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, 2001
[ ] 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
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(Address of Principal Executive Offices) (Zip Code)
Registrant' s Telephone Number, Including Area Code (336) 227-8861
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N/A
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of April 30, 2001, the issuer had 3,289,607 shares of common stock
issued and outstanding.
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001 (unaudited)
and September 30, 2000............................................1
Consolidated Statements of Income for the Three Months Ended
March 31, 2001 and 2000 (unaudited)...............................2
Consolidated Statements of Income for the Six Months Ended
March 31, 2001 and 2000 (unaudited)...............................3
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Six Months Ended March 31, 2001 and 2000
(unaudited).......................................................4
Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 2001 and 2000 (unaudited)...............................5
Notes to Consolidated Financial Statements...........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........16
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings...................................................17
Item 2. Changes in Securities and Use of Proceeds...........................17
Item 3. Defaults Upon Senior Securities.....................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K....................................17
SIGNATURES...................................................................18
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND SEPTEMBER 30, 2000
(IN THOUSANDS)
AT AT
MARCH 31, SEPTEMBER 30,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 34,356 33,107
Investment securities:
Held to maturity (fair value of $49,970 and $65,173
at March 31, 2001 and September 30, 2000, respectively) 49,708 67,232
Available for sale (cost of $13,914 and $10,019
at March 31, 2001 and September 30, 2000, respectively) 13,933 9,752
Loans held for sale, at lower of cost or fair value 6,544 5,533
Loans receivable (net of allowance for loan losses of $3,619
and $3,536 at March 31, 2001 and September 30, 2000,
respectively) 227,192 223,595
Real estate owned 2,106 --
Federal Home Loan Bank stock, at cost 1,650 1,650
Premises and equipment 8,692 8,453
Accrued interest receivable 2,441 2,653
Other assets 3,742 3,552
-------- --------
Total assets $350,364 355,527
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts 262,711 254,405
Advances from Federal Home Loan Bank 20,000 20,000
Advance payments by borrowers for property taxes and insurance 541 151
Dividend payable 263 17,270
Other liabilities 5,619 4,492
-------- --------
Total liabilities 289,134 296,318
-------- --------
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 shares issued and outstanding 33 33
Additional paid-in capital 35,575 35,587
Unearned ESOP shares (4,678) (4,950)
Unearned compensation - management recognition plan (907) (1,296)
Deferred compensation 3,815 2,679
Treasury stock for deferred compensation (3,815) (2,679)
Retained income - substantially restricted 31,195 29,999
Accumulated other comprehensive income (loss) - net unrealized
gain (loss) on investment securities available for sale 12 (164)
-------- --------
Total stockholders' equity 61,230 59,209
-------- --------
Total liabilities and stockholders' equity $350,364 355,527
======== ========
See accompanying notes to the consolidated financial statements.
1
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
-------- --------
Interest income:
Interest and fees on loans $ 4,927 4,442
Interest and dividends on investments 1,119 1,433
Overnight deposits 195 113
-------- --------
Total interest income 6,241 5,988
-------- --------
Interest expense:
Deposit accounts 3,013 2,437
Borrowings 277 365
-------- --------
Total interest expense 3,290 2,802
-------- --------
Net interest income 2,951 3,186
Provision for loan losses 60 60
-------- --------
Net interest income after provision for loan losses 2,891 3,126
-------- --------
Other income:
Service fees on loans sold 22 22
Customer service fees 162 140
Commissions from sales of annuities and mutual funds 108 115
Real estate operations, net (6) --
Mortgage banking income, net 193 25
Other 41 39
-------- --------
Total other income 520 341
-------- --------
Operating expenses:
Compensation and related benefits 1,431 1,108
Occupancy and equipment 331 255
Deposit insurance premiums 13 12
Other expenses 425 369
-------- --------
Total operating expenses 2,200 1,744
-------- --------
Income before income taxes 1,211 1,723
Income taxes 436 608
-------- --------
Net income $ 775 1,115
======== ========
Earnings per share:
Basic $ 0.26 $ 0.38
Diluted $ 0.24 $ 0.38
See accompanying notes to the consolidated financial statements.
