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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-25859
1ST STATE BANCORP, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
VIRGINIA 56-2130744
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
445 S. MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
- ----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant' s Telephone Number, Including Area Code
(336) 227-8861
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N/A
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of May 13, 1999, the issuer had 3,163,125 shares of
common stock issued and outstanding.
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CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
--------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and September 30, 1998. . . . . . . . . . 1
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 (unaudited). . 2
Consolidated Statements of Income for the Six Months
Ended March 31, 1999 and 1998 (unaudited). . . . . . 3
Consolidated Statements of Net Worth for the Six
Months Ended March 31, 1999 and 1998 (unaudited) . . 4
Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 1999 and 1998
(unaudited). . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . . .14
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . .15
Item 2. Changes in Securities and Use of Proceeds . . . . . .15
Item 3. Defaults Upon Senior Securities . . . . . . . . . . .16
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . .16
Item 5. Other Information . . . . . . . . . . . . . . . . . .16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . .16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . .17
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<PAGE>
1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
AT AT
MARCH 31, SEPTEMBER 30,
1999 1998
--------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $98,415,037 $31,077,054
Investment securities:
Held to maturity (fair value of
$49,633,053 and $30,415,447
at March 31, 1999 and September
30, 1998, respectively) 49,932,723 30,195,094
Available for sale (cost of $12,484,270
and $9,705,528 at March 31, 1999 and
September 30, 1998, respectively) 12,502,270 9,857,780
Loans held for sale, at lower of cost or
fair value 10,092,418 7,539,919
Loans receivable (net of allowance for
loan losses of $3,339,509 and $3,227,775
at March 31, 1999 and September 30, 1998,
respectively) 188,576,436 196,782,275
Federal Home Loan Bank stock, at cost 1,346,500 1,346,500
Premises and equipment 7,492,457 7,513,347
Accrued interest receivable 2,059,799 1,807,588
Other assets 4,677,478 2,103,659
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Total assets $375,095,118 $288,223,216
============ ============
LIABILITIES AND NET WORTH
Liabilities:
Deposit accounts $321,004,862 $235,693,715
Advances from Federal Home Loan Bank 20,000,000 20,000,000
Advance payments by borrowers for
property taxes and insurance 643,671 299,939
Other liabilities 5,945,740 6,263,957
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Total liabilities 347,594,273 262,257,611
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Commitments
Net worth:
Retained income - substantially
restricted 27,489,845 25,872,605
Accumulated other comprehensive income -
net unrealized gain on investment
securities available for sale 11,000 93,000
------------ ------------
Total net worth 27,500,845 25,965,605
------------ ------------
Total liabilities and net worth $375,095,118 $288,223,216
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
1<PAGE>
<PAGE>
1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Interest income:
Interest and fees on loans $3,910,451 $4,261,364
Interest and dividends on investments 912,252 513,530
Overnight deposits 366,796 262,167
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Total interest income 5,189,499 5,037,061
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Interest expense:
Deposit accounts 2,439,032 2,559,796
Borrowings 269,499 150,099
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Total interest expense 2,708,531 2,709,895
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Net interest income 2,480,968 2,327,166
Provision for loan losses 60,000 60,000
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Net interest income after provision for
loan losses 2,420,968 2,267,166
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Other income:
Loan servicing fees 26,613 24,880
Customer service fees 129,076 135,219
Commission from sales of annuities and
mutual funds 102,351 99,641
Real estate operations, net -- (762)
Mortgage banking income, net 79,634 136,836
Securities gains, net -- 23,556
Other 38,742 66,497
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Total other income 376,416 485,867
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Operating expenses:
Compensation and related benefits 994,493 976,712
Occupancy and equipment 194,645 247,564
Deposit insurance premiums 35,654 35,930
Other expenses 253,121 205,598
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Total operating expenses 1,477,913 1,465,804
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Income before income taxes 1,319,471 1,287,229
Income taxes 453,000 465,000
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Net income $ 866,471 $ 822,229
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2<PAGE>
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1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 7,958,710 $ 8,531,751
Interest and dividends on investments 1,638,745 1,097,949
Overnight deposits 686,480 379,375
----------- -----------
Total interest income 10,283,935 10,009,075
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Interest expense:
Deposit accounts 5,004,187 5,166,025
Borrowings 549,950 164,175
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Total interest expense 5,554,137 5,330,200
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Net interest income 4,729,798 4,678,875
Provision for loan losses 120,000 120,000
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Net interest income after provision for
loan losses 4,609,798 4,558,875
