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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 June 30, 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 July 31, 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
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Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
(unaudited) and September 30, 1998. . . . . . . . . . 1
Consolidated Statements of Income for the Three
Months Ended June 30, 1999 and 1998 (unaudited) . . 1
Consolidated Statements of Income for the Nine Months
Ended June 30, 1999 and 1998 (unaudited) . . . . . . 2
Consolidated Statements of Net Worth for the Nine
Months Ended June 30, 1999 and 1998 (unaudited) . . 3
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1999 and 1998
(unaudited). . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . . .13
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . .14
Item 2. Changes in Securities and Use of Proceeds . . . . . .14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . .14
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . .14
Item 5. Other Information . . . . . . . . . . . . . . . . . .14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . .14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . .15
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1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
AT AT
JUNE 30, SEPTEMBER 30,
1999 1998
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 15,361,716 $ 31,077,054
Investment securities:
Held to maturity (fair value of
$77,814,307 and $30,415,447 at
June 30, 1999 and September 30,
1998, respectively) 79,212,445 30,195,094
Available for sale (cost of $11,360,578
and $9,705,528 at June 30, 1999 and
September 30, 1998, respectively) 11,179,644 9,857,780
Loans held for sale, at lower of cost or
fair value 10,761,410 7,539,919
Loans receivable (net of allowance for loan
losses of $3,394,766 and $3,227,775 at
June 30, 1999 and September 30, 1998,
respectively) 189,037,512 196,782,275
Federal Home Loan Bank stock, at cost 1,259,600 1,346,500
Premises and equipment 7,362,925 7,513,347
Accrued interest receivable 2,102,440 1,807,588
Other assets 5,168,586 2,103,659
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Total assets $321,446,278 $288,223,216
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $224,751,824 $235,693,715
Advances from Federal Home Loan Bank 20,000,000 20,000,000
Advance payments by borrowers for property
taxes and insurance 810,138 299,939
Other liabilities 5,230,667 6,263,957
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Total liabilities 250,792,629 262,257,611
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Stockholders' Equity:
Preferred stock, $0.01 par value, 1,000,000
shares authorized; none issued -- --
Common stock, $0.01 par value, 7,000,000
shares authorized; 3,163,125 shares issued
and outstanding 31,631 --
Additional paid in capital 49,217,738 --
Unearned ESOP shares (4,566,657) --
Deferred compensation 2,351,365 --
Treasury stock (2,351,365) --
Retained income - substantially restricted 26,079,337 25,872,605
Accumulated other comprehensive income
(loss) - net unrealized gain (loss) on
investment securities available for sale (108,400) 93,000
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Total stockholders' equity 70,653,649 25,965,605
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Total liabilities and stockholders'
equity $321,446,278 $288,223,216
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
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1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
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<S> <C> <C>
Interest income:
Interest and fees on loans $ 3,990,379 $ 4,173,245
Interest and dividends on investments 1,085,944 551,675
Overnight deposits 392,250 481,761
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Total interest income 5,468,573 5,206,681
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Interest expense:
Deposit accounts 2,283,832 2,568,580
Borrowings 272,495 289,035
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Total interest expense 2,556,327 2,857,615
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Net interest income 2,912,246 2,349,066
Provision for loan losses 60,000 60,000
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Net interest income after provision for
loan losses 2,852,246 2,289,066
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Other income:
Loan servicing fees 24,808 18,363
Customer service fees 126,005 131,856
Commission from sales of annuities and
mutual funds 97,842 138,147
Mortgage banking income (loss), net (131,273) 71,414
Other 66,285 43,177
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Total other income 183,667 402,957
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Operating expenses:
Compensation and related benefits 1,242,392 1,018,596
Occupancy and equipment 277,719 259,232
Deposit insurance premiums 34,877 35,683
Contributions 3,014,205 13,375
Other expenses 265,422 187,952
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Total operating expenses 4,834,615 1,514,838
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Income (loss) before income taxes (1,798,702) 1,177,185
Income tax (benefit) (621,000) 417,000
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Net income (loss) $(1,177,702) $ 760,185
=========== ===========
Earnings (loss) per share:
Basic $(0.48) --
Diluted (0.48) --
</TABLE>
See accompanying notes to consolidated financial statements.
