EXHIBIT 13
Annual Report to Stockholders for Fiscal Year
Ended March 31, 2000
<PAGE>
SKIBO FINANCIAL CORP.
THE HOLDING COMPANY OF FIRST CARNEGIE DEPOSIT
2000 ANNUAL REPORT
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<PAGE>
SKIBO FINANCIAL CORP.
2000 ANNUAL REPORT
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TABLE OF CONTENTS
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Letter to Stockholders..................................................... 1
Selected Financial and Other Data.......................................... 2
Corporate Profile and Related Information.................................. 3
Average Balance Sheet, Interest Rates, and Yield........................... 4
Rate/Volume Analysis ...................................................... 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 6
Independent Auditors' Report...............................................12
Consolidated Statements of Financial Condition.............................13
Consolidated Statements of Income and Comprehensive Income.................14
Consolidated Statements of Stockholders' Equity............................15
Consolidated Statements of Cash Flows......................................16
Notes to Consolidated Financial Statements.................................17
Stock Market Information...................................................38
Office Locations and Other Corporate Information...........................39
<PAGE>
SKIBO FINANCIAL CORP.
To Our Stockholders:
The years 1999 and 2000 have been tumultuous years in all the major stock
markets. Bank stocks in general, and especially the SmallCap Nasdaq banking
sector, have been dramatically affected. Despite the turbulence, Skibo Financial
Corp. and its wholly owned subsidiary, First Carnegie Deposit, have posted their
best earnings in more than five years. The Company's net income for fiscal 2000
increased $377,000 or 51.9% to $1,104,000, as compared to $727,000 for the prior
fiscal year. During fiscal 2000, diluted earnings per share increased 50.0% to
$.33 per diluted share from $.22 per diluted share in fiscal 1999. These strong
earnings, despite an inverted yield curve, are primarily due to a 19 basis point
increase in the net interest rate spread. The spread was mainly impacted by a 22
basis point decrease in the average rate paid on average deposits, primarily due
to long term certificates of deposit maturing and renewing at lower rates of
interest, and a 66.8% decrease in interest expense on bonds payable and other
borrowings, resulting from their elimination. Several other factors influenced
the increase in net income, such as: lower loan loss reserves, due to the high
quality of our loan portfolio and a reduction in both compensation and employee
benefits expense and the costs of professional services rendered.
Predatory deposit pricing strategies by several area institutions and a strong
stock market (other than financial stocks) attributed to an almost 2% decline in
deposits, making it difficult to increase our loan and securities portfolios.
We, however, remain committed to investing in our local communities. We will
continue to originate and purchase loans, including loans to low and moderate
income borrowers, in the communities we serve. During fiscal 2000, the Company
purchased and originated $4.2 million in loans; however, borrowers utilized the
lower interest rates available, which ultimately increased the prepayment speed
of our loan portfolio. Loan repayments totaled $13.1 million, causing a decrease
in net loans receivable of $8.9 million. In light of the aforementioned inverted
yield curve, management believes at this time, it is more prudent and profitable
to repay advances (these advances are priced at the short end of the yield
curve) rather than make long term fixed rate loans at less than acceptable
spreads.
In its long term commitment to increase profitability and stockholder value, the
Board of Directors, on May 14, 1999, adopted a stock repurchase program to
repurchase up to 10% of the Company's outstanding shares of common stock held by
persons other than Skibo Bancshares, M.H.C. ("MHC"), its mutual holding company.
The 155,248 share repurchase was completed on February 15, 2000 at an average
cost of $6.68 per share. On April 18, 2000, the Board of Directors adopted a
second stock repurchase program to repurchase up to an additional l0% of the
Company's outstanding shares, excluding MHC shares, and began repurchasing
shares on April 24, 2000.
The Board of Directors, Officers and Employees of Skibo Financial Corp. would
like to thank you for your continued commitment to the Company, and we pledge to
concentrate our efforts toward increasing stockholder value in the years to
come.
Sincerely,
/s/ Walter G. Kelly
-------------------------------------
Walter G. Kelly
President and Chief Executive Officer
<PAGE>
SKIBO FINANCIAL CORP.
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Selected Financial Condition Data (In thousands)
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At March 31, 2000 1999 1998 1997 1996
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
Total assets................................. $ 152,632 $ 155,056 $ 148,132 $ 162,525 $ 117,814
Loans receivable, net........................ 56,504 65,309 67,884 61,625 43,846
Mortgage-backed securities................... 59,181 54,365 54,315 53,939 53,796
Investment securities........................ 26,696 25,087 15,777 17,532 13,714
Cash and cash equivalents.................... 1,726 2,499 3,271 22,701 1,697
Deposits..................................... 75,583 76,917 77,226 87,802 81,615
Stock subscriptions (1)...................... -- -- -- 13,606 --
FHLB advances................................ 49,000 49,300 41,300 41,933 16,828
Bonds payable................................ -- 1,299 1,618 2,066 2,612
Stockholders'/members' equity (1)............ $ 25,143 $ 25,130 $ 24,980 $ 15,008 $ 14,686
===============================================================================================================================
Selected Operating Data (In thousands, except per share data)
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Year Ended March 31, 2000 1999 1998 1997 1996
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Interest income.............................. $ 10,085 $ 9,691 $ 10,131 $ 9,219 $ 8,510
Interest expense............................. 5,951 5,880 6,167 5,942 5,353
------ ----- ----- ----- -----
Net interest income.......................... 4,134 3,811 3,964 3,277 3,157
Provision for loan losses.................... (150) 25 60 120 131
------ ------ ------ ----- ------
Net interest income after provision
for loan losses......................... 4,284 3,786 3,904 3,157 3,026
------ ----- ----- ----- -----
Total other income........................... 96 86 329 129 474
Total other expenses......................... 2,566 2,689 2,516 2,751 (2) 2,021
------- ------ ----- ----- -----
Income before income taxes................... 1,814 1,183 1,717 535 1,479
Provision for income taxes................... 710 456 748 212 432
------ ------- ------- ------ --------
Net income................................... $ 1,104 $ 727 $ 969 $ 323 $ 1,047
====== ======= ======= ===== =====
Basic earnings per share (1), (3)............ $ 0.33 $ 0.22 $ 0 .29 N/A N/A
Diluted earnings per share (1), (3).......... $ 0.33 $ 0.22 $ 0 .29 N/A N/A
=================================================================================================================================
Selected Financial Ratios and Other Data
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Year Ended March 31, 2000 1999 1998 1997 1996
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Return on average assets..................... .71% .49% .66% .23% (2) .86%
Return on average equity..................... 4.36 2.94 3.95 2.18 (2) 7.38
Average equity to average assets............. 16.35 16.60 16.64 10.77 11.70
Stockholders'/members' equity to assets at
period end ............................. 16.47 16.21 16.86 9.23 12.47
Net interest rate spread..................... 2.06 1.87 1.96 1.97 2.15
Net yield on average interest-earning assets. 2.78 2.66 2.79 2.46 2.69
Non-performing assets to total assets........ .03 .53 .77 .51 .74
Loan loss allowance to total loans (net)..... .75 .88 .81 .67 .66
Non-performing loans to total loans (net).... .08 1.25 1.66 1.32 1.59
Dividend payout ratio........................ 90.91 113.64 68.97 N/A N/A
=================================================================================================================================
</TABLE>
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1 On April 4, 1997, First Carnegie Deposit ("Bank") completed its mutual
holding company reorganization and minority stock issuance. Therefore all
numbers prior to 1998 are those of the Bank in mutual form.
2 Includes a one-time special assessment of $511,000 to recapitalize the
Savings Association Insurance Fund.
3 On October 29, l998, a mid-tier stock holding company ("Company") was
formed and stock was exchanged on a three-for-two basis. All prior per
share numbers have been restated.
2
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SKIBO FINANCIAL CORP.
Corporate Profile and Related Information
First Carnegie Deposit ("Bank") was originally chartered in 1924 as Fidelity
Building and Loan. In January 1939, the Bank's name changed to First Federal
Savings and Loan Association of Carnegie. The name was again changed on December
17, 1996 to First Carnegie Deposit. On April 4, 1997, the Bank reorganized from
a mutual savings bank into a federal mutual holding company structure, whereby
the Bank exchanged its federal mutual savings bank charter for a federal stock
savings bank charter and formed Skibo Bancshares, M.H.C., a federally chartered
mutual holding company.
A reorganization into a two-tier holding company structure was accomplished on
October 29, l998 ("Reorganization"). In the Reorganization, the Bank, the prior
reporting company, became a wholly- owned subsidiary of Skibo Financial Corp.
("Company"), a newly formed stock corporation which is majority owned by the
Mutual Holding Company. In the Reorganization, outstanding shares of the Bank
Common Stock were converted on a three-for-two basis into shares of the common
stock, par value $.10 per share, of the Company ("Company Common Stock"), and
the holders of Bank Common Stock became the holders of all the outstanding
shares of Company Common Stock. The Reorganization had no impact on the
operations of the Bank or the Mutual Holding Company. The Bank has continued its
operations at the same locations, with the same management and subject to all
the rights, obligations and liabilities of the Bank existing immediately prior
to the Reorganization.
All references in this document to the Company include activities of both Skibo
Financial Corp. and First Carnegie Deposit on a consolidated basis unless the
context requires otherwise.
The Bank is a community oriented savings association providing mortgage loans
and consumer loans. The Company is primarily engaged in attracting deposits from
the general public through its offices and using those and other available
sources of funds to purchase and originate one- to four-family mortgage loans
and farm loans and to invest in mortgage-backed and other securities, Small
Business Administration ("SBA") and other government agency guaranteed
commercial and consumer loans. Because the Company faces strong competition in
originating traditional residential mortgage loans, the Company purchases loans
including one- to four-family (conventional and government guaranteed), SBA and
other government agency guaranteed loans, and commercial real estate loans,
including farms.
The principal sources of funds for the Company's lending and investing
activities are deposits, the repayment and maturity of loans, the maturity and
call of securities, and Federal Home Loan Bank ("FHLB") advances. The principal
source of income is interest on loans and mortgage-backed and investment
securities and the principal expense is interest paid on deposits and FHLB
advances.
The Company's and Bank's executive offices are located at 242 East Main Street,
Carnegie, Pennsylvania 15106. The telephone and facsimile number is (412)
276-2424.
3
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AVERAGE BALANCE SHEET, INTEREST RATES, AND YIELD
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and the average
cost of liabilities for the periods indicated and the average yields earned and
rates paid. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
<TABLE>
<CAPTION>
For the Years Ended March 31,
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2000 1999
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Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Actual) (Actual)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).................. $ 59,521 $ 4,316 7.25% $ 65,591 $ 4,651 7.09%
Mortgage-backed securities............ 57,689 3,733 6.47 52,014 3,437 6.61
Investment securities................. 26,006 1,717 6.60 19,611 1,258 6.41
Other interest-earning assets (2)..... 5,423 319 5.88 6,156 345 5.60
----------- ----------- ----------- ---------
Total interest-earning assets.. 148,639 10,085 6.78 143,372 9,691 6.76
----------- ---------
Noninterest-earning assets................. 6,064 5,616
----------- -----------
Total assets.................... $ 154,703 $ 148,988
=========== ===========
Interest-bearing liabilities:
Deposit accounts:
NOW accounts . ................. $ 3,959 50 1.26 $ 3,609 48 1.33
Passbook accounts............... 16,986 454 2.67 17,073 454 2.66
Money market deposit accounts... 3,567 86 2.41 4,011 96 2.39
Certificates of deposit......... 50,693 2,678 5.28 50,799 2,850 5.61
Escrow................................ 133 1 .75 164 2 1.22
FHLB advances......................... 50,179 2,619 5.22 42,758 2,240 5.24
Bonds payable & other borrowings...... 541 63 11.65 1,947 190 9.76
--------------- ---------- ----------- ---------
Total interest-bearing liabilities 126,058 5,951 4.72 120,361 5,880 4.89
---------- ---------
Noninterest-bearing liabilities............ 3,346 3,896
----------- -----------
Total liabilities............... 129,404 124,257
Stockholders' equity....................... 25,299 24,731
----------- -----------
Total liabilities and
stockholders' equity $ 154,703 $ 148,988
=========== ===========
Net interest income........................ $ 4,134 $ 3,811
========== =========
Interest rate spread (3)................... 2.06% 1.87%
====== ======
Net yield on interest-earning assets (4)... 2.78% 2.66%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.91% 119.12%
====== ======
</TABLE>
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1 Non-accrual loans have been included in the average balance of loans;
unpaid interest on non-accrual loans has not been included for purposes of
determining interest income
2 Includes interest-bearing deposits in other financial institutions and
Federal Home Loan Bank ("FHLB") stock.
