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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ______ to ______
Commission File Number: 333-68091
1ST STATE BANCORP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
VIRGINIA 56-2130744
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
445 S. MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
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(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 ____ No __X__
As of March 25, 1999, the issuer had one share of common
stock issued and outstanding.
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CONTENTS
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998
(unaudited) and September 30, 1998 . . . . . . . . . 1
Consolidated Statements of Income for the Three
Months Ended December 31, 1998 and 1997
(unaudited). . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Net Worth for the Three
Months Ended December 31, 1998 and 1997
(unaudited). . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 1998 and 1997
(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. . . . . . . . . . . . . . . . . . . .12
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings. . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities and Use of Proceeds. . . . 13
Item 3. Defaults Upon Senior Securities. . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . 13
Item 5. Other Information. . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 14
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1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, SEPTEMBER 30,
1998 1998
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(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 27,224,550 $ 31,077,054
Investment securities:
Held to maturity (fair value of
$43,086,954 and $30,415,447
at December 31, 1998 and
September 30, 1998, respectively) 42,934,697 30,195,094
Available for sale (cost of $12,594,833
and $9,705,529 at December 31, 1998
and September 30, 1998, respectively) 12,732,832 9,857,780
Loans held for sale, at lower of cost or fair
value 6,185,452 7,539,919
Loans receivable (net of allowance for loan
losses of $3,278,570 and $3,227,775 at
December 31, 1998 and September 30, 1998,
respectively) 189,141,955 196,782,275
Federal Home Loan Bank stock, at cost 1,346,500 1,346,500
Premises and equipment 7,532,575 7,513,347
Accrued interest receivable 1,741,810 1,807,588
Other assets 2,408,946 2,103,659
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Total assets $291,249,317 $288,223,216
============ ============
LIABILITIES AND NET WORTH
Liabilities:
Deposit accounts $237,393,815 $235,693,715
Advances from Federal Home Loan Bank 20,000,000 20,000,000
Advance payments by borrowers for property
taxes and insurance 441,341 299,939
Other liabilities 6,706,788 6,263,957
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Total liabilities 264,541,944 262,257,611
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Commitments
Net worth:
Retained income - substantially restricted 26,623,373 25,872,605
Accumulated other comprehensive income -
net unrealized gain (loss) on investment
securities available for sale 84,000 93,000
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Total net worth 26,707,373 25,965,605
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Total liabilities and net worth $291,249,317 $288,223,216
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
1<PAGE>
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1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
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<S> <C> <C>
Interest income:
Interest and fees on loans $4,077,566 $4,270,221
Interest and dividends on investments 726,492 595,289
Overnight deposits 319,685 117,208
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Total interest income 5,123,743 4,982,718
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Interest expense:
Deposit accounts 2,565,154 2,606,228
Borrowings 280,452 14,077
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Total interest expense 2,845,606 2,620,305
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Net interest income 2,278,137 2,362,413
Provision for loan losses 60,000 60,000
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Net interest income after provision
for loan losses 2,218,137 2,302,413
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Other income:
Loan servicing fees 25,234 26,848
Customer service fees 146,550 134,658
Commission from sales of annuities and
mutual funds 128,756 96,533
Mortgage banking income, net 337,266 82,544
Other 27,425 50,755
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Total other income 665,231 391,338
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Operating expenses:
Compensation and related benefits 1,146,909 1,009,516
Occupancy and equipment 256,413 233,133
Deposit insurance premiums 33,813 35,325
Other expenses 281,465 218,729
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Total operating expenses 1,718,600 1,496,703
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Income before income taxes 1,164,768 1,197,048
Income taxes 414,000 439,000
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Net income $ 750,768 $ 758,048
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</TABLE>
See accompanying notes to consolidated financial statements.
