<PAGE>
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] 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
- --------------
N/A
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of May 10, 2000, the issuer had 3,163,125 shares of
common stock issued and outstanding.
<PAGE>
<PAGE>
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of March
31, 2000 (unaudited) and September 30, 1999. . . . 1
Consolidated Statements of Income for the
Three Months Ended March 31, 2000 and
1999 (unaudited) . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income for the
Six Months Ended March 31, 2000 and
1999 (unaudited) . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the Six Months
Ended March 31, 2000 and 1999 (unaudited). . . . . 4
Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2000 and
1999 (unaudited) . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION
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
<PAGE>
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
AT AT
MARCH 31, SEPTEMBER 30,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 21,371,784 $ 15,657,202
Investment securities:
Held to maturity (fair value of $80,480,070
and $82,541,457 at March 31, 2000 and
September 30, 1999, respectively) 83,039,952 84,228,343
Available for sale (cost of $10,104,329
and $11,241,966 at March 31, 2000 and
September 30, 1999, respectively) 9,753,329 11,035,966
Loans held for sale, at lower of cost or
fair value 3,753,080 12,143,063
Loans receivable (net of allowance for loan
losses of $3,573,846 and $3,454,373 at
March 31, 2000 and September 30, 1999,
respectively) 212,278,895 195,292,344
Federal Home Loan Bank stock, at cost 1,400,000 1,259,600
Premises and equipment 7,664,846 7,282,361
Accrued interest receivable 2,739,552 2,652,134
Other assets 3,573,264 3,374,915
------------ ------------
Total assets $345,574,702 $332,925,928
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $239,995,771 $234,094,735
Advances from Federal Home Loan Bank 28,000,000 22,000,000
Advance payments by borrowers for property
taxes and insurance 579,972 232,973
Other liabilities 3,459,795 4,983,039
------------ ------------
Total liabilities 272,035,538 261,310,747
------------ ------------
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 49,211,361 49,216,648
Unearned ESOP shares (4,188,194) (4,469,611)
Deferred compensation 2,603,381 2,373,485
Treasury stock for deferred compensation (2,603,381) (2,373,485)
Retained income - substantially restricted 28,698,366 26,959,913
Accumulated other comprehensive income
(loss) - net unrealized loss on investment
securities available for sale (214,000) (123,400)
------------ ------------
Total stockholders' equity 73,539,164 71,615,181
------------ ------------
Total liabilities and stockholders'
equity $345,574,702 $332,925,928
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
1
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------- -------
<S> <C> <C>
Interest income:
Interest and fees on loans $4,442,131 $3,910,451
Interest and dividends on investments 1,432,874 912,252
Overnight deposits 112,764 366,796
---------- ----------
Total interest income 5,987,769 5,189,499
---------- ----------
Interest expense:
Deposit accounts 2,436,297 2,439,032
Borrowings 365,281 269,499
---------- ----------
Total interest expense 2,801,578 2,708,531
---------- ----------
Net interest income 3,186,191 2,408,968
Provision for loan losses 60,000 60,000
---------- ----------
Net interest income after provision for
loan losses 3,126,191 2,420,968
---------- ----------
Other income:
Loan servicing fees 21,804 26,613
Customer service fees 140,425 129,076
Commission from sales of annuities and
mutual funds 115,549 102,351
Mortgage banking income, net 25,075 79,634
Other 38,646 38,742
---------- ----------
Total other income 341,499 376,416
---------- ----------
Operating expenses:
Compensation and related benefits 1,107,593 957,668
Occupancy and equipment 255,489 194,645
Deposit insurance premiums 12,404 35,654
Other expenses 368,773 289,946
---------- ----------
Total operating expenses 1,744,259 1,477,913
---------- ----------
Income before income taxes 1,723,431 1,319,471
Income taxes 608,000 453,000
---------- ----------
Net income $1,115,431 $ 866,471
========== ==========
Earnings per share:
Basic $ 0.38 --
Diluted $ 0.38 --
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 8,834,310 $ 7,958,710
Interest and dividends on investments 2,904,335 1,638,745
Overnight deposits 205,198 686,480
----------- -----------
Total interest income 11,943,843 10,283,935
----------- -----------
Interest expense:
Deposit accounts 4,770,588 5,004,187
Borrowings 720,761 549,950
----------- -----------
Total interest expense 5,491,349 5,554,137
----------- -----------
Net interest income 6,452,494 4,729,798
Provision for loan losses 120,000 120,000
----------- -----------
Net interest income after provision
for loan losses 6,332,494 4,609,798
----------- -----------
Other income:
Loan servicing fees 44,677 51,847
Customer service fees 281,418 275,625
Commission from sales of annuities and
mutual funds 194,917 229,637
Mortgage banking income (loss), net (57,732) 446,207
Other 84,771 67,788
----------- -----------
Total other income 548,051 1,071,104
