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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 December 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.
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(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
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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 X No
--- ---
As of February 10, 2000, the issuer had 3,163,125 shares 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, 1999 (unaudited) and September 30, 1999. . . . . 1
Consolidated Statements of Income for the
Three Months Ended December 31, 1999 and
1998 (unaudited) . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the Three Months
Ended December 31, 1999 and 1998 (unaudited) . . . . 3
Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 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. . . . . . . . . . . . . . . . . . . . .12
PART II. OTHER INFORMATION
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 BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
At At
December 31, September 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,921,183 $ 15,657,202
Investment securities:
Held to maturity (fair value of
$81,828,013 and $82,541,457 at
December 31, 1999 and September
30, 1999, respectively) 84,226,566 84,228,343
Available for sale (cost of
$10,138,604 and $11,241,966
at December 31, 1999 and
September 30, 1999, respectively) 9,820,604 11,035,966
Loans held for sale, at lower of cost or
fair value 12,762,730 12,143,063
Loans receivable (net of allowance for loan
losses of $3,513,439 and $3,454,373 at
December 31, 1999 and September 30, 1999,
respectively) 202,041,054 195,292,344
Federal Home Loan Bank stock, at cost 1,550,000 1,259,600
Premises and equipment 7,227,531 7,282,361
Accrued interest receivable 2,444,761 2,652,134
Other assets 3,511,498 3,374,915
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Total assets $335,505,927 $332,925,928
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $228,790,678 $234,094,735
Advances from Federal Home Loan Bank 31,000,000 22,000,000
Advance payments by borrowers for
property taxes and insurance 389,900 232,973
Other liabilities 2,776,306 4,983,039
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Total liabilities 262,956,884 261,310,747
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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 31,631
Additional paid in capital 49,218,198 49,216,648
Unearned ESOP shares (4,327,703) (4,469,611)
Deferred compensation 2,590,781 2,373,485
Treasury stock for deferred compensation (2,590,781) (2,373,485)
Retained income - substantially restricted 27,817,517 26,959,913
Accumulated other comprehensive income
(loss) - net unrealized gain (loss) on
investment securities available for sale (190,600) (123,400)
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Total stockholders' equity 72,549,043 71,615,181
------------ ------------
Total liabilities and stockholders'
equity $335,505,927 $332,925,928
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
1
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1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------
1999 1998
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<S> <C> <C>
Interest income:
Interest and fees on loans $4,392,179 $4,077,566
Interest and dividends on investments 1,471,461 726,492
Overnight deposits 92,434 319,685
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Total interest income 5,956,074 5,123,743
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Interest expense:
Deposit accounts 2,334,291 2,565,154
Borrowings 355,480 280,452
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Total interest expense 2,689,771 2,845,606
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Net interest income 3,266,303 2,278,137
Provision for loan losses 60,000 60,000
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Net interest income after provision for
loan losses 3,206,303 2,218,137
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Other income:
Service fees on loans sold 22,873 25,234
Customer service fees 140,993 146,550
Commission from sales of annuities and
mutual funds 79,368 128,756
Mortgage banking income (loss), net (82,807) 337,266
Other 46,125 27,425
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Total other income 206,552 665,231
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Operating expenses:
Compensation and related benefits 1,175,580 1,109,359
Occupancy and equipment 244,414 256,413
Deposit insurance premiums 33,365 33,813
Other expenses 290,313 319,015
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Total operating expenses 1,743,672 1,718,600
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Income before income taxes 1,669,183 1,164,768
Income taxes 577,000 414,000
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Net income $1,092,183 $ 750,768
========== ==========
Earnings per share:
Basic $ 0.37 --
Diluted $ 0.37 --
</TABLE>
See accompanying notes to the consolidated financial statements.
