U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 August 7, 2000, the issuer had 3,289,607 shares of common stock
issued and outstanding.
<PAGE>
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and September 30, 1999............................................1
Consolidated Statements of Income for the Three Months Ended
June 30, 2000 and 1999 (unaudited)................................2
Consolidated Statements of Income for the Nine Months Ended
June 30, 2000 and 1999 (unaudited)................................3
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Nine Months Ended June 30, 2000 and
1999 (unaudited)...................................................4
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 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>
1st State Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, 2000 and September 30, 1999
<TABLE>
<CAPTION>
AT AT
JUNE 30, SEPTEMBER 30,
2000 1999
---------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 32,318,574 $ 15,657,202
Investment securities:
Held to maturity (fair value of $65,422,922 and $82,541,457
at June 30, 2000 and September 30, 1999, respectively) 68,231,508 84,228,343
Available for sale (cost of $10,064,253 and $11,241,966
at June 30, 2000 and September 30, 1999, respectively) 9,697,632 11,035,966
Loans held for sale, at lower of cost or fair value 5,661,084 12,143,063
Loans receivable (net of allowance for loan losses of $3,474,480
and $3,454,373 at June 30, 2000 and September 30, 1999,
respectively) 222,641,437 195,292,344
Federal Home Loan Bank stock, at cost 1,650,000 1,259,600
Premises and equipment 7,733,565 7,282,361
Accrued interest receivable 2,437,766 2,652,134
Other assets 3,595,585 3,374,915
-------------- --------------
Total assets $ 353,967,151 $ 332,925,928
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 243,824,380 $ 234,094,735
Advances from Federal Home Loan Bank 30,000,000 22,000,000
Advance payments by borrowers for property taxes and insurance 758,839 232,973
Other liabilities 4,408,422 4,983,039
-------------- --------------
Total liabilities 278,991,641 261,310,747
-------------- --------------
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;
3,289,607 and 3,163,125 shares issued and outstanding
at June 30, 2000 and September 30, 1999, respectively 32,896 31,631
Additional paid in capital 51,536,043 49,216,648
Unearned ESOP shares (4,046,963) (4,469,611)
Deferred compensation 2,603,381 2,373,485
Treasury stock for deferred compensation (2,603,381) (2,373,485)
Unearned compensation - management recognition plan (1,489,856) --
Retained income - substantially restricted 29,166,990 26,959,913
Accumulated other comprehensive income (loss) - net unrealized
loss on investment securities available for sale (223,600) (123,400)
--------------- ---------------
Total stockholders' equity 74,975,510 71,615,181
-------------- --------------
Total liabilities and stockholders' equity $ 353,967,151 $ 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 June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
2000 1999
------------- --------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 4,721,798 $ 3,990,379
Interest and dividends on investments 1,380,171 1,085,944
Overnight deposits 178,419 392,250
------------- --------------
Total interest income 6,280,388 5,468,573
------------- --------------
Interest expense:
Deposit accounts 2,563,811 2,283,832
Borrowings 391,276 272,495
------------- --------------
Total interest expense 2,955,087 2,556,327
------------- --------------
Net interest income 3,325,301 2,912,246
Provision for loan losses 60,000 60,000
------------- --------------
Net interest income after provision for loan losses 3,265,301 2,852,246
------------- --------------
Other income:
Loan servicing fees 22,594 24,808
Customer service fees 149,217 126,005
Commissions from sales of annuities and mutual funds 128,180 97,842
Mortgage banking income (loss), net 80,282 (131,273)
Net gain on sale of real estate owned 148,739 --
Other 50,869 66,285
------------- --------------
Total other income 579,881 183,667
------------- --------------
Operating expenses:
Compensation and related benefits 2,075,326 1,242,392
Occupancy and equipment 262,878 277,719
Deposit insurance premiums 11,818 34,877
Contribution expense 2,600 3,014,205