----------- -----------
Operating expenses:
Compensation and related benefits 2,283,173 2,067,626
Occupancy and equipment 501,184 468,573
Deposit insurance premiums 45,769 69,467
Other expenses 657,805 590,996
----------- -----------
Total operating expenses 3,487,931 3,196,662
----------- -----------
Income before income taxes 3,392,614 2,484,240
Income taxes 1,185,000 867,000
----------- -----------
Net income $ 2,207,614 $ 1,617,240
=========== ===========
Earnings per share:
Basic $ 0.75 --
Diluted $ 0.75 --
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME FOR THE SIX MONTHS
ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Treasury Accumulated
Additional Unearned Deferred stock for other Total
Common paid-in ESOP comp- deferred Retained comprehensive stockholders'
stock capital shares ensation 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 -- -- -- -- -- 1,617,240 -- 1,617,240
Other comprehensive
income-unrealized
gain on securities
available-for-
sale net of
income taxes of
$52,000 -- -- -- -- -- -- (82,000) (82,000)
----------
Total comprehensive
income 1,535,240
Balance at March
31, 1999 $ -- -- -- -- -- 27,489,845 11,000 27,500,845
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 -- -- -- -- -- 2,207,614 -- 2,207,614
Other comprehensive
income-unrealized
loss on securities
available-for-
sale net of
income taxes of
$54,000 -- -- -- -- -- -- (90,600) (90,600)
----------
Total comprehensive
income 2,117,014
Release of ESOP
shares -- (5,287) 281,417 -- -- -- -- 276,130
Deferred
compensation -- -- -- 229,896 -- -- -- 229,896
Treasury stock
held for deferred
compensation -- -- -- -- (229,896) -- -- (229,896)
Cash dividend
declared -- -- -- -- -- (506,100) -- (506,100)
Cash dividend on
unallocated
ESOP shares -- -- -- -- -- 36,939 -- 36,939
Balance at March
31, 2000 $31,631 49,211,361 (4,188,194) 2,603,381 (2,603,381) 26,698,366 (214,000) 73,539,164
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,207,614 $ 1,617,240
Adjustment to reconcile net income to
net cash provided by (used in) operating
activities:
Provision for loan losses 120,000 120,000
Depreciation 238,739 201,926
Deferred tax expense (benefit) (115,000) --
Amortization of premiums and
discounts, net (17,453) 9,688
Release of ESOP shares 276,130 --
Loan origination fees and unearned
discounts deferred, net of current
amortization 32,820 68,996
Net loss on sale of loans 361,567 91,174
Proceeds from loans held for sale 9,209,435 26,931,170
Originations of loans held for sale (6,277,617) (29,574,843)
Increase in other assets (574,130) (396,967)
Increase in accrued interest receivable (87,418) (252,211)
Decrease in other liabilities (1,523,244) (2,442,817)
------------ ------------
Net cash provided by (used in)
operating activities 3,851,443 (3,262,644)
------------ ------------
Cash flows from investing activities:
Purchase of FHLB stock (430,800) --
Redemption of FHLB stock 290,400 --
Purchases of investment securities held
to maturity (3,996,250) (30,748,750)
Purchases of investment securities available
for sale -- (4,000,000)
Proceeds from maturities of investment
securities available for sale 2,040,166 1,222,691
Proceeds from maturities of investment
securities held to maturity 4,299,565 11,000,000
Net decrease (increase) in loans receivable (12,042,773) 8,016,843
Purchases of premises and equipment (76,043) (181,036)
------------ ------------
Net cash used in investing
activities (9,915,735) (14,690,252)
------------ ------------
(Continued)
</TABLE>
5
<PAGE>
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 5,901,036 $ 85,311,147
Advances from the Federal Home Loan Bank 16,000,000 --
Repayments of advances from Federal Home
Loan Bank (10,000,000) --
Dividends on common stock (469,161) --
Increase in advance payments by borrowers
for property taxes and insurance 346,999 343,732
------------ ------------
Net cash provided by financing
activities 11,778,874 85,654,879
------------ ------------
Net increase in cash and cash
equivalents 5,714,582 67,337,983
Cash and cash equivalents at beginning of
period 15,657,202 31,077,054
------------ ------------
Cash and cash equivalents at end of period $ 21,371,784 $ 98,415,037
============ ============
Payments are shown below for the following:
Interest $ 5,428,826 $ 5,464,109
============ ============
Income taxes $ 1,316,825 $ 300,000
============ ============
Deferred compensation to be settled in
Company's stock $ 229,896 $ 0
============ ============
Unrealized losses on investment securities
available for sale $ (144,600) $ (134,000)
============ ============
Dividends declared and payable $ 234,579 $ 0
============ ============
Cash dividends on unallocated ESOP shares $ 36,939 $ 0
============ ============
Transfer of land from other assets to premises
and equipment $ 545,181 $ 0
============ ============
Transfer from loans available for sale to
loans receivable $ 5,099,472 $ 0
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 (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 consolidated financial statements (which
are unaudited, 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 and six month
periods ended March 31, 2000 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.