2
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1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Treasury Accumulated
Additional Unearned Stock for Other Total
Common Paid-in ESOP Deferred Deferred Retained Comprehensive Stockholders'
Stock Capital Shares Compensation Compensation Income Income (Loss) Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1998 $25,872,605 93,000 25,965,605
Comprehensive income:
Net income 750,768 750,768
Other comprehensive
income-unrealized
gain on securities
available-for-
sale net of
income 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 26,716,373
=========== ======== ==========
Balance at September
30, 1999 $31,631 49,216,648 (4,469,611) 2,373,485 (2,373,485) 26,959,913 (123,400) 71,615,181
Comprehensive income:
Net income 1,092,183 1,092,183
Other comprehensive
income-unrealized
gain on securities
available-for-
sale net of
income taxes of
$44,800 (67,200) (67,200)
----------
Total comprehensive
income 1,024,983
----------
Release of ESOP
shares 1,550 141,908 143,458
Deferred
compensation 217,296 217,296
Treasury stock
held for deferred
compensation (217,296) (217,296)
Cash dividend
declared (253,050) (253,050)
Cash dividend on
unallocated
ESOP shares 18,471 18,471
----------- -------- ----------
Balance at December
31, 1999 $31,631 49,218,198 (4,327,703) 2,590,781 (2,590,781) 27,817,517 (190,600) 72,549,043
=========== ======== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
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1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,092,183 $ 750,768
Adjustment to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for loan losses 60,000 60,000
Depreciation 118,032 125,191
Deferred tax benefit (30,000) --
Amortization of premiums and
discounts, net (9,419) 8,651
Release of ESOP shares 143,458 --
Loan origination fees and unearned
discounts deferred, net of current
amortization 31,303 3,889
Net loss on sale of loans 152,162 53,405
Proceeds from loans held for sale 2,519,149 19,064,560
Originations of loans held for sale (3,288,104) (17,763,498)
Increase in other assets (61,783) (300,035)
Decrease in accrued interest receivable 207,373 65,778
Increase (decrease) in other
liabilities (2,206,733) 442,831
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Net cash provided by (used in)
operating activities (1,272,379) 2,511,540
----------- ------------
Cash flows from investing activities:
Purchase of FHLB stock (290,400) --
Purchases of investment securities held
to maturity (1,996,250) (15,750,000)
Purchases of investment securities
available for sale -- (4,000,000)
Proceeds from maturities of investment
securities available for sale 1,106,131 1,112,442
Proceeds from maturities of investment
securities held to maturity 2,004,677 3,000,000
Net decrease (increase) in loans receivable (6,842,887) 7,576,431
Purchases of premises and equipment (63,202) (144,419)
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Net cash used in investing
activities (6,081,931) (8,205,546)
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(Continued)
</TABLE>
4
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1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------
1999 1998
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<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $(5,304,057) $ 1,700,100
Advances from the Federal Home Loan Bank 11,000,000 --
Repayments of advances from the Federal
Home Loan Bank (2,000,000) --
Dividends on common stock (234,577) --
Increase in advance payments by borrowers
for property taxes and insurance 156,929 141,402
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Net cash provided by financing
activities 3,618,291 1,841,502
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Net decrease in cash and cash
equivalents (3,736,019) (3,852,504)
Cash and cash equivalents at beginning of
period 15,657,202 31,077,054
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Cash and cash equivalents at end
of period $11,921,183 $27,224,550
=========== ===========
Payments are shown below for the following:
Interest $ 2,622,073 $ 2,839,772
=========== ===========
Income taxes $ 261,000 $ --
=========== ===========
Deferred compensation to be settled in
Company's stock $ 217,296 $ --
=========== ===========
Unrealized gains (losses) on investment
securities available for sale $ (112,000) $ (14,000)
=========== ===========
Dividends declared and payable $ 234,579 $ --
=========== ===========
Cash dividends on unallocated ESOP shares $ 18,471 $ --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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1ST STATE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (UNAUDITED) AND SEPTEMBER 30, 1999
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 $1,363,000, 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 $ 46,247,000. 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, 1999, which is derived from the September 30, 1999
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, 1999 are not necessarily indicative of the results
of operations that may be expected for the year ended September
30, 2000.
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.
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 Form 10-Q include periods prior to December 31, 1999, such
statements include only the accounts and operations of the Bank
for periods prior to April 23,1999.
