<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, 1998
-------------------------------------
[_] 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 1-14266
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Scotland Bancorp, Inc.
----------------------
(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
--------------------------------
(Address of principal executive office) (Zip code)
(910)-276-2703
--------------
(Issuer's telephone number)
N/A
---
(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
--- ---
As of August 1, 1998 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
--- ---
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Pages
-----
<S> <C>
Item 1. Financial Statements
Condensed consolidated statements of financial condition at September 30,
1997 and June 30, 1998 (unaudited) 1
Condensed consolidated statements of income for the three months ended
June 30, 1997 and 1998 (unaudited) 2
Condensed consolidated statements of income for the nine months ended
June 30, 1997 and 1998 (unaudited) 3
Condensed consolidated statements of cash flows for the nine months ended
June 30, 1997 and 1998 (unaudited) 4-5
Notes to condensed consolidated financial statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
This Form 10-QSB contains forward-looking statements consisting of estimates
with respect to the financial condition, results of operations and other
business of Scotland Bancorp., Inc. and Subsidiary that are subject to various
factors which could cause actual results to differ materially from those
estimates. Factors which could influence the estimates include changes in the
national, regional and local market conditions, legislative and regulatory
conditions, and an adverse interest rate environment.
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 and June 30, 1998
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1997 1998
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<S> <C> <C>
(Note 2) (Unaudited)
Cash and cash equivalents, including federal funds sold $ 6,758,248 $ 6,239,130
Securities held to maturity, at amortized cost 500,000 500,000
Securities available for sale, at fair value 8,460,850 8,015,727
Nonmarketable equity securities 599,400 599,400
Loans receivable, net 46,463,348 44,126,120
Mortgage-backed securities, held to maturity, at amortized cost 418,657 337,690
Accrued interest receivable 210,759 208,962
Property and equipment, net 792,359 767,577
Prepaid expenses and other assets 195,666 287,270
---------------------------------------
Total assets $ 64,399,287 $ 61,081,876
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
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Liabilities:
Deposits $ 43,139,725 $ 44,786,223
Note payable 5,500,000 -
Accounts payable and accrued expenses 447,422 202,885
Advance payments by borrowers for taxes and insurance 160,229 195,652
Deferred income taxes 553,766 670,803
Income taxes payable 37,383 -
---------------------------------------
Total liabilities 49,838,525 45,855,563
---------------------------------------
Stockholders' Equity
Preferred stock, no par value, authorized 5,000,000 shares,
none issued - -
Common stock, no par value, authorized 20,000,000 shares,
1,913,600 shares issued - -
Additional paid-in capital 7,939,945 7,927,648
Note receivable from ESOP (1,708,545) (1,606,395)
Unrealized gain on securities available for sale, net of tax 518,552 720,518
Deferred management recognition plan (824,167) (651,667)
Unearned compensation (834,558) (818,508)
Retained earnings, substantially restricted 9,469,535 9,654,717
---------------------------------------
Total stockholders' equity 14,560,762 15,226,313
---------------------------------------
Total liabilities and stockholders' equity $ 64,399,287 $ 61,081,876
=======================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
Interest and dividend income:
Loans $ 1,000,223 $ 914,864
Investment securities 227,996 102,218
Mortgage-backed securities 12,634 9,357
Short-term cash investments 55,935 112,582
----------------------------------------
Total interest income 1,296,788 1,139,021
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Interest expense on deposits: 501,376 529,322
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Net interest income 795,412 609,699
Provision for loan losses 6,000 -
----------------------------------------
Net interest income after provision for loan losses 789,412 609,699
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Noninterest income:
Service charges and fees 14,291 12,866
Other 239,932 3,751
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254,223 16,617
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Noninterest expense:
Compensation and employee benefits 466,155 263,027
Occupancy 20,475 20,012
Insurance 3,544 9,699
Data processing 23,261 26,365
Furniture and fixture expense 5,994 8,874
Other 105,557 75,716
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624,986 403,693
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Income before income taxes 418,649 222,623
Income taxes 158,269 83,981
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Net income $ 260,380 $ 138,642
========================================
Basic earnings per share $ 0.15 $ 0.08
========================================
Diluted earnings per share $ 0.15 $ 0.08
=======================================
Dividends per share $ 0.075 $ 0.05
=======================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
Interest and dividend income:
Loans $ 2,932,001 $ 2,813,414
Investment securities 705,847 289,078
Mortgage-backed securities 39,846 31,905
Short-term cash investments 168,340 337,679
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Total interest income 3,846,034 3,472,076
----------------------------------------
Interest expense:
Deposits 1,465,630 1,613,525
FHLB advances and note payable 897 1,986
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Total interest expense 1,466,527 1,615,511
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Net interest income 2,379,507 1,856,565
Provision for loan losses 18,000 6,000
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Net interest income after provision for loan losses 2,361,507 1,850,565
----------------------------------------
Noninterest income:
Service charges and fees 40,229 36,978
