<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1995 1996
- - ------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,538,695 $ 5,809,464
Federal funds sold 1,550,000 1,500,000
Investment securities:
Held to maturity, at amortized cost 7,938,833 2,503,471
Available for sale, at estimated market value 2,969,589 14,543,743
Nonmarketable equity securities 599,400 599,400
Loans receivable, net 41,204,318 43,552,476
Mortgage-backed securities, held to maturity, at amortized cost 652,445 572,268
Accrued interest receivable 296,561 430,711
Property and equipment, net 835,666 818,841
Prepaid expenses and other assets 132,027 157,183
------------------------------
TOTAL ASSETS $57,717,534 $70,487,557
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $48,203,443 $41,672,430
FHLB advances - 3,000,000
Advance payments by borrowers for taxes and insurance 209,418 207,252
Accrued expenses and other liabilities 237,713 355,802
Deferred income taxes 475,506 454,806
Income taxes payable 11,349 91,116
------------------------------
TOTAL LIABILITIES 49,137,429 45,781,406
------------------------------
Stockholders' Equity
Preferred stock, no par value, authorized
5,000,000 shares, none issued - -
Common stock, no par value, authorized
20,000,000 shares, 1,840,000 shares issued - -
Additional paid-in capital - 17,423,417
Note receivable from ESOP for purchase of common stock - (1,772,293)
Unrealized gain on securities available for sale, net of tax 351,300 311,119
Retained earnings, substantially restricted 8,228,805 8,743,908
------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,580,105 24,706,151
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $57,717,534 $70,487,557
==============================
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
- - -----------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 845,078 $ 897,633
Investment securities 173,563 244,498
Mortgage-backed securities 20,356 17,247
Short-term cash investments 59,643 139,980
-----------------------------
TOTAL INTEREST INCOME 1,098,640 1,299,358
Interest expense:
Deposits 558,526 494,083
FHLB advances - 4,520
-----------------------------
TOTAL INTEREST EXPENSE 558,526 498,603
-----------------------------
NET INTEREST INCOME 540,114 800,755
Provision for loan losses - 6,528
-----------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 540,114 794,227
-----------------------------
Noninterest income:
Service charges and fees 13,285 13,659
Other 3,457 5,002
-----------------------------
16,742 18,661
-----------------------------
Noninterest expense:
Compensation and employee benefits 157,684 181,523
Occupancy 22,118 22,955
Insurance 31,001 30,089
Data processing 22,880 23,910
Furniture and fixture expense 9,409 9,819
Other 52,889 60,682
-----------------------------
295,981 328,978
-----------------------------
INCOME BEFORE INCOME TAXES 260,875 483,910
Income taxes 103,522 179,355
-----------------------------
NET INCOME $ 157,353 $ 304,555
=============================
Primary earnings per share $ n/a $ 0.18
=============================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
- - ----------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 2,400,646 $ 2,698,034
Investment securities 545,930 582,052
Mortgage-backed securities 60,582 52,920
Short-term cash investments 192,453 256,499
-----------------------------
TOTAL INTEREST INCOME 3,199,611 3,589,505
-----------------------------
Interest expense:
Deposits 1,558,340 1,694,380
FHLB advances - 4,520
-----------------------------
1,558,340 1,698,900
-----------------------------
NET INTEREST INCOME 1,641,271 1,890,605
Provision for loan losses 5,000 18,528
-----------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,636,271 1,872,077
-----------------------------
Noninterest income:
Service charges and fees 36,139 42,528
Other 14,734 21,079
-----------------------------
50,873 63,607
-----------------------------
Noninterest expense:
Compensation and employee benefits 472,192 488,820
Occupancy 65,684 68,246
Insurance 91,417 91,852
Data processing 69,495 74,570
Furniture and fixture expense 28,296 30,762
Other 164,322 166,567
-----------------------------
891,406 920,817
-----------------------------
INCOME BEFORE INCOME TAXES 795,738 1,014,867
Income taxes 290,977 372,620
-----------------------------
NET INCOME $ 504,761 $ 642,247
=============================
Primary earnings per share $ n/a $ 0.38
=============================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
- - -----------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 504,761 $ 642,247
Adjustments to reconcile net income to net
cash provided by operatinG activities:
Depreciation 39,654 38,341
ESOP compensation expense charged to
paid-in capital -- 1,132
Deferred income taxes (credits) (20,544) --
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (18,447) (25,156)
Accrued interest receivable (619) (134,150)
Increase (decrease) in:
Accrued expenses and other liabilities (38,130) (9,055)
Income taxes payable (3,730) 79,767
------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 462,945 593,126
------------------------------------
Cash Flows From Investing Activities
Net increase in loans receivable (2,674,645) (2,348,158)
Principal payments on mortgage-backed
securities 156,290 80,177
Net (increase) decrease in investment
securities 1,925,127 (6,199,673)
