<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 25049
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-14266
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Scotland Bancorp, Inc.
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(Exact name of small business issuer as specified in its charter)
North Carolina 56-1955133
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
505 South Main Street
Laurinburg, North Carolina 28352
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(Address of principal executive office) (Zip code)
(910)-276-2703
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check X whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days .
Yes X No
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As of August 5, 1997 there were issued and outstanding 1,913,600 shares of the
Registrant's common stock, no par value
Transitional Small Business Disclosure Format: Yes No X
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SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONTENTS
PART I - FINANCIAL INFORMATION PAGES
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Item 1. Financial Statements
Consolidated statements of financial condition at September 30,
1996 and June 30, 1997 (unaudited) 1
Consolidated statements of income for the three months ended
June 30, 1996 and 1997 (unaudited) 2
Consolidated statements of income for the nine months ended June
30, 1996 and 1997 (unaudited) 3
Consolidated statements of cash flows for the nine months ended
June 30, 1996 and 1997 (unaudited) 4-5
Notes to consolidated financial statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND JUNE 30, 1997
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<TABLE>
<CAPTION>
September 30, June 30,
1996 1997
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(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,005,923 $ 3,100,180
Federal funds sold 100,000 900,000
Investment securities:
Held to maturity, at amortized cost 2,502,326 500,000
Available for sale, at estimated market value 13,465,261 14,437,950
Nonmarketable equity securities 599,400 599,400
Loans receivable, net 45,078,860 47,922,908
Mortgage-backed securities, held to maturity, at amortized cost 545,290 441,953
Accrued interest receivable 352,284 337,407
Property and equipment, net 819,474 802,110
Prepaid expenses and other assets 152,747 437,455
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TOTAL ASSETS $ 68,621,565 $ 69,479,363
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 42,409,568 $ 42,451,095
Advance payments by borrowers for taxes and insurance 156,525 222,025
Accrued expenses and other liabilities 404,558 404,328
Special SAIF assessment 320,750 -
Deferred income taxes 402,802 588,605
Income taxes payable 136,090 83,317
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TOTAL LIABILITIES 43,830,293 43,749,370
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Stockholders' Equity
Preferred stock, no par value, authorized 5,000,000 shares,
none issued - -
Common stock, no par value, authorized 20,000,000 shares,
1996 1,840,000 shares issued; 1997 1,913,600 shares issued - -
Additional paid-in capital 17,420,468 18,581,799
Note receivable from ESOP for purchase of common stock (1,772,292) (1,708,545)
Unrealized gain on securities available for sale, net of tax 411,135 535,211
Deferred stock awards - (881,667)
Retained earnings, substantially restricted 8,731,961 9,203,195
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TOTAL STOCKHOLDERS' EQUITY 24,791,272 25,729,993
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,621,565 $ 69,479,363
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</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
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<TABLE>
<CAPTION>
1996 1997
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<S> <C> <C>
Interest and dividend income:
Loans $ 897,633 $ 1,000,223
Investment securities 244,498 227,996
Mortgage-backed securities 17,247 12,634
Short-term cash investments 139,980 55,935
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TOTAL INTEREST INCOME 1,299,358 1,296,788
Interest expense:
Deposits 494,083 501,376
FHLB advances 4,520 -
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TOTAL INTEREST EXPENSE 498,603 501,376
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NET INTEREST INCOME 800,755 795,412
Provision for loan losses 6,528 6,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 794,227 789,412
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Noninterest income:
Service charges and fees 13,659 14,291
Other 5,002 239,932
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18,661 254,223
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Noninterest expense:
Compensation and employee benefits 181,523 466,155
Occupancy 22,955 20,475
Insurance 30,089 3,544
Data processing 23,910 23,261
Furniture and fixture expense 9,819 5,994
Other 60,682 105,557
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328,978 624,986
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INCOME BEFORE INCOME TAXES 483,910 418,649
Income taxes 179,355 158,269
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NET INCOME $ 304,555 $ 260,380
