<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 March 31, 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
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 May 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]
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<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 March 31, 1998 1
Condensed consolidated statements of income for the three months
ended March 31, 1997 and 1998 2
Condensed consolidated statements of income for the six months
ended March 31, 1997 and 1998 3
Condensed consolidated statements of cash flows for the six months
ended March 31, 1997 and 1998 4-5
Notes to condensed consolidated financial statements 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
</TABLE>
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1997 1998
- -------------------------------------------------------------------------------------------------------------
(Note 2) (Unaudited)
<S> <C> <C>
Cash and cash equivalents, including federal funds sold $ 6,758,248 $ 8,041,739
Securities held to maturity, at amortized cost 500,000 500,000
Securities available for sale, at fair value 8,460,850 8,009,616
Nonmarketable equity securities 599,400 599,400
Loans receivable, net 46,463,348 42,505,880
Mortgage-backed securities, held to maturity, at amortized cost 418,657 364,798
Accrued interest receivable 210,759 199,944
Property and equipment, net 792,359 770,605
Prepaid expenses and other assets 195,666 285,988
-------------------------------
TOTAL ASSETS $ 64,399,287 $ 61,277,970
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 43,139,725 $ 45,173,856
Note payable 5,500,000 -
Accounts payable and accrued expenses 447,422 184,037
Advance payments by borrowers for taxes and insurance 160,229 158,974
Deferred income taxes 553,766 622,018
Income taxes payable 37,383 -
-------------------------------
TOTAL LIABILITIES 49,838,525 46,138,885
-------------------------------
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 7,933,818
Note receivable from ESOP (1,708,545) 1,614,395
Unrealized gain on securities available for sale, net of tax 518,552 762,538
Deferred management recognition plan (824,167) (709,167)
Unearned compensation (834,558) (834,558)
Retained earnings, substantially restricted 9,469,535 9,600,849
-------------------------------
TOTAL STOCKHOLDERS' EQUITY 14,560,762 15,139,085
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,399,287 $ 61,277,970
===============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 969,294 $ 932,213
Investment securities 238,938 110,820
Mortgage-backed securities 12,758 10,887
Short-term cash investments 42,888 106,838
---------------------------------------
TOTAL INTEREST INCOME 1,263,878 1,160,758
Interest expense on deposits 475,146 532,942
---------------------------------------
NET INTEREST INCOME 788,732 627,816
Provision for loan losses 6,000 -
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 782,732 627,816
---------------------------------------
Noninterest income:
Service charges and fees 12,647 11,892
Other 3,395 4,820
---------------------------------------
16,042 16,712
---------------------------------------
Noninterest expense:
Compensation and employee benefits 176,462 258,478
Occupancy 22,068 20,305
Insurance (8,798) 9,357
Data processing 24,577 24,740
Furniture and fixture expense 7,086 8,529
Other 105,824 89,562
---------------------------------------
327,219 410,971
---------------------------------------
INCOME BEFORE INCOME TAXES 471,555 233,557
Income taxes 175,323 87,987
---------------------------------------
NET INCOME $ 296,232 $ 145,570
=======================================
Basic earnings per share $ 0.17 $ 0.09
=======================================
Diluted earnings per share $ 0.17 $ 0.09
=======================================
Dividends per share $ 0.075 $ 0.50
=======================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 1,931,778 $ 1,898,550
Investment securities 477,851 186,860
Mortgage-backed securities 27,212 22,548
Short-term cash investments 112,405 225,097
----------------------------
TOTAL INTEREST INCOME 2,549,246 2,333,055
----------------------------
Interest expense:
Deposits 964,254 1,084,203
FHLB advances and note payable 897 1,986
----------------------------
TOTAL INTEREST EXPENSE 965,151 1,086,189
----------------------------
NET INTEREST INCOME 1,584,095 1,246,866
Provision for loan losses 12,000 6,000
----------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,572,095 1,240,866
----------------------------
Noninterest income:
Service charges and fees 25,938 24,112
Other 12,431 13,521
----------------------------
38,369 37,633
----------------------------
Noninterest expense:
Compensation and employee benefits 358,643 497,796
Occupancy 43,675 44,248
Insurance 17,980 18,830
Data processing 47,816 49,106
Furniture and fixture expense 13,371 13,279
Other 178,706 169,534
----------------------------
660,191 792,793
----------------------------
INCOME BEFORE INCOME TAXES 950,273 485,706
Income taxes 351,822 181,821
----------------------------
NET INCOME $ 598,451 $ 303,885
============================
Basic earnings per share $ 0.35 $ 0.18
============================
Diluted earnings per share $ 0.35 $ 0.18
============================
Dividends per share $ 0.15 $ 0.10
============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 598,451 $ 303,885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 21,253 21,754
Deferred income taxes 121,885 (6,747)
ESOP compensation expense (income) 6,157 (6,127)
Amortization of deferred management recognition plan - 115,000
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (46,312) (90,322)
Accrued interest receivable 14,394 10,815
Decrease in:
Accrued expenses and other liabilities (61,663) (214,946)
Special SAIF assessment (320,750)
Income taxes payable (63,042) (37,383)
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 270,373 95,929
--------------------------------
Cash Flows From Investing Activities