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.
7
<PAGE>
<PAGE>
The components of the earnings per share computation for the
three and six months ended March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Six Months Three Months
---------- ------------
<S> <C> <C>
Weighted average shares outstanding 3,163,125 3,163,125
Less: Unallocated ESOP shares 223,597 219,932
--------- ---------
Basic and diluted weighted average shares
outstanding 2,939,528 2,943,193
========= =========
</TABLE>
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 and six months ended
March 31, 2000, 7,251 and 14,582 shares of stock were committed
to be released and approximately $133,000 and $276,000 of
compensation expense was recognized, respectively.
NOTE 5. DEFERRED COMPENSATION
Directors and certain executive officers participate in a
deferred compensation plan, which was approved by the Board of
Directors on September 24, 1997. This plan generally provides
for fixed payments beginning after the participant retires.
Each participant is fully vested in his account balance under
the plan. Directors may elect to defer their directors' fees
and executive officers may elect to defer 25% of their salary
and 100% of bonus compensation.
Prior to the Conversion, amounts deferred by each
participant accumulated interest at a rate equal to the highest
rate of interest paid on the Bank's one-year certificates of
deposit. In connection with the Conversion, participants in the
plan were given the opportunity to prospectively elect to have
their deferred compensation balance earn a rate of return equal
to the total return of the Company's stock. All participants
elected this option concurrent with the Conversion, so the
Company purchased common stock in the Conversion on behalf of
these participants to fund this obligation. Refer to the
Company's notes to consolidated financial statements,
incorporated by reference in the Company's 1999 Annual Report
on Form 10-K for a discussion of the Company's accounting policy
with respect to this deferred compensation plan and the related
treasury stock purchased by the Company to fund this obligation.
During the six months ended March 31, 2000, deferred
compensation recognized was $229,696.
NOTE 5. COMPREHENSIVE INCOME
On October 1, 1998, the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose
financial statements. The statement requires that an enterprise
(a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings
and surplus in the equity section of a statement of financial
position. In accordance with the provisions of SFAS No. 130,
comparative financial statements presented for earlier periods
have been reclassified to reflect the provisions of the
statement.
Comprehensive income is the change in equity of an
enterprise during the period from transactions and other events
and circumstances from nonowner sources, and, accordingly,
includes both net income and amounts referred to as other
comprehensive income. The Bank's other comprehensive income for
the six months ended March 31, 2000 and 1999 consisted of
unrealized gains and losses on certain investment securities
available for sale. Comprehensive income for the six months
ended March 31, 2000 and 1999 amounted to $2,117,014 and
$1,535,240, respectively.
8
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will
likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties
including changes in economic conditions in our market area,
changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in our market area, and
competition that could cause actual results to differ materially
from historical earnings and those presently anticipated or
projected. We wish to caution you not to place undue reliance
on any such forward-looking statements, which speak only as of
the date made. We wish to advise you that the factors listed
above could affect our financial performance and could cause our
actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods
in any current statements.