Other expenses 405,985 265,422
------------- --------------
Total operating expenses 2,758,607 4,834,615
------------- --------------
Income (loss) before income taxes 1,086,575 (1,798,702)
Income taxes (benefit) 380,000 (621,000)
------------- ---------------
Net income (loss) $ 706,575 $ (1,177,702)
============= ===============
Earnings (loss) per share:
Basic $ 0.24 $ (0.48)
Diluted $ 0.23 $ (0.48)
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
1st State Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
For the Nine Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30,
2000 1999
------------- --------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 13,556,108 $11,949,089
Interest and dividends on investments 4,284,506 2,724,689
Overnight deposits 383,617 1,078,730
------------- -----------
Total interest income 18,224,231 15,752,508
------------- -----------
Interest expense:
Deposit accounts 7,334,399 7,288,019
Borrowings 1,112,037 822,445
------------- -----------
Total interest expense 8,446,436 8,110,464
------------- -----------
Net interest income 9,777,795 7,642,044
Provision for loan losses 180,000 180,000
------------- -----------
Net interest income after provision for loan losses 9,597,795 7,462,044
------------- -----------
Other income:
Loan servicing fees 67,271 76,655
Customer service fees 430,635 401,630
Commissions from sales of annuities and mutual funds 323,097 327,479
Mortgage banking income, net 22,550 314,934
Net gain on sale of real estate owned 148,739 --
Other 135,640 134,073
------------- -----------
Total other income 1,127,932 1,254,771
------------- -----------
Operating expenses:
Compensation and related benefits 4,358,499 3,383,794
Occupancy and equipment 764,062 701,404
Deposit insurance premiums 57,587 104,344
Contribution expense 8,250 3,033,196
Other expenses 1,058,140 808,539
------------- -----------
Total operating expenses 6,246,538 8,031,277
------------- -----------
Income before income taxes 4,479,189 685,538
Income taxes 1,565,000 246,000
------------- -----------
Net income $ 2,914,189 $ 439,538
============= ===========
Earnings per share:
Basic $ 0.99 $ (0.48)
Diluted $ 0.96 $ (0.48)
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
TREASURY
ADDITIONAL UNEARNED STOCK FOR
COMMON PAID-IN ESOP DEFERRED DEFERRED
STOCK CAPITAL SHARES COMPENSATION COMPENSATION
------ ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $ -- -- -- -- --
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive loss-unrealized
loss on securities available-for-sale net
of income taxes of $131,850 -- -- -- -- --
Total comprehensive income
Net proceeds from issuance of common stock 31,631 49,215,725 -- -- --
Common stock acquired by ESOP -- -- (4,898,639) -- --
Release of ESOP shares -- 2,013 331,982 -- --
Deferred compensation -- -- -- 2,351,365 --
Treasury stock held for deferred compensation -- -- -- -- (2,351,365)
Cash dividends declared -- -- -- -- --
Cash dividends on unallocated ESOP shares -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 31,631 49,217,738 (4,566,657) 2,351,365 (2,351,365)
=========== =========== =========== =========== ===========
Balance at September 30, 1999 $ 31,631 49,216,648 (4,469,611) 2,373,485 (2,373,485)
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive loss-unrealized
loss on securities available-for-sale net
of income taxes of $60,800 -- -- -- -- --
Total comprehensive income
Shares issued for MRP 1,265 2,330,747 -- -- --
Vesting of MRP shares -- -- -- -- --
Release of ESOP shares -- (11,352) 422,648 -- --
Deferred compensation -- -- -- 229,896 --
Treasury stock held for deferred compensation -- -- -- -- (229,896)
Cash dividend declared -- -- -- -- --
Cash dividends on unallocated ESOP and
unvested MRP shares -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 $ 32,896 51,536,043 (4,046,963) 2,603,381 (2,603,381)
=========== ----------- ----------- ----------- -----------
<CAPTION>
UNEARNED COMPENSATION ACCUMULATED
MANAGEMENT OTHER TOTAL
RECOGNITION RETAINED COMPREHENSIVE STOCKHOLDERS'
PLAN INCOME INCOME (LOSS) EQUITY
------------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1998 -- 25,872,605 93,000 25,965,605
Comprehensive income:
Net income -- 439,538 -- 439,538
Other comprehensive loss-unrealized
loss on securities available-for-sale net
of income taxes of $131,850 -- -- (201,400) (201,400)