Loan to ESOP for purchase of common
stock -- (1,772,293)
Purchase of property and equipment (12,952) (21,516)
------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES (606,180) (10,261,463)
------------------------------------
Cash Flows From Financing Activities
Net decrease in deposits (784,177) (6,531,013)
Advances from FHLB -- 3,000,000
Net proceeds received from issuance of
common stock -- 17,422,285
Increase (decrease) in advance
payments by borrowers
for taxes and insurance 54,589 (2,166)
------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (729,588) 13,889,106
------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (872,823) 4,220,769
Cash and cash equivalents, including
federal funds sold:
Beginning 6,042,948 3,088,695
------------------------------------
Ending $ 5,170,125 $ 7,309,464
====================================
</TABLE>
4
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
- - ----------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 1,559,758 $ 1,696,634
=========================
Cash payments for income taxes $ 314,803 $ 275,153
=========================
Supplemental Disclosure of Noncash
Financing Transactions
Dividends declared, accrued and
deducted from retained earnings $ - $ 127,144
=========================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- - --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS
Scotland Bancorp, Inc. (the "Company") was incorporated under the laws of the
State of North Carolina for the purpose of becoming the bank holding company of
Scotland Savings Bank, Inc., SSB (the "Bank" or "Scotland Savings Bank") in
connection with the Bank's conversion from a state chartered mutual savings bank
to a state chartered stock savings bank, pursuant to its amended and restated
Plan of Conversion. The Company was organized in 1995 to acquire all of the
common stock of Scotland Savings Bank upon its conversion to stock form, which
occurred on March 29, 1996. The Company commenced a subscription offering of its
shares in February 1996 and the stock offering also closed on March 29, 1996.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements (except for the
statement of financial condition at September 30, 1995, which is audited) have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB of
Regulation S-X. 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 financial statements of the Company are
presented on a consolidated basis with those of Scotland Savings Bank, although
the Company did not own any shares of the Bank and had no assets, liabilities,
equity or operations at any date prior to March 29, 1996. The Company did not
conduct any operations for any period prior to March 29, 1996. Therefore, the
information in financial statements presented for all periods prior to March 31,
1996 include only the accounts and operations of Scotland Savings Bank. The
results of operations for the nine month period ended June 30, 1996 are not
necessarily indicative of the results of operations that may be expected for the
year ended September 30, 1996.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the 1995 Scotland Savings Bank financial statements
which are included in the Prospectus of Scotland Bancorp, Inc., dated February
9, 1996, except for the adoption of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," which
was adopted on October 1, 1995 as explained below.
NOTE 3. EARNINGS PER SHARE
The Company's earnings per share for the three and nine month periods ended June
30, 1996 is based on 1,695,260 shares assumed to be outstanding for the periods.
Earnings per share has been calculated in accordance with Statement of Position
93-6 "Employers' Accounting for Employee Stock Ownership Plans." Earnings per
share for the nine month period ended June 30, 1996 is reported based upon the
assumption that such shares had been outstanding from the beginning of the nine
month period although the shares were actually outstanding for periods
subsequent to March 29, 1996 and no consideration has
6
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- - -------------------------------------------------------------------------------
NOTE 3. EARNINGS PER SHARE (CONTINUED):
been given to the earnings that would have been generated had such shares been
issued as of October 1, 1995. Earnings per share for the three and nine month
periods ended June 30, 1995 have not been presented in the consolidated
statements of income because the Bank had not converted to stock form and the
Company had not completed its stock offering at any time during those periods.
NOTE 4. ADOPTION OF SFAS NO. 114 AND 118
The Company and Scotland Savings Bank were required to adopt Statement of
Financial Accounting Standards (SFAS) No. 114 "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" at October 1, 1995. SFAS No.
114 requires all creditors to measure the impairment of a loan based upon the
present value of the loan's future cash flows discounted using the loan's
effective interest rate. The loan can also be valued at its fair value or the
market price of its underlying collateral if the loan is primarily collateral
dependent. SFAS No. 118 amended SFAS No. 114 by adding disclosure requirements
for impaired loans and it permits greater latitude in the manner in which income
on impaired loans may be recognized as long as the creditor's policies are
disclosed.