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Other income:
Loan servicing fees 51,847 51,729
Customer service fees 275,625 280,581
Commission from sales of annuities and
mutual funds 229,637 190,425
Real estate operations, net -- (762)
Mortgage banking income, net 446,207 219,943
Securities gains, net -- 22,991
Other 67,788 123,001
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Total other income 1,071,104 887,908
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Operating expenses:
Compensation and related benefits 2,141,402 1,986,229
Occupancy and equipment 423,685 475,807
Deposit insurance premiums 69,467 71,255
Other expenses 562,108 429,216
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Total operating expenses 3,196,662 2,962,507
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Income before income taxes 2,484,240 2,484,276
Income taxes 867,000 904,000
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Net income $ 1,617,240 $ 1,580,276
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3<PAGE>
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1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF NET WORTH
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
RETAINED INCOME INCOME NET WORTH
--------------- ----------- ----------
<S> <C> <C> <C>
Balance at September 30, 1997 $23,351,343 (74,000) 23,277,343
Net income 1,580,276 -- 1,580,276
Other comprehensive income -
unrealized gain (loss) on
securities available for
sale, net of taxes of $7,000 -- (10,000) (10,000)
-----------
Total comprehensive income 1,570,276
----------- ------- -----------
Balance at March 31, 1998 $24,931,619 (84,000) 24,847,619
=========== ======= ===========
Balance at September 30, 1998 $25,872,605 93,000 25,965,605
Net income 1,617,240 -- 1,617,240
Other comprehensive income -
unrealized gain (loss) on
securities available for
sale, net of taxes of $52,000 -- (82,000) (82,000)
-----------
Total comprehensive income 1,535,240
----------- ------- -----------
Balance at March 31, 1999 $27,489,845 11,000 27,500,845
=========== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4<PAGE>
<PAGE>
1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,617,240 $ 1,580,276
Adjustment to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for loan losses 120,000 120,000
Depreciation 201,926 128,905
Amortization of premiums and discounts,
net 9,688 3,909
Loan origination fees and unearned
discounts deferred, net of current
amortization 68,996 55,065
Net loss on sale of loans 91,174 94,628
Proceeds from loans held for sale 26,931,170 15,623,803
Originations of loans held for sale (29,574,843) (16,526,292)
Increase in other assets (2,521,567) (444,050)
Decrease (increase) in accrued interest
receivable (252,211) 103,905
Decrease in other liabilities (318,217) (259,639)
------------ ------------
Net cash provided by (used in)
operating activities (3,626,644) 480,510
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Cash flows from investing activities:
Purchase of Federal home Loan Bank stock -- (65,300)
Purchases of investment securities held
to maturity (30,748,750) (7,001,000)
Purchases of investment securities
available for sale (4,000,000) --
Proceeds from maturities of investment
securities available for sale 1,222,691 3,213,214
Proceeds from maturities of investment
securities held to maturity 11,000,000 11,000,000
Net decrease (increase) in loans receivable 8,016,843 2,542,444
Purchases of premises and equipment (181,036) (612,990)
------------ ------------
Net cash provided by (used in)
investing activities (14,690,252) 9,076,368
------------ ------------
(Continued)
</TABLE>
5<PAGE>
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1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $85,311,147 $ 2,502,661
Advances from the Federal Home Loan Bank -- 20,000,000
Increase in advance payments by borrowers for
property taxes and insurance 343,732 369,689
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Net cash provided by financing
activities 85,654,879 22,872,350
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Net increase in cash and cash
equivalents 67,337,983 32,429,228
Cash and cash equivalents at beginning of
period 31,077,054 14,990,413
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Cash and cash equivalents at end of
period $98,415,037 $47,419,641
=========== ===========
Payments are shown below for the following:
Interest $ 5,464,109 $ 5,172,000
=========== ===========
Income taxes $ 300,000 $ 705,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6<PAGE>
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1ST STATE BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998
NOTE 1. NATURE OF BUSINESS
1st State Bancorp, Inc. (the "Company") was incorporated
under the laws of the Commonwealth of Virginia for the purpose
of becoming the holding company for 1st State Bank (the "Bank)
in connection with the Bank's conversion from a North Carolina-
chartered mutual savings bank to a North Carolina-chartered
stock savings bank (the "Converted Bank") pursuant to its Plan
of Conversion (the "Stock Conversion"). Immediately upon
completion of the Stock Conversion, the Bank intends to convert
from a North Carolina-chartered stock savings bank to a North
Carolina commercial bank (the "Bank Conversion"), retaining the
name 1st State Bank (the "Commercial Bank"), and the Commercial
Bank will succeed to all of the assets and liabilities of the
Converted Bank. A subscription offering of the Company's common
stock commenced on February 19, 1999 and the expiration date for
submitting stock order forms was March 16, 1999. The Plan of
Conversion was approved by the members at special shareholders'
meeting on March 29, 1999. Refer to Note 3.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements (except for the consolidated balance sheet at
September 30, 1998, which is derived from the September 30, 1998
audited consolidated financial statements) have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (none
of which were other than normal recurring accruals) necessary
for a fair presentation of the financial position and results of
operations for the periods presented have been included.