-----------
Total comprehensive income 238,138
Net proceeds from issuance of common stock -- -- -- 49,247,356
Common stock acquired by ESOP -- -- -- (4,898,639)
Release of ESOP shares -- -- -- 333,995
Deferred compensation -- -- -- 2,351,365
Treasury stock held for deferred compensation -- -- -- (2,351,365)
Cash dividends declared -- (253,050) -- (253,050)
Cash dividends on unallocated ESOP shares -- 20,244 -- 20,244
----------- ----------- ----------- -----------
Balance at June 30, 1999 -- 26,079,337 (108,400) 70,653,649
=========== =========== =========== ===========
Balance at September 30, 1999 26,959,913 (123,400) 71,615,181
Comprehensive income:
Net income 2,914,189 -- 2,914,189
Other comprehensive loss-unrealized
loss on securities available-for-sale net
of income taxes of $60,800 -- (100,200) (100,200)
-----------
Total comprehensive income 2,813,989
Shares issued for MRP (2,332,012) -- -- --
Vesting of MRP shares 842,156 -- -- 842,156
Release of ESOP shares -- -- -- 411,296
Deferred compensation -- -- -- 229,896
Treasury stock held for deferred compensation -- -- -- (229,896)
Cash dividend declared -- (769,269) -- (769,269)
Cash dividends on unallocated ESOP and -- -- -- --
unvested MRP shares -- 62,157 -- 62,157
----------- ----------- ----------- -----------
Balance at June 30, 2000 (1,489,856) 29,166,990 (223,600) 74,975,510
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30,
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,914,189 $ 439,538
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 180,000 180,000
Depreciation 359,483 349,827
Deferred tax expense 84,000 --
Amortization of premiums and discounts, net (23,253) 32,664
Gain on sale of real estate owned 148,739 --
Contribution of shares to Foundation -- 3,000,000
Release of ESOP shares 411,296 333,990
Vesting of MRP shares 842,156 --
Loan origination fees and unearned discounts
deferred, net of current amortization 56,287 85,925
Net loss on sale of loans 424,670 427,120
Proceeds from loans held for sale 14,324,397 34,604,174
Originations of loans held for sale (13,363,686) (38,252,785)
Increase in other assets (789,050) (2,979,028)
Decrease (increase) in accrued interest receivable 214,368 (294,852)
Decrease in other liabilities (577,989) (1,266,096)
------------- -------------
Net cash provided by (used in) operating activities 5,205,607 (3,339,523)
------------- -------------
Cash flows from investing activities:
Purchase of FHLB stock (680,800) --
Redemption of FHLB stock 290,400 86,900
Purchases of investment securities held to maturity (3,996,250) (63,680,540)
Purchases of investment securities available for sale -- (4,000,000)
Proceeds from maturities of investment securities available for sale 2,080,908 2,345,049
Proceeds from maturities of investment securities
held to maturity 19,112,764 14,676,313
Proceeds from sale of real estate owned (148,740) --
Net decrease (increase) in loans receivable (22,488,782) 7,478,838
Purchases of premises and equipment (265,506) (199,405)
------------- -------------
Net cash used in investing activities (6,096,006) (43,292,845)
------------- -------------
(Continued)
</TABLE>
5
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30,
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 9,729,645 $ (10,941,891)
Advances from the Federal Home Loan Bank 36,000,000 --
Repayments of advances from Federal Home Loan Bank (28,000,000) --
Dividends on common stock (703,740) --
Net proceeds from sale of stock -- 46,247,361
Purchase of stock for ESOP -- (4,898,639)
Increase in advance payments by borrowers for
property taxes and insurance 525,866 510,199
------------- -------------
Net cash provided by financing activities 17,551,771 30,917,030
------------- -------------
Net increase (decrease) in cash and cash equivalents 16,661,372 (15,715,338)
Cash and cash equivalents at beginning of period 15,657,202 31,077,054
------------- -------------
Cash and cash equivalents at end of period $ 32,318,574 $ 15,361,716
============= =============
Payments are shown below for the following:
Interest $ 8,403,517 $ 8,103,571
============= =============
Income taxes $ 2,112,412 $ 303,000
============= =============
Deferred compensation to be settled in Company's stock $ 229,896 $ --
============= =============
Unrealized losses on investment securities