Other 252,363 17,272
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292,592 54,250
----------------------------------------
Noninterest expense:
Compensation and employee benefits 824,798 760,823
Occupancy 64,150 64,260
Insurance 21,524 28,529
Data processing 71,077 75,471
Furniture and fixture expense 19,365 22,153
Other 284,263 245,250
----------------------------------------
1,285,177 1,196,486
----------------------------------------
Income before income taxes 1,368,922 708,329
Income taxes 510,091 265,802
----------------------------------------
Net income $ 858,831 $ 442,527
========================================
Basic earnings per share $ 0.50 $ 0.26
========================================
Diluted earnings per share $ 0.50 $ 0.26
========================================
Dividends per share $ 0.225 $ 0.15
========================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 858,831 $ 442,527
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 32,366 24,782
Deferred income taxes 121,885 (6,747)
ESOP compensation expense (income) 11,331 (12,297)
Amortization of deferred management recognition plan 268,333 172,500
Amortization of unearned compensation - 16,050
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (284,708) (91,604)
Accrued interest receivable 14,877 1,797
Decrease in:
Accrued expenses and other liabilities (5,992) (196,223)
Special SAIF assessment (320,750) -
Income taxes payable (52,773) (37,383)
--------------------------------------
Net cash provided by operating activities 643,400 313,402
--------------------------------------
Cash Flows From Investing Activities
Net (increase) decrease in loans receivable (2,844,048) 2,337,228
Principal payments received on mortgage-backed securities 103,337 80,967
Net decrease in investment securities 1,217,631 770,873
Purchase of property and equipment (15,002) -
--------------------------------------
Net cash provided by (used in) investing activities (1,538,082) 3,189,068
--------------------------------------
Cash Flows From Financing Activities
Net increase in deposits 41,527 1,646,498
Repayment of note payable - (5,500,000)
Cash dividends paid (381,835) (305,659)
Repayment of ESOP debt 63,747 102,150
Decrease in advance payments by borrowers
for taxes and insurance 65,500 35,423
--------------------------------------
Net cash used in financing activities (211,061) (4,021,588)
--------------------------------------
Net decrease in cash and cash equivalents (1,105,743) (519,118)
Cash and cash equivalents, including federal funds sold:
Beginning 5,105,923 6,758,248
--------------------------------------
Ending $ 4,000,180 $ 6,239,130
======================================
</TABLE>
4
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 1,446,567 $ 1,629,886
======================================
Cash payments for income taxes $ 455,290 $ 360,727
======================================
Supplemental Disclosure of Noncash Financing Transactions
Dividends declared, accrued and deducted from retained earnings $ 133,088 $ 84,774
======================================
Issuance of common stock for the Management Recognition Plan $ 1,150,000 $ -
======================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED 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. (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 condensed consolidated financial statements (except
for the condensed consolidated statement of financial condition at September 30,
1997, which has been taken from the audited financial statements at that date)
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. The
results of operations for the three and nine month periods ended June 30, 1998
are not necessarily indicative of the results of operations that may be expected
for the year ended September 30, 1998. The accounting policies followed are as
set forth in Note 1 of the Notes to Consolidated Financial Statements in the
1997 annual report of the Company.
6
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
Note 3. Earnings Per Share
Earnings per share has been calculated in accordance with Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share," and Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans." 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. MRP restricted stock
awards for the three and nine month periods ended June 30, 1998 have not been
included since they are anti-dilutive. The following are reconciliations of the
amounts used in the per share calculations:
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 1998
---------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------
<S> <C> <C> <C>
Basic and Diluted EPS
Income available to stockholders $ 138,642 1,656,239 $ 0.08
=====================
<CAPTION>
For the Nine Months Ended June 30, 1998
---------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------
<S> <C> <C> <C>
Basic and Diluted EPS
Income available to stockholders $ 442,527 1,684,654 $ 0.26
=====================
<CAPTION>
For the Three Months Ended June 30, 1997
---------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------
<C> <C> <C>
Basic EPS
Income available to stockholders $ 260,380 1,716,676 $ 0.15
=====================
Effect of dilutive securities
MRP restricted stock awards $ - 1,322
Stock options - 4,148
------------------------------------------
Diluted EPS
Income available to stockholders $ 260,380 1,722,146 $ 0.15
=====================
</TABLE>
7
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
Note 3. Earnings Per Share (Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended June 30, 1997
---------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Income available to stockholders $ 858,831 1,715,292 $ 0.50
=====================
Effect of dilutive securities
MRP restricted stock awards $ - 1,322
Stock options - 4,148
-------------------------------------
Diluted EPS
Income available to stockholders $ 858,831 1,720,762 $ 0.50
=====================
</TABLE>
Note 4. Dividends Declared
On June 17, 1998, the Board of Directors of Scotland Bancorp, Inc. declared a
dividend of $.05 per share for stockholders of record as of July 10, 1998 and
payable on July 24, 1998. The dividends declared were accrued and reported as
other liabilities in the June 30, 1998 consolidated statement of financial
condition.
