.1 million or 0.89% of total assets. At September 30,
2000, non-performing assets consisted entirely of loans, which were
approximately $2.9 million or 0.82% of total assets. At June 30, 2001, impaired
loans totaled $2.5 million as defined by Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," compared
to $2.6 million at September 30, 2000. The impaired loans at June 30, 2001
result from two borrowers and are collateralized primarily by real estate in
Alamance County. Impaired loans totaling $434,000 are on non-accrual status.
Interest income of $57,000 has been recorded on impaired loans in the three and
nine months ended June 30, 2001. The related reserve for loan losses on these
loans totaled $45,000. The average carrying value of impaired loans was $1.0
million and $1.5 million during the three and nine months ended June 30, 2001,
respectively. All amounts received on non-accrual impaired loans have been
recorded as a reduction of the principal balance of the loan. At June 30, 2001
real estate owned totaled $2.0 million, compared to zero at September 30, 2000.
The increase is attributable to foreclosing on two loans secured by real estate
during the current fiscal year. Within real estate owned is a 53 unit apartment
complex in Burlington, N. C. with a carrying value of $1.9 million. We have
engaged a management company to rent and operate the complex while we own it.
The Company is undertaking steps to liquidate the real estate owned properties.
The Bank's net chargeoffs for the nine months ended June 30, 2001 and 2000 were
$163,000 and $160,000, respectively. The allowance for loan losses was $3.6
million or 1.57% of outstanding loans at June 30, 2001. This compares to 1.56%
at September 30, 2000 and 1.54% at June 30, 2000.
14
Regulations require that we classify our assets on a regular basis. There
are three classifications for problem assets: substandard, doubtful and loss. We
regularly review our assets to determine whether any assets require
classification or re-classification. At June 30, 2001, we had $ 3.9 million in
classified assets consisting of $1.9 million in substandard loans and $2.0
million in real estate owned.
In addition to regulatory classifications, we also classify as "special
mention" and "watch" assets that are currently performing in accordance with
their contractual terms but may become classified or nonperforming assets in the
future. At June 30, 2001, we have identified approximately $3.1 million in
assets classified as special mention and $34.1 million as watch. Included in the
watch asset total are five loans with an aggregate outstanding balance of $4.4
million at June 30, 2001 to a company affiliated with one of our directors. In
addition, the director has the ability to borrow an additional $77,000 from us
under a line of credit. All the loans are secured by a first lien on all company
assets, including accounts receivable, inventory, equipment, furniture and real
property occupied by the borrower. In addition, the director has personally
guaranteed repayment of the loans. At June 30, 2001, such loans were current
with respect to their payment terms and were performing in accordance with the
related loan agreements. Based on an analysis of the borrower's current
financial statements received in July 2001, management has concerns that the
borrower may have difficulty in complying with the present loan repayment terms
on an ongoing basis. Accordingly, this loan may become a nonperforming asset in
future periods. Management will continue to closely monitor the performance of
these loans in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Bank must meet certain liquidity requirements established by the State
of North Carolina Office of the Commissioner of Banks (the "Commissioner"). At
June 30, 2001, the Bank's liquidity ratio exceeded such requirements. Liquidity
generally refers to the Bank's ability to generate adequate amounts of funds to
meet its cash needs. Adequate liquidity guarantees that sufficient funds are
available to meet deposit withdrawals, fund loan commitments, maintain adequate
reserve requirements, pay operating expenses, provide funds for debt service,
pay dividends to stockholders and meet other general commitments.
Our primary sources of funds are deposits, principal and interest payments
on loans, proceeds from the sale of loans, and to a lesser extent, advances from
the FHLB of Atlanta. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and local competition.
Our most liquid assets are cash and cash equivalents. The levels of
these assets are dependent on our operating, financing, lending and investing
activities during any given period. At June 30, 2001, cash and cash equivalents
totaled $23.4 million. We have other sources of liquidity should we need
additional funds. During the nine months ended June 30, 2001 and 2000, we sold
loans totaling $37.5 million and $14.7 million, respectively. Additional sources
of funds include FHLB of Atlanta advances. Other sources of liquidity include
loans and investment securities designated as available for sale, which totaled
$57.6 million at June 30, 2001.