3 Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
4 Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
4
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RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities, the table
distinguishes between (i) changes attributable to volume (changes in average
volume multiplied by prior period's rate); (ii) changes attributable to rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in average volume multiplied by the change in rate).
<TABLE>
<CAPTION>
Year Ended March 31, Year Ended March 31,
------------------------------------ -----------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------------ -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------ -----------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ------ ------ ----- ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ..................... $(430) $ 105 $ (10) $(335) $ 248 $(214) $ (11) $ 23
Mortgage-backed securities ........... 375 (71) (8) 296 (380) (164) 16 (528)
Investment securities ................ 410 37 12 459 179 (121) (18) 40
Other interest-earning assets ........ (41) 17 (2) (26) 47 (19) (3) 25
----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets .... 314 88 (8) 394 94 (518) (16) (440)
----- ----- ----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
NOW accounts ......................... 4 (2) -- 2 4 (6) (1) (3)
Passbook accounts .................... (2) 2 -- -- (4) (6) -- (10)
Money market deposit accounts ........ (11) 1 -- (10) 1 -- -- 1
Certificates of deposit .............. (6) (166) -- (172) (57) (55) 1 (111)
Escrow ............................... -- (1) -- (1) -- -- -- --
FHLB advances ........................ 389 (8) (2) 379 145 (232) (14) (101)
Bonds payable & other borrowings ..... (137) 37 (27) (127) (69) 8 (2) (63)
----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing liabilities 237 (137) (29) 71 20 (291) (16) (287)
----- ----- ----- ----- ----- ----- ----- -----
Net interest income .................... $ 77 $ 225 $ 21 $ 323 $ 74 $(227) $ -- $(153)
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's results of operations are primarily dependent upon its net
interest income, which is the difference between the interest income earned on
its assets, primarily loans, mortgage-backed securities and investments and the
interest expense on its liabilities, primarily deposits and borrowings. Net
interest income may be affected significantly by general economic and
competitive conditions and policies of regulatory agencies, particularly those
with respect to market interest rates. The results of operations are also
significantly influenced by the level of noninterest expenses, such as employee
salaries and benefits, noninterest income, such as loan-related fees and fees on
deposit-related services, and the Company's provision for loan losses.
Changes in Financial Condition
The Company's total assets of $152,632,000 at March 31, 2000 are reflective of a
decrease of $2,424,000 or 1.6%, as compared to $155,056,000 at March 31, 1999.
The decrease in total assets was primarily due to decreases in cash, loans
receivable, and accrued interest receivable, partially offset by increases in
investment and mortgage-backed securities, prepaid expenses and interest-bearing
deposits at other financial institutions.
The decrease in the Company's liabilities was primarily due to decreases in
deposits, bonds payable, and FHLB advances, partially offset by increases in
accrued expenses and other liabilities. Changes in the components of assets,
liabilities and equity are discussed herein.
The Company's non-performing loans and assets at March 31, 2000, totaled
$48,000, as compared to $818,000 at March 31, 1999, respectively.
Loans Receivable, net. Net loans receivable at March 31, 2000 totaled
$56,504,000, a decrease of $8,805,000 or 13.5%, as compared to $65,309,000 at
March 31, 1999. The decrease was primarily due to principal repayments of $13.1
million, partially offset by purchases of $2.4 million of one- to four-family
fixed rate mortgages (of which $804,000 were FHA/VA insured), $142,000 GNMA
insured multi-family project loans, $420,000 of commercial loans (of which
$174,000 are government guaranteed and/or insured), $573,000 of commercial
non-mortgage loans (all of which are government guaranteed and/or insured) and
the origination of $304,000 one- to four-family and $32,000 commercial fixed
rate mortgages, and $256,000 consumer non-mortgage loans.
Mortgage-backed Securities. Mortgage-backed securities were $59,181,000 at March
31, 2000, an increase of $4,816,000 or 8.9%, as compared to $54,365,000 at March
31, 1999. The increase was due to purchases of $18.4 million of securities,
partially offset by principal repayments and maturities, as many of the
underlying loans refinanced in the low interest rate environment.
Investment Securities. Investment securities totaled $26,696,000 at March 31,
2000, an increase of $1,609,000 or 6.4%, as compared to $25,087,000 at March 31,
1999. This was primarily a result of purchases of U.S. Agency securities
comprised of bonds, debentures and REMICs.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits, totaled $1,726,000, a
decrease of $773,000 or 30.9% from the prior fiscal year. This decrease was due
to decreases in cash and noninterest-bearing deposits at other financial
institutions.
Deposits. Total deposits, after interest credited, decreased by $1,334,000 or
1.7% to $75,583,000 at March 31, 2000, as compared to $76,917,000 at March 31,
1999. The decrease was primarily due to decreases in passbook savings,
certificates of deposit and money market accounts, partially offset by an
increase in checking accounts.
FHLB Advances. FHLB advances, at March 31, 2000, totaled $49,000,000, a decrease
of $300,000 or 0.6%, as compared to $49,300,000 at March 31, 1999. The Company
uses FHLB advances as a supplement to deposits to fund its purchase of loans and
investments.
6
<PAGE>
Stockholders' Equity. The Company's stockholders' equity totaled $25,143,000 at
March 31, 2000, as compared to $25,130,000 at March 31, 1999. The increase of
$13,000 or .1% was due to earnings for the fiscal year ended March 31, 2000,
partially offset by the purchase of 155,248 shares of treasury stock at an
average cost of $6.68 per share. The Company has announced its intention to
purchase up to an additional 10% of the shares of common stock held by persons
other than Skibo Bancshares, Mutual Holding Company. Any future purchases will
decrease stockholders' equity.
Comparison of Operating Results for the Years Ended March 31, 2000 and 1999
Net Income. The Company recorded net income of $1,104,000 for the year ended
March 31, 2000, as compared to net income of $727,000 for the year ended March
31, 1999. Changes in the components of income and expense are discussed herein.
Net Interest Income. Net interest income increased $323,000 or 8.5% for the year
ended March 31, 2000, as compared to the prior fiscal year due to an increase of
$5.3 million or 3.7% in the average balance of interest-earning assets and a 2
basis point increase in the average yield earned thereon. The average balance of
interest-bearing liabilities increased by $5.7 million or 4.7%, offset somewhat
by a 17 basis point decrease in the average rate paid thereon.
The net yield on average interest earning assets, which represents net interest
income as a percentage of average interest earning assets, increased to 2.78%
for the year ended March 31, 2000, from 2.66% for the prior fiscal year.
Interest Income. Interest income totaled $10,085,000 for the year ended March
31, 2000, as compared to $9,691,000 for the year ended March 31, 1999. The
$394,000 or 4.1% increase was largely the result of increased income from
investment and mortgage-backed securities and a 2 basis point increase in the
average yield earned on the total average interest earning assets, offset
somewhat by decreased income from the Company's loan portfolio.
Interest on loans receivable decreased $335,000 or 7.2% in 2000, as compared to
the prior fiscal year. This decrease was primarily the result of a $6.1 million
decrease in the average balance of loans receivable, offset by an increase in
the average yield of 16 basis points.
Interest income on mortgage-backed securities increased $296,000 or 8.6% in
2000, as compared to the prior fiscal year. This increase was primarily the
result of a $5.7 million increase in the average balance of such securities,
offset by a decrease in the average yield of 14 basis points.
Interest income on investment securities increased by $459,000 or 36.5% for the
year ended March 31, 2000, as compared to the prior fiscal year. The increase
was primarily due to a $6.4 million increase in the average balance of such
securities and an increase in the average yield of 19 basis points.
Interest income on other interest-earning assets decreased by $26,000 or 7.5% in
2000, as compared to the prior fiscal year. The decrease was primarily due to a
$733,000 decrease in the average balance of such assets, offset by a 28 basis
point increase in the yield.
The average yield on the average balance of interest-earning assets was 6.78%
and 6.76% for the years ended March 31, 2000 and 1999, respectively.
Interest Expense. Interest expense totaled $5,951,000 for the year ended March
31, 2000, as compared to $5,880,000 for the year ended March 31, 1999. The
$71,000 or 1.2% increase was primarily due to an increase in the average balance
of FHLB advances, offset by decreases in the average balance of deposits and
bonds payable and a 17 basis point decrease in the average rate paid on the
total average interest-bearing liabilities.
Interest expense on deposits (including escrows) decreased $181,000 or 5.2% in
2000, as compared to the prior fiscal year. The decrease was primarily due to a
$318,000 decrease in the average balance of deposits and a 22 basis point
decrease in the average rate paid thereon. See Note 6 to Consolidated Financial
Statements.
Interest on FHLB advances increased $379,000 or 16.9% in 2000, as compared to
the prior fiscal year. The increase was primarily due to a $7.4 million or 17.4%
increase in the average balance of such advances, offset by a 2 basis point
decrease
7
<PAGE>
in the rate paid thereon. The Company uses FHLB advances as a funding source and
has in the past used borrowings to supplement deposits, which are the Company's
primary source of funds.
Interest on bonds payable and other borrowings, a less significant portion of
interest expense, decreased by $127,000 or 66.8%, as the average principal
amount of bonds and other borrowings outstanding decreased by $1.4 million,
primarily due to the repayment of the bond in its entirety.
Provision for Loan Losses. The Company's management continually monitors and
adjusts its allowance for loan losses based upon its analysis of the loan
portfolio. The allowance is increased by a provision for loan losses charged
against income, the amount of which depends upon an analysis of the changing
risks inherent in the Company's loan portfolio. However, following a review of
the adequacy of the allowance for loan losses, it was determined that the
Company was over-reserved by $153,000. Therefore, net income was increased and
the allowance for loan losses was reduced by this amount in the fourth quarter
of fiscal 2000. A reduction to the loan loss provision is not typical, given the
function of the Company to lend funds, not all of which may be repaid. The
reduction was made because of the change in the loan portfolio over time to
include a large percentage of federally insured loans and the lack of any
material loss during recent periods. While the allowance is maintained at a
level believed to be adequate, there can be no assurance that the current or
future allowance for loan losses will cover actual losses in the portfolio.
During the years ended March 31, 2000 and 1999, the Company established
provisions for loan losses of $(150,000) and $25,000, respectively. At March 31,
2000, the Company's allowance for loan losses amounted to $425,000 or 0.8% of
total net loans outstanding and 885.4% of total non- performing loans. The
non-performing loans at March 31, 1999, included two Farm Service Agency (FSA)
loans in the amount of $618,000, which have now been paid off. The Company's
ratio of non-performing loans to total assets was .03% and .53% at March 31,
2000 and 1999, respectively.