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, 1998 and September 30, 1997:
Total assets decreased by $3.3 million to $61.1 million at June 30, 1998 from
$64.4 million at September 30, 1997. Net loans receivable decreased by $2.4
million to $44.1 million at June 30, 1998 from $46.5 million at September 30,
1997. Cash and cash equivalents, including federal funds sold, decreased by
$519,000 to $6.2 million at June 30, 1998 from $6.8 million at September 30,
1997. Investment securities decreased by $526,000 to $9.5 million at June 30,
1998 from $10.0 million at September 30, 1997. During the nine months ended June
30, 1998, investment securities totaling $5.1 million were sold in order to pay
off the Company's note payable described below, $1.5 million of securities were
called, $5.8 million of securities were purchased, and the fair value of the
securities available for sale portfolio increased by $326,000. Deposits
increased by $1.7 million to $44.8 million at June 30, 1998 from $43.1 million
at September 30, 1997. The Company repaid the $5.5 million note payable which
was incurred in September of 1997, thus eliminating the Company's external debt.
Retained earnings increased by $185,000 during the current period to $9.7
million at June 30, 1998, which is attributable to the Company's earnings of
$443,000 for the nine months ended June 30, 1998, less cash dividends declared
of $257,000.
At June 30, 1998, the Company's capital amounted to $15.2 million, which as a
percentage of total consolidated assets was 24.9%, 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 had no loans which were
nonperforming at June 30, 1998. The Bank's nonperforming loans as a percentage
of total loans outstanding was .00% and .06% at June 30, 1998 and September 30,
1997, respectively. During the nine month period ended June 30, 1998, the Bank's
level of nonperforming loans has remained consistently low in relation to prior
periods and total loans outstanding, and the Bank has not incurred any loan
charge-offs during the nine months ended June 30, 1998. As a result, and based
on management's analysis of the adequacy of its allowances, only $6,000 was
provided to the loan loss allowance during the nine month period ended June 30,
1998.
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,
1998 and 1997:
General. Net income for the three months ended June 30, 1998 was $139,000
compared to $260,000 earned during the same quarter in 1997. Net income for the
nine months ended June 30, 1998 was $443,000 compared to $859,000 earned during
the same period in 1997. As discussed below, the decrease in net income was
primarily attributable to a decrease in net interest income for the three and
nine month periods ended June 30, 1998, as compared to the same period in 1997,
due to a lower level of loans and investment securities and moderate deposit
growth. In October 1997, the Company liquidated certain investment securities
and utilized the cash to repay a $5.5 million note payable incurred in September
1997 due to a $6.00 per share return of capital dividend.
Interest income. Interest income decreased by $158,000 from $1.3 million for the
three months ended June 30, 1997 to $1.1 million for the three months ended June
30, 1998. Interest income decreased by $374,000 from $3.8 million for the nine
months ended June 30, 1997 to $3.5 million for the nine months ended June 30,
1998. The decrease was attributable to a lower level of interest-earning assets,
primarily loans receivable and investment securities, which were outstanding
during the first three quarters of this year in comparison to the same three
quarters a year earlier. Interest-earning assets amounted to $59.3 million at
June 30, 1998 as compared to $67.6 million at June 30, 1997. The Company
utilized investment securities as the funding source to pay a $11.5 million
return of capital dividend. Approximately 97% of the Company's assets were
interest-earning at June 30, 1998, and approximately 74% of such
interest-earning assets were held in the form of loans receivable.
Interest Expense. Interest expense increased by $28,000 from $501,000 for the
three months ended June 30, 1997 to $529,000 for the three months ended June 30,
1998. Interest expense increased by $149,000 from $1.5 million for the nine
months ended June 30, 1997 to $1.6 million for the nine months ended June 30,
1998. The increase was attributable to a higher level of interest-bearing
liabilities outstanding during the first three quarters of this year in
comparison to the same three quarters a year earlier, while the cost of funds
remained fairly stable.