The results of operations for the three and six month
periods ended March 31, 1999 are not necessarily indicative of
the results of operations that may be expected for the year
ended September 30, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included
in the Registration Statement on Form S-1 (and the related
Prospectus) of the Company, dated February 11, 1999.
All financial statements of 1st State Bancorp, Inc. have
been omitted because as of March 31, 1999, 1st State Bancorp,
Inc. has not yet issued any stock, had no assets and no
liabilities and had not conducted any business other than of an
organizational nature. Subsequent to the Stock Conversion the
Company will be consolidated with the Bank for financial
reporting purposes and thus, the accompanying consolidated
financial statements of the Bank will essentially become those
of the Company.
NOTE 3. PLAN OF CONVERSION
On August 11, 1998, the Board of Directors of the Bank
adopted a Plan of Conversion (the "Plan"), which provides for
both the Stock Conversion and the Bank Conversion. Pursuant to
the Stock Conversion, the Bank will convert from a North
Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank, and the Converted Bank
will operate as a wholly owned subsidiary of a newly organized
holding company formed by the Bank. Upon consummation of the
Stock Conversion, the Converted Bank will issue all of its
outstanding capital stock to the Company in exchange for a
portion of the net proceeds from the sale of the Common Stock in
the Stock Conversion. Thereafter, pursuant to the Bank
Conversion, the Converted Bank will convert to a North
Carolina commercial bank.
The Conversion was consummated on April 23, 1999.
7 <PAGE>
<PAGE>
The portion of the net proceeds from the sale of Common
Stock in the Stock Conversion to be distributed to the Converted
Bank by the Company will substantially increase the Converted
Bank's and the Commercial Bank's capital position, which will in
turn increase the amount of funds available for lending and
investment and provide greater resources to support the Bank's
operations. The holding company structure will provide greater
flexibility than the Bank alone would have for diversification
of business activities and expansion. Management believes that
this increased capital will enable the Converted Bank and the
Commercial Bank to compete more effectively with other types of
financial services organizations. In addition, the Conversion
will enhance the future access of the Company and the Commercial
Bank to the capital markets and will afford depositors and
others the opportunity to become stockholders of the Company and
thereby participate in any future growth of the Commercial Bank.
NOTE 4. EARNINGS PER SHARE
Earnings per share for the three and six month periods
ended March 31, 1999 have not been presented in the consolidated
statements of income because the Bank had not converted to stock
form and the Company had not completed its stock offering at any
time during these periods.
NOTE 5. COMPREHENSIVE INCOME
On October 1, 1998, the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose
financial statements. The statement requires that an enterprise
(a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings
and surplus in the equity section of a statement of financial
position. In accordance with the provisions of SFAS No. 130,
comparative financial statements presented for earlier periods
have been reclassified to reflect the provisions of the
statement.
Comprehensive income is the change in equity of an
enterprise during the period from transactions and other events
and circumstances from nonowner sources, and, accordingly,
includes both net income and amounts referred to as other
comprehensive income. The Bank's other comprehensive income for
the six months ended March 31, 1999 and 1998 consisted of
unrealized gains and losses on certain investment securities.
Comprehensive income for the six months ended March 31, 1999 and
1998 amounted to $1,535,240 and $1,570,276, respectively.
8<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will
likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties
including changes in economic conditions in our market area,
changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in our market area, and
competition that could cause actual results to differ materially
from historical earnings and those presently anticipated or
projected. We wish to caution you not to place undue reliance
on any such forward-looking statements, which speak only as of
the date made. We wish to advise you that the factors listed
above could affect our financial performance and could cause our
actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods
in any current statements.