2
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1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
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<S> <C> <C>
Interest income:
Interest and fees on loans $11,949,089 $12,704,996
Interest and dividends on investments 2,724,689 1,649,624
Overnight deposits 1,078,730 861,136
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Total interest income 15,752,508 15,215,756
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Interest expense:
Deposit accounts 7,288,019 7,734,604
Borrowings 822,445 453,210
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Total interest expense 8,110,464 8,187,814
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Net interest income 7,642,044 7,027,942
Provision for loan losses 180,000 180,000
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Net interest income after provision for
loan losses 7,462,044 6,847,942
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Other income:
Loan servicing fees 76,655 70,092
Customer service fees 401,630 412,437
Commission from sales of annuities and
mutual funds 327,479 328,572
Real estate operations, net -- (762)
Mortgage banking income, net 314,934 291,357
Securities gains, net -- 22,991
Other 134,073 166,177
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Total other income 1,254,771 1,290,864
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Operating expenses:
Compensation and related benefits 3,383,794 3,004,825
Occupancy and equipment 701,404 735,039
Deposit insurance premiums 104,344 106,938
Contributions 3,033,196 20,771
Other expenses 808,539 609,772
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Total operating expenses 8,031,277 4,477,345
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Income before income taxes 685,538 3,661,461
Income taxes 246,000 1,321,000
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Net income $ 439,538 $ 2,340,461
=========== ===========
Earnings (loss) per share:
Basic $(0.48) --
Diluted (0.48) --
</TABLE>
See accompanying notes to consolidated financial statements.
3
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1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 439,538 2,340,461
Adjustment to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for loan losses 180,000 180,000
Depreciation 349,827 215,717
Amortization of premiums and
discounts, net 32,664 10,599
Contribution of shares to Foundation 3,000,000 --
Release of ESOP shares 333,990 --
Loan origination fees and unearned
discounts deferred, net of
current amortization 85,925 55,172
Net loss on sale of loans 427,120 145,020
Proceeds from loans held for sale 34,604,174 20,151,385
Originations of loans held for sale (38,252,785) (19,748,991)
Increase in other assets (2,979,028) (297,090)
Increase in accrued interest
receivable (294,852) (180,963)
Decrease in other liabilities (1,266,096) (1,910,622)
------------ ----------
Net cash provided by (used in)
operating activities (3,339,523) 960,688
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Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock -- (65,300)
Proceeds from sales of Federal Home Loan
Bank stock 86,900 --
Purchases of investment securities held to
maturity (63,680,540) (22,389,414)
Purchases of investment securities available
for sale (4,000,000) (1,000,000)
Proceeds from maturities of investment
securities available for sale 2,345,049 3,319,412
Proceeds from maturities of investment
securities held to maturity 14,676,313 18,031,276
Net decrease (increase) in loans receivable 7,478,838 (2,406,798)
Purchases of premises and equipment (199,405) (887,990)
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Net cash provided by (used in)
investing activities (43,292,845) (5,398,814)
------------ -----------
(Continued)
</TABLE>
4
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1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
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<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $(10,941,891) $ 1,146,085
Advances from the Federal Home Loan Bank -- 20,000,000
Increase in advance payments by borrowers for
property taxes and insurance 510,199 546,607
Net proceeds from sale of common stock 46,247,361 --
Purchase of stock for ESOP (4,898,639) --
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Net cash provided by financing activities (30,917,030) 21,692,692
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Net increase in cash and cash equivalents (15,715,338) 17,254,566
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 $ 15,361,716 $32,244,979
============ ===========
Payments are shown below for the following:
Interest $ 8,103,571 $ 7,958,858
============ ===========
Income taxes $ 303,000 $ 1,871,000
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Noncash investing and financing activities:
Unrealized gains (losses) on investment
securities available for sale $ (201,400) $ (102,000)
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Dividends declared and payable $ 232,806 $ --
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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1ST STATE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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"). Upon
completion of the Stock Conversion, the Bank converted 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
succeeded to all of the assets and liabilities of the Converted
Bank. The Stock Conversion and the Bank Conversion were
consummated on April 23, 1999. The Company issued 3,163,125
shares of its common stock, par value $0.01 per share, for
$16.00 per share. After deducting issuance costs of
approximately $1,637,000, and excluding proceeds on 187,500
shares donated at the time of the Stock Conversion to the 1st
State Bank Foundation, Inc. (the "Foundation"), the Stock
Conversion resulted in net proceeds of $ 46,247,361. Included
in this amount are proceeds received from withdrawals from
deposit accounts that were used to acquire stock in the Stock
Conversion. The common stock of the Company began trading on
the Nasdaq National Market System under the symbol "FSBC" on
April 26, 1999.