available for sale $ (100,200) $ ( 201,400)
============= =============
Dividends declared and payable $ 237,951 $ 232,806
============= =============
Supplemental noncash investing and financing activities:
Cash dividends on unallocated ESOP and unissued MRP shares $ 62,157 $ 20,244
============= =============
Transfer of land from other assets to premises and equipment $ 545,181 $ --
============= =============
Transfer from loans available for sale to loans receivable $ 5,099,472 $ --
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
1ST STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 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 nine month periods ended
June 30, 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. The Company's earnings per share for the three and
nine month periods ended June 30, 2000 are based on basic weighted average
shares of 2,961,604 and 2,946,833, respectively, and diluted weighted average
shares of 3,062,235 and 3,047,464, respectively, of common stock outstanding,
excluding ESOP and MRP benefit plan shares not committed to be released or
granted, as follows:
<TABLE>
<CAPTION>
Nine months Three months
----------- ------------
<S> <C> <C>
Average shares issued and outstanding 3,163,125 3,163,125
Add: weighted average vested MRP shares issued 3,693 11,120
Less: weighted average unallocated ESOP shares (219,985) (212,641)
--------- ---------
Average basic shares for earnings per share 2,946,833 2,961,604
Add: unvested MRP shares 84,319 84,319
Add: potential common stock pursuant to stock option plan 16,312 16,312
--------- -----------
Average diluted shares for earnings per share 3,047,464 3,062,235
</TABLE>
7
<PAGE>
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 nine months ended June 30, 2000, 7,251 and 21,833 shares of
stock were committed to be released and approximately $135,000 and $411,000 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 have 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.
The expense related to this plan for the three and nine months ended
June 30, 2000 was $53,000 and $161,000, respectively, and it is included in
compensation expense.
NOTE 6. MANAGEMENT RECOGNITION PLAN
The Company has a Management Recognition Plan ("MRP") which serves as a
means of providing existing directors and officers of the bank with an ownership
interest in the company. On June 6, 2000, restricted stock awards of 126,482
shares were granted. The shares awarded under the MRP were issued from
authorized but unissued shares of common stock at no cost to the recipients. The
shares vest at a rate of 33 1/3% per year with one-third immediately vesting on
the date of the grant. Compensation expense of $842,000 associated with the MRP
was recorded during the quarter ended June 30, 2000.
NOTE 7. STOCK OPTION AND INCENTIVE PLAN
On June 6, 2000 the Company's stockholders approved the 1 st State
Bancorp, Inc. 2000 Stock Option and Incentive Plan (the "Plan"). The purpose of
this plan is to advance the interests of the Company through providing select
key employees and directors of the Bank with the opportunity to acquire shares.
By encouraging such stock ownership, the Company seeks to attract, retain and
motivate the best available personnel for positions of substantial
responsibility and to provide incentives to the key employees and directors.
Under the Plan, the Company has granted 316,312 options to purchase its $0.01
par value common stock. The exercise price per share is equal to the fair market
value per share on the date of the grant of the stock.
8
<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 JUNE 30, 2000 AND SEPTEMBER 30, 1999
Total assets increased by $21.1 million or 6.3% from $332.9 million at
September 30, 1999 to $354.0 million at June 30, 2000. Asset growth was funded
during the period by a $9.7 million, or 4.1% increase in deposits and a $8.0
million, or 36.4% increase in FHLB advances. Deposits at June 30, 2000 and
September 30, 1999 were $243.8 million and $234.1 million, respectively. The
majority of the deposit increase was in demand, checking and money market
investment accounts, which typically carry a lower interest rate than time
deposits. At June 30, 2000, 65.6% of the Company's deposits are time deposits.
Advances at June 30, 2000 and September 30, 1999 were $30.0 million and $22.0
million, respectively.