We do not undertake, and specifically disclaim any
obligation, to publicly release the result of any revisions
which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
YEAR 2000 READINESS DISCLOSURE
The following information constitutes "Year 2000 Readiness
Disclosure" under the Year 2000 Information and Readiness
Disclosure Act.
Our operations, like those of most financial institutions,
are substantially dependent upon computer systems for our
lending and deposit activities. We are addressing the potential
problems associated with the possibility that the computers
which control our data processing activities, facilities and
networks may not be programmed to read four-digit dates and,
upon the arrival of the year 2000, may recognize the two-digit
code "00" as the year 1900 rather than 2000. This could cause
systems to fail to function or generate erroneous information.
We formed a Year 2000 Committee early in 1998 with senior
representatives from every functional area of our Bank. At the
direction of the Board, this Committee is leading our efforts to
ensure that we are ready for the Year 2000. Our board of
directors has approved 1st State Bank's five phase Year 2000
Plan that was developed in accordance with the guidelines set
forth by the Federal Financial Institutions Examination Council.
The first phase, awareness, was intended to provide
on-going information to our employees, directors and customers
of the impact of the Year 2000 issue. We have conducted Year
2000 training for all directors and employees.
The second phase, assessment, required us to review all
systems that we believe to be potential risks in order to
minimize any Year 2000 operating difficulties. This review
included all major computer and non-computer based systems, such
as vaults, security systems and telephone systems and resulted
in us identifying one vendor (Open Solutions, Inc.) and one
system (The Complete Banking System) as mission critical.
In April 1998, we converted to a new computer system for
processing all loan, deposit and general ledger transactions.
In conjunction with this conversion, we purchased and installed
new hardware and software throughout 1st State Bank. The
hardware and software purchased are Year 2000 compliant or will
be with minor modifications or upgrades. The combined cost of
this hardware and software was $1.2 million, which was
capitalized during the year ended September 30, 1998 in
accordance with our capitalization policy. This phase is
virtually complete, and we are following up on any remaining
issues to complete our thorough assessment.
We have contacted all of our significant commercial
borrowers and have determined that they are progressing
appropriately with their efforts on Year 2000 issues. We do not
believe this poses a significant risk to us at this time. In
addition, we take into consideration a commercial loan
applicant's Year 2000 preparedness and will reject any
application where the applicant's Year 2000 preparedness could
hinder its ability to repay the loan.
9<PAGE>
<PAGE>
The third phase, renovation, includes making the necessary
enhancements to ensure that our systems are Year 2000 compliant
as well as obtaining certification from our vendors that their
systems are Year 2000 compliant. As noted above, the hardware
and software purchased as part of our system conversion is Year
2000 compliant. We have contacted significant third parties
with whom we interface to complete customer transactions. These
vendors have advised us that they have completed the renovation
phase of their mission critical processes, and that their
validation processes are either complete, or substantially
complete.
The fourth phase, validation, involves developing a
testing strategy by establishing priorities based on the risks
that a data processing failure may have on mission critical
operations. Hardware used to operate mission critical processes
has been successfully tested. In addition, we have received
representations from our mission critical third party vendor
that they are Year 2000 compliant. Testing of mission critical
software applications has been completed. Regression testing
has also been completed and is being reviewed by the Year 2000
Committee. External testing with significant third parties
(i.e. Federal Reserve, debit card and ATM processors) is
complete at March 31, 1999.
The fifth and final phase, implementation, will commence in
the second quarter of calendar 1999, ending with the first
quarter of calendar 2000. We are currently in the process of
developing contingency plans for processes that are not Year
2000 compliant. We expected this contingency plan to be ready
by March 31, 1999; however, we adjusted the timing of our
process based on current regulatory guidance. At March 31,
1999, we have completed developing organizational guidelines and
a business impact analysis that identifies those processes,
which if disrupted, could have an operational or financial
impact on us. We are in the process of preparing individual
contingency plans for those processes and expect that critical
business continuity plans will be substantially validated by
June 30, 1999.
We estimate that the total future cost of Year 2000
compliance, excluding internal staffing costs, will not exceed
$10,000. Year 2000 expenses were $7,500 for the six months
ended March 31, 1999. This estimate includes the cost of an
independent consultant that has been retained to assist us in
evaluating our Year 2000 Plan and assist us in testing. We
believe that our policies, plans and actions are in compliance
with regulatory guidelines and milestone dates.