The adoption of SFAS No. 114 did not have an effect on the Bank's reporting for
impaired loans since the Bank had no loans outstanding at October 1, 1995 or for
the nine months ended June 30, 1996 which it considers to be impaired.
Therefore, there is no specific SFAS No. 114 allowance for impaired loans at
June 30, 1996.
The Bank does not accrue interest on loans delinquent 90 days or more. At the
time the loan becomes delinquent 90 days, the Bank reverses all previously
recorded interest income and establishes a reserve for uncollected interest,
which is reported as a liability. Interest collected while the loan is in such
status is credited to income in the period received. If the loan is brought to
a status in which it is no longer delinquent 90 days, the reserve for
uncollected interest is reversed and interest income is recognized. The Bank
anticipates that it will account for interest on impaired loans in a similar
fashion in the future if and when it has impaired loans.
NOTE 5. DIVIDENDS DECLARED
On June 25, 1996, the Board of Directors of Scotland Bancorp, Inc. declared a
dividend of $ .075 a share for stockholders of record as of July 15, 1996 and
payable on July 26, 1996. The dividends declared were accrued and reported as
other liabilities in the June 30, 1996 consolidated balance sheet. In addition,
on June 25, 1996, the Board of Directors of Scotland Savings Bank declared an
upstream dividend of $75,000 to Scotland Bancorp, Inc., which was paid on July
1, 1996.
7
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- - -------------------------------------------------------------------------------
NOTE 6. MUTUAL TO STOCK CONVERSION
On October 24, 1995, the Board of Directors of the Bank adopted a Plan of
Conversion (the Plan) which was subsequently amended and restated, under which
the Bank converted from a state chartered mutual savings bank to a state
chartered stock savings bank and became a wholly-owned subsidiary of the Company
formed in connection with the Conversion. The Plan was approved by the Federal
Deposit Insurance Corporation (FDIC) and the North Carolina Administrator,
Savings Institutions Division, and included the filing of a registration
statement with the Securities and Exchange Commission. The Plan was also
approved by the members of the Bank at a special meeting held March 12, 1996.
On March 29, 1996, the Conversion was completed and the Company issued 1,840,000
shares of its common stock with a value of $18,400,000 which resulted in capital
of $17,422,285, net of conversion costs. The Company utilized $7,754,342 of the
net conversion proceeds to purchase all of the capital stock of the Bank.
Concurrent with the Conversion, the Bank established a liquidation account in
an amount equal to its net worth as reflected in its latest statement of
financial condition used in its final conversion-offering circular. The
liquidation account will be maintained for the benefit of eligible deposit
account holders and supplemental eligible deposit account holders who continue
to maintain their deposit accounts in the Bank after conversion. Only in the
event of a complete liquidation will eligible deposit account holders and
supplemental eligible deposit account holders be entitled to receive a
liquidation distribution from the liquidation account in the amount of the then
current adjusted sub account balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stock. Dividends
paid by the Bank subsequent to the Conversion cannot be paid from this
liquidation account.
The Bank may not declare or pay a cash dividend on its common stock if its net
worth would thereby be reduced below either the aggregate amount then required
for the liquidation account or the minimum regulatory capital requirements
imposed by federal or state regulations.
8
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 AND SEPTEMBER 30, 1995:
Total assets increased by $12.8 million or 22.1%, to $70.5 million at June 30,
1996 from $57.7 million at September 30, 1995. Net loans receivable increased
by $2.4 million or 5.7% to $43.6 million at June 30, 1996 from $41.2 million at
September 30, 1995 as stabilized rates over the nine month period created a
fairly typical loan demand. Cash and cash equivalents, including federal funds
sold, increased by $4.2 million or 136.7% to $7.3 million at June 30, 1996 from
$3.1 million at September 30, 1995. Investment securities increased by $6.1
million or 53.3%, to $17.6 million at June 30, 1996 from $11.5 million at
September 30, 1995. Cash and cash equivalents and investment securities
increased primarily due to the investment of stock proceeds received by the
Company in its initial public offering which closed on March 29, 1996. Such
increase would have been similar to the net conversion proceeds of $17.4
million; however, a sizable portion of the funds used by common stock
subscribers came from existing deposit accounts at the Bank. Deposits decreased
by $6.5 million during the period from September 30, 1995 to June 30, 1996 as a
number of common stockholders used existing deposits to purchase shares of stock
in the Company. During the three months ended June 30, 1996, the Company loaned
$1.8 million to the Company's ESOP plan to purchase shares of the Company's
common stock in the open market. To boost liquidity depleted by the funds
loaned to the ESOP, and provide funding for loan originations, the Bank borrowed
$3,000,000 from the FHLB of Atlanta during the three months ended June 30, 1996.