<PAGE>
NOTE 3. EARNINGS PER SHARE
Earnings per share computations have been made only for the
periods subsequent to the Conversion. Since the Company has no
potential dilutive common stock there is no difference in the
computations of basic and diluted earnings per share. For
purposes of computing basic and diluted earnings per share,
weighted average shares outstanding excludes unallocated ESOP
shares that have not been committed to be released.
6
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<PAGE>
The components of the earnings per share computation for
1999 are as follows:
Weighted average shares outstanding 3,163,125
Less: Unallocated ESOP shares 227,223
Basic and diluted weighted average shares
outstanding 2,935,902
NOTE 4. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The Company sponsors an employee stock ownership plan (the
"ESOP") whereby an aggregate number of shares amounting to
253,050 or 8% of the stock issued in the Conversion was
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 December
31, 1999, 7,331 shares of stock were committed to be released
and approximately $143,000 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 three months ended December 31, 1999 and 1998 consisted of
unrealized gains and losses on certain investment securities
available for sale. Comprehensive income for the three months
ended December 31, 1999 and 1998 amounted to $1,024,983 and
$741,678, 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 addressed 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. If this were not
corrected, some systems would have been at risk of not being
able to function properly.
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 led the Company's efforts
to ensure that we would be ready for the Year 2000. Our board
of directors 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 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 and one 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 the Company. The hardware
and software purchased were Year 2000 compliant. 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.
We contacted all of our significant commercial borrowers
and determined that they were progressing appropriately with
their efforts on Year 2000 issues. In addition, we have taken
into consideration a commercial loan applicant's Year 2000
preparedness and would 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 were Year 2000 compliant. As noted above, the hardware
and software purchased as part of our system conversion was Year
2000 compliant. We contacted significant third parties with
whom we interface to complete customer transactions. These
vendors advised us that they completed the renovation phase of
their mission critical processes, and that their validation
processes were 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
was successfully tested. In addition, we have received
representations from our mission critical third party vendor
that they were Year 2000 compliant. Testing of mission critical
software applications and external testing with significant
third parties was completed.
The fifth and final phase, implementation, began in the
second quarter of calendar 1999. In accordance with regulatory
guidelines, we developed a business resumption contingency plan
for our computer processes, including the use of alternative
systems and manual processing of certain critical operations.
We have operated and evaluated our computer operating
systems following January 1, 2000, and have not identified any
errors or experienced any computer system malfunction. We will
continue to monitor our information systems to assess whether
our systems are at risk of misinterpreting any future dates and
will maintain appropriate contingency plans to prevent any
potential system malfunction or correct any system failures.
We have not been informed of any such problem experienced
by our vendors or customers. It is too soon to conclude that
there will not be any problems arising from the century date
change. We will continue to monitor external entities and
customers to assure that they have not experienced any Year 2000
problems that could impact their relationship with us.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND
SEPTEMBER 30, 1999
Total assets increased by $2.6 million, or 0.8% from $332.9
million at September 30, 1999 to $335.5 million at December 31,
1999. Asset growth was funded during the period by a $9.0
million, or 40.9% increase in FHLB advances. Advances at
December 31, 1999 and September 30, 1999 were $31.0 million and
$22.0 million, respectively. The increase was principally to
replace deposit outflow and fund loan growth. Total deposits
decreased by $5.3 million, or 2.3% from $234.1 million at
September 30, 1999 to $$228.8 million at December 31, 1999.
Certificates of deposits decreased $5.6 million, or 3.6% from
$157.7 million at September 30, 1999 to $152.1 million at
December 31, 1999. Of this decrease, certificates of deposits
over $100,000 decreased by $3.4 million.
Investment securities, both available for sale and held to
maturity, decreased a combined total of $1.2 million, or 1.3%,
from $95.2 million at September 30, 1999 to $94.0 million at
December 31, 1999. During the three months ended December 31,
1999, we purchased $2.0 million of short-term government agency
securities and we received $3.2 million from the maturity of
like securities. Cash and cash equivalents decreased $3.8
million, or 24.2%, from $15.7 million at September 30, 1999 to
$11.9 million at December 31, 1999. Invested cash decreased $2.4
million to fund loan growth during the quarter.