Net (increase) decrease in loans receivable (2,242,892) 3,957,468
Principal payments received on mortgage-backed securities 95,385 53,859
Net decrease in investment securities 710,516 770,219
Purchase of property and equipment (15,001) -
--------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,451,992) 4,781,546
--------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits 87,783 2,034,131
Cash dividends paid (254,536) 221,010
Repayment of note payable - (5,500,000)
Repayment of ESOP debt 63,747 94,150
Decrease in advance payments by borrowers
for taxes and insurance 3,513 (1,255)
--------------------------------
NET CASH USED IN FINANCING ACTIVITIES (99,493) (3,593,984)
--------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,281,112) 1,283,491
Cash and cash equivalents, including federal funds sold:
Beginning 5,105,923 6,758,248
--------------------------------
Ending $ 3,824,811 $8,041,739
=================================
</TABLE>
4
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 917,397 $ 1,093,078
=============================
Cash payments for income taxes $ 307,290 $ 261,528
=============================
Supplemental Disclosure of Noncash Financing Transactions
Dividends declared, accrued and deducted from retained earnings $ 127,299 $ 84,649
=============================
</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 is 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 six month periods ended March 31, 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 3-6, "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. The following are
reconciliations of the amounts used in the per share calculations:
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1998
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------------
<S> <C> <C> <C>
BASIC AND DILUTED EPS
Income available to stockholders $ 145,570 1,673,749 $ 0.09
For the Six Months Ended March 31, 1998
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------------
BASIC AND DILUTED EPS
Income available to stockholders $ 303,885 1,698,862 $ 0.18
For the Three Months Ended March 31, 1997
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------------
BASIC AND DILUTED EPS
Income available to stockholders $ 296,232 1,698,096 $ 0.17
For the Six Months Ended March 31, 1997
----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------------
BASIC AND DILUTED EPS
Income available to stockholders $ 598,451 1,698,096 $ 0.35
</TABLE>
NOTE 4. DIVIDENDS DECLARED
On March 24, 1998, the Board of Directors of Scotland Bancorp, Inc. declared a
dividend of $.05 per share for stockholders of record as of April 10, 1998 and
payable on April 24, 1998. The dividends declared were accrued and reported as
other liabilities in the March 31, 1998 consolidated statement of financial
condition.
7
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
________________________________________________________________________________
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND SEPTEMBER 30, 1997:
Total assets decreased by $3.1 million to $61.3 million at March 31, 1998 from
$64.4 million at September 30, 1997. Net loans receivable decreased by $4.0
million to $42.5 million at March 31, 1998 from $46.5 million at September 30,
1997. Cash and cash equivalents, including federal funds sold, increased by $1.3
million to $8.0 million at March 31, 1998 from $6.8 million at September 30,
1997. Investment securities decreased by $505,000 to $9.5 million at March 31,
1998 from $10.0 million at September 30, 1997. During the six months ended March
31, 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 $319,000. Deposits
increased by $2.0 million to $45.2 million at March 31, 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 $131,000 during the current period to $9.6
million at March 31, 1998, which is attributable to the Company's earnings of
$304,000 for the six months ended March 31, 1998, less cash dividends declared
of $173,000.
At March 31, 1998, the Company's capital amounted to $15.1 million, which as a
percentage of total consolidated assets was 24.7%, 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 March 31, 1998. The Bank's nonperforming loans as a percentage
of total loans outstanding was .00% and .06% at March 31, 1998 and September 30,
1997, respectively. During the six month period ended March 31, 1998, 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 $50 in
net loan charge-offs during the six months ended March 31, 1998. As a result,
and based on management's analysis of the adequacy of its allowances, $6,000 was
provided to the loan loss allowance during the six month period ended March 31,
1998. 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
________________________________________________________________________________
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
1998 AND 1997:
GENERAL. Net income for the three months ended March 31, 1998 was $146,000
compared to $296,000 earned during the same quarter in 1997. Net income for the
six months ended March 31, 1998 was $304,000 compared to $598,000 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
six month periods ended March 31, 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 $103,000 from $1.3 million for the
three months ended March 31, 1997 to $1.2 million for the three months ended
March 31, 1998. Interest income decreased by $216,000 from $2.5 million for the
six months ended March 31, 1997 to $2.3 million for the six months ended March
31, 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 two quarters of this year in comparison to the same
two quarters a year earlier. Interest-earning assets amounted to $60.0 million
at March 31, 1998 as compared to $67.9 million at March 31, 1997. The Company
utilized investment securities as the funding source to pay a $11.5 million
return of capital dividend. Approximately 98% of the Company's assets were
interest-earning at March 31, 1998, and approximately 71% of such interest-
earning assets were held in the form of loans receivable.
