UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 25049
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1999
------------------------
OR
[ ] 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 000-23465
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Coddle Creek Financial Corp.
---------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-2045998
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
347 North Main Street/Post Office Box 117
Mooresville, North Carolina 28115
---------------------------------
(Address of principal executive offices) (Zip code)
(704) 664-4888
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(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 Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
As of August 1, 1999 there were issued and outstanding 698,756 shares of the
Registrant's common stock, no par value.
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
June 30, 1999 (Unaudited) and December 31, 1998 1
Condensed Consolidated Statements of Income and Comprehensive Income for
the Three Months ended June 30, 1999 and 1998 (Unaudited) 2
Condensed Consolidated Statements of Income and Comprehensive Income for
the Six Months ended June 30, 1999 and 1998 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1999 and 1998 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8 - 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 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 - 14
</TABLE>
This Form 10-Q contains forward-looking statements consisting of estimates with
respect to the financial condition, results of operations and other business of
Coddle Creek Financial Corp. 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.
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Note)
<S> <C> <C>
Cash and cash equivalents $ 10,360,000 $ 8,245,000
Certificates of deposit 100,000 100,000
Securities available for sale 3,592,000 10,244,000
Securities held to maturity 1,286,000 1,381,000
Federal Home Loan Bank stock 1,060,000 964,000
Loans receivable, net 117,471,000 110,578,000
Office properties and equipment, net 1,123,000 999,000
Accrued interest receivable 792,000 908,000
Cash value of life insurance 1,044,000 1,075,000
Deferred income taxes 1,278,000 1,193,000
Prepaid expenses and other assets 127,000 124,000
----------------------------------
Total assets $ 138,233,000 $ 135,811,000
==================================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities:
<S> <C> <C>
Deposits $ 88,688,000 $ 87,569,000
Advances from borrowers for taxes and insurance 214,000 110,000
Accounts payable and other liabilities 1,058,000 522,000
Deferred compensation 2,520,000 2,491,000
----------------------------------
Total liabilities 92,480,000 90,692,000
----------------------------------
Stockholders' Equity:
Preferred stock, authorized 5,000,000 shares; none issued - -
Common stock, no par value, authorized 20,000,000 shares;
June 30, 1999 issued 698,756 shares, December 31, 1998
issued 674,475 shares - -
Additional paid-in capital 33,971,000 32,461,000
Retained earnings, substantially restricted 16,770,000 16,633,000
Unearned ESOP shares (4,021,000) (4,021,000)
Deferred management recognition plan (964,000) -
Accumulated other comprehensive income, unrealized gain (loss)
on securities available for sale, net of tax (3,000) 46,000
----------------------------------
Total stockholders' equity 45,753,000 45,119,000
----------------------------------
Total liabilities and stockholders' equity $ 138,233,000 $ 135,811,000
==================================
</TABLE>
NOTE: The Condensed Consolidated Statement of Financial Condition as of December
31, 1998 has been taken from the audited financial statements at that
date.
See Notes to Condensed Consolidated Financial Statements.
1
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
For the Three Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 2,295,000 $ 2,169,000
Investment securities 88,000 244,000
Other 105,000 85,000
------------------------------------
2,488,000 2,498,000
Interest expense:
Deposits 982,000 1,021,000
------------------------------------
Net interest income 1,506,000 1,477,000
Provision for loan losses - 60,000
------------------------------------
Net interest income after provision for loan losses 1,506,000 1,417,000
------------------------------------
Noninterest income 55,000 46,000
------------------------------------
Noninterest expenses:
Compensation and employee benefits 617,000 527,000
Net occupancy 65,000 54,000
Deposit insurance premiums 14,000 17,000
Data processing 42,000 46,000
Other 167,000 134,000
------------------------------------
905,000 778,000
------------------------------------
Income before income taxes 656,000 685,000
Income taxes 214,000 244,000
------------------------------------
Net income 442,000 441,000
Other comprehensive income (loss), unrealized holding
gains (losses) arising during the period, net of tax (26,000) 1,000
------------------------------------
Comprehensive income $ 416,000 $ 442,000
====================================