Loans receivable, net increased by $6.7 million, or 3.4%,
from $195.3 million at September 30, 1999 to $202.0 million at
December 31, 1999. Commercial real estate loans increased by
$3.1 million, or 9.75%, compared to September 30, 1999 levels
reflecting current loan demand. As interest rates increased
during the quarter borrowers turned to adjustable rate mortgage
products which we hold in the loan portfolio. One to four
family residential loans increased $1.2 million during the
quarter. We continued to emphasize consumer loans and equity
lines of credit which increased $662,000 and $1.6 million,
respectively. Loans held for sale increased $620,000 during the
quarter.
9
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<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999 AND 1998
Net Income. We recorded net income of $1.1 million for the
quarter ended December 31, 1999, compared to net income of
$751,000 for the quarter ended December 31, 1998, representing
an increase of $341,000, or 45.5%. The principal reason for the
increase was the increase in the net interest income which was
offset in part by a decrease in other income and increased
income taxes. For the three months ended December 31, 1999 both
basic and diluted earnings per share were $0.37.
Interest Income. Total interest income was $6.0 million
for the quarter ended December 31, 1999, as compared to $5.1
million for the quarter ended December 31, 1998, representing an
increase of $832,000, or 16.3%. Average interest-earning assets
increased by $42.1 million, or 15.5 %, from $271.6 million for
the quarter ended December 31, 1998 to $313.7 million for the
quarter ended December 31, 1999. The growth in average
interest-earning assets was primarily from the investment of the
net proceeds from the Conversion. We invested excess overnight
funds into higher yielding government and agency securities and
loans. Adding to the increase in interest income was a 4 basis
point increase in the average yield on interest-earning assets
from 7.55% for the three months ended December 31, 1998 to 7.59%
for the three months ended December 31, 1999. The increased
volume of interest-earning assets raised interest income by
approximately $752,000 and the increased yield increased
interest income by approximately $80,000.
Interest Expense. Total interest expense was $2.7 million
for the quarter ended December 31, 1999, as compared to $2.8
million for the quarter ended December 31, 1998, representing a
decrease of $156,000, or 5.6%. Average interest-bearing
liabilities increased $663,000, or 0.3%, from $248.0 million for
the quarter ended December 31, 1998 to $248.7 million for the
quarter ended December 31, 1999. The cost of funds decreased 26
basis points from 4.59% for the three months ended December 31,
1998 to 4.33% for the same period in 1999. The decrease in the
rate paid on interest-bearing liabilities reduced interest
expense by approximately $182,000 and the increase in average
outstandings raised interest expense by approximately $26,000.
Net Interest Income. Net interest income, the difference
between interest earned on loans and investments and interest
paid on interest-bearing liabilities, increased by $988,000 or
43.0% from $2.3 million for the quarter ended December 31, 1998
to $3.3 million for the quarter ended December 31, 1999. Net
earning assets increased by $41.5 million while our net
interest rate spread increased 31 basis points from 2.96% to
3.27% and the net interest margin increased 80 basis points from
3.36% to 4.16%. The increase in net spread resulted from our
increased level of loans and investments and higher 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 December 31, 1999 and 1998.
Other Income. Other income decreased $459,000, or 67.5%,
from $665,000 for the quarter ended December 31, 1998 to
$207,000 for the quarter ended December 31, 1999. Long-term
interest rates increased during the quarter ended December 31,
1999, which slowed the origination and sale of fixed rate
mortgage loans. As a result, mortgage banking income, net
decreased $420,000, or 124.6%, from income of $337,000 for the
quarter ended December 31, 1998 to a loss of $83,000 for the
quarter ended December 31, 1999. During the quarter ended
December 31, 1999, we sold fixed-rate mortgage loans of $2.5
million and recognized gains of $36,000 from the sale of these
loans. The increase in interest rates during the quarter caused
the fair market value of the $12.8 million of loans held for
sale to decline below cost. We charged earnings with a loss of
$119,000, which offset the gains on the loans sold and resulted
in a net loss of $83,000 for the three months ended December 31,
1999. During the quarter ended December 31, 1998, we sold
fixed-rate mortgage loans of $19.0 million and recognized gains
of $367,000 from the sale of these loans. In addition, during
the quarter ended December 31, 1999, commissions from sales of
annuities and mutual funds decreased $49,000 or 38.4% from
$129,000 for the quarter ended December 31, 1998 to $79,000
for the quarter ended December 31, 1999. The decrease resulted
from lower sales of these products. Sales of annuities and
mutual funds decreased $1.4 million, or 56.0% from $2.5 million
during the quarter ended December 31, 1998 to $1.1 million for
the quarter ended December 31, 1999.