Other Income. During the year ended March 31, 2000, other income increased
$10,000 or 11.6%, as compared to the prior fiscal year.
Other Expenses. Total other expenses decreased by $123,000 or 4.6% during the
year ended March 31, 2000, as compared to the prior year. The decrease was
primarily attributable to a decrease of $52,000 in compensation and employee
benefits expense and $56,000 in other operating expenses. The decrease in
compensation and employee benefits expense was primarily attributable to
decreases of $61,000 in ESOP expense, $185,000 in RSP expense, and $34,000 in
compensation and employee benefits expense, offset by an increase of $228,000 in
defined benefit pension plan, Supplemental Employee Retirement Plan (SERP) and
Directors Retirement Plan (DRP) costs. Higher levels of reported (W-2)
compensation, due to RSP shares awarded, increased the costs of these plans.
Amendments made to the defined benefit pension plan also attributed to their
increased costs. In December 1999, amendments were adopted to this plan which
included (i) accrued benefit changes so that participants will earn an equal
percentage of their benefits over a 25 year period starting on January 1, 1984
instead of proportionally over all projected service with the Company until age
65, (ii) the calculation of average compensation was changed from the highest
5-year consecutive period to the highest 3-year consecutive period, (iii) the
normal retirement benefit defined in the formula was changed to be payable for
the life of the participant and his assumed spouse of the same age (50% joint
and survivor annuity) from being payable only for the life of the participant,
(iv) the benefits payable at early retirement were changed to be reduced by 2.5%
per year prior to normal retirement instead of being reduced by actuarial
factors, and (v) other changes required by the Internal Revenue Code. In
December 1999, an amendment was also adopted to both the SERP and DRP to only
consider calendar years 1999 and earlier in the computation of final average
compensation. It is anticipated that the expense related to the defined benefit
pension plan and SERP/DRP (exclusive of outside administrative and actuarial
costs) in fiscal 2001 shall be $237,000 and $161,000, respectively, as compared
to $325,000 and $236,000 in fiscal 2000.
Income Tax Expense. The provision for income tax totaled $710,000 for the year
ended March 31, 2000, as compared to $456,000 for fiscal 1999. The $254,000 or
55.7% increase is due to increased income. The Company's effective tax rate
amounted to 39.1% and 38.5% for fiscal 2000 and 1999, respectively. See Note 9
of the Notes to Consolidated Financial Statements.
8
<PAGE>
Market Risk & Asset/Liability Management
Quantitative. The Company does not maintain a trading account for any class of
financial instrument nor does it engage in hedging activities or purchase
high-risk derivative instruments. Furthermore, the Company is not subject to
foreign currency exchange rate risk or commodity price risk.
Qualitative. The Company's net interest income is sensitive to changes in
interest rates, as the rates paid on its interest- bearing liabilities generally
change faster than the rates earned on its interest-earning assets. As a result,
net interest income will frequently decline in periods of rising interest rates
and increase in periods of decreasing interest rates. Therefore, the interest
rate sensitivity of the Company demands constant refinement and further
restructuring to maintain an asset and liability structure which can be managed
for interest rate risk that exists in the uncertain markets currently in
existence. To mitigate the impact of changing interest rates on its net interest
income, the Company monitors the interest rate sensitivity of its assets and
liabilities on an ongoing basis. Historically, the Company has managed interest
rate risk by shortening the repricing and maturity characteristics of its assets
and lengthening the repricing and maturity characteristics of its retail deposit
base. The Company utilizes the interest rate risk exposure analysis performed by
the OTS as the primary tool for monitoring its interest rate risk.
Rates on deposits are primarily based on the Company's need for funds and on a
review of rates offered by other financial institutions in the Company's market
areas. Rates on certificate accounts are competitive in order to retain deposits
which face increased competition from financial institutions, stockbrokers,
insurance companies and others. Interest rates on loans are primarily based on
the interest rates offered by other financial institutions in the Company's
primary market areas as well as the Company's cost of funds.
The Company manages the interest rate sensitivity of its assets and liabilities
through the determination and adjustment of asset/liability composition and
pricing strategies. The Company then monitors the impact on the interest rate
risk and earnings consequences of such strategies for consistency with the
Company's liquidity needs, growth, and capital adequacy. The Company's principal
strategy is to reduce the interest rate sensitivity of its interest-earning
assets and to match, as closely as possible, the maturities of interest-earning
assets with interest-bearing liabilities. In an effort to reduce interest rate
risk and protect itself from the negative effects of rapid or prolonged changes
in interest rates, the Company has instituted certain asset and liability
management measures, including (i) continued emphasis on core deposits, (ii)
increased use of borrowings to leverage the Company, and (iii) origination and
purchase of short term and variable rate assets, predominately real estate
oriented.
Net Portfolio Value. In order to encourage savings associations to reduce their
interest rate risk, the OTS adopted a rule incorporating an interest rate risk
("IRR") component into the risk-based capital rules. The IRR component is a
dollar amount that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and is measured in
terms of the sensitivity of its net portfolio value ('NPV") to changes in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. An
institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the estimated present value of total assets
("PV") will require the institution to deduct from its capital 50% of that
excess change. The rules provide that the OTS will calculate the IRR component
quarterly for each institution. The Bank, based on asset size and risk-based
capital, has been informed by the OTS that it is exempt from this rule.
Nevertheless, the following table presents the Bank's NPV at March 31, 2000 and
the estimated effect thereon of various interest rate changes, as calculated by
the OTS, based on quarterly information voluntarily provided to the OTS by the
Bank.
9
<PAGE>
Net Portfolio Equity Value NPV as % of PV of Assets
------------------------------------- --------------------------
Change in
Interest Rates
in Basis Points Basis Point
(Rate Shock) Amount $ Change(1) % Change NPV Ratio(2) Change(3)
------------ ------ ----------- -------- ------------ -----------
(Dollars in Thousands)
300 $ 11,036 $ (11,018) (50) 8.31 (661)
200 14,633 (7,421) (34) 10.63 (429)
100 18,361 (3,694) (17) 12.87 (206)
Static 22,054 -- -- 14.93 --
(100) 25,253 3,198 15 16.57 164
(200) 27,185 5,130 23 17.45 252
(300) 28,762 6,708 30 18.09 317
--------------
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in interest
rates.
(2) Calculated as the estimated NPV divided by the present value of total
assets. The Bank's PV is the estimated present value of total assets.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. The calculation methodology used by the OTS has certain
shortcomings which include, among others, that not all OTS assumptions apply
equally to all savings institutions and the repricing of both loans and deposits
is often discretionary and under the control of the Bank's customers. Even if
interest rates change in the designated amounts, there can be no assurance that
the Bank's assets and liabilities would perform as projected by the OTS.
At March 31, 2000, the change in NPV as a percentage of portfolio value of total
assets is negative 5.0%, which is greater than negative 2.0%, indicating that
the Company has a greater than "normal" level of interest rate risk. Generally,
during periods of increasing interest rates, the Company's liabilities are
expected to reprice faster than its assets, causing a decline in the Company's
interest rate spread. This would result from an increase in the Company's cost
of funds that would not be immediately offset by an increase in its yield on
earning assets. An increase in the cost of funds without an equivalent increase
in the yield on interest-earning assets would tend to reduce net interest
income. The Company's net interest rate spread increased to 2.06% during the
fiscal year ending March 31, 2000, as compared to 1.87% for the prior fiscal
year.
In times of decreasing interest rates, fixed rate assets are expected to
increase in value and the lag in repricing of interest rate sensitive assets is
expected to have a positive effect on the Company's net interest income.
Management believes that strategies employed to respond to changing interest
rate environments can have a significant impact upon the net value of assets and
extent of earnings fluctuations. Also, management believes that a strong equity
capital position and existence of the corporate authority to raise additional
capital are valuable tools to absorb interest rate risk.
Liquidity and Capital Requirements
The Bank is required by Section 6 of the Home Owners' Loan Act (HOLA) to hold a
prescribed amount of statutorily defined liquid assets. The OTS may, by
regulation, vary the amount of the liquidity requirement, but only within pre-
established statutory limits. The requirement must be no less than four percent
and no greater than ten percent of the Bank's net withdrawable accounts and
borrowings payable on demand or with unexpired maturities of one year or less.
The liquidity requirement for fiscal 2000 is 4% of net withdrawable accounts and
short term borrowings. Monetary penalties may be imposed for failure to meet
these requirements. The Bank's average liquidity ratio for March 31, 2000 was
10
<PAGE>
154.76%, which exceeded the applicable requirements. See Note 10 to Consolidated
Financial Statements for a discussion of the Bank's regulatory capital
requirements.
Recent Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," requires
that derivative instruments be carried at fair value on the balance sheet. The
statement continues to allow derivative instruments to be used to hedge various
risks and sets forth specific criteria to be used to determine when hedge
accounting can be used. The statement also provides for offsetting changes in
fair value or cash flows of both the derivative and the hedged asset or
liability to be recognized in earnings in the same period; however, any changes
in fair value or cash flow that represent the ineffective portion of a hedge are
required to be recognized in earnings and cannot be deferred. For derivative
instruments not accounted for as hedges, changes in fair value are required to
be recognized in earnings.
The provisions of this statement as amended will be adopted by the Company for
its quarterly and annual reporting beginning January 1, 2001. The Company
anticipates, based on current activities, that the adoption of SFAS No. 133 will
not have a material effect on its financial position or results of operations.
Year 2000 Compliance Issues
Like many financial institutions, we rely on computers to conduct our business
and information systems processing. Industry experts were concerned that on
January 1, 2000, some computers might not be able to interpret the new year
properly, causing computer malfunctions. Some banking industry experts remain
concerned that some computers may not be able to interpret additional dates in
the year 2000 properly. We have operated and evaluated our computer operating
systems following January 1, 2000 and have not identified any errors or
experienced any computer system malfunctions. We will continue to monitor our
information systems to assess whether our systems are at risk of misinterpreting
any future dates and will develop appropriate contingency plans to prevent any
potential system malfunction or correct any system failures. The Company has not
been informed of any such problem experienced by its vendors or its customers,
nor by any of the municipal agencies that provide services to the Company.
Nevertheless, it is too soon to conclude that there will not be any Year 2000
related problems, particularly at some of the Company's vendors. The Company
will continue to monitor its significant vendors of goods and services with
respect to Year 2000 problems they may encounter as those issues may effect the
Company's ability to continue operations, or might adversely affect the
Company's financial position, results of operations and cash flows. The Company
does not believe at this time that these potential problems will materially
impact the ability of the Company to continue its operations, however, no
assurance can be given that this will be the case.
The expectations of the Company contained in this section on Year 2000 are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve substantial risks and uncertainties
that may cause actual results to differ materially from those indicated by the
forward-looking statements. All forward-looking statements in this section are
based on information available to the Company on the date of this document, and
the Company assumes no obligation to update such forward-looking statements.