We do not undertake, and specifically disclaim any
obligation, to publicly release the result of any revisions
which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND
SEPTEMBER 30, 1999
Total assets increased by $12.6 million or 3.8% from $332.9
million at September 30, 1999 to $345.6 million at March 31,
2000. Asset growth was funded during the period by a $5.9
million, or 2.5% increase in deposits and a $6.0 million, or
27.3% increase in FHLB advances. Deposits at March 31, 2000 and
September 30, 1999 were $240.0 million and $234.1 million,
respectively. The majority of the deposit increase was in
demand, savings and money market investment accounts, which
typically carry a lower interest rate than time deposits. At
March 31, 2000, 65.7% of the Company's deposits are time
deposits. Advances at March 31, 2000 and September 30, 1999 were
$28.0 million and $22.0 million, respectively.
Investment securities, both available for sale and held to
maturity, decreased a combined total of $2.5 million, or 2.6%,
from $95.3 million at September 30, 1999 to $92.8 million at
March 31, 2000. During the six months ended March 31, 2000, we
purchased $4.0 million of short-term government agency
securities and we received $6.3 million from the maturity of
like securities. Cash and cash equivalents increased $5.7
million, or 36.5%, from $15.7 million at September 30, 1999 to
$21.4 million at March 31, 2000. The increase in cash and cash
equivalents resulted primarily from the sale of $4.0 million of
mortgage loans which was funded on March 31, 2000.
Loans receivable, net increased by $17.0 million, or 8.7%,
from $195.3 million at September 30, 1999 to $212.3 million at
March 31, 2000. This increase was offset somewhat by an $8.4
million decrease in loans held for sale. During the quarter
ended March 31, 2000, the Company sold $6.9 million of loans
held for sale and transferred $5.1 million to loans, net. These
loans were transferred at the lower of their cost or fair value.
Commercial and commercial real estate loans increased $7.1
million, or 8.1%, compared to September 30, 1999 levels
reflecting current loan demand. Interest rates have risen to a
level that we are retaining more of our mortgage production. One
to four family residential loans increased $15.3 million, or
19.7%, compared to September 30, 1999 levels. We continue to
emphasize consumer loans and equity lines of credit, which
increased a combined total of $1.8 million since September 30,
1999.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH
31, 2000 AND 1999
Net Income. We recorded net income of $1.1 million for the
quarter ended March 31, 2000, compared to net income of $866,000
for the quarter ended March 31, 1999, representing an increase
of $249,000, or 28.8%. 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 operating
expenses and income taxes. For the three months ended March 31,
2000 both basic and diluted earnings per share were $0.38.
Earnings per share data is not available for the 1999 period
since the Company had no shares outstanding at that time.
9
<PAGE>
<PAGE>
Interest Income. Total interest income was $6.0 million
for the quarter ended March 31, 2000, as compared to $5.2
million for the quarter ended March 31, 1999, representing an
increase of $798,000, or 15.4%. Average interest-earning assets
increased by $35.6 million, or 12.5%, from $283.8 million for
the quarter ended March 31, 1999 to $319.4 million for the
quarter ended March 31, 2000. The growth in average
interest-earning assets resulted from increases in loans and
investments, which was partially offset by a decrease in
overnight funds. We invested excess overnight funds into higher
yielding government and agency securities and loans. Adding to
the increase in interest income was an 18 basis point increase
in the annualized average yield on interest-earning assets which
increased from 7.32% for the three months ended March 31, 1999
to 7.50% for the three months ended March 31, 2000. The
increased volume of interest-earning assets raised interest
income by approximately $678,000 and the increased yield
increased interest income by approximately $120,000.
Interest Expense. Total interest expense was $2.8 million
for the quarter ended March 31, 2000, as compared to $2.7
million for the quarter ended March 31, 1999, representing a
decrease of $93,000, or 3.4%. Average interest-bearing
liabilities increased $5.0 million, or 2.0%, from $247.4 million
for the quarter ended March 31, 1999 to $252.4 million for the
quarter ended March 31, 2000. Deposits decreased $1.3 million,
which was offset by increased FHLB advances of $6.3 million.
Some of the deposit outflow was used to fund 1st State stock
purchases. The cost of funds increased 6 basis points from 4.38%
for the three months ended March 31, 1999 to 4.44% for the same
period in 2000. The Federal Reserve raised interest rates two
times during the quarter ended March 31, 2000. The Company's
cost of funds is directly impacted by movements in short-term
interest rates. The increase in the rate paid on
interest-bearing liabilities increased interest expense by
approximately $39,000 and the increase in average outstandings
raised interest expense by approximately $54,000.