Cash and cash equivalents increased $16.6 million, or 105.7%, from
$15.7 million at September 30, 1999 to $32.3 million at June 30, 2000. The
increase in cash and cash equivalents resulted primarily from investment
maturities. Investment securities, both available for sale and held to maturity,
decreased a combined total of $17.4 million, or 18.3%, from $95.3 million at
September 30, 1999 to $77.9 million at June 30, 2000. During the nine months
ended June 30, 2000, we purchased $4.0 million of short-term government agency
securities and we received $21.2 million from the maturity of like securities.
Loans receivable, net increased by $27.3 million, or 14.0%, from $195.3
million at September 30, 1999 to $222.6 million at June 30, 2000. This increase
was offset somewhat by a $6.4 million decrease in loans held for sale. Loans
held for sale decreased 52.9% from $12.1 million at September 30, 1999 to $5.7
million at June 30, 2000. Commercial and commercial real estate loans increased
$14.5 million, or 21.2%, 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
$7.4 million, or 8.2%, compared to September 30, 1999 levels. We continue to
emphasize consumer loans and equity lines of credit, which increased a combined
total of $2.4 million since September 30, 1999.
Stockholders' equity increased from $71.6 million at September 30, 1999
to $75.0 million at June 30, 2000. On June 6, 2000, restricted stock awards of
126,482 shares were awarded to 15 directors and officers of the Bank under the
1st State Bancorp, Inc. Management Recognition Plan (the "MRP) which was
approved by the stockholders at a Special Meeting on that day. The shares
awarded under the MRP were issued from authorized but unissued shares of common
stock at no cost to the recipients. The shares granted vest at the rate of 33
1/3% each year beginning with a one-third immediate vest on the date of the
grant.
9
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND
1999
Net Income. We recorded net income of $707,000 for the quarter ended
June 30, 2000, compared to a net loss of $1.2 million for the quarter ended June
30, 1999. The results for the quarter ended June 30, 1999 included a one-time
after-tax charge of $2.0 million to fund the 1st State Bank Foundation, Inc.
Earnings of $802,000 would have been reported for the quarter excluding the
effect of the one-time charge. For the three months ended June 30, 2000 basic
and diluted earnings per share were $0.24 and $0.23, respectively. The Company
reported basic and diluted loss per share for the quarter ended June 30, 1999 of
$0.48 per share. The 1999 earnings per share calculation includes only the
Company's results since the conversion on April 23, 1999, which also includes
the one-time after-tax charge of $2.0 million.
Interest Income. Total interest income was $6.3 million for the quarter
ended June 30, 2000, as compared to $5.5 million for the quarter ended June 30,
1999, representing an increase of $812,000, or 14.8%. Average interest-earning
assets increased by $19.1 million, or 6.3%, from $304.6 million for the quarter
ended June 30, 1999 to $323.7 million for the quarter ended June 30, 2000. The
growth in average interest-earning assets resulted primarily 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 a 58
basis point increase in the annualized average yield on interest-earning assets
which increased from 7.18% for the three months ended June 30, 1999 to 7.76% for
the three months ended June 30, 2000. The increased volume of interest-earning
assets raised interest income by approximately $343,000 and the increased yield
increased interest income by approximately $469,000.
Interest Expense. Total interest expense was $3.0 million for the
quarter ended June 30, 2000, as compared to $2.6 million for the quarter ended
June 30, 1999, representing an increase of $399,000, or 15.3%. Average
interest-bearing liabilities increased $3.9 million, or 1.6%, from $250.8
million for the quarter ended June 30, 1999 to $254.7 million for the quarter
ended June 30, 2000. Average deposits decreased $3.2 million, which was offset
by increased average FHLB advances of $7.1 million. Some of the deposit outflow
was used by Bank customers in 1999 to fund 1st State stock purchases. The cost
of funds increased 56 basis points from 4.08% for the three months ended June
30, 1999 to 4.64% for the same period in 2000. The Federal Reserve raised
interest rates six times during the year ended June 30, 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 $359,000 and the increase in average outstandings
raised interest expense by approximately $40,000.