Effect of Inflation and Changing Prices
The Company's financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation. Unlike industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
11
<PAGE>
[LOGO]
Independent Auditors' Report Stokes Kelly & Hinds, LLC
Certified Public Accountants
& Business Advisors
Members:
American and Pennsylvania Institutes
of Certified Public Accountants
Division for CPA Firms:
SEC Practice Section
The Board of Directors and Stockholders
Skibo Financial Corp.:
We have audited the accompanying consolidated statements of financial condition
of Skibo Financial Corp. and subsidiaries as of March 31, 2000, and the related
consolidated statements of income and comprehensive income, stockholders' equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Skibo Financial Corp. as of
March 31, 1999 were audited by other auditors whose report dated April 30, 1999
expressed an unqualified opinion on these statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Skibo Financial
Corp. and subsidiaries as of March 31, 2000, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/Stokes Kelly & Hinds, LLC
----------------------------
Pittsburgh, Pennsylvania
April 27, 2000
9401 McKnight Road
Pittsburgh, Pennsylvania
15237-6000
Phone 412-364-0590
Voice Mail 412-364-6070
Fax 412-364-6176
12
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 2000 and 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
------------------------
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions ............... $ 446 $ 1,288
Interest-bearing deposits with other institutions (note 1) ...... 1,280 1,211
Investment securities (note 2):
Held-to-maturity (market value $24,928 and $24,703) ........ 26,696 25,087
Mortgage-backed securities (notes 2 and 7):
Held-to-maturity (market value $57,840 and $54,605) ........ 59,181 54,365
Loans receivable, net (notes 1 and 3) ........................... 56,504 65,309
Accrued interest receivable:
Investment securities ...................................... 427 400
Mortgage-backed securities ................................. 410 382
Loans receivable ........................................... 486 726
FHLB stock ................................................. 43 --
Federal Home Loan Bank stock, at cost (notes 4 and 7) ........... 2,615 2,465
Premises and equipment, net (note 5) ............................ 626 695
Prepaid expenses and other assets ............................... 3,918 3,128
--------- ---------
Total Assets ............................................ $ 152,632 $ 155,056
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6) ............................................... $ 75,583 $ 76,917
Federal Home Loan Bank advances (note 7) ........................ 49,000 49,300
Bonds payable (note 8) .......................................... -- 1,299
Advances from borrowers for taxes and insurance ................. 128 143
Accrued expenses and other liabilities .......................... 2,778 2,267
--------- ---------
Total Liabilities ....................................... 127,489 129,926
Commitments and contingencies (notes 3, 5 and 14)
Stockholders' Equity (notes 10 and 15):
Preferred stock, 5,000,000 authorized; none issued or outstanding -- --
Common stock, $0.10 par value; 10,000,000 shares authorized;
3,449,974 and 3,449,974 shares issued
3,286,863 and 3,444,746 shares outstanding .......... 345 345
Additional paid-in capital ...................................... 9,740 9,755
Treasury stock, at cost (163,111 shares at March 31, 2000
and 5,228 shares at March 31, 1999) ................. (1,119) (65)
Unearned Employee Stock Ownership Plan (ESOP) shares (note 11) .. (267) (458)
Unearned Restricted Stock Plan (RSP) shares (note 11) ........... (199) (392)
Retained earnings, substantially restricted (note 9) ............ 16,643 15,945
--------- ---------
Total Stockholders' Equity .............................. 25,143 25,130
--------- ---------
Total Liabilities and Stockholders' Equity .............. $ 152,632 $ 155,056
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Years Ended March 31, 2000 and 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Interest income:
Loans receivable ............................................ $ 4,316 $ 4,651
Mortgage-backed securities .................................. 3,733 3,437
Investment securities ....................................... 1,717 1,258
Other ....................................................... 319 345
----------- -----------
Total interest income ................................. 10,085 9,691
Interest expense:
Deposits (note 6) ........................................... 3,269 3,450
Federal Home Loan Bank advances ............................. 2,619 2,240
Bonds payable ............................................... 63 147
Other borrowings ............................................ -- 43
----------- -----------
Total interest expense ................................ 5,951 5,880
----------- -----------
Net interest income ................................... 4,134 3,811
Provision for loan losses (note 3) ............................... (150) 25
----------- -----------
Net interest income after provision for loan losses ... 4,284 3,786
Other income:
Fees and service charges .................................... 50 49
Other ....................................................... 46 37
----------- -----------
Total other income .................................... 96 86
Other expenses:
Compensation and employee benefits (note 11) ................ 2,014 2,066
Premises and occupancy costs ................................ 215 222
Federal insurance premiums .................................. 38 46
Other operating expenses .................................... 299 355
----------- -----------
Total other expenses .................................. 2,566 2,689
----------- -----------
Income before income taxes ............................ 1,814 1,183
Provision for income taxes (note 9) .............................. 710 456
----------- -----------
Net income ............................................ 1,104 727
Other comprehensive income:
Unrealized gain on securities available- for-sale, net of tax -- --
----------- -----------
Total comprehensive income ............................ $ 1,104 $ 727
=========== ===========
Basic earnings per share ......................................... $ 0.33 $ 0.22
=========== ===========
Diluted earnings per share ....................................... $ 0.33 $ 0.22
=========== ===========
Weighted average shares outstanding - Basic ...................... 3,301,793 3,348,966
Weighted average shares outstanding - Diluted .................... 3,301,793 3,355,940
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended March 31, 2000 and 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
========================================================================================
Additional Unearn.
Common Paid-in Treas. ESOP Retained
Stock Capital Stock Shares RSP Earnings Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998.................. $ 230 $ 9,800 $ -- $ (625) $ -- $ 15,575 $ 24,980
Cash dividends declared, net ($0.25 per share)(1) -- -- -- -- -- (357) (357)
Reduction of equity for restricted stock plan
(RSP) liability........................ -- -- -- -- (770) -- (770)
Excess of fair value above cost of ESOP shares
released or committed to be released... -- 70 -- -- -- -- 70
Amortization of ESOP liability............. -- -- -- 167 -- -- 167
Amortization of RSP liability.............. -- -- -- -- 378 -- 378
Treasury stock purchased, at cost
(5,228 shares)........................ -- -- (65) -- -- -- (65)
Reorganization-additional stock issued..... 115 (115) -- -- -- -- --
Net income................................. -- -- -- -- -- 727 727
-------------------------------------------------------------------------------------
Balance at March 31, 1999.................. 345 9,755 (65) (458) (392) 15,945 25,130
Cash dividends declared, net ($0.30 per share) -- -- -- -- -- (406) (406)
Excess of fair value above cost of ESOP
shares released or committed to be released -- (15) -- -- -- -- (15)
Amortization of ESOP liability............. -- -- 191 -- -- 191
Amortization of RSP liability.............. -- -- -- -- 193 -- 193
Treasury stock purchased, at cost
(157,883 shares)...................... -- -- (1,054) -- -- -- (1,054)
Net income................................. -- -- -- -- -- 1,104 1,104
-------------------------------------------------------------------------------------
Balance at March 31, 2000.................. $ 345 $ 9,740 $(1,119) $ (267) $ (199) $ 16,643 $ 25,143
=====================================================================================
</TABLE>
--------------
(1) Restated to reflect three-for-two stock exchange which occurred October 29,
1998.
See accompanying notes to consolidated financial statements.
15
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31, 2000 and 1999
(In thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net income ..................................................................... $ 1,104 $ 727
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses ................................................. (150) 25
Depreciation .............................................................. 79 86
Compensation expense-ESOP and RSP ......................................... 369 616
Deferred tax benefit ...................................................... (75) (77)
Net amortization of premiums and discounts ................................ 243 35
Decrease (increase) in accrued interest receivable ........................ 142 (76)
Increase in prepaid expenses .............................................. (790) (752)
Decrease in accrued interest payable ...................................... (13) (154)
Increase in accrued income taxes .......................................... 92 48
Other, net ................................................................ 493 231
-------- --------
Net cash provided by operating activities ........................... 1,494 709
-------- --------
Investing activities:
Purchases of premises and equipment ............................................ (10) (22)
Purchases of investment securities held-to maturity ............................ (5,772) (19,947)
Purchases of mortgage-backed securities held-to-maturity ....................... (18,395) (16,772)
Proceeds from maturities/calls and principal repayments of:
Investment securities held-to-maturity .................................... 4,143 10,604
Mortgage-backed securities held-to-maturity ............................... 13,470 16,842
Proceeds of REO sold ........................................................... -- 11
Loans purchased (1)............................................................. (3,631) (15,713)
Net principal repayments on loans .............................................. 12,486 18,145
Increase in Federal Home Loan Bank stock ....................................... (150) (158)
-------- --------
Net cash provided by (used by) investing activities ............... 2,141 (7,010)
-------- --------
Financing activities:
Net decrease in deposits ....................................................... (1,334) (309)
Proceeds from Federal Home Loan Bank advances .................................. 22,900 28,500
Repayment of Federal Home Loan Bank advances ................................... (23,200) (20,500)
Principal repayments on bonds payable .......................................... (1,299) (319)
Principal repayment of other borrowings ........................................ -- (666)
Net decrease in mortgage escrow ................................................ (15) (23)
Common stock acquired for RSP .................................................. -- (770)
Treasury stock purchased ....................................................... (1,054) (65)
Cash dividends paid ............................................................ (406) (319)
-------- --------
Net cash provided by (used in) financing activities ............... (4,408) 5,529
-------- --------
Net decrease in cash and cash equivalents ...................................... (773) (772)
Cash and cash equivalents, beginning of year ................................... 2,499 3,271
-------- --------
Cash and cash equivalents, end of year ......................................... $ 1,726 $ 2,499
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .................................................................. $ 5,964 $ 6,034
======== ========
Income taxes .............................................................. $ 733 $ 550
======== ========
Noncash investing activities:
Loans transferred to Real Estate Owned ......................................... $ -- $ 28
======== ========
</TABLE>
--------------
1 Included in Loans purchased at March 31, 2000 was an $81 loans-in-process
disbursement of a prior year purchased construction loan.
See accompanying notes to consolidated financial statements.
16
<PAGE>
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
(Dollars in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Skibo Financial Corp. (the "Company") is primarily engaged in the business of
attracting retail deposits from the general public through its subsidiary First
Carnegie Deposit (the "Bank"), and using such funds primarily to purchase and
originate one- to four-family mortgage loans and farm loans and to invest in
mortgage-backed and investment securities, Small Business Administration ("SBA")
and other agency guaranteed commercial real estate and commercial non-real
estate loans. The Company, subject to strong competition from other financial
institutions in attracting deposits, uses FHLB advances as a funding source to
supplement deposits. The Company is also subject to the regulations of certain
federal agencies and undergoes periodic examinations by those regulatory
authorities.
The following comprise the significant accounting policies which the Company
follows in preparing and presenting its consolidated financial statements:
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of Skibo Financial Corp., its wholly owned subsidiary,
First Carnegie Deposit, and the Bank's wholly owned subsidiaries, Fedcar, Inc.
and Carnegie Federal Funding Corporation ("CFFC"). Fedcar, Inc. is a service
corporation that is currently inactive. CFFC was a special purpose subsidiary
that was formed for the issuance of collateralized mortgage obligations (CMOs).
In September 1999, CFFC fully repaid the remaining obligation and subsequently
was dissolved. All significant intercompany transactions and balances have been
eliminated in consolidation.
Basis of Presentation. The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which require
management to make estimates and assumptions that affect both the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates.
Cash and Cash Equivalents. For the purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash on hand and amounts due from
depository institutions and interest-bearing deposits with other institutions.