Retained earnings increased by $515,000 to $8.7 million at June 30, 1996, which
is attributable to the Bank's earnings during the nine months ended June 30,
1996 of $642,000 less cash dividends declared of $127,000.
At June 30, 1996, the Company's capital amounted to $24.7 million, which as a
percentage of total consolidated assets was 37.6%, and was considerably in
excess of the regulatory capital requirements at such date.
The Bank had no nonperforming loans, defined as loans past due 90 days or more,
as a percentage of loans outstanding, at June 30, 1996 or September 30, 1995.
During the three and nine month periods ended June 30, 1996, the Bank's level of
nonperforming loans has remained consistently low in relation to prior periods
and total loans outstanding, and the Bank has only charged off $6,648 in loans
during these periods. As a result, and based on management's analysis of the
adequacy of its allowances, only $6,528 and $18,528 for the three and nine month
periods ended June 30, 1996, respectively, were provided to the loan loss
allowance. Such amounts were added as general valuation allowances due to the
increase in the Bank's loan portfolio during these periods. During the nine
month period ended June 30, 1996, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan". The adoption had no effect on the
operating results of the Bank.
9
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - ------------------------------------------------------------------------------
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1996 AND 1995:
GENERAL. Net income for the three months ended June 30, 1996 was $305,000 or
$148,000 more than the $157,000 earned during the same quarter in 1995. Net
income for the nine months ended June 30, 1996 was $642,000 or $137,000 more
than the $505,000 earned during the same period in 1995.
INTEREST INCOME. Interest income increased by $201,000 from $1.1 million for
the three months ended June 30, 1995 to $1.3 million for the three months ended
June 30, 1996. Interest income increased by $390,000 from $3.2 million for the
nine months ended June 30, 1995 to $3.6 million for the nine months ended June
30, 1996. These increases were attributable to an overall increase in market
interest rates as well as a change in the volume and mix of interest-earning
assets outstanding between the periods. More of the Bank's interest earning
assets were invested in loans for the three and nine month periods ended June
30, 1996 compared to the three and nine month periods ended June 30, 1995.
Additionally, the increase in interest income was reflective of the earnings
during the three months ended June 30, 1996 on the proceeds received in the
stock offering.
INTEREST EXPENSE. Interest expense decreased by $60,000 from $559,000 for the
three months ended June 30, 1995 to $499,000 for the three months ended June 30,
1996. Interest expense increased by $141,000 from $1.6 million for the nine
months ended June 30, 1995 to $1.7 million for the nine months ended June 30,
1996. Higher market interest rates in effect during the three and nine month
periods ended June 30, 1996, and the resulting increase in the Bank's cost of
funds caused interest expense to be higher for the nine months period ended June
30, 1996. However, this higher cost of funds was more than offset during the
three months ended June 30, 1996 by a material decrease in deposits as a
substantial number of common stockholders paid for their stock from existing
deposits or the Bank returned deposits on subscription orders that could not be
filled.
NET INTEREST INCOME. Net interest income increased by $261,000 from $540,000
for the three months ended June 30, 1995 to $801,000 for the three months ended
June 30, 1996. Net interest income increased by $249,000 from $1.6 million for
the nine months ended June 30, 1995 to $1.9 million for the nine months ended
June 30, 1996. Although there was a modest decrease in net interest rate spread
between the periods, this was more than offset by an increase in the volume of
net interest earning assets between the periods. The Bank's interest rate
spread decreased primarily because its deposits were more rate sensitive than
its interest earning assets, while overall market interest rates were higher
during the nine month period ended June 30, 1996 as compared to the same period
in 1995.
PROVISION FOR LOAN LOSSES. The Bank provided for a $6,528 and $18,528 provision
for loan losses during the quarter and nine months ended June 30, 1996, in
comparison with a $5,000 provision during the first quarter of fiscal year 1995
and no provision in the second or third quarters of fiscal year 1995.
Provisions, which are charged to operations, and the resulting loan loss
allowances are amounts the Bank's management believes will be adequate to absorb
losses on existing loans that may become uncollectible. Loans are charged off
against the allowance when management believes that collectibility
10
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES (CONTINUED):
is unlikely. The evaluation to increase or decrease the provision and resulting
allowances is based both on prior loan loss experience and other factors, such
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, and current economic conditions.