Net Interest Income. Net interest income, the difference between
interest earned on loans and investments and interest paid on interest-bearing
liabilities, increased by $413,000 or 14.2% from $2.9 million for the quarter
ended June 30, 1999 to $3.3 million for the quarter ended June 30, 2000. Net
earning assets increased by $15.2 million from $53.8 million for the quarter
ended June 30, 1999 to $69.0 million for the quarter ended June 30, 2000 while
our net interest rate spread increased 2 basis points from 3.10% to 3.12% and
the annualized net interest margin increased 29 basis points from 3.82% to
4.11%. The increase in the 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 June 30, 2000 and 1999.
Other Income. Other income increased $396,000, or 215.2%, from $184,000
for the quarter ended June 30, 1999 to $580,000 for the quarter ended June 30,
2000. Mortgage banking income, net increased $211,000 from a loss of $131,000
for the quarter ended June 30, 1999 to income of $80,000 for the quarter ended
June 30, 2000. During the quarter ended June 30, 2000, we sold fixed-rate for
sale mortgage loans of $5.1 million and recognized $61,000 from the origination
and sale of these loans, and the Bank was able to record a nominal recovery on
its lower of cost or fair value valuation reserve on loans held for sale of
$20,000. During the quarter ended June 30, 1999, we sold fixed-rate mortgage
loans of $8.1 million and recognized income of $95,000 from the origination and
sale of these loans; however, the increase in interest rates during this quarter
required a $226,000 charge to earnings
10
<PAGE>
to record the loans held for sale to the lower of cost or fair value. Customer
service fees increased $23,000, or 18.3% from $126,000 for the quarter ended
June 30, 1999 to $149,000 for the quarter ended June 30, 2000. This increase
results from growth in the number of transaction accounts. In addition, during
the quarter ended June 30, 2000, commissions from sales of annuities and mutual
funds increased $30,000 or 30.6% from $98,000 for the quarter ended June 30,
1999 to $128,000 for the quarter ended June 30, 2000. The increase resulted from
a slightly higher volume of sales of annuities and mutual fund products. The
Company recorded a one-time gain on the sale of an other real estate owned
property of $149,000 during the quarter ended June 30, 2000.
Operating Expenses. Total operating expenses were $4.8 million for the
quarter ended June 30, 1999 compared to $2.8 million for the quarter ended June
30, 2000. Compensation and related benefits expense increased $833,000, or 69.4%
from $1.2 million for the quarter ended June 30, 1999 to $2.1 million for the
quarter ended June 30, 2000. This increase was primarily the result of the MRP
expense of $842,000 for the quarter ended June 30, 2000, which was not present
in 1999. Contributions expense decreased $3.0 million, or 99.9% from $3.0
million for the quarter ended June 30, 1999 to $3,000 for the quarter ended June
30, 2000. This decrease was the result of the $3.0 million contribution to fund
the Foundation that occurred in 1999. Other operating expense increased
$141,000, or 53.2% from $265,000 for the quarter ended June 30, 1999 to $406,000
for the quarter ended June 30, 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 remain at these higher levels in subsequent
periods as a result of increased costs associated with operating as a public
company.
Income Tax Expense. Income tax expense increased $1.0 million from a
tax benefit of $621,000 for the quarter ended June 30, 1999 to expense of
$380,000 for the quarter ended June 30, 2000. The increase resulted from a $2.9
million increase in income before income taxes. The effective tax rates were
35.0% and 34.5% for the quarters ended June 30, 2000 and 1999, respectively.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
Net Income. We recorded net income of $2.9 million for the nine months
ended June 30, 2000, compared to net income of $440,000 for the nine months
ended June 30, 1999. The primary reasons for the increase was an increase in the
net interest income and a decrease in operating expenses which were partially
offset by a decrease in other income and increased income tax expense. For the
nine months ended June 30, 2000, basic and diluted earnings per share were $0.99
and $0.96, respectively. For the nine months ended June 30, 1999, both basic and
diluted loss per share were $0.48. The earnings per share data includes only the
Company's results since the conversion on April 23, 1999.