Investment and Mortgage-Backed Securities. The Company classifies investment and
mortgage-backed securities (securities) into two categories: (1) securities
held-to-maturity and (2) securities available-for-sale. The Company has no
trading securities. The Company classifies securities as held-to-maturity when
it has the ability and positive intent to hold the securities. Securities
held-to-maturity are stated at cost adjusted for amortization of premiums and
accretion of discounts, computed on the interest method. Securities not
identified at the time of purchase as held-to-maturity are classified as
available-for-sale. The Company intends to use these securities as part of its
asset/liability management strategy and such securities may be sold in response
to changes in interest rates, prepayment risk or other factors. Securities
available-for-sale (adjusted for amortization of premiums and accretion of
discounts, computed on the interest method) are recorded at the estimated fair
market value, with aggregate unrealized gains or losses reported, net of income
taxes, as a separate component of stockholders' equity. The fair market value is
based on quoted market prices where available, dealer quotes, or prices obtained
from independent pricing services.
Purchases and sales of securities are accounted for on a settlement-date basis
which is not materially different than the use of the trade-date basis. Gains
and losses on the sale of securities are recognized using the specific
identification method.
Loans Receivable. Loans are stated at their unpaid principal balances less
allowances for losses. Monthly loan payments are scheduled to include interest.
Interest on loans is credited to income as earned. Interest earned on loans for
which no payments were received during the month is accrued. An allowance is
established for accrued interest deemed to be uncollectible, generally when a
loan is 90 days or more delinquent. Such interest ultimately collected is
credited to income in the period received. Monthly mortgage loan payments are
adjusted annually to cover insurance and tax requirements.
17
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Amortization of premiums and accretion of discounts are recognized over the term
of the loan as an adjustment to the loan's yield using the interest method and
cease if a loan becomes non-performing.
A loan is considered to be impaired when it is probable that the Company will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. All of the Company's non-performing
loans, excluding certain consumer and single-family residential loans, are
considered to be impaired loans. Impaired loans are required to be measured
based upon the present value of expected future cash flows, discounted at the
loan's initial effective interest rate, or at the loan's market price or fair
value of the collateral if the loan is collateral dependent. If the loan
valuation is less than the recorded value of the loan, an impairment reserve
must be established for the difference. Impaired loans totaled $0 and $685 at
March 31, 2000 and March 31, 1999, respectively. Average impaired loans were
$165 and $685 for the years ended March 31, 2000 and March 31, 1999,
respectively. No impairment reserves were necessary as of March 31, 2000 and
1999, as (i) the estimated value of the underlying collateral exceeded the
carrying value of the impaired loan, (ii) the principal portion of the impaired
loan is guaranteed by agencies of the federal government, or (iii) there were no
impaired loans. Non-performing consumer and single-family residential loans have
been collectively evaluated for impairment. Estimated impairment losses for
these loans are based on various factors including past loss experience, recent
economic events and conditions and portfolio delinquency rates. No impairment
reserves were necessary as of March 31, 2000 and 1999 for the non-performing
consumer and single-family residential loans. Interest income recognized on
impaired loans was $0 and $57 for the years ended March 31, 2000 and 1999,
respectively.
Provision for Loan Losses. Provisions for estimated losses on loans are charged
to operations in an amount that results in an allowance for loan losses
sufficient, in management's judgment, to cover losses based on management's
periodic evaluation of known and inherent risks in the loan portfolio, past loss
experience of the Company, current economic conditions, industry loss reserve
levels, adverse situations which may affect the borrower, the estimated value of
any underlying collateral and other relevant factors. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses. Management believes that the
allowance for loan losses is adequate. While management uses current available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies can
require the Company to adjust the allowance based on their judgments about
information available to them at the time of their examination.
Loan Origination Fees and Costs. Loan origination fees and certain direct loan
origination costs are deferred and recognized over the contractual lives of the
related loans as an adjustment to the loan's yield. Accretion of net deferred
fees and amortization of net deferred costs cease if a loan becomes
non-performing.
Real Estate Owned. Real estate owned is recorded at the lower of cost or fair
value less estimated cost of disposal as of the acquisition date. Costs relating
to development and improvement of the property are capitalized, whereas costs
relating to the holding of such real estate are expensed as incurred. Subsequent
to acquisition, valuations are periodically performed by management; and the
carrying value of the real estate acquired may be subsequently adjusted by
establishing a valuation allowance and recording a charge to operations if the
carrying value of a property exceeds its estimated fair value less estimated
costs to sell. Gains and losses from the sale of real estate owned are normally
recognized upon sale.
Premises and Equipment. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation for financial reporting purposes is
computed using the straight-line method over the estimated useful lives of the
related assets of 5 to 40 years. Accelerated methods are used for income tax
purposes.
Income Taxes. Income taxes are accounted for under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
18
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Employee Benefit Plans. The Company has a qualified, defined benefit pension
plan covering substantially all of its employees. The benefits are based on
years of service and average compensation during the specified periods prior to
retirement. Qualifying employees become fully vested upon completion of five
years of service. The Company makes annual contributions to the plan based on
the recommendations of its consulting actuaries and within income tax rules.
Assets of the plan consist of mortgage-backed securities and interest-bearing
deposits. In December 1999, amendments were adopted to this plan which included
(i) accrued benefit changes so that participants will earn an equal percentage
of their benefits over a 25 year period starting on January 1, 1984 instead of
proportionally over all projected service with the Company until age 65, (ii)
the calculation of average compensation was changed from the highest 5-year
consecutive period to the highest 3-year consecutive period, (iii) the normal
retirement benefit defined in the formula was changed to be payable for the life
of the participant and his assumed spouse of the same age (50% joint and
survivor annuity) from being payable only for the life of the participant, (iv)
the benefits payable at early retirement were changed to be reduced by 2.5% per
year prior to normal retirement instead of being reduced by actuarial factors,
and (v) other changes required by the Internal Revenue Code.
The Company has a nonqualified, supplemental executive retirement plan ("SERP")
and a directors' retirement plan ("DRP") to provide senior management and
members of the Board of Directors with benefits in excess of normal pension
benefits. Benefits under the SERP are based upon amounts stipulated in the plan
document or an amount derived from the participants' final average compensation
for the highest three consecutive years, whichever is greater. Benefits vest
after 20 years of credited service as defined in the plan document. In December
1999, an amendment was adopted to both the SERP and DRP to only consider
calendar years 1999 and earlier in the computation of final average
compensation. Benefits under the DRP are based upon a portion of the final
average compensation and vest after five years of service as defined in the plan
document. Both the SERP and the DRP will be funded through contributions from
the Company. The Company has life insurance policies on the lives of the
participants. The change in the cash surrender value of the underlying policies
is netted against insurance premiums paid in determining expense or income to be
recorded in the period.
The Company formed an ESOP to reward eligible employees for their service and
provide them with greater retirement income. The ESOP covers employees who have
completed at least 1,000 hours of service during a twelve month period and have
attained the age of 21. The Company makes annual contributions to the plan based
on the recommendations of its consulting actuaries and within income tax rules.
The Company makes scheduled discretionary payments to the ESOP sufficient to
service the debt. Shares are allocated to participants based on compensation.
Qualifying employees become fully vested upon completion of five years of
service. Assets of the plan primarily consist of the Company's stock.
The Company has adopted a Stock Option Plan to reward its officers, directors,
key employees and other persons providing services to the Company. Options were
first exercisable at a rate of 50% on the date of the grant and 50% one year
later. The exercise price on the date of the award was $13.58. However, due to a
significant fluctuation in general market conditions of the Company and similar
financial institutions, the original awards were canceled and reissued on
October 8, 1998, at the exercise price of $6.83. The Company uses the "intrinsic
value based method" as prescribed by APB Opinion 25. Under APB No. 25, because
the exercise price of the Company's stock options equal the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized. Accordingly, common stock issuable pursuant to outstanding options
will be considered outstanding for purposes of calculating earnings per share,
if dilutive.
The Company has also formed a Restricted Stock Plan ("RSP"). Awards under the
Restricted Stock Plan were made in recognition of expected future services to
the Company by its directors, officers and key employees responsible for
implementation of the policies adopted by the Company's Board of Directors and
as a means of providing a further retention incentive. Twenty and thirty-three
percent of such awards were earned and non-forfeitable at the date of the grant
and twenty and thirty-three percent annually thereafter, provided the recipient
remains an employee. Executive officers earn awards at a rate of thirty-three
percent per year, while directors, other officers, and key employees earn at a
rate of twenty percent per year.
19
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Stock Exchange. Upon the Reorganization into a two-tier stock holding company,
shareholders of record on October 29, 1998, upon surrender of First Carnegie
Deposit common stock, received shares of the new publicly traded entity, Skibo
Financial Corp. on a three-for-two basis. The stock exchange increased the
Company's outstanding common shares from 2,300,000 to 3,449,974 shares. All
references in the consolidated financial statements and notes thereto to
per-share amounts, stock option and stock grant data and fair value of the
Company's common stock have been restated giving retroactive recognition to the
stock exchange.
Earnings Per Share ("EPS"). Basic EPS is computed by dividing net income
applicable to common stock by the weighted average number of common shares
outstanding during the period, without considering any dilutive items. Diluted
EPS is computed by dividing net income applicable to common stock by the
weighted average number of common shares and common stock equivalents for items
that are dilutive, net of shares assumed to be repurchased using the treasury
stock method at the average share price for the Company's common stock during
the period. Common stock equivalents arise from the assumed conversion of
outstanding stock options and unvested RSP shares.
The number of shares and related earnings per share have been restated to
reflect the Company's reorganized structure and three-for-two exchange of stock
in fiscal 1999.
The computation of basic and diluted earnings per share is shown in the table
below:
March 31, March 31,
2000 1999
--------- ----------
Basic EPS computation:
Numerator-Net Income............ $ 1,104 $ 727
Denominator-Wt Avg common
shares outstanding............. 3,301,793 3,348,966
Basic EPS....................... $ 0.33 $ 0.22
========= =========
Diluted EPS computation:
Numerator-Net Income............ $ 1,104 $ 727
Denominator-Wt Avg common
shares outstanding............. 3,301,793 3,348,966
Dilutive Stock Options.......... -- 6,974
Dilutive Unvested RSP........... -- --
--------- ----------
Weighted avg common shares and
common stock equivalents....... 3,301,793 3,355,940
Diluted EPS..................... $ 0.33 $ 0.22
========= =========
For the fiscal years ending March 31, 2000 and 1999, 30,946 and 46,522 RSP
shares, respectively, were excluded from the diluted EPS computation due to
their anti-dilutive effect. For the fiscal year ending March 31, 2000, 155,246
stock option shares were excluded from the diluted EPS computation due to their
anti-dilutive effect. Shares outstanding for the years ended March 31, 2000 and
1999 do not include ESOP shares that were unallocated in accordance with
Statement of Position ("SOP") 93-6, "Employers' Accounting for Employees Stock
Ownership Plans". Unallocated ESOP shares amounted to 40,046 and 68,760 at March
31, 2000 and 1999, respectively.
20
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized costs, estimated market values and contractual maturities (or
balloon dates, if applicable) of investment and mortgage-backed securities as of
March 31, 2000 and 1999, are summarized below.