Basic earnings per share $ 0.69 $ 0.71
====================================
Diluted earnings per share $ 0.69 $ 0.71
====================================
Dividends per share $ 0.53 $ 0.25
====================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
For the Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 4,545,000 $ 4,363,000
Investment securities 232,000 429,000
Other 190,000 368,000
------------------------------------
4,967,000 5,160,000
Interest expense:
Deposits 1,954,000 2,081,000
------------------------------------
Net interest income 3,013,000 3,079,000
Provision for loan losses - 120,000
------------------------------------
Net interest income after provision for loan losses 3,013,000 2,959,000
------------------------------------
Noninterest income 105,000 94,000
------------------------------------
Noninterest expenses:
Compensation and employee benefits 1,605,000 1,004,000
Net occupancy 115,000 107,000
Deposit insurance premiums 28,000 32,000
Data processing 108,000 94,000
Other 305,000 244,000
------------------------------------
2,161,000 1,481,000
------------------------------------
Income before income taxes 957,000 1,572,000
Income taxes 315,000 612,000
------------------------------------
Net income 642,000 960,000
Other comprehensive loss, unrealized holding losses arising
during the period, net of tax (49,000) (12,000)
------------------------------------
Comprehensive income $ 593,000 $ 948,000
====================================
Basic earnings per share $ 1.01 $ 1.55
====================================
Diluted earnings per share $ 1.01 $ 1.55
====================================
Dividends per share $ 0.78 $ 0.5
====================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 642,000 $ 960,000
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for loan losses - 120,000
Provision for depreciation 44,000 11,000
Provision for deferred income taxes (60,000) (59,000)
Amortization of deferred management recognition plan 579,000 -
ESOP compensation (31,000) -
Changes in assets and liabilities:
(Increase) decrease in:
Interest receivable 116,000 (192,000)
Cash value of life insurance 31,000 3,000
Prepaid expenses and other assets (3,000) (118,000)
Increase (decrease) in:
Accounts payable and other liabilities 347,000 (18,000)
Deferred compensation 29,000 97,000
-------------------------------------
Net cash provided by operating activities 1,694,000 804,000
-------------------------------------
Cash Flows From Investing Activities
Net (increase) decrease in investments 6,576,000 (11,497,000)
Net increase in loans receivable (6,893,000) (5,181,000)
Purchases of office properties and equipment (168,000) -
-------------------------------------
Net cash used in investing activities (485,000) (16,678,000)
-------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits 1,119,000 (12,801,000)
Loan to ESOP for purchase of stock, net of principal payment - (4,216,000)
Increase in advances from borrowers for taxes and insurance 104,000 120,000
Cash dividends paid (317,000) (156,000)
-------------------------------------
Net cash provided by (used in) financing activities 906,000 (17,053,000)
-------------------------------------
Net increase (decrease) in cash and cash equivalents 2,115,000 (32,927,000)
Cash and cash equivalents:
Beginning 8,245,000 37,071,000
-------------------------------------
Ending $10,360,000 $ 4,144,000
=====================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 1,985,000 $ 2,170,000
Income taxes 144,000 808,000
Change in accrued dividends 188,000 156,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. Nature of Business
On December 30, 1997, pursuant to a Plan of Conversion which was approved by it
members and regulators, Mooresville Savings Bank, Inc., SSB (the "Bank" or
"Mooresville Savings Bank") converted from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank (the "Conversion")
and became a wholly-owned subsidiary of Coddle Creek Financial Corp. (the
"Company"). Coddle Creek was formed to acquire all of the common stock of the
Bank upon its conversion to stock form. The Company has no operations and
conducts no business of its own other than owning Mooresville Savings, investing
its portion of the net proceeds received in the Conversion, and lending funds to
the Employee Stock Ownership Plan (the "ESOP"), which was established in
connection with the Conversion. The closing of the offering occurred on
December 30, 1997 and resulted in the issuance of 674,475 shares of common stock
at a price of $50.00 per share, for proceeds of $32,494,000 (net of $1,230,000
in conversion costs). The Company transferred $14,134,000 of the net proceeds
to Mooresville Savings for the purchase of all of the common stock of the Bank.
The Company then loaned the ESOP trust $4,216,000 to purchase 53,958 shares of
common stock in the open market.
Mooresville 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, occupancy costs, furniture and
fixture expense, data processing charges, and other general and administrative
expenses.