10
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<PAGE>
Operating Expenses. Total operating expenses were $1.7
million for each of the quarters ended December 31, 1999 and
1998. Compensation and related benefits expense increased
$66,000, or 6.0% from $1.1 million for the quarter ended
December 31, 1998 to $1.2 million for the quarter ended December
31, 1999 due to normal salary increases and increases in the
number of employees.
Income Tax Expense. Income tax expense increased $163,000,
or 39.4%, from $414,000 for the quarter ended December 31, 1998
to $577,000 for the quarter ended December 31, 1999. The
increase resulted from a $504,000 increase in income before
income taxes. The effective tax rates were 34.6% and 35.5% for
the quarters ended December 31, 1999 and 1998, respectively.
The decrease in rate results from our increased investment in
state tax-exempt securities in 1999.
ASSET QUALITY
At December 31, 1999, we had approximately $330,000 of
loans in nonaccrual status as compared with $366,000 at
September 30, 1999 and $442,000 at December 31, 1998. At
December 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 December 31, 1999 and 1998. The allowance for loan
losses was $3,513,000 or 1.71% of outstanding loans at December
31, 1999. This compares to 1.74% at September 30, 1999 and
1.71% at December 31, 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 December 31,
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 December 31, 1999, cash and cash equivalents totaled
$11.9 million. We have other sources of liquidity should we need
additional funds. During the three months ended December 31,
1999 and 1998, we sold loans totaling $2.5 million and $19.0
million, respectively. Additional sources of funds include FHLB
of Atlanta advances. Other potential sources of liquidity
include loans and investment securities designated as available
for sale, which totaled $22.6 million at December 31, 1999.
We anticipate that we will have sufficient funds available
to meet our current commitments. At December 31, 1999, we had
$4.3 million in commitments to originate new loans, $53.3
million in unfunded commitments to extend credit under existing
equity lines and commercial lines of credit and $467,000 in
standby letters of credit. At December 31, 1999, certificates
of deposit which are scheduled to mature within one year totaled
$117.2 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 December 31, 1999 and is deemed to be "well
capitalized."
11
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<PAGE>
ACCOUNTING ISSUES
Accounting for Derivative Instruments and Hedging
Activities. In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133
("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities.
Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities Deferral of
the Effective Date of FASB Statement No. 133 an amendment of
FASB No. 133" delayed the effective date of this statement for
one year. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company plans
to adopt SFAS 133 in fiscal year 2000 without any impact on its
consolidated financial statements as the Company does not have
any derivative financial instruments and is not involved in any
hedging activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company monitors whether material changes in market
risk have occurred since September 30, 1999. The Company does
not believe that any material adverse changes in market risk
exposures occurred during the three months ended December 31,
1999.
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) There were no Current Report on Form 8-K filed
during this quarter.
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: February 10, 2000 /s/ James C. McGill
--------------------------------
James C. McGill
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 10, 2000 /s/ A. Christine Baker
--------------------------------
A. Christine Baker
Executive Vice President,
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
14
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 9,676,579
<INT-BEARING-DEPOSITS> 2,244,604
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,820,604
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<ALLOWANCE> 3,513,439
<TOTAL-ASSETS> 335,505,927
<DEPOSITS> 228,790,678
<SHORT-TERM> 11,000,000
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<COMMON> 27,626,917
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<EXPENSE-OTHER> 1,743,672
<INCOME-PRETAX> 1,669,183
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<NET-INCOME> 1,092,183
<EPS-BASIC> 0.37
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<YIELD-ACTUAL> 3.27
<LOANS-NON> 330,000
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