Investment securities held-to-maturity are as follows:
<TABLE>
<CAPTION>
March 31, 2000
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due after one year through five years........... $ 226 $ -- $ (2) $ 224
Due after five years through ten years.......... 2,550 2 (142) 2,410
Due after ten years............................. 21,118 18 (1,499) 19,637
State, county and municipal obligations:
Due after five years through ten years.......... 150 -- (3) 147
Due after ten years............................. 356 3 (4) 355
REMIC's
Due after five years through ten years.......... 137 -- -- 137
Due after ten years............................. 1,979 7 (131) 1,855
Other Investments
Due after five years through ten years.......... 90 -- (4) 86
Due after ten years............................. 90 -- (13) 77
------ --- ------- --------
Total.............................. $ 26,696 $ 30 $ (1,798) $ 24,928
====== === ======= ======
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year............................. $ 74 $ -- $ (1) $ 73
Due after one year through five years........... 817 4 (9) 812
Due after five years through ten years.......... 2,340 10 (28) 2,322
Due after ten years............................. 19,278 31 (402) 18,907
State, county, and municipal obligations:
Due after ten years............................. 356 19 -- 375
REMIC's due after ten years.......................... 1,778 12 (18) 1,772
Other Investments
Due within one year............................. 264 -- -- 264
Due after five years through ten years.......... 90 -- -- 90
Due after ten years............................. 90 -- (2) 88
------ --- ---- ------
Total.............................. $ 25,087 $ 76 $ (460) $ 24,703
====== === ==== ======
</TABLE>
21
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Mortgage-backed securities held-to-maturity are as follows:
<TABLE>
<CAPTION>
March 31, 2000
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------- ------------ ------------ ------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Due after five years through ten years.......... $ 123 $ -- $ (2) $ 121
Due after ten years............................. 18,570 22 (486) 18,106
Federal Home Loan Mortgage Corporation:
Due after one year through five years........... 193 -- (1) 192
Due after five years through ten years.......... 1,402 9 (7) 1,404
Due after ten years............................. 10,083 49 (111) 10,021
Federal National Mortgage Association:
Due within one year............................. 1 -- -- 1
Due after one year through five years........... 182 -- (3) 179
Due after five years through ten years.......... 1,122 2 (10) 1,114
Due after ten years............................. 27,505 30 (833) 26,702
------ --- ----- ------
Total........................................ $ 59,181 $ 112 $ (1,453) $ 57,840
====== === ===== ======
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------- ------------ ------------ ------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Due after ten years............................. $ 14,187 $ 199 $ (57) $ 14,329
Federal Home Loan Mortgage Corporation:
Due within one year............................. 45 -- -- 45
Due after one year through five years........... 52 1 -- 53
Due after five years through ten years.......... 655 16 (1) 670
Due after ten years............................. 10,604 73 (27) 10,650
Federal National Mortgage Association:
Due after five years through ten years.......... 624 14 -- 638
Due after ten years............................. 28,198 125 (103) 28,220
------ --- --- ------
Total........................................ $ 54,365 $ 428 $ (188) $ 54,605
====== === === ======
</TABLE>
As of March 31,2000, the Company had firm commitments to purchase
mortgage-backed securities amounting to $242.
22
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
March 31,
---------------------
2000 1999
-------- --------
Mortgage loans:
Conventional:
One- to four-family dwellings ............... $ 20,557 $ 21,839
Multi-family dwellings ...................... 2,332 2,510
FSA, FHA, and other government
agency guaranteed ........................... 11,739 12,814
Commercial ..................................... 11,080 13,175
-------- --------
Total mortgage loans .............. 45,708 50,338
Net unamortized premiums ....................... 195 255
Unearned fees .................................. (36) (50)
Loans in process ............................... -- (81)
-------- --------
Net mortgage loans ................ 45,867 50,462
Consumer and commercial loans:
Small Business Administration guaranteed ....... 7,876 11,083
Other government agency guaranteed ............. 2,073 3,076
Loans secured by savings accounts .............. 390 350
Other .......................................... 621 757
-------- --------
Total consumer and commercial loans 10,960 15,266
Net unamortized premiums ....................... 102 156
-------- --------
Net consumer and commercial loans . 11,062 15,422
Allowance for loan losses ........................... (425) (575)
-------- --------
Net loans receivable .............. $ 56,504 $ 65,309
======== ========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the borrower. The collateral consists primarily of real
estate and personal property.
As of March 31, 2000 and 1999, the Company had outstanding commitments to fund
fixed rate first mortgage and commercial non-mortgage loans of $0 and $492,
respectively; and outstanding commitments to fund adjustable rate first mortgage
and commercial non-mortgage loans of $0 and $247, respectively.
Non-accrual loans totaled $0 and $685 as of March 31, 2000 and 1999,
respectively. For the fiscal year ended March 31, 2000, there are no loans
accounted for on a non-accrual basis; therefore, all interest was recorded and
included in the Company's interest income. For the fiscal year ended March 31,
1999 interest that would have been recorded if all such loans were on a current
status in accordance with original terms was $65; the amount that was recorded
was $57. The Company is not committed to lend additional funds to debtors whose
loans have been placed on non-accrual status.
23
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Allowance for Loan Losses
Activity with respect to the allowance for loan losses for the years ended March
31, 2000 and 1999 is summarized as follows:
2000 1999
---- ----
Balance at beginning of period.............. $ 575 $ 549
Provision for loan losses................... (150) 25
Charge-offs................................. -- --
Recoveries.................................. -- 1
---- ----
Balance at end of period.................... $ 425 $ 575
==== ====
NOTE 4 - FEDERAL HOME LOAN BANK STOCK
The Company is a member of the Federal Home Loan Bank System and, as a member,
maintains an investment in the capital stock of the Federal Home Loan Bank of
Pittsburgh. The investment is based on a predetermined formula and is carried at
cost.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment as of March 31, 2000 and 1999 are summarized by major
classification as follows:
2000 1999
---- ----
Land....................................... $ 209 $ 209
Office buildings and improvements.......... 492 492
Furniture, fixtures and equipment.......... 337 342
Leasehold improvements..................... 122 122
------ ------
Total, at cost........................ 1,160 1,165
Less accumulated depreciation
and amortization........................ 534 470
------ ------
Premises and equipment, net........... $ 626 $ 695
====== ======
The Company maintains an operating lease with respect to branch office
facilities which expires on March 25, 2010. Lease expense approximated $45 in
both 2000 and 1999, and is included in premises and occupancy costs.
Minimum annual lease commitments as of March 31, 2000 are as follows:
Years ending
March 31, Amount
--------- ------
2001................ $ 50
2002................ 50
2003................ 50
2004................ 50
2005................ 50
Thereafter.......... 270
---
Total.......... $ 520
===
24
<PAGE>
NOTE 6 - SAVINGS DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------
2000 1999
------------------------- --------------------------
Weighted Weighted
average average
rate Amount rate Amount
----------- ------ ------------ ------
<S> <C> <C> <C> <C>
Passbook accounts.......................... 2.66 % $ 16,750 2.69% $ 17,169
NOW accounts............................... 1.25 4,112 1.26 3,789
Noninterest-bearing checking accounts...... -- 1,067 -- 980
Money market deposit accounts.............. 2.40 3,474 2.43 3,935
Certificates of deposit:
3.00% to 3.99%........................ 3.25 47 3.71 249
4.00% to 4.99%........................ 4.68 14,111 4.49 16,371
5.00% to 5.99%........................ 5.42 23,845 5.42 25,899
6.00% to 6.99%........................ 6.14 9,434 6.22 4,021
7.00% to 7.99%........................ 7.30 2,743 7.28 4,278
8.00% and greater..................... -- -- 8.68 226
------ -------
Total........................... $ 75,583 $ 76,917
====== ======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100 was $9,954 and $9,028 as of March 31, 2000 and March 31, 1999,
respectively. Amounts in excess of $100 may not be insured by the Savings
Association Insurance Fund. The Company does not have any brokered deposits.
The scheduled contractual maturities of certificates of deposit are summarized
as follows:
March 31,
----------------------------
2000 1999
---- ----
Within one year......................... $ 31,408 $ 36,000
After one year through two years........ 6,952 5,341
After two years through three years..... 3,567 2,328
After three years through four years.... 1,126 773
After four years through five years..... 1,952 829
After five years........................ 5,175 5,773
------ ------
Total........................... $ 50,180 $ 51,044
====== ======
25
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The following table summarizes the interest expense incurred on the respective
savings and escrow deposits:
For the year ended
March 31,
------------------------
2000 1999
---- ----
Passbook accounts............................ $ 454 $ 454
NOW accounts................................. 50 48
Money market deposit accounts................ 86 96
Escrow accounts.............................. 1 2
Certificates of deposit...................... 2,678 2,850
----- -----
Total.............................. $ 3,269 $ 3,450
===== =====
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Maturities and interest rates on advances from the Federal Home Loan Bank of
Pittsburgh are as follows:
March 31,
-----------------------------------------------------------
2000 1999
-------------------------- -----------------------------
Fiscal Year Interest Interest
of maturity rates Amount rates Amount
----------- ------- ------ ------- ------
2001 5.98 % $ 300 5.98% $ 300
2006 5.55 % 3,000 5.55% 3,000
2008 5.31 - 5.48 % 10,000 4.94 - 5.48% 21,000
2009 4.63 - 5.58 % 15,000 4.32 - 5.58% 25,000
2010 5.31 - 5.99 % 15,000 --
------ ---------
43,300 49,300
Open Repo Plus 6.62 % 5,700 --
------ ---------
Total $ 49,000 $ 49,300
====== ======
Advances from the Federal Home Loan Bank are primarily secured by the Company's
stock in the Federal Home Loan Bank of Pittsburgh and mortgage-backed
securities. These advances are subject to restrictions and penalties in the
event of prepayment. The Company also has access to a variable rate line of
credit ("Open Repo Plus") with the FHLB, subject to the same collateralization
requirements as the advances. At March 31, 2000 and 1999 the Open Repo Plus had
an outstanding balance of $5,700 and $0, respectively.
26
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
NOTE 8 - BONDS PAYABLE
Bonds payable at March 31, 2000 and 1999 consist of the following Series 1986-A
Federal Home Loan Mortgage Corporation (FHLMC) - Collateralized Bonds:
Interest Maturity March 31,
Class rate date 2000 1999
------- ---------- ------------- ---- ----
Z 9.65% April 1, 2010 $ -- $ 1,299
== =====
In September 1999, Carnegie Federal Funding Corporation fully repaid the
remaining obligation.
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
March 31,
-----------------------
2000 1999
---- ----
Income tax expense charged to operations:
Current tax expense:
Federal....................................... $ 685 $ 463
State......................................... 100 70
---- ----
785 533
Deferred tax benefit:
Federal....................................... (75) (77)
---- ----
Provision for taxes on income.............. 710 456
Income tax expense reported in
stockholders' equity related to securities
available-for-sale............................... -- --
---- ----
Total income tax expense................... $ 710 $ 456
==== ====
A reconciliation of the expected federal statutory income tax rate to the actual
effective tax rate expressed as a percentage of pretax income is summarized as
follows:
March 31,
-------------------
2000 1999
---- ----
Expected federal tax rate .................. 34.0% 34.0%
State taxes, net of federal benefit......... 3.7 3.9
Tax-exempt interest income, net of
disallowed interest expense............ -- (.2)
SERP and directors retirement plan.......... (.6) .2
Employee stock ownership plan............... (.2) 2.0
Low income housing credit................... (1.6) (2.5)
Other....................................... 3.8 1.1
---- ----
39.1% 38.5%
==== ====
27
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities and the related
valuation allowance are as follows:
March 31,
------------------------
2000 1999
---- ----
Deferred tax assets:
Deferred compensation.................... $ 358 $ 278
Deferred loan fees....................... 4 5
Book loan loss reserve .................. 144 195
Other.................................... 69 67
---- ----
Gross deferred tax asset................. $ 575 $ 545
Deferred tax liabilities:
Tax loan loss reserve.................... $(144) $(160)
Property, plant, and equipment........... (15) (17)
Other.................................... (11) (38)
---- ----
Gross deferred tax liability............. (170) (215)
---- ----
Net deferred tax asset .................. $ 405 $ 330
==== ====
The Company has determined that it was not required to establish a valuation
allowance for deferred tax assets since it is more likely than not that the
deferred tax asset will be realized through carryback to taxable income in prior
years, future reversal of existing temporary differences and, to a lesser
extent, future taxable income. The net deferred tax asset is included as a
component of prepaid expenses and other assets in the consolidated statements of
financial condition.