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 nine month
periods ended June 30, 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.
The financial statements of the Company are presented on a
consolidated basis with those of the Bank, although, the Company
did not own any shares of the Bank and had no assets,
liabilities, equity or operations prior to April 23, 1999.
Therefore, although certain financial statements presented in
this From 10-Q include periods prior to June 30, 1999, such
statements include only the accounts and operations of the Bank
for periods prior to April 23,1999.
NOTE 3. EARNINGS PER SHARE
The Company's earnings per share for the periods ended June
30, 1999 are comprised solely of net income for the
post-conversion period. The preparation of consolidated
financial statements in accordance with generally accepted
accounting principles requires management to make certain
estimates. These amounts may be revised in future periods
because of changes in the facts and circumstances underlying
their estimation.
6
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The net loss for the post conversion period that was used
in the computation of earnings (loss) per share was
$(1,398,783). This loss includes the after tax cost of
$1,980,000 related to donating 187,500 shares of the Company's
common stock to the Foundation as part of the Stock Conversion.
This charge represents a loss per share of $(0.68). Excluding
this charge, earnings per share would have been $0.20.
The following table presents the components of basic and
diluted weighted average shares outstanding used in the
computation of earnings per share:
Weighted average shares outstanding 3,163,125
Less: Unallocated ESOP shares 244,338
Basic and diluted weighted average shares
outstanding 2,918,787
The Company had no potential common stock for the periods
presented.
NOTE 4. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The Company sponsors an ESOP whereby an aggregate number of
shares amounting to 253,050 or 8% of the stock issued in the
conversion were purchased for future allocation to employees.
The ESOP was funded by an 11 year term loan from the Company in
the amount of $4,898,639. The loan is secured by the shares of
stock purchased by the ESOP. During the three months ended June
30, 1999, 17,253 shares of stock were committed to be released
and approximately $332,000 in compensation expense was
recognized.
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 nine months ended June 30, 1999 and 1998 consisted of
unrealized gains and losses on certain investment securities
available for sale. Comprehensive income for the nine months
ended June 30, 1999 and 1998 amounted to $238,138 and
$2,238,461, respectively.
7
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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 Bancorp, Inc.'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 Bancorp, Inc.
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.
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.
8
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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 and external testing with significant
third parties has been completed.
The fifth and final phase, implementation, began in the
second quarter of calendar 1999 and will be completed in the
first quarter of calendar 2000. In accordance with regulatory
guidelines at June 30, 1999, we have developed a business
resumption contingency plan and designed a method of plan
validation. We expect to have validated the plan by September
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 nine months
ended June 30, 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 JUNE 30, 1999 AND SEPTEMBER
30, 1998
Total assets increased by $33.2 million, or 11.5% from
$288.2 million at September 30, 1998 to $321.4 million at June
30, 1999. Asset growth was funded during the period by the
$41.4 million of net proceeds from the sale and issuance of
common stock. During this same time period, deposits decreased
$10.9 million or 4.6% from $235.7 million at September 30, 1998
to $224.8 million at June 30, 1999 as some customers used their
deposits to fund their purchase of stock.