Concurrent with the Conversion, and pursuant to North Carolina regulations, the
Bank established a liquidation account in an amount equal to its net worth as
reflected in its latest statement of financial condition contained in the
prospectus used in connection with the Company's initial public offering. The
liquidation account will be maintained for the benefit of eligible deposit
account holders who continue to maintain their deposit accounts in the Bank
after conversion. Only in the event of a complete liquidation of the Company
will each deposit account holder be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted subaccount balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stock. Dividends
paid by the Bank subsequent to the Conversion cannot be paid from this
liquidation account.
In connection with the Conversion, the Bank has agreed with the FDIC that,
within the first three years after completion of the Conversion, neither the
Company nor the Bank will pay any taxable dividend or make any taxable
distribution in excess of their current and retained earnings. The Company and
the Bank have agreed to notify the FDIC before making a return of capital during
the first three years following the Conversion.
5
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Note 1. Nature of Business (Continued)
The Bank may not declare or pay a cash dividend on or repurchase any of its
common stock if its net worth would there by be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations. For a
period of five years after its Conversion, the Bank must obtain written approval
from the Administrator of the North Carolina Savings Institutions Division
before declaring or paying a cash dividend on its common stock in an amount in
excess of one-half of the greater of (i) the Bank's net income for the most
recent fiscal year end, or (ii) the average of the Bank's net income after
dividends for the most recent year end and not more than two of the immediately
preceding fiscal year ends.
2. Basis of Presentation
The accompanying unaudited financial statements (except for the statement of
financial condition at December 31, 1998, which is from 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-Q and 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, except for
the implementation of the Management Recognition Plan discussed in Note 5)
necessary for a fair presentation of the financial position and results of
operations for the periods presented have been included. The results of
operations for the three and six month periods ended June 30, 1999 are not
necessarily indicative of the results of operations that may be expected for the
year ended December 31, 1999. The accounting policies followed are as set forth
in Note 1 of the Notes to Consolidated Financial Statements in the 1998 annual
report of the Company.
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
ESOP which have not been allocated to participant accounts are not assumed to be
outstanding. Stock options are not included in the calculations because they
are anti-dilutive.
6
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Note 3. Earnings Per Share (Continued)
The following are reconciliations of the amounts used in the per share
calculations for 1999 and 1998:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, 1999 and 1998
---------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
---------------------------------------
<S> <C> <C> <C>
Basic EPS and diluted EPS for 1999 $ 642,000 633,080 $ 1.01
Basic EPS and diluted EPS for 1998 960,000 621,260 1.55
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, 1999 and 1998
---------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
---------------------------------------
<S> <C> <C> <C>
Basic EPS and diluted EPS for 1999 $ 442,000 633,080 $ 0.69
Basic EPS and diluted EPS for 1998 441,000 621,260 0.71
</TABLE>
4. Dividends Declared
On June 15, 1999, the Board of Directors of Coddle Creek Financial Corp.
declared a dividend of $.53 per share for stockholders of record as of June 30,
1999 and payable on July 15, 1999. The dividends declared were accrued and
reported as other liabilities in the June 30, 1999 condensed consolidated
statement of financial condition.
5. Stock Option and Management Recognition Plans
The Company's stockholders approved the Company's Stock Option Plan and the
Bank's Management Recognition Plan (the "MRP") on January 26, 1999. The Stock
Option Plan reserves for issuance up to 67,447 stock options to 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 value of the Company's common
stock at date of grant. As permitted under generally accepted accounting
principles, grants under the plan will be accounted for following the provisions
of APB Opinion No. 25 and its related interpretations.
The MRP reserved for issuance 26,979 shares of common stock to officers,
directors, and employees at the time of the adoption. The Bank issued 24,281
shares from authorized but unissued common stock to fund the MRP on January 26,
1999. The restricted common stock under the MRP vests 25% at the date of grant
and 25% annually beginning on the one year anniversary of the date of grant.
7
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Comparison of Financial Condition at June 30, 1999 and December 31, 1998:
At June 30, 1999 and December 31, 1998 total assets amounted to $138.2 million
and $135.8 million, respectively. Loans receivable, net, increased from $110.6
million at December 31, 1998 to $117.5 million at June 30, 1999, a $6.9 million
increase. Savings deposits increased $1.1 million from $87.6 million at
December 31, 1998 to $88.7 million at June 30, 1999. Investment securities
decreased $6.7 million from $12.7 million at December 31, 1998 to $6.0 million
at June 30, 1999 due to the maturity of securities during the first six months
of 1999. Stockholders' equity increased by $634,000 for the six months ended
June 30, 1999. This increase is due to $579,000 that was recorded to additional
paid-in capital that is associated with the implementation of the MRP and net
income of $642,000 offset by $505,000 of dividends declared.