As a result of the special tax treatment accorded the Company under income tax
regulations, $1.5 million of balances in retained earnings at March 31, 2000
represent allocations of income to bad debt deductions for tax purposes only. No
provision for federal income tax has been made for such amount. If any portion
of that amount is used other than to absorb loan losses (which is not
anticipated), taxable income will be generated subject to tax at the rate then
in effect.
28
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
NOTE 10 - REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and, possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of tangible and core capital (as defined in the regulations) to
total assets, and of total capital (as defined) to risk-weighted assets (as
defined). As of March 31, 2000, the Bank meets all capital adequacy requirements
to which it is subject.
As of March 31, 2000, the most recent notification from the Office of Thrift
Supervision (OTS) categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum total risk-based, core and tangible
ratios as set forth in the accompanying table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are also presented in the table.
There is no deduction from capital for interest-rate risk.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------------- ------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ----------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Total Capital
(to Risk Weighted Assets).......... $ 24,822 53.8% $ 3,689 8.0% $ 4,611 10.0%
Core capital
(to Adjust Tangible Assets)........ $ 24,397 16.0% $ 6,092 4.0% $ 7,615 5.0%
Tangible capital
(to Tangible Assets)............... $ 24,397 16.0% $ 2,284 1.5% N/A
Tier 1 Capital
(to Risk Weighted Assets).......... $ 24,397 52.9% N/A $ 2,767 6.0%
As of March 31, 1999:
Total capital
(to Risk Weighted Assets).............. $ 24,447 50.0% $ 3,912 8.0% $ 4,890 10.0%
Core capital
(to Adjusted Tangible Assets).......... $ 23,872 15.4% $ 6,183 4.0% $ 7,729 5.0%
Tangible capital
(to Tangible Assets)................... $ 23,872 15.4% $ 2,319 1.5% N/A
Tier 1 Capital
(to Risk Weighted Assets).............. $ 23,872 48.8% N/A $ 2,934 6.0%
</TABLE>
29
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
NOTE 11 - BENEFIT PLANS
Pension Plan and Supplemental Executive Retirement and Directors Retirement
Plans
The following table sets forth the defined benefit pension plan's and
Supplemental Executive Retirement and Directors Retirement Plans' change in
benefit obligation and change in fair value of the plans' assets and the plans'
funded status for the plan years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Pension Benefits SERP/DRP Benefits
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ........ $ 1,542 $ 1,177 $ 1,434 $ 952
Service cost ................................... 154 93 66 45
Interest cost .................................. 100 77 93 62
Change to PBO due to Amendment ................. 787 -- (21) --
Actuarial (gain)/loss .......................... (756) 195 (357) 375
Benefits paid .................................. -- -- -- --
------- ------- ------- -------
Benefit obligation at end of year .............. 1,827 1,542 1,215 1,434
------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year . 852 650 -- --
Actual return on plan assets ................... 42 39 -- --
Employer contribution .......................... 213 163 -- --
Benefits paid .................................. -- -- -- --
------- ------- ------- -------
Fair value of plan assets at end of year ....... 1,107 852 -- --
------- ------- ------- -------
Unfunded liability ............................. (720) (690) (1,215) (1,434)
Unrecognized transition obligation ............. 142 155 311 368
Unrecognized actuarial (gain)/loss ............. (304) 467 (146) 222
Unrecognized prior period service cost ......... 841 121 38 68
Minimum liability .............................. (312) -- (178) (265)
------- ------- ------- -------
Net amount recognized .......................... $ (353) $ 53 $(1,190) $(1,041)
======= ======= ======= =======
Amounts recognized in the statement of financial
condition consist of:
Prepaid benefit cost ........................... $ -- $ 53 $ -- $ --
Accrued benefit liability ...................... (41) -- (1,012) (776)
Minimum liability .............................. (312) -- (178) (265)
------- ------- ------- -------
Net amount recognized .......................... $ (353) $ 53 $(1,190) $(1,041)
======= ======= ======= =======
</TABLE>
Pension costs consist of the following components for the years ended March 31,
2000 and 1999:
<TABLE>
<CAPTION>
Pension Benefits SERP/DRP Benefits
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost ..................................... $ 154 $ 93 $ 66 $ 45
Interest cost .................................... 133 77 93 62
Expected return on plan assets ................... (60) (46) -- --
Amortization of unrecognized transition obligation 13 13 57 57
Recognized prior service cost .................... 67 9 9 9
Recognized actuarial (gain)/loss ................. -- 9 11 (8)
----- ----- ----- -----
Net periodic benefit cost ........................ $ 307 $ 155 $ 236 $ 165
===== ===== ===== =====
Weighted average assumptions as of December 31:
Discount rate .................................... 6.50% 6.50% 6.50% 6.50%
Expected return on plan assets ................... 6.50% 6.50% N/A N/A
Rate of compensation increase .................... 5.00% 5.00% 3.00% 3.50%/5.00%*
</TABLE>
------------
* In the 1999 plan year, the rate of compensation increase is 3.50% for the
DRP and 5.00% for the SERP.
30
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Employee Stock Ownership Plan ("ESOP")
The Company has an ESOP which covers employees who have completed at least 1,000
hours of service during a twelve month period and have attained the age of 21.
The ESOP originally borrowed $828 from an independent third party lender to fund
the purchase of 8.0% of the shares the Company sold in the minority stock
offering. In December 1998, after the Reorganization was accomplished, the Bank
refinanced the remaining ESOP loan balance of approximately $501 with the
Company. Unreleased ESOP shares collateralize the loan payable to the Company.
The ESOP loan bears a rate of 7.75% with a remaining contractual maturity of 7
years. It is anticipated that this loan will be repaid as early as fiscal year
2002. The ESOP's sources of repayment of the loan shall include dividends on
both allocated and unallocated stock held by the ESOP and discretionary cash
contributions from the Bank to the ESOP.
Shares are released and allocated to the participants on the basis of a
compensation formula. Compensation expense for the years ended March 31, 2000
and 1999 was approximately $176 and $237, respectively. As shares are released
from collateral, the Company reports compensation expense based upon the amounts
released or committed to be released each year and the shares become outstanding
for earnings per share computations.
The following table presents the components of the ESOP shares at March 31, 2000
and 1999:
2000 1999
---- ----
Allocated shares....................... 77,154 49,065
Shares committed to be released........ 7,000 6,375
Unallocated shares..................... 40,046 68,760
------- -------
Total ESOP shares.................. 124,200 124,200
======= =======
Fair value of ESOP shares ............. $ 642,735 $ 993,600
======= =======
Stock Based Compensation Plans
The Company has two stock-based compensation plans which are described herein.
The Company has elected to follow Accounting Principles Board Opinion Number 25,
"Accounting For Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its stock-based compensation plans.
Stock Awards
On April 16, 1998, shareholders approved the Company's "1998 Restricted Stock
Plan" (the "Restricted Stock Plan"). Under this plan, up to 4% of the Company's
outstanding shares or 62,100 shares could be awarded to directors, officers, or
key employees. Generally, between twenty and thirty-three percent of such awards
were earned and non-forfeitable as of the date of the grant and twenty and
thirty-three percent are earned annually thereafter, provided the recipient
remains an employee. Executive officers earn awards at a rate of thirty-three
percent per year, while directors, other officers, and key employees earn at a
rate of twenty percent per year. The value of the stock on the award date was
$12.40 which was equal to the market price of the stock on the date of purchase.
Compensation expense recorded in the consolidated financial statements under
this plan for fiscal 2000 was $193,000. The unearned compensation expense as of
March 31, 2000 and 1999 was approximately $199,000 and $392,000, respectively.
Stock Options
On April 16, 1998, shareholders also approved the Company's "1998 Stock Option
Plan" (the "Stock Option Plan"). The Stock Option Plan provides for authorizing
the issuance of an additional 155,250 shares of common stock. The Board awarded
options of 155,246 to officers, directors, and key employees. The exercise price
on the date of the award was $13.58 (reflective of the three-for-two stock
exchange). However, due to a significant fluctuation in the general market
31
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
conditions of the Company and similar financial institutions, the original
awards were canceled and reissued on October 8, 1998, at the exercise price
equal to the fair market value ($6.83) on that date (this price is also
reflective of the three-for- two stock exchange). Options were first exercisable
at a rate of 50% on the date of the grant and 50% one year later. Options remain
exercisable for up to ten years from their date of grant. Because the Company
accounts for this stock option plan using APB Opinion 25, no compensation
expense has been recorded in the financial statements for this plan. Had
compensation cost for this stock option plan been determined based on the fair
value at the grant date consistent with the method of FASB Statement 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
March 31,
-----------------------
2000 1999
Net Income
As reported...................... $1,104 $ 727
Pro forma........................ $1,049 $ 562
Basic earnings per share
As reported...................... $ 0.33 $ 0.22
Pro forma........................ $ 0.32 $ 0.17
Diluted earnings per share
As reported...................... $ 0.33 $ 0.22
Pro forma........................ $ 0.32 $ 0.17
The fair value for the options described above was estimated at the date of the
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 2000: risk-free interest rate of 5.01%, dividend yield
of 4.44%, volatility factors of the expected market price of the Company's
common stock of 30% and an average life of the options of 5 years. The
Black-Scholes valuation model was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the effect of applying SFAS No. 123 for pro forma
disclosures are not likely to be representative of the effects on reported net
income for future years.
A summary of the status of the Company's stock option plan as of March 31, 2000
and changes during the year is presented below:
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------------------
2000 1999
--------------------------- -------------------------------
Weighted Average Weighted Average
Exercise Price Exercise Price
Options On Options Options On Options
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the year.... 155,246 $ 6.83 -- --
Granted..................................... -- -- 155,246 $ 13.58
Canceled.................................... -- -- (155,246) (13.58)
Reissued.................................... -- -- 155,246 $ 6.83
Exercised................................... -- -- -- --
Forfeited................................... -- -- -- --
------- ----- ------- -----
Outstanding at year end..................... 155,246 $ 6.83 155,246 $ 6.83
======= ===== ======= =====
Options exercisable at year end............. 155,246 $ 6.83 77,619 $ 6.83
======= ===== ======= =====
Weighted average fair value of options
granted during the year........................ N/A $ 1.42
=== =====
</TABLE>
32
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The following table summarizes the characteristics of stock options outstanding
at March 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------
Exercise Remaining Contractual Exercise Number
Price Outstanding Life Price Exercisable
----- ----------- ---- ----- -----------
$ 6.83 155,246 8.5 years $ 6.83 155,246
The following table summarizes the characteristics of stock options outstanding
at March 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------
Exercise Remaining Contractual Exercise Number
Price Outstanding Life Price Exercisable
----- ----------- ---- ----- -----------
$ 6.83 155,246 9.5 years $ 6.83 77,619
NOTE 12 - CONCENTRATION OF CREDIT RISK
The Company conducts its business through three offices located in the
Pittsburgh and Washington areas of Pennsylvania. As of March 31, 2000 and 1999,
the majority of the Company's mortgage loan portfolio was secured by properties
located in this geographical area. The Company utilizes established loan
underwriting procedures which generally require the taking of collateral to
secure loans. Given its underwriting and collateral requirements, the Company
does not believe it has significant concentrations of credit risk to any one
group of borrowers.
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the statements of financial condition, for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be sustained by comparison of
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying
value of the Company.