Investment securities, both available for sale and held to
maturity, increased a combined total of $50.3 million, or
125.7%, from $40.1 million at September 30, 1998 to $90.4
million at June 30, 1999. During the nine months ended June 30,
1999, we purchased $67.6 million of short-term government agency
securities to invest the stock proceeds and excess overnight
funds. Cash and cash equivalents decreased $15.7 million, or
50.6%, from $31.1 million at September 30, 1998 to $15.4 million
at June 30, 1999.
9
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During the first and second quarters of fiscal 1999,
long-term interest rates continued to be at levels which
encouraged borrowers to refinance their mortgage loans. As a
result, we originated $38.3 million in loans held for sale
during the nine months ended June 30, 1999. We sold $35.0
million of loans held for sale during the nine months ended June
30, 1999. As a result, our loans held for sale increased $3.2
million, or 42.7%, from $7.5 million at September 30, 1998 to
$10.8 million at June 30, 1999. In addition, our loans
receivable, net decreased by $7.8 million, or 3.9%, from $196.8
million at September 30, 1998 to $189.0 million at June 30,
1999. During the nine months ended June 30, 1999, we had many
loan customers refinance their existing loans into fixed rate
mortgage loans which were sold to minimize the Bank's exposure
to interest rate risk.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE
30, 1999 AND 1998
Net Income. We recorded a net loss of $1.2 million for the
quarter ended June 30, 1999, compared to net income of $760,000
for the quarter ended June 30, 1998, representing a decrease of
$1.9 million, or 254.9%. The principal reason for the decrease
was the Bank's contribution of $3.0 million to fund the 1st
State Bancorp, Inc. Foundation, Inc. The Bank recognized a net
tax benefit of $1.0 million on this contribution for a net
charge to earnings of $2.0 million. Earnings of $802,000 would
have been reported for the three months ended June 30, 1999
excluding the effect of the one time charges associated with the
establishment of the Foundation.
Interest Income. Total interest income was $5.5 million
for the quarter ended June 30, 1999, as compared to $5.2 million
for the quarter ended June 30, 1998, representing an increase of
$262,000, or 5.0%. Average interest-earning assets increased by
$39.1 million, or 14.7%, from $265.5 million for the quarter
ended June 30, 1998 to $304.6 for the quarter ended June 30,
1999. The growth in average interest-earning assets was offset
in part by a 66 basis point decrease in average yield on
interest-earning assets from 7.84% for the three months ended
June 30, 1998 to 7.18% for the three months ended June 30, 1999.
Interest Expense. Total interest expense was $2.6 million
for the quarter ended June 30, 1999, as compared to $2.9 million
for the quarter ended June 30, 1998, representing a decrease of
$301,000, or 10.5%. Average interest-bearing liabilities
increased $5.4 million, or 2.2%, from $245.4 million for the
quarter ended June 30, 1998 to $250.8 million for the quarter
ended June 30, 1999. The cost of funds decreased from 4.66% for
the three months ended June 30, 1998 to 4.08% for the same
period in 1999.
Net Interest Income. Net earning assets increased by
$33.7 million while our net interest rate spread decreased from
3.18% to 3.10% and the net interest margin increased from 3.54%
to 3.82%. The decrease in net spread resulted from our
increased level of investment securities and lower interest
rates. The increase in net earning assets and net interest
margin resulted from the net proceeds from the sale of stock.
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 June 30, 1999 and 1998.
Other Income. Other income decreased $219,000, or 54.4%,
from $403,000 for the quarter ended June 30, 1998 to $184,000
for the quarter ended June 30, 1999. Mortgage banking income,
net decreased $203,000, or 283.8%, from $71,000 for the quarter
ended June 30, 1998 to a loss of $131,000 or the quarter ended
June 30, 1999. During the quarter ended June 30, 1999, we sold
fixed-rate mortgage loans of $8.1 million and recognized
$95,000 from the origination and sale of these loans. Long-term
interest rates increased during the quarter which caused the
fair market value of the $10.8 million of loans held for sale to
decline below cost. We charged earnings with a loss of
$226,000, which offset the earnings on the loans sold and
resulted in a net loss of $131,000 for the quarter ended June
30, 1999. During the quarter ended June 30, 1998, we sold
fixed-rate mortgage loans of $4.6 million and recognized income
of $71,000 from the origination and sale of these loans.