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Earnings per share $ 0.18 $ 0.15
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Weighted average shares outstanding 1,695,260 1,699,502
============ =============
Dividends paid per share $ 0.075 $ 0.075
============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1996 AND 1997
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<TABLE>
<CAPTION>
1996 1997
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<S> <C> <C>
Interest and dividend income:
Loans $ 2,698,034 $ 2,932,001
Investment securities 582,052 705,847
Mortgage-backed securities 52,920 39,846
Short-term cash investments 256,499 168,340
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TOTAL INTEREST INCOME 3,589,505 3,846,034
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Interest expense:
Deposits 1,694,380 1,465,630
FHLB advances 4,520 897
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1,698,900 1,466,527
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NET INTEREST INCOME 1,890,605 2,379,507
Provision for loan losses 18,528 18,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,872,077 2,361,507
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Noninterest income:
Service charges and fees 42,528 40,229
Other 21,079 252,363
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63,607 292,592
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Noninterest expense:
Compensation and employee benefits 488,820 824,798
Occupancy 68,246 64,150
Insurance 91,852 21,524
Data processing 74,570 71,077
Furniture and fixture expense 30,762 19,365
Other 166,567 284,263
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920,817 1,285,177
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INCOME BEFORE INCOME TAXES 1,014,867 1,368,922
Income taxes 372,620 510,091
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NET INCOME $ 642,247 $ 858,831
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Earnings per share $ 0.18 $ 0.50
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Weighted average shares outstanding 1,695,260 1,698,118
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Dividends paid per share $ 0.075 $ 0.225
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
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SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1996 AND 1997
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<TABLE>
<CAPTION>
1996 1997
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<S> <C> <C>
Net income $ 642,247 $ 858,831
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 38,341 32,366
Amortization of deferred stock awards - 268,333
Deferred income taxes - 121,885
ESOP compensation expense charged to paid-in capital 1,132 11,331
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (25,156) (284,708)
Accrued interest receivable (134,150) 14,877
Increase (decrease) in:
Accrued expenses and other liabilities (9,055) (5,992)
Special SAIF assessment - (320,750)
Income taxes payable 79,767 (52,773)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 593,126 643,400
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Cash Flows From Investing Activities
Net increase in loans receivable (2,348,158) (2,844,048)
Principal payments on mortgage-backed securities 80,177 103,337
Net (increase) decrease in investment securities (6,199,673) 1,217,631
Purchase of property and equipment (21,516) (15,002)
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NET CASH USED IN INVESTING ACTIVITIES (8,489,170) (1,538,082)
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Cash Flows From Financing Activities
Net increase (decrease) in deposits (6,531,014) 41,527
Advances from FHLB 3,000,000 -
Cash dividends paid - (381,835)
Loan to ESOP for purchase of common stock (1,772,292) -
Repayment of ESOP debt - 63,747
Net proceeds received from issuance of common stock 17,422,285 -
Increase (decrease) in advance payments by borrowers
for taxes and insurance (2,166) 65,500
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 12,116,813 (211,061)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,220,769 (1,105,743)
Cash and cash equivalents, including federal funds sold:
Beginning 3,088,695 5,105,923
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Ending $ 7,309,464 $ 4,000,180
============= =============
</TABLE>
4
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1996 AND 1997
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<TABLE>
<CAPTION>
1996 1997
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<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 1,696,634 $ 1,446,567
============= =============
Cash payments for income taxes $ 275,153 $ 455,290
============= =============
Supplemental Disclosure of Noncash Financing Transactions
Dividends declared, accrued and deducted from retained earnings $ 127,144 $ 132,981
============= =============
Issuance of common stock for the Management Recognition Plan $ - $ 1,150,000
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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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. A subscription offering of the Company's shares
closed on March 29, 1996, at which time the Company acquired all of the shares
of the Bank and commenced operations.