The Bank's level of nonperforming loans, defined as loans past due 90 days or
more, has historically been and continues to be low as a percentage of total
loans outstanding. The Bank had $869,000 of loans outstanding which were
delinquent more than 90 days at June 30, 1999, compared to $1.4 million at
December 31, 1998. Based on management's analysis of the adequacy of the
allowance for loan losses, the composition of the loan portfolio, the credit
risk inherent in the portfolio and historical loan loss experience, the
allowance for loan losses was increased by $4,000 to $899,000 at June 30, 1999
from $895,000 at December 31, 1998. Management believes the allowance to be
adequate to absorb any future losses in the portfolio.
At June 30, 1999, the Company's capital amounted to $45.8 million, which as a
percentage of total consolidated assets was 33.1%, and was considerably in
excess of the regulatory capital requirements at such date.
Comparison of Operating Results for the Three and Six Months Ended June 30, 1999
and 1998:
General. Net income for the three and six months ended June 30, 1999 was
$442,000 and $642,000 respectively or $1,000 and $318,000 less than the $441,000
and $960,000 earned during the same periods in 1998. The decrease in earnings
was primarily attributable to the implementation of the MRP which resulted in
additional expense of $579,000 during the first six months of 1999.
Interest income. Interest income remained stable at $2.5 million for the three
months ended June 30, 1998 and 1999. Interest income decreased by $193,000 from
$5.2 million for the six months ended June 30, 1998 to $5.0 million for the six
months ended June 30, 1999. The decrease is primarily due to a decrease in the
average balance of investment securities and interest-earning deposits during
the first six months of 1999 as compared to 1998. Approximately 97% of the
Bank's assets were interest-earning at June 30, 1999, and approximately 88% of
such interest-earning assets were held in the form of loans receivable.
8
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Interest Expense. Interest expense decreased by $39,000 from $1.0 million
during the three months ended June 30, 1998 to $982,000 for the three months
ended June 30, 1999. Interest expense decreased by $127,000 from $2.1 million
during the six months ended June 30, 1998 to $2.0 million for the six months
ended June 30, 1999. The decrease is due to a lower average yield on interest-
bearing liabilities outstanding during the first six months of 1999 in
comparison to the same period a year earlier.
Net interest income. Net interest income increased by $29,000 from $1,477,000
for the three months ended June 30, 1998 to $1,506,000 for the three months
ended June 30, 1999. Net interest income decreased by $66,000 from $3.1 million
for the six months ended June 30, 1998 to $3.0 million for the six months ended
June 30, 1999. The decrease in the six months ended June 30, 1999 is due to the
maturity of $2.0 million of investment securities during the first quarter of 19
99.
Provision for loan losses. The Bank added $-0- and $120,000 in loan loss
provisions during the six months ended June 30, 1999 and 1998, respectively.
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 level of nonperforming loans has remained consistently low in
relation to prior periods and total loans outstanding. At June 30, 1999, the
Bank's level of general valuation allowances for loan losses amounted to
$899,000, which management believes is adequate to absorb potential losses in
its loan portfolio.
Noninterest expense. Noninterest expense increased from $778,000 to $905,000
for the three months ended June 30, 1998 and 1999, respectively. Noninterest
expense increased from $1.5 million to $2.2 million for the six months ended
June 30, 1998 and 1999, respectively. Compensation expense included $579,000 of
MRP expense for the six months ended June 30, 1999. The restricted common stock
under the MRP vests 25% immediately at the date of grant and 25% annually
beginning on the one year anniversary of the date of grant. All other
categories of noninterest expense fluctuated by insignificant amounts between
the periods.
9
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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.
Mooresville Savings Bank must maintain liquidity in the form of cash, cash
equivalents and investment securities, including mortgage-backed securities,
equal to at least 10% of total assets. The Bank's liquidity has decreased from
December 31, 1998 as investment securities that matured were used to fund loan
growth. However, the Bank's liquidity ratio at June 30, 1999 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.
Impact of the Inflation and Changing Prices:
The financial statements and accompanying footnotes have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The assets and liabilities of the Bank are
primarily monetary in nature and changes in market interest rates have a greater
impact on the Bank's performance than do the effects of inflation.