Our customers may also experience Year 2000 problems, which
could adversely affect their ability to comply with their
obligations to us. We have assessed all significant commercial
loan customers to determine their Year 2000 readiness. Although
Year 2000 readiness varies among our customers, we do not expect
that Year 2000 problems will have such a serious impact on our
customers as to cause them to suffer material adverse financial
consequences.
We believe that the potential effects on our internal
operations from Year 2000 issues can and will be addressed prior
to the Year 2000. However, as unforeseen circumstances arise,
the Year 2000 issue could disrupt our normal business
operations. The most reasonably likely worst case Year 2000
scenarios foreseeable at this time would include our not being
able to systematically process, in some combination, various
types of customer transactions. This could affect our ability
to accept deposits or process withdrawals, originate new loans
or accept loan payments in the automated manner we currently
utilize. Depending upon how long this scenario lasted, this
could have a material adverse effect on our operations. Our
contingency plan will address alternative methods to enable us
to continue to offer basic services to our customers. The costs
of our Year 2000 project and our benchmark dates are based on
our best estimates, which are based on a number of assumptions
including future events. We cannot guarantee that these
estimates will be achieved at the cost disclosed or within the
time frames indicated.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND
SEPTEMBER 30, 1998
Total assets increased by $86.9 million, or 30.2% from
$288.2 million at September 30, 1998 to $375.1 million at March
31, 1999. Asset growth was funded during the period by an
increase of $85.3 million in deposits, as deposits increased
from $235.7 million at September 30, 1998 to $321.0 million at
March 31, 1999. The significant increase in assets and deposits
were the result of stock subscriptions received during the
Bank's stock sale. The Bank's stock was oversubscribed;
therefore, the proceeds were invested in overnight funds until
refunds were made subsequent to March 31, 1999.
10<PAGE>
<PAGE>
Investment securities, both available for sale and held to
maturity, increased a combined total of $22.4 million, or 55.9%,
from $40.1 million at September 30, 1998 to $62.4 million at
March 31, 1999. During the six months ended March 31, 1999,
we purchased $34.7 million of short-term government agency
securities to invest excess liquidity. The increased liquidity
resulted from loan sales during the quarter. Cash and cash
equivalents increased $67.3 million, or 216.7%, from $31.1
million at September 30, 1998 to $98.4 million at March 31,
1999. The large increase in invested cash came from the Bank's
stock subscriptions.
Interest rates continued to be lower in the six months
ended March 31, 1999 than during the previous year, which
encouraged borrowers to refinance their mortgage loans into
fixed-rate loans. As a result, we originated $29.6 million in
loans held for sale during the six months ended March 31, 1999.
We sold $26.9 million of loans held for sale during the six
months ended March 31, 1999. As a result, our loans held for
sale increased $2.6 million, or 33.9%, from $7.5 million at
September 30, 1998 to $10.1 million at March 31, 1999. In
addition, our loans receivable, net decreased by $8.2 million,
or 4.2%, from $196.8 million at September 30, 1998 to $188.6
million at March 31, 1999.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH
31, 1999 AND 1998
Net Income. We had $866,000 of net income for the quarter
ended March 31, 1999, compared to $822,000 of net income for the
quarter ended March 31, 1998, representing a increase of
$44,000, or 5.4%. The principal reason for the increase was an
increase of $154,000 in net interest income which was partially
offset by a decrease in other income of $109,000.
Interest Income. Total interest income was $5.2 million
for the quarter ended March 31, 1999, as compared to $5.0
million for the quarter ended March 31, 1998, representing an
increase of $152,000, or 3.0%. Average interest-earning assets
increased by $35.0 million, or 14.1%, from $248.7 million for
the quarter ended March 31, 1998 to $283.8 for the quarter ended
March 31, 1999. The growth in average interest-earning assets
was offset in part by a 79 basis point decrease in average yield
on interest-earning assets from 8.10% for the three months ended
March 31, 1998 to 7.31% for the three months ended March 31,
1999.
Interest Expense. Total interest expense was $2.7 million
for both of the quarters ended March 31, 1999 and 1998.
Average interest-bearing liabilities increased $13.5 million, or
5.8%, from $234.0 million for the quarter ended March 31, 1998
to $247.4 million for the quarter ended March 31, 1999. The
cost of funds decreased slightly from 4.63% for the three months
ended March 31, 1998 to 4.38% for the same period in 1999.