The Company has no operations and conducts no business of its own other than
owning Scotland Savings Bank, investing its portion of the net proceeds received
in the Conversion, and lending funds to the Employee Stock Ownership Plan (the
"ESOP") which was formed in connection with the Conversion. The principal
business of the Bank is accepting deposits from the general public and using
those deposits and other sources of funds to make loans secured by real estate
and other forms of collateral located in the Bank's primary market area of
Scotland and Moore counties in North Carolina.
Scotland Savings Bank's results of operations depend primarily on its net
interest income, which is the difference between interest income from interest-
earning assets and interest expense on interest-bearing liabilities. The Bank's
operations are also affected by noninterest income, such as miscellaneous income
from loans, customer deposit account service charges, and other sources of
revenue. The Bank's principal operating expenses, aside from interest expense,
consist of compensation and associated benefits, federal deposit insurance
premiums, occupancy costs, furniture and fixture expense, data processing
charges, and other general and administrative expenses.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements (except for the
statement of financial condition at September 30, 1996, which is audited) have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the Regulation S-B. 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 29, 1996 include only the accounts and
operations of Scotland Savings Bank. The results of operations for the three and
nine month periods ended June 30, 1997 are not necessarily indicative of the
results of operations that may be expected for the year ended September 30,
1997. The accounting policies followed are as set forth in Note 1 of the Notes
to Consolidated Financial Statements in the September 30, 1996 annual report of
the Company.
6
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 3. DIVIDENDS DECLARED
On June 27, 1997, the Board of Directors of Scotland Bancorp, Inc. declared a
dividend of $ .075 a share for stockholders of record as of July 11, 1997 and
payable on July 25, 1997. The dividends declared were accrued and reported as
other liabilities in the June 30, 1997 consolidated statement of financial
condition.
NOTE 4. EARNINGS PER SHARE
The Company's earnings per share is based on 1,699,502 and 1,698,118 shares
assumed to be outstanding for the three and nine month periods ended June 30,
1997, respectively . 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
based on net income earned form the date of Conversion, March 29, 1996, divided
by the weighted average number of shares outstanding from the date of Conversion
to the end of the nine month period ending June 30, 1996. For purposes of this
computation, the number of shares of common stock purchased by the Bank's
employee stock ownership plan which have not been allocated to participant
accounts are not assumed to be outstanding.
NOTE 5. ADOPTION OF STOCK OPTION PLAN AND MANAGEMENT RECOGNITION PLAN
At a special meeting of stockholders held on April 17, 1997, the stockholders
voted to approve the Company's stock option plan and the Bank's Management
Recognition Plan (the "MRP"). The stock option plan reserves for issuance of up
to 184,000 stock options to all officers, directors and employees at the time of
the adoption either in the form of incentive stock options or non-incentive
stock options. The exercise price of the stock options may not be less than the
fair market value of the Company's common stock at date of grant. The options,
which vest at the rate of 25% annually beginning at the date of grant, were all
granted upon the adoption of the plan. The MRP reserved for issuance 73,600
shares of common stock to all officers, directors and employees at the time of
the adoption. The Bank issued shares to fund the MRP in May, 1997. The
restricted common stock under the MRP vests at the rate of 20% annually
beginning at the date of grant.
7
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND SEPTEMBER 30, 1996:
Total assets increased by $858,000 to $69.5 million at June 30, 1997 from $68.6
million at September 30, 1996. Net loans receivable increased by $2.8 million to
$47.9 million at June 30, 1997 from $45.1 million at September 30, 1996, which
on an annualized basis when compared with the increase in loans for the past two
years, represented a fairly typical pace for loan growth. Cash and cash
equivalents, including federal funds sold, decreased by $2.0 million to $3.1
million at June 30, 1997 from $5.1 million at September 30, 1996. Investment
securities decreased by $1.2 million and were offset by unrealized gains in the
fair value of the available for sale securities portfolio of $188,000, for a net
decrease of $1.0 million, and amounted to $14.9 million at June 30, 1997. Cash
and cash equivalents and investments decreased primarily to fund the increase in
loans, to fund the payment of $321,000 during the nine month period ended June
30, 1997 for the special SAIF assessment to recapitalize the insurance fund, and
to realize a gain in order to offset an increase in compensation as a result of
the first 20% vesting of the recently adopted Management Recognition Plan.