The Bank's loan loss provisions have been relatively minor during the three and
nine month periods ended June 30, 1996 and 1995 because the Bank's level of
nonperforming loans has remained consistently low (or the Bank had no
nonperforming loans) in relation to prior periods and total loans outstanding.
At June 30, 1996, the Bank's level of general valuation allowances for loan
losses amounted to $219,000, which management believes is adequate to absorb
potential losses in its loan portfolio.
NONINTEREST EXPENSE. Noninterest expense increased by $33,000 to $329,000 for
the three month period ended June 30, 1996 from $296,000 for the comparable
quarter in 1995, and by $30,000 to $921,000 for the nine month period ended June
30, 1996 from $891,000 for the comparable period in 1995, principally as a
result of an increase in compensation expense resulting from the establishment
of the Company's ESOP as discussed below. Other categories of noninterest
expense fluctuated by insignificant amounts between the periods.
As a part of the Conversion, the Company established an ESOP that acquired 8% of
the shares offered in the Conversion in the after market with funds provided in
the form of a loan from the Company. The loan is expected to be repaid over a
fifteen year period with funds provided by the Bank in the form of retirement
plan contributions sufficient to amortize the debt. The expense associated with
the ESOP is reported in accordance with SOP 93-6 "Employers' Accounting for
Employee Stock Ownership Plans." In addition, certain other benefit plans are
expected to be placed before the Company's stockholders for approval at a future
stockholders' meeting to be held no sooner than nine months after the close of
the Conversion.
CAPITAL RESOURCES AND LIQUIDITY:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-bearing deposits.
11
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RSULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED):
One form of liquidity, which is made up of cash and cash equivalents and
federal funds sold, increased by $4.2 million during the nine month period ended
June 30, 1996. Such increase resulted primarily from the equity raised by the
Company during its initial public offering which closed on March 29, 1996. The
issuance of common stock resulted in $17.4 million in additional equity although
approximately 30% of the equity raised actually originated from existing
deposits at the Bank held by its stockholders. To a lesser extent, operating
activities resulted in $593,000 of additional liquidity.
As a state chartered stock savings bank, Scotland Savings Bank must maintain
liquidity in the form of cash and cash equivalents and investment securities,
including mortgage-backed securities, equal to at least 10% of total assets.
The Bank's liquidity ratio at June 30, 1996 was considerable in excess of such
requirements. Given its excess liquidity and its ability to borrow from the
Federal Home Loan Bank, the Bank believes that it will have sufficient funds
available to meet anticipated future loan commitments, unexpected deposit
withdrawals, and other cash requirements.
12
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings at the present
time. From time to time, the Bank is a party to legal proceedings
within the normal course of business wherein it enforces its
security interest in loans made by it, and other matters of a like
kind.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Not applicable
(b) Not applicable
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCOTLAND BANCORP, INC.
Dated August 2, 1996 By: s/s William C. Fitzgerald, III
---------------------------- --------------------------------
William C. Fitzgerald, III
President and CEO
Dated August 2, 1996 By: s/s Debora B. Steagall
---------------------------- --------------------------------
Debora B. Steagall
Assistant Treasurer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 891,172
<INT-BEARING-DEPOSITS> 4,918,292
<FED-FUNDS-SOLD> 1,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 3,075,739
<INVESTMENTS-MARKET> 3,134,000
<LOANS> 43,771,828
<ALLOWANCE> 219,352
<TOTAL-ASSETS> 70,487,557
<DEPOSITS> 41,672,430
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 1,108,976
<LONG-TERM> 0
0
0
<COMMON> 17,423,417
<OTHER-SE> 7,282,734
<TOTAL-LIABILITIES-AND-EQUITY> 70,487,557
<INTEREST-LOAN> 2,698,034
<INTEREST-INVEST> 634,972
<INTEREST-OTHER> 256,499
<INTEREST-TOTAL> 3,589,505
<INTEREST-DEPOSIT> 1,694,380
<INTEREST-EXPENSE> 1,698,900
<INTEREST-INCOME-NET> 1,890,605
<LOAN-LOSSES> 18,528
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 920,817
<INCOME-PRETAX> 1,014,867
<INCOME-PRE-EXTRAORDINARY> 1,014,867
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 642,247
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.33
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 207,472
<CHARGE-OFFS> 6,648
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 219,352
<ALLOWANCE-DOMESTIC> 219,352
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