Net Interest Income. Despite our increases in net earning
assets of $21.6 million, our net interest rate spread decreased
from 3.47% to 2.93% and the net interest margin decreased from
3.74% to 3.50%. These decreases reflected our increased level
of invested cash and investment securities and our decreased
level of loans. Loans generally carry higher interest rates
than investment securities. Contributing to the Bank's
decreased loan yield were decreases in the Prime rate from 8.50%
at September 30, 1998 to 7.75% on November 18, 1998. This is
the most common index used for pricing the Bank's commercial and
consumer loans.
Provision for Loan Losses. The provision for loan losses
is charged to earnings to maintain the total allowance for loan
losses at a level considered adequate to absorb estimated
probable losses inherent in the loan portfolio based on existing
loan levels and types of loans outstanding, nonperforming loans,
prior loan loss experience, general economic conditions and
other factors. Provisions for loan losses totaled $60,000 for
the three months ended March 31, 1999 and 1998.
Other Income. Other income decreased $109,000, or 22.5%,
from $486,000 for the quarter ended March 31, 1998 to $376,000
for the quarter ended March 31, 1999. As interest rates
continued to remain low, we sold $7.9 million of loans during
the quarter to reduce our interest rate risk associated with
long-term fixed-rate mortgages. We recognized income of $80,000
from the origination and sale of these loans. This is a
decrease of $57,000, or 41.6%, from the same quarter in the
prior year, when we sold $11.2 million of loans and recognized
$137,000. Net securities gains decreased $24,000 for the
quarter ended March 31, 1999.
11<PAGE>
<PAGE>
Operating Expenses. Total operating expenses were $1.5
million for both of the quarters ended March 31, 1999 and 1998.
Occupancy and equipment expenses decreased $53,000, or 21.4%
from $248,000 for the quarter ended March 31, 1998 to $195,000
for the quarter ended March 31, 1999. Expenses related to
installing the new computer system were the primary reason for
the increased expenses in 1998. Other operating expenses
increased $48,000, or 23.1% from $206,000 for the quarter ended
March 31, 1998 to $253,000 for the quarter ended March 31, 1999.
These increased expenses resulted from growth in advertising,
postage and office supplies expense.
Income Tax Expense. Income tax expense was $453,000 for
the three months ended March 31, 1999 resulting in an effective
rate of 34.3% compared to $465,000 or 36.1% for the same period
in 1998. The decrease in the effective tax rate is due to an
increase in state tax exempt investment securities during the
quarter ended March 31, 1999.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED
MARCH 31, 1999 AND 1998
Net Income. We had $1.6 million of net income for both the
six months ended March 31, 1999 and 1998.
Interest Income. Total interest income was $10.3 million
for the six months ended March 31, 1999, as compared to $10.0
million for the six months ended March 31, 1998, representing an
increase of $275,000, or 2.7%. Average interest-earning assets
increased by $31.2 million, or 12.7%, from $246.0 million for
the six months ended March 31, 1998 to $277.2 million for the
six months ended March 31, 1999. The growth in average
interest-earning assets was offset in part by a 72 basis point
decrease in average yield on interest-earning assets from 8.14%
for the six months ended March 31, 1998 to 7.42% for the six
months ended March 31, 1999.
Interest Expense. Total interest expense was $5.6 million
for the six months ended March 31, 1999, as compared to $5.3
million for the six months ended March 31, 1998, representing an
increase of $224,000, or 4.2%. Average interest-bearing
liabilities increased $18.3 million, or 8.0%, from $229.4
million for the six months ended March 31, 1998 to $247.7
million for the six months ended March 31, 1999. The cost of
funds decreased slightly from 4.65% for the six months ended
March 31, 1998 to 4.48% for the same period in 1998.
Net Interest Income. Despite our increases in net earning
assets of $12.9 million, our net interest rate spread decreased
from 3.49% to 2.94% and the net interest margin decreased from
3.80% to 3.41%. These decreases reflected our increased level
of investment securities and our decreased level of loans as
well as lower loan rates. Loans generally carry higher interest
rates than investment securities.
Provision for Loan Losses. The provision for loan losses
is charged to earnings to maintain the total allowance for loan
losses at a level considered adequate to absorb estimated
probable losses inherent in the loan portfolio based on existing
loan levels and types of loans outstanding, nonperforming loans,
prior loan loss experience, general economic conditions and
other factors. Provisions for loan losses totaled $120,000 for
the six months ended March 31, 1999 and 1998.