Operating Expenses. Total operating expenses increased
$3.3 million, or 219.2% from $1.5 million for the quarter ended
June 30, 1998 to $4.8 million for the quarter ended June 30,
1999. The largest increase was the $3.0 million increase in
charitable contribution expense to fund the Foundation.
Contributions increased from $13,000 for
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the quarter ended June 30, 1999 to $3.0 million for the quarter
ended June 30, 1999. Compensation and related benefits expense
increased $224,000, or 22.0% from $1.0 million for the quarter
ended June 30, 1998 to $1.2 million for the quarter ended June
30, 1999. Included in compensation expense for the quarter
ended June 30, 1999 was $332,000 related to the newly
implemented ESOP. Other operating expenses increased $77,000,
or 41.2% from $188,000 for the quarter ended June 30, 1998 to
$265,000 for the quarter ended June 30, 1999. These increased
expenses resulted primarily from an increase in professional
services expenses related to being a public company.
Income Tax Expense. We recognized a net tax benefit of
$621,000 for the quarter ended June 30, 1999. This represents an
effective tax benefit of 34.5%. Income tax expense was
$417,000 for the three months ended June 30, 1998 resulting in
an effective rate of 35.4%.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE
30, 1999 AND 1998
Net Income. We recorded net income of $440,000 for the
nine months ended June 30, 1999, a decrease of $1.9 million
from the net income of $2.3 million which was recorded for the
nine months ended June 30, 1999. The after tax cost of funding
the Foundation was $2.0 million which accounts for the decrease.
Excluding the net effect of the Foundation contribution less the
associated tax benefit, the net income for the first nine months
of 1999 would have been $2.4 million.
Interest Income. Total interest income was $15.8 million
for the nine months ended June 30, 1999, as compared to $15.2
million for the nine months ended June 30, 1998, representing an
increase of $537,000, or 3.5%. Average interest-earning assets
increased by $31.6 million, or 12.4%, from $255.2 million for
the nine months ended June 30, 1998 to $286.8 million for the
nine months ended June 30, 1999. The growth in average
interest-earning assets was offset in part by a 63 basis point
decrease in average yield on interest-earning assets from 7.95%
for the nine months ended June 30, 1998 to 7.32% for the nine
months ended June 30, 1999.
Interest Expense. Total interest expense was $8.1 million
for the nine months ended June 30, 1999, as compared to $8.2
million for the nine months ended June 30, 1998, representing a
decrease of $77,000, or 1.0%. Average interest-bearing
liabilities increased $18.9 million, or 8.1%, from $234.8
million for the nine months ended June 30, 1998 to $253.7
million for the nine months ended June 30, 1999. The cost of
funds decreased from 4.65% for the nine months ended June 30,
1998 to 4.26% for the same period in 1999.
Net Interest Income. Despite our increases in net earning
assets of $12.7 million, our net interest rate spread decreased
from 3.30% to 3.06% and the net interest margin decreased from
3.67% to 3.55%. These decreases reflected our increased level
of investment securities and overnight investments as well as
lower interest rates on loans and investments.
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 nine months ended June 30, 1999 and 1998.
Other Income. Other income was $1.3 million for each of
the nine months ended June 30, 1999 and 1998 with no significant
changes in any of the various components.