We anticipate that we will have sufficient funds available to meet our
current commitments. At June 30, 2001, we had $7.4 million in commitments to
originate new loans, $62.6 million in unfunded commitments to extend credit
under existing equity lines and commercial lines of credit and $256,000 in
standby letters of credit. At June 30, 2001, certificates of deposit, which are
scheduled to mature within one year, totaled $139.4 million. We believe that a
significant portion of such deposits will remain with us.
The FDIC requires the Bank to meet a minimum leverage capital requirement
of Tier I capital to assets ratio of 4%. The FDIC also requires the Bank to meet
a ratio of total capital to risk-weighted assets of 8%, of which 4% must be in
the form of Tier I capital. The Commissioner requires the Bank at all times to
maintain certain minimum capital levels. The Bank was in compliance with all
capital requirements of the FDIC and the Commissioner at June 30, 2001 and is
deemed to be "well capitalized."
The Federal Reserve also mandates capital requirements on all bank holding
companies, including 1st State Bancorp, Inc. These capital requirements are
similar to those imposed by the FDIC on the Bank. At June 30, 2001, the Company
was in compliance with the capital requirements of the Federal Reserve.
ACCOUNTING ISSUES
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities." In June 2000 the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. Changes in the fair values of those derivatives
will be reported in earnings or other comprehensive income depending on the use
of the derivative and whether the derivative qualifies for hedge accounting.
SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all
fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133, as
amended by SFAS No. 138, on October 1, 2000.
15
On October 1, 2000 and June 30, 2001, the Company had no embedded
derivative instruments requiring separate accounting treatment and had
identified fixed rate conforming loan commitments as its only freestanding
derivative instrument. The Company does not currently engage in hedging
activities. The commitments to originate fixed rate conforming loans totaled
$2,265,000 and $1,114,000 at June 30, 2001 and October 1, 2000, respectively.
The fair value of these commitments was less than $ 10,000 on these dates and
therefore the adoption of SFAS 133 on October 1, 2000 as well as the impact of
applying SFAS 133 at June 30, 2001 was not material to the Company's
consolidated financial statements.
The FASB has issued Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 140"). This statement replaces SFAS No. 125 ("Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities") and revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of the provisions of SFAS No. 125 without
consideration. SFAS No. 140 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities,
based on application of a financial components approach that focuses on control.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 2001. Adoption of SFAS No.
140 is not expected to have a material impact on the Company's consolidated
financial statements.
The FASB has issued Statements of Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142").
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. SFAS 141 requires
that intangible assets that meet certain criteria be recognized as assets apart
from goodwill. SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. SFAS 142 addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. SFAS 142 also addresses how goodwill and
other intangible assets should be accounted for after they have been initially
recognized in the financial statements. SFAS 142 is required to be applied
starting with fiscal years beginning after December 15, 2001 and early
application is permitted for entities with fiscal years beginning after March
31, 2001, under certain conditions. Impairment losses for goodwill and
intangible assets with indefinite useful lives that arise due to the initial
application of SFAS 142 (resulting from a transitional impairment test) are to
be reported as the cumulative effect of a change in accounting principle.
Adoption of SFAS 141 and SFAS 142 are not expected to have a material impact on
the Company's consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on interest-earning assets over interest expense on
interest-bearing liabilities.
The Company considers interest rate risk to be its most significant market
risk, which could potentially have the greatest impact on operating earnings.
The structure of the Company's loan and deposit portfolios is such that a
significant decline in interest rates may adversely impact net market values and
net interest income.
The Company monitors whether material changes in market risk have occurred
since September 30, 2000. The Company does not believe that any material adverse
changes in market risk exposures occurred since September 30, 2000.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits. None.
--------
(b.) Reports on Form 8-K. During the quarter ended June 30, 2001,
-------------------
the registrant did not file any current reports on Form 8-K.
17
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
1ST STATE BANCORP, INC.
/s/ James C. McGill
Date: August 13, 2001 --------------------------------------------
James C. McGill
President and Chief Executive Officer
(Principal Executive Officer)
/s/ A. Christine Baker
Date: August 13, 2001 --------------------------------------------
A. Christine Baker
Executive Vice President
Treasurer and Secretary
(Principal Financial and Accounting Officer)
18