During the three months ended June 30, 1996, the Company loaned $1.8 million to
the Bank's ESOP plan to purchase shares of the Company's common stock in the
open market. The loan, scheduled to be repaid over a 15 year term, was reduced
by a principal installment of $64,000 during the nine month period. The note to
the ESOP is reported as a reduction in stockholders' equity. The Bank borrowed
and repaid $1,000,000 from the FHLB of Atlanta during the nine month period
ended June 30, 1997. Retained earnings increased by $471,000 during the nine
month period ended June 30, 1997 to $9.2 million at June 30, 1997, which is
attributable to the Company's earnings of $859,000 for the nine months ended
June 30, 1997 less cash dividends declared or paid of $388,000.
At June 30, 1997, the Company's capital amounted to $25.7 million, which as a
percentage of total consolidated assets, was 37.03%, and was considerably in
excess of the regulatory capital requirements at such date.
The Bank considers all loans past due 90 days or more to be nonperforming, even
though a loan may have sufficient collateral and/or the Bank ultimately expects
to receive all delinquent payments. The Bank's nonperforming loans as a
percentage of total loans outstanding were .06% and .07% at September 30, 1997
and 1996, respectively. During the nine month period ended June 30, 1997, the
Bank's level of nonperforming loans has remained consistently low in relation to
prior periods and total loans outstanding, and the Bank only incurred $492 in
loan charge-offs during the nine month period ended June 30, 1997. As a result,
and based on management's analysis of the adequacy of its allowances, only
$18,000 during the nine month period ended June 30, 1997 was provided to the
loan loss allowance. Such amounts were added as a general valuation allowance
primarily due to the increase in the Bank's loan portfolio during the period.
8
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS
ENDED JUNE 30, 1997 AND 1996:
GENERAL. Net income for the three months ended June 30, 1997 was $260,000 or
$44,000 less than the $304,000 earned during the same quarter in 1996. Net
income for the nine months ended June 30, 1997 was $859,000 or $217,000 more
than the $642,000 earned during the same period in 1996. The decrease in net
income for the three month period ended June 30, 1997 can be primarily
attributable to an increase in compensation expense during that same period as a
result of the first vesting period of the Management Recognition Plan adopted by
the shareholders during the quarter. The provisions of the plan call for vesting
over a 5 year period with an immediate vesting of the first 20%. This expense,
amounting to approximately $230,000 for the initial vesting and approximately
$38,000 for monthly accruals, was all recognized in the third fiscal quarter and
was partially offset by a gain on the sale of FHLMC securities of $237,000. As
discussed below, the increase in net income for the nine month period ended June
30, 1997 was primarily attributable to an increase in net interest income for
the period as compared to the same period in 1996 due to the investment of the
Company's stock proceeds. Due to the added capital, net interest income was also
positively effected during the nine month period ended June 30, 1997 compared to
the same period for 1996 due to a lower level of savings deposits required to
finance the Company's operations. In addition, noninterest income increased as a
result of capital gains on the sale of investment securities as described below.
INTEREST INCOME. Interest income was approximately $1.3 million for the three
months ended June 30, 1997 and 1996. Interest income increased by $257,000 from
$3.6 million for the nine months ended June 30, 1996 to $3.8 million for the
nine months ended June 30, 1997. The increase in interest income for the nine
month period ended June 30, 1997 as compared to the comparable period for the
previous year is attributable to a higher level of interest-earning assets
outstanding during the period. At June 30, 1997, average interest-earning assets
amounted to $67.6 million of which 68.8% were loans receivable. In comparison,
at June 30, 1996, average interest-earning assets amounted to $62.8 million.