Net Interest Income. Net interest income, the difference
between interest earned on loans and investments and interest
paid on interest-bearing liabilities, increased by $705,000 or
28.4% from $2.5 million for the quarter ended March 31, 1999 to
$3.2 million for the quarter ended March 31, 2000. Net earning
assets increased by $30.7 million while our net interest rate
spread increased 12 basis points from 2.94% to 3.06% and the
annualized net interest margin increased 49 basis points from
3.50% to 3.99%. The increase in net interest rate 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 primarily 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
both the three months ended March 31, 2000 and 1999.
Other Income. Other income decreased $35,000, or 9.3%,
from $376,000 for the quarter ended March 31, 1999 to $341,000
for the quarter ended March 31, 2000. Mortgage banking income,
net decreased $55,000, or 68.5%, from $80,000 for the quarter
ended March 31, 1999 to $25,000 for the quarter ended March 31,
2000. Interest rates were higher in 2000 than in 1999 which
decreased our origination of mortgage loans and consequently our
mortgage banking income. During the quarter ended March 31,
2000, we sold fixed-rate mortgage loans of $6.7 million and
recognized $25,000 from the origination and sale of these loans.
During the quarter ended March 31, 1999, we sold fixed-rate
mortgage loans of $7.9 million and recognized income of $80,000
from the origination and sale of these loans. Customer service
fees increased $11,000, or 8.8% from $129,000 for the quarter
ended March 31, 1999 to $140,000 for the quarter ended March 31,
2000. This increase results from growth in the number of
transaction accounts. In addition, during the quarter ended
March 31, 2000, commissions from sales of annuities and mutual
funds increased $14,000 or 12.9% from $102,000 for the quarter
ended March 31, 1999 to $116,000 for the quarter ended March 31,
2000. The increase resulted from a slightly higher volume of
sales of annuities and mutual fund products.
Operating Expenses. Total operating expenses increased
$266,000, or 18.0% from $1.5 million for the quarter ended March
31, 1999 to $1.7 million for the quarter ended March 31, 2000.
Compensation and related benefits expense increased $150,000, or
15.7% from $1.0 million for the quarter ended March 31, 1999 to
$1.1 million for the quarter ended March 31, 2000. This
10
<PAGE>
<PAGE>
increase was primarily the result of the ESOP expense of
$133,000 for the quarter ended March 31, 2000, which was not
present in 1999. Occupancy and equipment expense increased
$61,000, or 31.3% from $195,000 million for the quarter ended
March 31, 1999 to $255,000 for the quarter ended March 31, 2000.
This increase was primarily the result of higher depreciation
expense. Other operating expense increased $79,000, or 27.2%
from $290,000 for the quarter ended March 31, 1999 to $369,000
for the quarter ended March 31, 2000. This increase results
from expenses of being a public company that were not present in
the prior year. We expect that operating expenses will continue
to increase in subsequent periods as a result of increased cost
associated with operating as a public company. Operating
expense is also expected to increase as the result of the
implementation of stock-based compensation plans.
Income Tax Expense. Income tax expense increased $155,000,
or 34.2%, from $453,000 for the quarter ended March 31, 1999 to
$608,000 for the quarter ended March 31, 2000. The increase
resulted from a $404,000 increase in income before income taxes.
The effective tax rates were 35.3% and 34.3% for the quarters
ended March 31, 2000 and 1999, respectively.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH
31, 2000 AND 1999
Net Income. We recorded net income of $2.2 million for the
six months ended March 31, 2000, compared to net income of $1.6
million for the six months ended March 31, 1999, representing an
increase of $590,000, or 36.5%. 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 increases in
operating expenses and income taxes. For the six months ended
March 31, 2000 both basic and diluted earnings per share were
$0.75. Earnings per share data is not available for the 1999
period since the Company had no shares outstanding at that time.
Interest Income. Total interest income was $11.9 million
for the six months ended March 31, 2000, as compared to $10.3
million for the six months ended March 31, 1999, representing an
increase of $1.7 million, or 16.1%. Average interest-earning
assets increased by $40.0 million, or 14.4 %, from $277.2
million for the six months ended March 31, 1999 to $317.2
million for the six months ended March 31, 2000. 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. Interest income also increased
because of an 11 basis point increase in the annualized average
yield on interest-earning assets from 7.42% for the six months
ended March 31, 1999 to 7.53% for the six months ended March 31,
2000. The increased volume of interest-earning assets raised
interest income by approximately $1.5 million and the increased
yield increased interest income by approximately $155,000.