Operating Expenses. Total operating expenses increased
$3.6 million, or 79.4%, from $4.5 million for the nine months
ended June 30, 1998 to $8.0 million for the nine months ended
June 30, 1999. Charitable contributions increased $3.0 million
from $21,000 for the nine months ended June 30, 1998 to $3.0
million for the nine months ended June 30, 1999. This increase
resulted from the $3.0 million that was donated to the
Foundation that was established as a part of the stock
conversion. Compensation expense increased $379,000, or 12.6%,
from $3.0 million for the nine months ended June 30, 1998 to
$3.4 million for the nine months ended June 30, 1999. This
increase resulted from the additional ESOP expense incurred
during the quarter ended June 30, 1999. Other operating
expenses increased $199,000, or 32.6% from $610,000 for the
quarter ended June 30, 1998 to $809,000 for the quarter ended
June 30, 1999. These increased expenses resulted from growth in
legal, accounting, postage and office supplies expense. These
11
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<PAGE>
expenses were necessary in order to operate as a public company
and to provide additional services to our growing customer base.
Income Tax Expense. Income tax expense was $246,000 for
the nine months ended June 30, 1999 resulting in an effective
rate of 35.9% compared to $1.3 million or 36.1% for the same
period in 1998. With our increased levels of liquidity, we
owned more state tax exempt investments during the nine months
ended June 30, 1999 which lowered our effective tax rate
compared to the same period in 1998.
ASSET QUALITY
June 30, 1999, we had approximately $480,000 of loans in
nonaccrual status as compared with $263,000 at September 30,
1998 and $637,000 at June 30, 1998. At June 30, 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
June 30, 1999 and 1998. The allowance for loan losses was
$3,395,000 or 1.77% of outstanding loans at June 30, 1999. This
compares to 1.61% at September 30, 1998 and 1.45% at June 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Bank must meet certain liquidity requirements
established by the State of North Carolina Office of the
Commissioner of Banks (the "Commissioner"). At June 30, 1999,
the Bank's liquidity ratio exceeded such requirements.
Liquidity generally refers to the Bank's ability to generate
adequate amounts of funds to meet its cash needs. Adequate
liquidity guarantees that sufficient funds are available to meet
deposit withdrawals, fund loan commitments, maintain adequate
reserve requirements, pay operating expenses, provide funds for
debt service, pay dividends to stockholders and meet other
general commitments.
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.
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 June 30, 1999, cash and cash equivalents totaled
$15.4 million. We have other sources of liquidity should we
need additional funds. During the three months ended June 30,
1999 and 1998, we sold loans totaling $8.1 million and $4.6
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 $22.2 million at June 30, 1999.
We anticipate that we will have sufficient funds available
to meet our current commitments. At June 30, 1999, we had $3.6
million in commitments to originate new loans, $53.4 million in
unfunded commitments to extend credit under existing equity
lines and commercial lines of credit and $581,000 in standby
letters of credit. At June 30, 1999, certificates of deposit
which are scheduled to mature within one year totaled $96.3
million. We believe that a significant portion of such deposits
will remain with us.
The FDIC requires the Bank to meet a minimum leverage
capital requirement of Tier I capital to assets ratio of 4%.
The FDIC also requires the Bank to meet a ratio of total capital
to risk-weighted assets of 8%, of which 4% must be in the form
of Tier I capital. The Commissioner requires the Bank at all
times to maintain certain minimum capital levels. The Bank was
in compliance with all capital requirements of the FDIC and the
Commissioner at June 30, 1999. At June 30, 1999, the Bank was
well capitalized.
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 establishes
standards for the way that public businesses report information
about operating segments in the annual
12
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<PAGE>
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, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. We plan to adopt SFAS No. 133 in fiscal
2001 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
The Company monitors whether material changes in market
risk have occurred since September 30, 1998 The Company does
not believe that any material adverse changes in market risk
exposures occurred during the nine months ended June 30, 1999.
13
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
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) On June 29, 1999, we filed a form 8-K report under Item 5.
The Board of Directors established a policy for the payment
of quarterly cash dividends on June 15,1999.
14
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<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: August 11, 1999 /s/ James C. McGill
--------------------------------
James C. McGill
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 1999 /s/ A. Christine Baker
--------------------------------
A. Christine Baker
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
15
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