Net interest income. Net interest income decreased by $185,000 from $795,000 for
the three months ended June 30, 1997 to $610,000 for the three months ended June
30, 1998. Net interest income decreased by $523,000 from $2.4 million for the
nine months ended June 30, 1997 to $1.9 million for the nine months ended June
30, 1998. This decrease resulted from the combination of an decrease in the
volume of interest-earning assets and a increase in the volume of
interest-bearing liabilities between the periods.
10
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Provision for loan losses. The Bank added $6,000 in loan loss provisions during
the first and second quarters of fiscal year 1997 and during the first quarter
of fiscal year 1998. 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 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 were relatively minor during the three and nine
month periods ended June 31, 1997 and 1998 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, 1998, the Bank's level of general valuation allowances for loan
losses amounted to $255,000, which management believes is adequate to absorb
potential losses in its loan portfolio.
Noninterest expense. Noninterest expense decreased by $221,000 to $404,000 for
the three month period ended June 30, 1998 from $625,000 for the comparable
quarter in 1997, and by $89,000 to $1.2 million for the nine month period ended
June 30, 1998 from $1.3 million for the comparable period in 1997. The decrease
is principally as a result of an increase in compensation expense resulting from
the establishment of the Bank's Management Recognition Plan ("MRP") during the
three months ended June 30, 1997, as discussed below. Other categories of
noninterest expense fluctuated by insignificant amounts between the periods.
On April 17, 1997, the Company's stockholders approved the Bank's "MRP" which
reserved for issuance 73,600 shares of common stock to all officers, directors,
and employees at the time of adoption. The restricted common stock under the MRP
vests at the rate of 20% on the date of grant and 20% annually thereafter. The
expense associated with the MRP amounted to $268,000 for the three and nine
months ended June 30, 1997, and to $58,000 and $173,000 for the three and nine
months ended June 30, 1998, respectively, and is included in compensation
expense on the consolidated statement of income.
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 RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
One form of liquidity, which is made up of cash and cash equivalents and federal
funds sold, decreased by $519,000 during the nine months ended June 30, 1998. As
reported in the consolidated statement of cash flows, such decrease occurred as
a result of the repayment of debt, offset by deposit growth, a decrease in loans
receivable and sales of investment securities.
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, 1998 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.
Year 2000:
At the turn of the century, computer-based information systems will be faced
with the problems potentially affecting hardware, software, networks, processing
platforms, as well as customer and vendor interdependencies. The Company has
established a committee and is in the process of assessing the effect of Year
2000 on the Bank's operating plans and systems. The Company is developing a plan
for identifying, renovating, testing and implementing its systems for Year 2000
processing and internal control requirements. Management's estimate of the cost
for becoming Year 2000 compliant to be approximately $160,000.
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 and Use of Proceeds
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) Exhibit
(27) Financial Data Schedule.
(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 1, 1998 By: /s/ William C. Fitzgerald, III
---------------------- ------------------------------
William C. Fitzgerald, III
President and CEO
Dated August 1, 1998 By: /s/ Debora B. Steagall
---------------------- ------------------------------
Debora B. Steagall
Assistant Treasurer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 527 897
<INT-BEARING-DEPOSITS> 2,412 2,203
<FED-FUNDS-SOLD> 3,300 900
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 8,016 14,438
<INVESTMENTS-CARRYING> 1,437 942
<INVESTMENTS-MARKET> 1,483 991
<LOANS> 44,381 48,166
<ALLOWANCE> 255 243
<TOTAL-ASSETS> 61,082 69,479
<DEPOSITS> 44,786 42,451
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 1,070 1,298
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,226 25,730
<TOTAL-LIABILITIES-AND-EQUITY> 61,082 69,479
<INTEREST-LOAN> 2,813 2,932
<INTEREST-INVEST> 321 746
<INTEREST-OTHER> 338 168
<INTEREST-TOTAL> 3,472 3,846
<INTEREST-DEPOSIT> 1,614 1,466
<INTEREST-EXPENSE> 1,615 1,467
<INTEREST-INCOME-NET> 1,841 2,380
<LOAN-LOSSES> 6 18
<SECURITIES-GAINS> 0 237
<EXPENSE-OTHER> 1,196 1,285
<INCOME-PRETAX> 708 1,369
<INCOME-PRE-EXTRAORDINARY> 708 1,369
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 443 859
<EPS-PRIMARY> .26 .50
<EPS-DILUTED> .26 .50
<YIELD-ACTUAL> 7.39 7.59
<LOANS-NON> 0 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 30
<ALLOWANCE-OPEN> 249 225
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 255 243
<ALLOWANCE-DOMESTIC> 255 243
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