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1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF NET WORTH
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(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 758,048 -- 758,048
Other comprehensive income -
unrealized gain (loss) on
securities available for sale,
net of taxes of $10,000 -- 15,000 15,000
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Total comprehensive income 773,048
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Balance at December 31, 1997 $24,109,391 (59,000) 24,050,391
=========== ======== ==========
Balance at September 30, 1998 $25,872,605 93,000 25,965,605
Net income 750,768 -- 750,768
Other comprehensive income -
unrealized gain (loss) on
securities available for sale,
net of taxes of $5,252 -- (9,000) (9,000)
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Total comprehensive income 741,768
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Balance at December 31, 1998 $26,623,373 84,000 26,707,373
=========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 750,768 $ 758,048
Adjustment to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for loan losses $ 60,000 $ 60,000
Depreciation 125,191 64,354
Amortization of premiums and discounts, net 8,651 (10,691)
Loan origination fees and unearned discounts
deferred, net of current amortization 3,889 21,719
Net loss on sale of loans 53,405 18,434
Proceeds from loans held for sale 19,064,560 4,567,583
Originations of loans held for sale (17,763,498) (4,698,109)
Increase in other assets (300,035) (1,566,819)
Decrease in accrued interest receivable 65,778 60,973
Increase (decrease) in other liabilities 442,831 (1,283,176)
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Net cash provided by (used in)
operating activities 2,511,540 (2,007,684)
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Cash flows from investing activities:
Purchases of investment securities held to
maturity (15,750,000) (3,996,600)
Purchases of investment securities available
for sale (4,000,000) --
Proceeds from maturities of investment
securities available for sale 1,112,442 7,010,598
Proceeds from maturities of investment
securities held to maturity 3,000,000 172,181
Net decrease (increase) in loans receivable 7,576,431 (3,763,526)
Purchases of premises and equipment (144,419) (117,537)
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Net cash used in investing
activities (8,205,546) (694,884)
------------ ------------
</TABLE>
(Continued)
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1ST STATE BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
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<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 1,700,100 $ 1,530,672
Increase in advance payments by borrowers for
property taxes and insurance 141,402 159,116
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Net cash provided by financing
activities 1,841,502 1,689,788
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Net decrease in cash and cash
equivalents (3,852,504) (1,012,780)
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 $27,224,550 $13,977,633
=========== ===========
Payments are shown below for the following:
Interest $ 2,839,772 $ 2,618,555
=========== ===========
Income Taxes $ 0 $ 141,000
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</TABLE>
See accompanying notes to consolidated financial statements.
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1ST STATE BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 (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.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements (except for the statement of financial condition 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 month period ended
December 31, 1998 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
Prospectus of the Company, dated February 11, 1999.
All financial statements of 1st State Bancorp, Inc. have
been omitted because 1st State Bancorp, Inc. has not yet issued
any stock, has no assets and no liabilities and has 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.
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The Conversion is subject to certain conditions, including
the prior approval of the Plan at a special meeting of members
to be held on March 29, 1999 (the "Special Meeting").
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 that 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 month periods ended
December 31, 1998 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 three months ended December 31, 1998 and 1997 consisted of
unrealized gains and losses on certain investment securities.
Comprehensive income for the three months ended December 31,
1998 and 1997 amounted to $741,768 and $773,048, respectively.
7<PAGE>
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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 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. 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 identified one vendor and one system as mission
critical. This vendor represents that its system is Year 2000
compliant.
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<PAGE>
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The third phase, renovation and/or replacement, includes
obtaining vendor certification and/or the necessary upgrades and
enhancements to ensure that our existing systems are Year 2000
compliant. We are continuing to follow up with third party
vendors as necessary. Our mission critical system has been
successfully tested for Year 2000 compliance.
The fourth phase, testing, is currently underway. The
hardware has been successfully tested, and we have begun testing
the software. We have received representations from our mission
critical third party vendors that they are Year 2000 compliant.
Initial testing of mission critical processes is complete.
Regression testing has been completed and is being reviewed by
the Year 2000 Committee. Testing on nonmission critical
processes is underway and should be completed by March 31, 1999.
The last phase, implementation, will commence in the second
quarter of 1999, ending with the first quarter of 2000. We are
currently in the process of developing contingency plans for
processes that are not Year 2000 compliant. We expect this
contingency plan to be ready by March 31, 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 $5,000 for the three months
ended December 31, 1998. 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 DECEMBER 31, 1998 AND
SEPTEMBER 30, 1998
Total assets increased by $3.0 million, or 1.05% from
$288.2 million at September 30, 1998 to $291.2 million at
December 31, 1998. Asset growth was funded during the period by
an increase of $1.7 million in deposits, as deposits increased
from $235.7 million at September 30, 1998 to $237.4 million at
December 31, 1998.
Investment securities, both available for sale and held to
maturity, increased a combined total of $15.6 million, or 39.0%,
from $40.1 million at September 30, 1998 to $55.7 million at
December 31, 1998. During the quarter ended December 31, 1998,
we purchased $19.8 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 decreased $3.9 million, or 12.4%, from $31.1 million
at September 30, 1998 to $27.2 million at December 31, 1998.
Interest rates continued to be low during the quarter,
which encouraged borrowers to refinance their mortgage loans
into fixed-rate loans. As a result, we originated $17.8 million
in loans held for sale during the quarter. We sold $19.1
million of loans held for sale during the quarter. As a result,
our loans held for sale decreased $1.4 million, or 18.0%, from
$7.5 million at September 30, 1998 to $6.2 million at December
31, 1998. In addition, our loans
9<PAGE>
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receivable, net decreased by $7.6 million, or 3.9%, from $196.8
million at September 30, 1998 to $189.1 million at December 31,
1998.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND 1997
Net Income. We had $751,000 of net income for the quarter
ended December 31, 1998, compared to $758,000 of net income for
the quarter ended December 31, 1997, representing a decrease of
$7,300, or 1.0%. The principal reason for the decrease was an
$84,000 decrease in net interest income. Increases in other
income of $274,000 were largely offset by increases of $222,000
in operating expenses.