Other Income. Other income increased $183,000, or 20.6%,
from $888,000 for the six months ended March 31, 1998 to $1.1
million for the six months ended March 31, 1999. As interest
rates continued to remain low, we sold $27.0 million of loans
during the six months to reduce our interest rate risk
associated with long-term fixed-rate mortgages. We recognized
income of $446,000 from the origination and sale of these loans.
This is an increase of $226,000, or 102.9%, from the same period
in the prior year, when we sold $15.7 million of loans and
recognized income of $220,000. Net securities gains decreased
$23,000 for the six months ended March 31, 1999. Other income
decreased $55,000, or 44.9% from $123,000 for the six months
ended March 31, 1998 to $68,000 for the six months ended March
31, 1999.
Operating Expenses. Total operating expenses increased
$234,000, or 7.9%, from $3.0 million for the six months ended
March 31, 1998 to $3.2 million for the six months ended March
31, 1999. Compensation expense increased $155,000, or 7.8%,
from $2.0 million for the six months ended March 31, 1998 to
$2.1 million for the six months ended March 31, 1999. This
increase resulted from normal salary increases and increases in
the number of employees. Occupancy and equipment expenses
decreased $52,000, or 11.0% from $476,000 for the quarter ended
March 31, 1998 to $424,000 for the quarter ended March 31, 1999.
Expenses related to installing the new computer system were the
primary reason for the increased expenses in 1998. Other
operating expenses increased $133,000, or
12<PAGE>
<PAGE>
31.0% from $429,000 for the quarter ended March 31, 1998 to
$562,000 for the quarter ended March 31, 1999. These increased
expenses resulted from growth in advertising, postage and office
supplies expense. These expenses were necessary in order to
provide additional services to our growing customer base.
Income Tax Expense. Income tax expense was $867,000 for
the six months ended March 31, 1999 resulting in an effective
rate of 34.9% compared to $904,000 or 36.4% for the same period
in 1998. With our increased levels of liquidity, we owned more
state tax exempt investments during the six months ended March
31, 1999 which lowered our effective tax rate compared to the
same period in 1998.
ASSET QUALITY
At March 31, 1999, we had approximately $505,000 of loans
in nonaccrual status as compared with $263,000 at September 30,
1998 and $344,000 at March 31, 1998. At March 31, 1999 and
1998, we had no loans that were considered to be impaired under
Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan." We had no loans
contractually past due 90 days or more and still accruing at
March 31, 1999 and 1998. The allowance for loan losses was
$3,340,000 or 1.74% of outstanding loans at March 31, 1999.
This compares to 1.61% at September 30, 1998 and 1.49% at March
31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, we had net worth of $27.5 million, as
compared to $26.0 million at September 30, 1998. At March 31,
1999, we had a Tier 1 risk-based capital to risk-weighted assets
ratio of 13.8%. At March 31, 1999, we had Tier 1 leverage
capital, Tier 1 risk-based capital, and total risk-based capital
of $27.3 million, $27.3 million and $29.8 million, respectively.
At March 31, 1999, we exceeded all regulatory minimum capital
requirements.
Our primary sources of funds are deposits, principal and
interest payments on loans, proceeds from the sale of loans, and
to a lesser extent, advances from the FHLB of Atlanta. While
maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic
conditions and local competition.
The North Carolina Savings Bank Administrator's regulations
require savings banks to maintain liquid assets equal to at
least 10% of total assets. The computation of liquidity under
the North Carolina Savings Bank Administrator's regulations
allows the inclusion of investments with readily marketable
value, including investments with maturities in excess of five
years. Our average liquidity ratio was 28.7% for the three
months ended March 31, 1999. We have maintained high liquidity
ratios in recent years in anticipation of our conversion to a
commercial bank. Commercial banks are subject to higher
liquidity requirements than savings banks. Our most liquid
assets are cash and cash equivalents. The levels of these
assets are dependent on our operating, financing, lending and
investing activities during any given period. At March 31,
1999, cash and cash equivalents totaled $98.4 million. We have
other sources of liquidity should we need additional funds.
During the three months ended March 31, 1999 and 1998, we sold
loans totaling $7.9 million and $11.2 million, respectively.
Additional sources of funds include FHLB of Atlanta advances.
Other sources of liquidity include loans and investment
securities designated as available for sale, which totaled $22.6
million at March 31, 1999.
<PAGE>
We anticipate that we will have sufficient funds available
to meet our current commitments. At March 31, 1999, we had $2.7
million in commitments to originate new loans, $36.9 million in
unfunded commitments to extend credit under existing equity line
and commercial lines of credit and $708,000 in standby letters
of credit. At March 31, 1999, certificates of deposit which are
scheduled to mature within one year totaled $96.9 million. We
believe that a significant portion of such deposits will remain
with us. However, some of these deposits may be used to buy
stock in the conversion stock offering currently pending.