INTEREST EXPENSE. Interest expense increased by $3,000 from $498,000 for the
three months ended June 30, 1996 to $501,000 for the three months ended June 30,
1997. Interest expense decreased by $232,000 from $1.7 million for the nine
months ended June 30, 1996 to $1.5 million for the nine months ended June 30,
1997. In total, the average balance of interest bearing liabilities was
approximately $2.5 million lower during the nine months ending June 30, 1997
compared to the same period in 1996. In addition, the Bank's average cost of
funds, which approximated 4.61% for the nine month period ended June 30, 1997,
was approximately 43 basis points lower than the cost of funds for the same
period in 1996.
NET INTEREST INCOME. Net interest income decreased by $5,000 from $801,000 for
the three months ended June 30, 1996 to $796,000 for the three months ended June
30, 1997. Net interest income increased by $489,000 from $1.9 million for the
nine months ended June 30, 1996 to $2.4 million for the nine months ended June
30, 1997. These increases resulted from the combination of an increase in the
volume of interest-earning assets as a result of the proceeds received in the
stock offering on March 29, 1996 and a decrease in the volume of interest-
bearing liabilities between the periods and a lower cost of funds in the three
and nine month periods ended June 30, 1997 as compared to the same periods in
1996.
9
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES. The Bank provided approximately $6,000 in provisions
for loan losses during each of its first three quarters of fiscal years 1997 and
1996. Provisions, which are charged to operations, and the resulting loan loss
allowances are amounts the Bank's management believes will be adequate to absorb
potential losses on existing loans that may become uncollectible. Loans are
charged off against the allowance when management believes that collectibility
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 provisions which were added in the
three and nine month periods ended June 30, 1997 and 1996 were provided
primarily due to the increases in the volume of the Bank's loan portfolio during
these periods.
The Bank's loan loss provisions have been relatively minor during the three and
nine month periods ended June 30, 1997 and 1996 because the Bank's level of
nonperforming loans has remained consistently low in relation to prior periods
and total loans outstanding. At June 30, 1997, the Bank's level of general
valuation allowances for loan losses amounted to $243,000, which management
believes is adequate to absorb potential losses in its loan portfolio.
NONINTEREST INCOME. Noninterest income increased by $235,000 to $254,000 for the
three month period ended June 30, 1997 from $19,000 for the comparable quarter
in 1996, and by $229,000 to $293,000 for the nine month period ended June 30,
1997 from $64,000 for the comparable period in 1996. This was due almost
entirely to the sale of FHLMC securities in the third quarter which resulted in
a gain of $237,000.
NONINTEREST EXPENSE. Noninterest expense increased by $296,000 to $625,000 for
the three month period ended June 30, 1997 from $329,000 for the comparable
quarter in 1996, and by $364,000 to $1.3 million for the nine month period ended
June 30, 1997 from $921,000 for the comparable period in 1996. The increases are
principally as a result of an increase in compensation expense resulting from
the adoption by the shareholders of a Management Recognition Plan as discussed
below and the establishment of the Company's ESOP as discussed below. Other
categories of noninterest expense fluctuated by insignificant amounts between
the periods except for insurance expense, which decreased as a result of reduced
premium rates subsequent to the recapitalization of the SAIF, and other
noninterest expense which increased due primarily to certain expenses associated
with operating as a public company.