Interest Expense. Total interest expense was $5.5 million
for the six months ended March 31, 2000, as compared to $5.6
million for the six months ended March 31, 1999, representing a
decrease of $63,000, or 1.1%. Average interest-bearing
liabilities increased $2.7 million, or 1.1%, from $247.7 million
for the six months ended March 31, 1999 to $250.4 million for
the six months ended March 31, 2000. The cost of funds
decreased 9 basis points from 4.48% for the six months ended
March 31, 1999 to 4.39% for the same period in 2000. The
decrease in the rate paid on interest-bearing liabilities
reduced interest expense by approximately $123,000 and the
increase in average outstandings raised interest expense by
approximately $60,000.
Net Interest Income. Net interest income, the difference
between interest earned on loans and investments and interest
paid on interest-bearing liabilities, increased by $1.7 million
or 36.4% from $4.7 million for the six months ended March 31,
1999 to $6.5 million for the six months ended March 31, 2000.
Net earning assets increased by $37.4 million while our net
interest rate spread increased 66 basis points from 3.41% to
4.07% and the annualized net interest margin increased 20 basis
points from 2.94% to 3.14%. The increase in net interest rate
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 primarily 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 $120,000 for
both the six months ended March 31, 2000 and 1999.
11
<PAGE>
<PAGE>
Other Income. Other income decreased $523,000, or 48.8%,
from $1.1 million for the six months ended March 31, 1999 to
$548,000 for the six months ended March 31, 2000. Interest
rates on mortgage loans were higher in the six months ended
March 31, 2000 than in 1999 which slowed the origination and
sale of fixed rate mortgage loans. As a result, mortgage banking
income, net decreased $504,000, or 113.0%, from income of
$446,000 for the six months ended March 31, 1999 to a loss of
$58,000 for the six months ended March 31, 2000. We sold $9.2
million of loans during the six months ended March 31, 2000, a
decrease of $17.7 million, or 65.8% from the $26.9 million sold
in the six months ended March 31, 1999. The increase in
interest rates during the six months caused the fair market
value of the loans held for sale to decline below cost. We
charged earnings with a loss of $180,000, which offset the
$122,000, recognized from the origination and sale of loans
during the six months ended March 31, 2000. In addition, during
the six months ended March 31, 2000, commissions from sales of
annuities and mutual funds decreased $35,000 or 15.1% from
$230,000 for the six months ended March 31, 2000 to $195,000 for
the six months ended March 31, 2000. The decrease resulted from
lower sales of these products during the first quarter of fiscal
2000.
Operating Expenses. Total operating expenses increased
$291,000, or 9.1% from $3.2 million for the six months ended
March 31, 1999 to $3.5 million for the six months ended March
31, 2000. Compensation and related benefits expense increased
$216,000, or 10.4% from $2.1 million for the six months ended
March 31, 1999 to $2.3 million for the six months ended March
31, 2000. The primary reason for this increase was the $276,000
of ESOP expense which was not present in 1999. Other operating
expenses increased $67,000 or 11.3% from $591,000 for the six
months ended March 31, 1999 to $658,000 for the six months ended
March 31, 2000. The primary reason for this increase is
additional expenses (legal, accounting, printing, postage) of
being a public company which were not present in 1999. We expect
that operating expenses will continue to increase in subsequent
periods as a result of increased cost associated with operating
as a public company. Operating expense is also expected to
increase as the result of the implementation of stock-based
compensation plans.
Income Tax Expense. Income tax expense increased $318,000,
or 36.7%, from $867,000 for the six months ended March 31, 1999
to $1,185,000 for the six months ended March 31, 2000. The
increase resulted from a $908,000 increase in income before
income taxes. The effective tax rates were 34.9% for both the
six months ended March 31, 2000 and 1999.
ASSET QUALITY
At March 31, 2000, we had approximately $3.1 million of
loans in nonaccrual status as compared with $366,000 at
September 30, 1999 and $505,000 at March 31, 1999. At March 31,
2000, impaired loans totaled $2.8 million as defined by
Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan." The increase resulted
from two unrelated loan customers, both of which have loans
secured by commercial real estate properties in Alamance county.
At March 31, 2000, all of the $2.8 million is on non-accrual
status, and their related reserve for loan losses totaled
$404,000. There was no impact on the provision as management
had already anticipated the loans' performance in setting the
allowance for loan losses in previous periods. The average
carrying value of impaired loans was $2.8 million and $1.7
million during the three and six months ended March 31, 2000,
respectively. Gross interest income of $1,000 and $47,000 was
recognized during the three and six months ended March 31, 2000.