Impact of the Year 2000:
A lot of attention has been given to the impact that the year 2000 date change
will have on businesses, utilities and other organizations that rely on
computerized systems to help run their operations. The year 2000 date change
can affect any system that uses computer software or computer chips including
automated equipment and machinery. For example, many computer programs and
computer chips store the calendar year portion of the date as two digits rather
than four digits. These software programs and chips record the year 1999 as
"99". This approach works until the year 2000 when the "00" may be interpreted
as the year 1900 instead of the year 2000. Banks use computer systems to
perform financial calculations, transfer funds, record deposits and loan
payments, run security systems and vaults and a myriad of other functions.
Because banks rely heavily on their computer systems, the Federal Financial
Institutions Examination Council ("FFIEC") has placed significant emphasis on
the problems surrounding the year 2000 issues and has required financial
institutions to document the assessment, testing and corrections made to ready
their computer systems and programs for the year 2000 date change. The FFIEC
has strict regulations, guidelines, and milestones in place that each FDIC
insured financial institution must follow in order to remain operational. The
Company's board of directors has remained informed of the Company's position and
progress in its year 2000 project.
10
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The Company's year 2000 project remains on schedule according to the guidelines
set forth by the FFIEC. The Company's most critical external exposure to year
2000 system problems is with its data processing provider, Fiserv. Fiserv
renovated its systems in June 1998 and is currently testing its remediation
efforts. Fiserv planned to have all of its systems year 2000 compliant by
December 1998. Fiserv has responded to the Company that renovation of its
program is virtually complete. In the event that Fiserv is unable to make the
necessary corrections to its programs to accommodate the year 2000, the Company
will convert its data to one of the other Fiserv programs that is able to
operate in the 2000 environment. In addition, the Company has contacted its
major customers and vendors to inquire about their progress in addressing the
year 2000 problem and does not believe that the problems of such customers and
vendors will have a material adverse effect on the Company or its operations.
The Company will continue to monitor the progress of these parties in addressing
the year 2000 problem as the new millennium approaches. Management estimates
the cost to replace the computer hardware and software with year 2000 compliant
equipment to be approximately $150,000.
The year 2000 problems can affect the Company's operation in a number of ways
but the mission critical issue is maintaining customers' account information
including tracking deposits, interest accruals and loan payments. The Company
is dependent upon electricity, telephone lines, computer hardware and Fiserv's
data processing capability.
The Company is not aware of any major year 2000 problems that exist with its
electric utility and phone company. The Company is encouraged that both
companies will have all material year 2000 problems addressed well before
December 31, 1999. However, the Company believes that a temporary
unavailability of electrical power will not hinder safe and secure operations.
The Company will rely on manual operations and all of the necessary supplies
will be stored on hand by September 1, 1999 at each location. To prevent
difficulties in the event there is an unforeseen interruption in either
telephone or electrical service when the year changes, the Company will print
hard copies of all account information. In addition, the Company will download
all account information into programs on the Company's hardware that will allow
bank personnel to extract customer information without regard to outside
sources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has not experienced any substantive changes in its portfolio risk
during the six months ended June 30, 1999.
11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any material legal proceedings at the
present time. From time to time, the Company 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 The Company
held an Annual Meeting of Stockholders on April 21, 1999. The
purpose of the meeting was to vote on the following proposals.
1. Election of directors, Willis L. Barnette, Donald R. Belk, Dale
W. Brawley, George W. Brawley, Jr., Jack G. Lawler and Claude U.
Voils, Jr.
2. Ratification of amendments to the Mooresville Savings Bank, SSB
Management Recognition Plan.
3. Ratification of amendments to the Coddle Creek Financial Corp.
Option Plan.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) 27 - Financial Data Schedule
(b) Not applicable
12
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.
Coddle Creek Financial Corp.
Dated August 1, 1999 By: /s/ George W. Brawley, Jr.
------------------------------- ----------------------------
George W. Brawley
President and CEO
Dated August 1, 1999 By: /s/ Billy R. Williams
------------------------------- ----------------------------
Billy R. Williams
Secretary/Controller
13
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.
Coddle Creek Financial Corp.
Dated August 1, 1999 By:
---------------------------- -------------------------
George W. Brawley
President and CEO
Dated August 1, 1999 By:
---------------------------- -------------------------
Billy R. Williams
Secretary/Controller
14
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