Interest Income. Total interest income was $5.1 million
for the quarter ended December 31, 1998, as compared to $5.0
million for the quarter ended December 31, 1997, representing an
increase of $141,000, or 2.8%. Average interest-earning assets
increased by $28.2 million, or 11.6%, from $243.3 million for
the quarter ended December 31, 1997 to $271.6 for the quarter
ended December 31, 1998. The growth in average interest-earning
assets was offset in part by a 64 basis point decrease in
average yield on interest-earning assets from 8.19% for the
three months ended December 31, 1997 to 7.55% for the three
months ended December 31, 1998.
Interest Expense. Total interest expense was $2.8 million
for the quarter ended December 31, 1998, as compared to $2.6
million for the quarter ended December 31, 1997, representing an
increase of $225,000, or 8.6%. Average interest-bearing
liabilities increased $23.2 million, or 10.3%, from $224.8
million for the quarter ended December 31, 1997 to $248.0
million for the quarter ended December 31, 1998. The cost of
funds decreased slightly from 4.66% for the three months ended
December 31, 1997 to 4.59% for the same period in 1998.
Net Interest Income. Despite our increases in net earning
assets of $5.0 million, our net interest rate spread decreased
from 3.53% to 2.96% and the net interest margin decreased from
3.88% to 3.36%. These decreases reflected our increased level
of investment securities and our decreased level of loans.
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 $60,000 for
the three months ended December 31, 1998 and 1997.
Other Income. Other income increased $274,000, or 70.0%,
from $391,000 for the quarter ended December 31, 1997 to
$665,000 for the quarter ended December 31, 1998. As interest
rates continued to remain low, we sold $19.1 million of loans
during the quarter to reduce our interest rate risk associated
with long-term fixed-rate mortgages. We recognized income of
$337,000 from the origination and sale of these loans. This is
an increase of $255,000, or 308.6%, from the same quarter in the
prior year, when we sold $46 million of loans.
Operating Expenses. Total operating expenses increased
$222,000, or 14.8%, from $1.5 million for the quarter ended
December 31, 1997 to $1.7 million for the quarter ended December
31, 1998. Compensation expense increased $137,000, or 13.6%,
from $1.0 million for the quarter ended December 31, 1997 to
$1.1 million for the quarter ended December 31, 1998.
Income Tax Expense. Income tax expense was $414,000 for
the three months ended December 31, 1998 resulting in an
effective rate of 35.5% compared to $439,000 or 36.7% for the
same period in 1997.
ASSET QUALITY
At December 31, 1998, we had approximately $453,000 of
loans in nonaccrual status as compared with $263,000 at
September 30, 1998 and $417,000 at December 31, 1997. At
December 31, 1998 and 1997, 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
10<PAGE>
<PAGE>
December 31, 1998 and 1997. The allowance for loan losses was
$3,279,000 or 1.70% of outstanding loans at December 31, 1998.
This compares to 1.61% at September 30, 1998 and 1.38% at
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had net worth of $26.7 million, as
compared to $26.0 million at September 30, 1998. At December
31, 1998, we had a Tier 1 risk-based capital to risk-weighted
assets ratio of 16.8%. At December 31, 1998, we had Tier 1
leverage capital, Tier 1 risk-based capital, and total risk-
based capital of $26.6 million, $26.6 million and $28.8 million,
respectively. At December 31, 1998, 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 24.7% for the three
months ended December 31, 1998. 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 December
31, 1998, cash and cash equivalents totaled $27.2 million. We
have other sources of liquidity should we need additional funds.
During the three months ended December 31, 1998 and 1997, we
sold loans totaling $19.1 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 $18.9 million at December 31, 1998.
We anticipate that we will have sufficient funds available
to meet our current commitments. At December 31, 1998, we had
$3.7 million in commitments to originate new loans, $37.0
million in unfunded commitments to extend credit under existing
equity line and commercial lines of credit and $1.0 million in
standby letters of credit. At December 31, 1998, 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 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 in
1998 without any significant impact on our financial statements
as the chief operating decision maker reviews the results of
operations of 1st State Bank and its subsidiary as a single
enterprise.
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 in 1998 with
no impact on our financial statements.
11<PAGE>
<PAGE>
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 2000 without 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 Related 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 plan to adopt SFAS No. 134 in 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.
12<PAGE>
<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) No reports on Form 8-K were filed during the quarter
ended December 31, 1998.
13<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: March 26, 1999 /s/ James C. McGill
-------------------------------------
James C. McGill
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 26 , 1999 /s/ A. Christine Baker
-------------------------------------
A. Christine Baker
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
14
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