This interest income represents payments that were made on these
impaired loans before they were impaired. If amounts are
received on nonaccrual loans or impaired loans, we decide
whether payments received should be recorded as a reduction of
the principal balance or as interest income depending on our
analysis of the collectibility of principal. No payments have
been received on impaired loans since they have been classified
as impaired. There were no impaired loans at March 31, 1999.
We had no loans contractually past due 90 days or more and still
accruing at March 31, 2000 and 1999. The allowance for loan
losses was $3.6 million or 1.66% of outstanding loans at March
31, 2000. This compares to 1.74% at September 30, 1999 and
1.74% at March 31, 1999.
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 March 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
12
<PAGE>
<PAGE>
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 March 31, 1999, cash and cash equivalents totaled
$21.4 million. We have other sources of liquidity should we
need additional funds. During the six months ended March 31,
2000 and 1999, we sold loans totaling $9.2 million and $26.9
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 $13.5 million at March 31, 2000.
We anticipate that we will have sufficient funds available
to meet our current commitments. At March 31, 2000, we had
$11.9 million in commitments to originate new loans, $52.5
million in unfunded commitments to extend credit under existing
equity lines and commercial lines of credit and $139,000 in
standby letters of credit. At March 31, 2000, certificates of
deposit, which are scheduled to mature within one year totaled
$126.3 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 March 31, 2000 and is deemed to be "well
capitalized."
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 No. 133 - an amendment of FASB No.
133" delayed the effective date of this statement for one year.
This statement is effective for the Company beginning October 1,
2000, without any significant impact expected on the
consolidated financial statements as the Company does not have
any significant 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 since September 30, 1999.
13
<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
The Company's Annual Meeting of Stockholders was held on
January 25, 2000. At this meeting 2,536,884 shares of the
Company's common stock were represented in person or by proxy.
Stockholders voted in favor of the election of three
nominees for director. The voting results for each nominee were
as follows:
Votes in Favor Votes
Nominee Of Election Withheld
Bernie C. Bean 2,532,383 4,501
James C. McGill 2,532,383 4,501
Virgil L. Stadler 2,532,383 4,501
There were no broker nonvotes on the matter.
The terms of office of Directors James A. Barnwell, Jr.,
James G. McClure, T. Scott Quakenbush, Richard C. Keziah and
Richard H. Shirley continued after the meeting.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) The following exhibits are being filed with this
quarterly report on Form 10-Q:
NO. DESCRIPTION
-- -----------
27 Financial Data Schedule (EDGAR Only)
(b.) Reports on Form 8-K. During the quarter ended March 31,
-------------------
2000, the registrant did not file any current reports on Form
8-K.
14
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
1ST STATE BANCORP, INC.
Date: May 11, 2000 /s/ James C. McGill
--------------------------------
James C. McGill
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 11, 2000 /s/ A. Christine Baker
--------------------------------
A. Christine Baker
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
15
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,842,803
<INT-BEARING-DEPOSITS> 10,528,981
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,753,329
<INVESTMENTS-CARRYING> 83,039,952
<INVESTMENTS-MARKET> 80,480,070
<LOANS> 219,605,521
<ALLOWANCE> 3,573,846
<TOTAL-ASSETS> 345,574,702
<DEPOSITS> 239,995,771
<SHORT-TERM> 8,000,000
<LIABILITIES-OTHER> 4,039,768
<LONG-TERM> 20,000,000
0
0
<COMMON> 28,484,366
<OTHER-SE> 45,054,798
<TOTAL-LIABILITIES-AND-EQUITY> 345,574,702
<INTEREST-LOAN> 8,834,310
<INTEREST-INVEST> 2,904,335
<INTEREST-OTHER> 205,198
<INTEREST-TOTAL> 11,943,843
<INTEREST-DEPOSIT> 4,770,588
<INTEREST-EXPENSE> 5,491,349
<INTEREST-INCOME-NET> 6,452,494
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,487,931
<INCOME-PRETAX> 3,392,614
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,207,614
<EPS-BASIC> 0.75
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 3.14
<LOANS-NON> 3,126,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,454,373
<CHARGE-OFFS> 4,752
<RECOVERIES> 4,225
<ALLOWANCE-CLOSE> 3,573,846
<ALLOWANCE-DOMESTIC> 3,573,846
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