Interest Income. Total interest income was $18.2 million for the nine
months ended June 30, 2000, as compared to $15.8 million for the nine months
ended June 30, 1999, representing an increase of $2.4 million, or 15.2%. Average
interest-earning assets increased by $32.6 million, or 11.4 %, from $286.8
million for the nine months ended June 30, 1999 to $319.4 million for the nine
months ended June 30, 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 a 29 basis point
increase in the annualized average yield on interest-earning assets from 7.32%
for the nine months ended June 30, 1999 to 7.61% for the nine months ended June
30, 2000. The increased volume of interest-earning assets raised interest income
by approximately $1.8 million and the increased yield increased interest income
by approximately $683,000.
Interest Expense. Total interest expense was $8.4 million for the nine
months ended June 30, 2000, as compared to $8.1 million for the nine months
ended June 30, 1999, representing an increase of $336,000, or 4.1%. Average
interest-bearing liabilities decreased $1.8 million, or 0.7%, from $253.7
million for the nine months ended June 30, 1999 to $251.9 million for the nine
months ended June 30, 2000. The cost of funds increased 21 basis points from
4.26% for the nine months ended June 30, 1999 to 4.47% for the same period in
2000. The increase in the rate paid on interest-bearing liabilities increased
interest expense by approximately $392,000 and the decrease in average
outstandings decreased interest expense by approximately $56,000.
Net Interest Income. Net interest income, the difference between
interest earned on loans and investments and interest paid on interest-bearing
liabilities, increased by $2.2 million or 28.9% from $7.6 million for the nine
months ended June 30, 1999 to $9.8 million for the nine months ended June 30,
2000. Net average earning assets
11
<PAGE>
increased by $34.3 million while our net interest rate spread increased 8 basis
points from 3.06% to 3.14% and the annualized net interest margin increased 53
basis points from 3.55% to 4.08%. 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 $180,000 for both the nine months
ended June 30, 2000 and 1999.
Other Income. Other income decreased $127,000, or 9.8%, from $1.3
million for the nine months ended June 30, 1999 to $1.1 million for the nine
months ended June 30, 2000. Interest rates on mortgage loans were higher in the
nine months ended June 30, 2000 than in 1999 which slowed the origination and
sale of fixed rate mortgage loans. As a result, mortgage banking income, net
decreased $292,000, or 92.7%, from $315,000 for the nine months ended June 30,
1999 to $23,000 for the nine months ended June 30, 2000. We sold $13.6 million
of loans during the nine months ended June 30, 2000, a decrease of $21.0
million, or 60.7% from the $34.6 million sold in the nine months ended June 30,
1999. In addition, during the nine months ended June 30, 2000, customer service
fees increased $29,000 or 7.2% from $402,000 for the nine months ended June 30,
1999 to $431,000 for the nine months ended June 30, 2000. This increase results
from growth in the number of transaction accounts. Included in the nine months
ended June 30, 2000 was a $149,000 gain on sale of REO which was not present in
1999.
Operating Expenses. Total operating expenses were $8.0 million for the
nine months ended June 30, 1999 compared to $6.2 million for the nine months
ended June 30, 2000. Compensation and related benefits expense increased $1.0
million, or 29.4% from $3.4 million for the nine months ended June 30, 1999 to
$4.4 million for the nine months ended June 30, 2000. The primary reason for
this increase was the $842,000 of MRP expense which was not present in 1999 and
increased ESOP expense of $79,000 over the prior year. Contribution expense
decreased by $3.0 million for the nine months ended June 30, 2000 compared to
the nine months ended June 30, 1999. Contribution expense in 1999 included the
$3.0 million donation to fund the 1st State Bank Foundation, Inc. Other
operating expenses increased $250,000 or 30.9% from $809,000 for the nine months
ended June 30, 1999 to $1.1 million for the nine months ended June 30, 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 $1.3 million, or
528.5%, from $246,000 for the nine months ended June 30, 1999 to $1.6 million
for the nine months ended June 30, 2000. The increase resulted from a $3.8
million increase in income before income taxes. The effective tax rates were
34.9% and 35.9% for the nine months ended June 30, 2000 and 1999, respectively.