Management has made estimates of fair value that it believes to be reasonable
considering expected prepayment rates, rates offered in the geographic areas in
which the Company competes, credit risk and liquidity risk. However, because
there is no active market for many of these financial instruments, management
has no basis to verify whether the resulting fair value estimates would be
indicative of the value negotiated in an actual sale.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the financial
statements for cash and various interest-bearing deposits approximates those
assets' fair values.
33
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Investment and mortgage-backed securities: Fair values for investment and
mortgage-backed securities are based on quoted market prices where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. See Note 2 of the consolidated financial
statements for a detailed breakdown of these securities.
Loans receivable: The fair values for one- to four-family residential loans are
estimated using discounted cash flow analyses using yields from similar products
in the secondary markets. The carrying amount of construction loans approximates
its fair value given their short-term nature. The fair values of consumer and
commercial loans are estimated using discounted cash flow analyses, using
interest rates reported in various government releases. The fair values of
multi- family and nonresidential mortgages are estimated using discounted cash
flow analyses, using interest rates based on a national survey of similar loans.
The carrying amount of accrued interest approximate its fair value.
Deposits: The fair values disclosed for demand deposits (e.g., passbook savings
accounts) are, by definition, equal to the amount payable on demand at the
repricing date (i.e., their carrying amounts). Fair values of certificates of
deposits are estimated using a discounted cash flow calculation that applies a
comparable Federal Home Loan Bank advance rate to the aggregated weighted
average maturity on time deposits.
Federal Home Loan Bank (FHLB) advances: The estimated fair value of the FHLB
advances was determined using a discounted cash flow analysis based on current
FHLB of Pittsburgh advance rates for advances with similar maturities.
Off-balance sheet instruments: Fair values for the Company's off-balance sheet
instruments (e.g., lending commitments) are based on their carrying value,
taking into account the remaining terms and conditions of the agreements.
The following table includes financial instruments as defined by SFAS No. 107,
whose estimated fair value is not represented by the carrying value as reported
on the Company's financial statements.
March 31, 2000 March 31, 1999
---------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
Loans receivable....... $ 56,504 $ 59,642 $ 65,309 $ 65,193
Deposits............... 75,583 74,579 76,917 76,895
FHLB advances.......... 49,000 48,350 49,300 49,895
Bonds payable.......... -- -- 1,299 1,318
NOTE 14 - CONTINGENCIES
The Company is subject to asserted and unasserted claims encountered in the
normal course of business. In the opinion of management and legal counsel, the
resolution of these claims will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE 15 - REORGANIZATION
Effective October 29, 1998, the Mutual Holding Company and the Bank reorganized
into a two-tier company structure. The reorganization included the formation of
Skibo Financial Corp. (the "Company"), a federally chartered stock holding
company. The outstanding shares of common stock of the Bank were exchanged, on a
three-for-two basis, for shares of common stock, par value $.10 per share, of
the Company. The reorganization had no impact on the operations of the Bank or
the Mutual Holding Company. The Bank has continued its operations at the same
locations, with the same management, and subject to all the rights, obligations
and liabilities of the Bank existing immediately prior to the reorganization.
34
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
June 30 September 30 December 31 March 31
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Fiscal 2000
Interest income ........................ $ 2,486 $ 2,516 $ 2,539 $ 2,544
Interest expense ....................... 1,473 1,485 1,497 1,496
------- ------- ------- -------
Net interest income before provision for
loan losses ........................ 1,013 1,031 1,042 1,048
Provision for loan losses .............. 1 1 1 (153)
Noninterest income ..................... 28 21 22 25
Noninterest expense .................... 639 624 599 704
------- ------- ------- -------
Income before income taxes ............. 401 427 464 522
Provision for income taxes ............. 174 141 184 211
------- ------- ------- -------
Net income ............................. $ 227 $ 286 $ 280 $ 311
======= ======= ======= =======
Basic earnings per share(1) ............ $ 0.07 $ 0.08 $ 0.09 $ 0.10
======= ======= ======= =======
Diluted earnings per share(1) .......... $ 0.07 $ 0.08 $ 0.09 $ 0.10
======= ======= ======= =======
Fiscal 1999
Interest income ........................ $ 2,477 $ 2,368 $ 2,401 $ 2,445
Interest expense ....................... 1,508 1,426 1,462 1,484
------- ------- ------- -------
Net interest income before provision for
loan losses ........................ 969 942 939 961
Provision for loan losses .............. 3 12 5 5
Noninterest income ..................... 21 26 17 22
Noninterest expense .................... 831 525 731 602
------- ------- ------- -------
Income before income taxes ............. 156 431 220 376
Provision for income taxes ............. 60 180 95 121
------- ------- ------- -------
Net income ............................. $ 96 $ 251 $ 125 $ 255
======= ======= ======= =======
Basic earnings per share(1) ............ $ 0.03 $ 0.07 $ 0.04 $ 0.08
======= ======= ======= =======
Diluted earnings per share(1) .......... $ 0.03 $ 0.07 $ 0.04 $ 0.08
======= ======= ======= =======
</TABLE>
-------------
(1) Quarterly earnings per share may vary from annual earnings per share due to
rounding.
35
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
NOTE 17 - SKIBO FINANCIAL CORP. FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Following is the condensed statement of financial condition as of March 31, 2000
and the condensed statements of income and cash flows for the fiscal year ended
March 31, 2000 and the period from October 29, 1998 to March 31, 1999.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
March 31,
-----------------
2000 1999
------- -------
ASSETS
Interest-earning deposits with subsidiary bank ...... $ 197 $ 380
Investment in subsidiary bank ....................... 24,397 23,872
Loans receivable .................................... 705 1,006
Accrued interest receivable and other assets ........ 47 62
------- -------
Total assets ............................. $25,346 $25,320
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ................................... $ 121 $ 125
Stockholders' equity ................................ 25,225 25,195
------- -------
Total liabilities and stockholders' equity $25,346 $25,320
======= =======
CONDENSED STATEMENTS OF INCOME
March 31,
----------------
2000 1999
------ ------
INCOME
Interest income .................................... $ 76 $ 26
Dividend income .................................... 943 529
Equity in undistributed net income of subsidiary.... 155 189
------ ------
Total income ............................ 1,174 744
OPERATING EXPENSES
Other operating expenses ........................... 62 10
------ ------
Total operating expenses ................ 62 10
------ ------
Income before income taxes ......................... 1,112 734
Provision for income taxes ......................... 8 7
------ ------
Net income .............................. $1,104 $ 727
====== ======
36
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Operating activities:
Net income .................................................. $ 1,104 $ 727
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed earnings of subsidiary ......... (155) (189)
Decrease (increase) in accrued interest receivable ..... 4 (10)
Decrease (increase) in prepaid expenses ................ 4 (33)
Increase in accrued income tax payable ................. 9 7
Other .................................................. (7) (10)
------- -------
Net cash provided by operating activities ........... 959 492
------- -------
Investing activities:
Loans originated ............................................ -- (518)
Principal repayments on loans ............................... 301 13
------- -------
Net cash provided by (used in) investing activities.. 301 (505)
------- -------
Financing:
Treasury Stock Purchased .................................... (1,037) --
Cash dividends paid ......................................... (406) (105)
Refinancing of ESOP loan .................................... -- (501)
Capital contribution from Bank .............................. -- 999
------- -------
Net cash provided by (used in) financing activities.. (1,443) 393
------- -------
Net increase in cash and cash equivalents ................... (183) 380
Cash and cash equivalents, beginning of period .............. 380 --
------- -------
Cash and cash equivalents, end of period .................... $ 197 $ 380
======= =======
</TABLE>
37
<PAGE>
Stock Market Information
Skibo Financial Corp.'s common stock is currently traded on the Nasdaq SmallCap
Market under the trading symbol of "SKBO." The number of stockholders of record
of common stock as of March 31, 2000 was approximately 313. This does not
reflect the number of persons or entities who held stock in nominee or "street"
name through various brokerage firms. At March 31, 2000, the Company had
3,286,863 shares outstanding. The following table illustrates Skibo Financial
Corp's. high and low closing stock price on the Nasdaq SmallCap market and the
cash dividend per share declared during fiscal 2000 and 1999:(1)
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
Quarter High Low Cash Dividend Quarter High Low Cash Dividend
------- ---- --- ------------- ------- ---- --- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
QI 8.078 5.500 $ 0.075 QI 14.000 13.000 $ 0.050
QII 6.625 5.625 0.075 QII 12.667 7.250 0.050
QIII 6.938 5.625 0.075 QIII 12.500 7.625 0.075
QIV 6.438 5.000 0.075 QIV 8.500 6.000 0.075
</TABLE>
----------------
(1) The three-for-two stock exchange was completed on October 29, l998.
All prior period stock prices and cash dividends have been restated to
reflect the exchange. The Mutual Holding Company currently waives the
receipt of dividends.
The Company may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause the Bank's regulatory capital to be reduced below (1)
the amount required for the liquidation account established in connection with
the Company's Reorganization from mutual to stock form, or (2) the regulatory
capital requirements imposed by the Office of Thrift Supervision ("OTS").
The Company has paid a regular quarterly cash dividend of $0.075 since becoming
a public company on April 4, 1997. In accordance with current OTS policy, Skibo
Bancshares, M.H.C. waived the receipt of dividends on its 1,897,500 shares for
each cash dividend declared during the year. There can be no assurance that the
OTS will permit future waivers.
38
<PAGE>
SKIBO FINANCIAL CORP.
OFFICE LOCATIONS
Main Office
242 East Main Street
Carnegie, Pennsylvania 15106
Branch Offices
Kennedy Center Office Washington Office
1811 McKees Rocks Road 1265 West Chestnut Street
McKees Rocks, Pennsylvania 15136 Washington, Pennsylvania 15301
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS EXECUTIVE OFFICERS
John C. Burne, Chairman Walter G. Kelly
Sole Proprietor President and Chief Executive Officer
Burne Enterprises
Carol A. Gilbert
Layne W. Craig Chief Financial and Operating Officer
Retired Owner and Treasurer
Craig Plumbing & Heating
Alexander J. Senules
Walter G. Kelly Vice President and Secretary
President & Chief Executive Officer
Skibo Financial Corp. & First Carnegie Deposit
John T. Mendenhall INDEPENDENT AUDITORS
Sole Practitioner Stokes Kelly & Hinds, LLC
General Dentist 9401 McKnight Road
Pittsburgh, Pennsylvania 15237
Alexander J. Senules
President
Senex Explosives, Inc. & Blasting Products, Inc.
SPECIAL COUNSEL TRANSFER AGENT AND REGISTRAR
Malizia Spidi & Fisch, PC Registrar and Transfer Company
One Franklin Square 10 Commerce Drive
1301 K Street, N.W., Suite 700 East Cranford, New Jersey 07016-3572
Washington, DC 20005 (800) 456-0596
-------------------------------------------------------------------------------------
</TABLE>
The Company's Annual Report for the Year Ended March 31, 2000 filed with the
Securities and Exchange Commission on Form 10-KSB without exhibits is available
without charge upon written request. For a copy of the Form 10-KSB or any other
investor information, please write the Secretary of the Company at 242 East Main
Street, Carnegie, Pennsylvania 15106 or visit our website at www.skibofin.com
and choose "Stockholder Reports". Copies of any exhibits to the Form 10-KSB are
available at cost.
The Annual Meeting of Stockholders will be held on July 20, 2000 at 9:00 a.m. at
Southpointe Golf Club, 360 Southpointe Boulevard, Canonsburg, PA 15317.
39