ACCOUNTING ISSUES
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131
13<PAGE>
<PAGE>
establishes standards for the way that public businesses report
information about operating segments in the annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial
reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic
areas, and major customers. This Statement is effective for
financial statements for fiscal years beginning after December
15, 1997 and in the initial year of application, comparative
information for earlier years is to be restated. We adopted SFAS
No. 131 on October 1, 1998 without any significant impact on our
financial statements as there are no reportable operating
segments as defined by SFAS No. 131.
In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132,
"Employers Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS No. 132"). SFAS No. 132 standardizes the
disclosure requirements of pensions and other postretirment
benefits. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997. We adopted SFAS No. 132 on October 1,
1998 with no impact on our financial statements.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS NO. 133"). SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. We plan
to adopt SFAS No. 133 in fiscal 2000 without any impact on our
financial statements as we do not have any derivative financial
instruments and are not involved in any hedging activities.
In October 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed and Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" ("SFAS No. 134"). SFAS No. 134 establishes
accounting and reporting standards for certain mortgage banking
activities. SFAS No. 134 is effective for financial statements
for the first fiscal quarter beginning after December 15, 1998.
We adopted SFAS No. 134 in the second quarter of fiscal 1999
without any impact on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Neither our interest rate risk position nor our
Asset/Liability position has changed significantly since
September 30, 1998.
14<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 23, 1998, we issued a total of 3,163,125
shares of our common stock, including 2,975,625 shares sold
to the public and 187,500 issued to a charitable foundation
we established. We issued these shares in connection with
the conversion of our subsidiary bank, 1st State Bank, from
mutual to stock form and then to a commercial bank.
We are providing the following information with
respect to our sale of shares of common stock pursuant to our
Registration Statement on Form S-1, Commission File No. 333-
68091, declared effective by the Securities and Exchange
Commission ("SEC") on February 11, 1999. We commenced the
offering on February 19, 1999 and terminated it on March 16,
1999. We retained Trident Securities, Inc. ("Trident
Securities"), a broker-dealer registered with the SEC and a
member of the National Association of Securities Dealers,
Inc., to provide financial and sales assistance in connection
with the offering. Trident Securities agreed to use its best
efforts to assist us with the sale of the common stock in the
offering. Trident Securities was not obligated to take or
purchase any shares of common stock in the offering. In the
offering, we registered 3,163,125 shares of common stock with
an aggregate offering price of $50,610,000, all for our
account. On April 23, 1999, we sold a total of 2,975,625
shares of common stock for aggregate cash consideration of
$47,610,000 and donated 187,500 shares of common stock to a
charitable foundation we established named 1st State Bank
Foundation, Inc.
The following table sets forth expenses we incurred or
estimate to have been incurred in connection with the offering.
An asterisk indicates that the amount is an estimate. We paid
all of these amounts to persons or entities who were not
officers, directors or 10% stockholders of the Company or their
affiliates or an affiliate of the Company.
Expenses Amount
- -------- ------
Underwriting discounts and commissions $ 591,069
Finders' fees --
Expenses paid to or for underwriters 37,309
Other expenses 581,469 *
----------
Total expenses 1,209,847 *
After deducting expenses, the net offering proceeds
are estimated to be $46,400,153.
The following table sets forth the purposes for which we used
the net offering proceeds and the amount of the net offering
proceeds we used for each purpose. An asterisk indicates that
the amount is an estimate. We paid all of such amounts to
persons or entities who were not officers, directors or 10%
stockholders of the Company or their affiliates or an affiliate
of the Company.
15<PAGE>
<PAGE>
Use of Proceeds Amount
- --------------- ------
1st State Bancorp, Inc. working capital 20,750,757 *
Investment in 1st State Bank 20,750,757 *
Loan to Employee Stock Ownership Plan 4,898,639
-----------
$46,400,153
===========
The uses of proceeds described above do not represent a
material change in the use of proceeds described in the
prospectus.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the
quarter ended March 31, 1999.
16<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
1ST STATE BANCORP, INC.
Date: May 13, 1999 /s/ James C. McGill
--------------------------------
James C. McGill
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1999 /s/ A. Christine Baker
--------------------------------
A. Christine Baker
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
17
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