INTEREST EXPENSE. Interest expense increased by $58,000 from $475,000 for the
three months ended March 31, 1997 to $533,000 for the three months ended March
31, 1998. Interest expense increased by $121,000 from $965,000 for the six
months ended March 31, 1997 to $1.1 million for the six months ended March 31,
1998. The increase was attributable to a higher level of interest-bearing
liabilities outstanding during the first two quarters of this year in comparison
to the same two quarters a year earlier, while the cost of funds remained fairly
stable.
NET INTEREST INCOME. Net interest income decreased by $161,000 from $789,000 for
the three months ended March 31, 1997 to $628,000 for the three months ended
March 31, 1998. Net interest income decreased by $337,000 from $1.6 million for
the six months ended March 31, 1997 to $1.2 million for the six months ended
March 31, 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.
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
9
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
________________________________________________________________________________
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 six
month periods ended March 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 March 31, 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 increased by $84,000 to $411,000 for
the three month period ended March 31, 1998 from $327,000 for the comparable
quarter in 1997, and by $133,000 to $793,000 for the six month period ended
March 31, 1998 from $660,000 for the comparable period in 1997. The increase is
principally as a result of an increase in compensation expense resulting from
the establishment of the Bank's Management Recognition Plan 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 Management
Recognition Plan ("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% annually
beginning at the date of grant. The expense associated with the MRP amounted to
$58,000 and $115,000 for the three and six months ended March 31, 1998, 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.
One form of liquidity, which is made up of cash and cash equivalents and
federal funds sold, increased by $1.2 million during the six months ended March
31, 1998. As reported in the consolidated statement of cash flows, such
increase occurred as a result of deposit growth and sales of investment
securities, offset somewhat by repayment of debt.
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 March 31, 1998 was considerable in excess of such
requirements. Given its excess liquidity and its ability to borrow from the
Federal Home Loan
10
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
________________________________________________________________________________
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.
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
The Annual Meeting of the Stockholders was held on January 16,
1998. The purpose of the meeting was to elect three directors
for the Company for three year terms and to ratify the
selection of McGladrey & Pullen, LLP as the independent
auditor of the Company for the fiscal year ending September
30, 1998. The following table sets for information as to each
of the votes:
<TABLE>
<CAPTION>
Votes Against Abstentions and
Matter Votes For or Withheld Broker Non-Votes
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratify selection of Auditor 1,613,794 3,000 10,556
James W. Mason, Director 1,599,870 27,480 -
Clifton P. Buie, Director 1,610,370 16,980 -
John W. Hudson, Director 1,611,270 16,080 -
</TABLE>
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
-------
(3)(i) and (3)(ii) Previously reported.
(4) Previously reported.
(10) Previously reported.
(11) Previously reported.
(27) Financial Data Schedule.
(b) Not applicable
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 May 1, 1998 By: s/s William C. Fitzgerald, III
--------------------- -----------------------------------
William C. Fitzgerald, III
President and CEO
Dated May 1, 1998 By: s/s Debora B. Steagall
--------------------- -----------------------------------
Debora B. Steagall
Assistant Treasurer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 1,248 1,228
<INT-BEARING-DEPOSITS> 1,894 1,547
<FED-FUNDS-SOLD> 4,900 1,050
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 8,010 13,878
<INVESTMENTS-CARRYING> 1,464 2,549
<INVESTMENTS-MARKET> 1,512 2,537
<LOANS> 42,506 47,322
<ALLOWANCE> 255 237
<TOTAL-ASSETS> 61,278 68,924
<DEPOSITS> 45,174 42,497
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 965 1,142
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,139 25,285
<TOTAL-LIABILITIES-AND-EQUITY> 61,278 68,924
<INTEREST-LOAN> 1,899 1,932
<INTEREST-INVEST> 209 505
<INTEREST-OTHER> 225 112
<INTEREST-TOTAL> 2,333 2,549
<INTEREST-DEPOSIT> 1,084 964
<INTEREST-EXPENSE> 1,086 965
<INTEREST-INCOME-NET> 1,247 1,584
<LOAN-LOSSES> 6 12
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 793 660
<INCOME-PRETAX> 486 950
<INCOME-PRE-EXTRAORDINARY> 486 950
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 304 598
<EPS-PRIMARY> .18 .35
<EPS-DILUTED> .18 .35
<YIELD-ACTUAL> 7.69 7.56
<LOANS-NON> 0 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 249 225
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 255 237
<ALLOWANCE-DOMESTIC> 255 237
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