10
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
As a part of the Conversion, the Company has 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 sufficient to
amortize the debt. The expense associated with the ESOP will be reported in
accordance with SOP 93-6 "Employers' Accounting for Employee Stock Ownership
Plans" and will increase compensation and related employee benefit expense in
future years. In addition, a management recognition plan was approved by the
Company's stockholders at a special meeting held on April 17, 1997. All
directors are eligible to participate in the plan as well as any officers or
employees designated by the Board. All officers and employees at the time of the
adoption became eligible. The management recognition plan shares will be
expensed over a four year vesting period based upon the fair value of the common
stock at date of grant. The first 20% vesting was immediate upon the adoption of
the plan. This vesting resulted in additional compensation expense of $230,000.
The remaining unvested amounts will amortize evenly over the remaining vesting
period.
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.
One form of liquidity, which is made up of cash and cash equivalents and federal
funds sold, decreased by $1.1 million during the nine month period ended June
30, 1997. As reported in the consolidated statement of cash flows, such decrease
occurred in order to fund the Bank's new loan originations, to fund the payment
of the special SAIF assessment, and to provide funds for dividends to the
Company's stockholders.
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, 1997 was considerably 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.
11
<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
On April 17, 1997, a special meeting of stockholders was held to
consider and vote upon the adoption of the Scotland Bancorp, Inc.
Stock Option Plan and the Scotland Savings Bank, Inc. SSB
Management Recognition Plan. All items were approved by the
stockholders as shown below:
Vote concerning approval of the Scotland Bancorp, Inc. Stock
Option Plan
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,016,645 170,924 4,361 461,703 1,653,633
</TABLE>
Vote concerning approval of the Scotland Savings Bank, Inc.
SSB Management Recognition Plan
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,005,556 181,063 5,311 461,703 1,653,633
</TABLE>
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Not applicable
(b) No reports on 8-K issued
12
<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 5, 1997 By: s/s William C. Fitzgerald, III
-------------- ------------------------------
William C. Fitzgerald, III
President and CEO
Dated August 5, 1997 By: s/s Debora B. Steagall
-------------- ------------------------------
Debora B. Steagall
Assistant Treasurer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1996
<PERIOD-START> OCT-01-1996 OCT-01-1995
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 896,972 891,172
<INT-BEARING-DEPOSITS> 2,203,208 4,918,297
<FED-FUNDS-SOLD> 900,000 1,500,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 14,437,950 14,543,743
<INVESTMENTS-CARRYING> 941,953 3,075,739
<INVESTMENTS-MARKET> 990,678 3,134,000
<LOANS> 48,165,768 43,771,828
<ALLOWANCE> 242,860 219,352
<TOTAL-ASSETS> 63,479,363 70,487,557
<DEPOSITS> 42,451,095 41,672,430
<SHORT-TERM> 0 3,000,000
<LIABILITIES-OTHER> 1,298,375 1,108,976
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 18,581,799 17,423,417
<OTHER-SE> 7,148,194 7,282,734
<TOTAL-LIABILITIES-AND-EQUITY> 69,479,363 70,487,557
<INTEREST-LOAN> 2,932,001 2,698,034
<INTEREST-INVEST> 745,693 634,972
<INTEREST-OTHER> 168,340 756,499
<INTEREST-TOTAL> 3,846,034 3,589,505
<INTEREST-DEPOSIT> 1,465,630 1,694,380
<INTEREST-EXPENSE> 1,466,527 1,698,900
<INTEREST-INCOME-NET> 2,379,507 1,890,605
<LOAN-LOSSES> 18,000 18,528
<SECURITIES-GAINS> 237,000 0
<EXPENSE-OTHER> 1,285,177 920,817
<INCOME-PRETAX> 1,368,922 1,014,867
<INCOME-PRE-EXTRAORDINARY> 1,368,922 1,014,867
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 858,831 642,247
<EPS-PRIMARY> .50 .38
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 7.59 7.33
<LOANS-NON> 0 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 30,314 0
<ALLOWANCE-OPEN> 224,860 207,472
<CHARGE-OFFS> 0 6,648
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 242,860 219,352
<ALLOWANCE-DOMESTIC> 242,860 219,352
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