ASSET QUALITY
At June 30, 2000, we had approximately $3.2 million of loans in
nonaccrual status as compared with $366,000 at September 30, 1999 and $480,000
at June 30, 1999. At June 30, 2000, impaired loans totaled $2.7 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 June 30, 2000, all of the $2.7 million of
impaired loans is on non-accrual status, and their related reserve for loan
losses totaled $245,000. 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 $2.1 million during the three and nine months ended June 30,
2000, respectively. Gross interest income of $0 and $47,000 was recognized on
these impaired loans during the three and nine months ended June 30, 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, management decides 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
12
<PAGE>
June 30, 1999. We had no loans contractually past due 90 days or more and still
accruing interest at June 30, 2000 and 1999. The Bank's net chargeoffs for the
nine months ended June 30, 2000 and 1999 were $159,893 and $13,009,
respectively. These net chargeoffs represent 0.07% and 0.01% of average loans
outstanding for the nine months ended June 30, 2000 and 1999, respectively. The
allowance for loan losses was $3.5 million or 1.54% of outstanding loans at June
30, 2000. This compares to 1.74% at September 30, 1999 and 1.76% at June 30,
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 June 30, 2000, the Bank's liquidity ratio exceeded such
requirements. Liquidity generally refers to the Bank's ability to generate
adequate amounts of funds to meet its cash needs. Adequate liquidity guarantees
that sufficient funds are available to meet deposit withdrawals, fund loan
commitments, maintain adequate reserve requirements, pay operating expenses,
provide funds for debt service, pay dividends to stockholders and meet other
general commitments.
Our primary sources of funds are deposits, principal and interest
payments on loans, proceeds from the sale of loans, and to a lesser extent,
advances from the FHLB of Atlanta. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and local competition.
Our most liquid assets are cash and cash equivalents. The levels of
these assets are dependent on our operating, financing, lending and investing
activities during any given period. At June 30, 2000, cash and cash equivalents
totaled $32.3 million. We have other sources of liquidity should we need
additional funds. During the nine months ended June 30, 2000 and 1999, we sold
loans totaling $13.6 million and $34.6 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
$15.4 million at June 30, 2000.
We anticipate that we will have sufficient funds available to meet our
current commitments. At June 30, 2000, we had $4.7 million in commitments to
originate new loans, $53.5 million in unfunded commitments to extend credit
under existing equity lines and commercial lines of credit and $118,000 in
standby letters of credit. At June 30, 2000, certificates of deposit, which are
scheduled to mature within one year totaled $124.5 million. We believe that a
significant portion of such deposits will remain with us.
The FDIC requires the Bank to meet a minimum leverage capital
requirement of Tier I capital to assets ratio of 4%. The FDIC also requires the
Bank to meet a ratio of total capital to risk-weighted assets of 8%, of which 4%
must be in the form of Tier I capital. The Commissioner requires the Bank at all
times to maintain certain minimum capital levels. The Bank was in compliance
with all capital requirements of the FDIC and the Commissioner at June 30, 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. This
statement, as amended by SFAS No. 137 and No. 138 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>
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 held a Special Meeting of Stockholders on June 6,
2000. At this meeting 2,156,346 shares of the Company's common stock
were represented in person or by proxy.
Stockholders approved the 1st State Bancorp, Inc. 2000 Stock
Option and Incentive Plan and the 1st State Bancorp, Inc. Management
Recognition Plan. The voting results for each proposal were as
follows:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstained
<S> <C> <C> <C>
Stock Option and Incentive Plan 1,930,971 211,575 13,800
Management Recognition Plan 1,921,166 218,916 16,264
</TABLE>
There were no broker nonvotes on the matter.
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 June 30, 2000,
-------------------
the registrant did not file any current reports on Form
8-K.
14
<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.
/s/ James C. McGill
Date: August 10, 2000 -------------------------------------------
James C. McGill
President and Chief Executive Officer
(Principal Executive Officer)
/s/ A. Christine Baker
Date: August 10, 2000 -------------------------------------------
A. Christine Baker
Executive Vice President
Treasurer and Secretary
Principal Financial and Accounting Officer)
15