2
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
-------- --------
Interest income:
Interest and fees on loans $ 10,017 8,834
Interest and dividends on investments 2,336 2,905
Overnight deposits 398 205
-------- --------
Total interest income 12,751 11,944
-------- --------
Interest expense:
Deposit accounts 5,990 4,770
Borrowings 580 721
-------- --------
Total interest expense 6,570 5,491
-------- --------
Net interest income 6,181 6,453
Provision for loan losses 120 120
-------- --------
Net interest income after provision for loan losses 6,061 6,333
-------- --------
Other income:
Service fees on loans sold 42 45
Customer service fees 318 281
Commissions from sales of annuities and mutual funds 219 195
Real estate operations, net (6) --
Mortgage banking income (loss), net 321 (58)
Other 83 85
-------- --------
Total other income 977 548
-------- --------
Operating expenses:
Compensation and related benefits 2,974 2,283
Occupancy and equipment 608 501
Deposit insurance premiums 25 46
Other expenses 836 658
-------- --------
Total operating expenses 4,443 3,488
-------- --------
Income before income taxes 2,595 3,393
Income taxes 919 1,185
-------- --------
Net income $ 1,676 2,208
======== ========
Earnings per share:
Basic $ 0.56 $ 0.75
Diluted $ 0.53 $ 0.75
See accompanying notes to the consolidated financial statements
3
1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
(IN THOUSANDS)
TREASURY
ADDITIONAL UNEARNED UNEARNED STOCK FOR
COMMON PAID-IN ESOP COMPENSATION DEFERRED DEFERRED
STOCK CAPITAL SHARES MRP COMPENSATION COMPENSATION
----- ------- ------ --- ------------ -----------
Balance at September 30, 1999 $ 32 49,216 (4,470) -- 2,373 (2,373)
Comprehensive income:
Net income -- -- -- -- -- --
Other comprehensive income-unrealized
loss on securities available-for-sale
net
of income taxes of $52 -- -- -- -- -- --
Total comprehensive income
Release of ESOP shares -- (5) 282 -- -- --
Deferred compensation -- -- -- -- 230 --
Treasury stock held for deferred
compensation -- -- -- -- -- (230)
Cash dividend declared -- -- -- -- -- --
Cash dividend on unallocated ESOP shares -- -- -- -- -- --
-------- ---------- ----------- ------------ ---------- --------
Balance at March 31, 2000 $ 32 49,211 (4,188) -- 2,603 (2,603)
======== ========== =========== ============ ========== ========
Balance at September 30, 2000 $ 33 35,587 (4,950) (1,296) 2,679 (2,679)
Comprehensive income:
Net income -- -- -- -- -- --
Other comprehensive income-unrealized
gain on securities available-for-sale
net of income taxes of $110 -- -- -- -- -- --
Total comprehensive income
Release of ESOP shares -- (12) 272 -- -- --
Deferred compensation -- -- -- -- 1,136 --
Treasury stock held for deferred
compensation -- -- -- -- -- (1,136)
MRP share amortization -- -- -- 389 -- --
Cash dividend declared -- -- -- -- -- --
Cash dividend on unallocated ESOP shares -- -- -- -- -- --
-------- ---------- ----------- ------------ ---------- --------
Balance at March 31, 2001 $ 33 35,575 (4,678) (907) 3,815 (3,815)
======== ========== =========== ============ ========== ========
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS'
INCOME INCOME (LOSS) EQUITY
------ ------------- ------
Balance at September 30, 1999 26,960 (123) 71,615
Comprehensive income:
Net income 2,208 -- 2,208
Other comprehensive income-unrealized
loss on securities available-for-sale
net of income taxes of $52 -- (91) (91)
----------
Total comprehensive income 2,117
Release of ESOP shares -- -- 277
Deferred compensation -- -- 230
Treasury stock held for deferred
compensation -- -- (230)
Cash dividend declared (506) -- (506)
Cash dividend on unallocated ESOP shares 36 -- 36
------------- ------------- -----------
Balance at March 31, 2000 28,698 (214) 73,539
============= ============= ===========
Balance at September 30, 2000 29,999 (164) 59,209
Comprehensive income:
Net income 1,676 -- 1,676
Other comprehensive income-unrealized
gain on securities available-for-sale
net of income taxes of $110 -- 176 176
----------
Total comprehensive income 1,852
Release of ESOP shares -- -- 260
Deferred compensation -- -- 1,136
Treasury stock held for deferred
compensation -- -- (1,136)
MRP share amortization -- -- 389
Cash dividend declared (526) -- (526)
Cash dividend on unallocated ESOP shares 46 -- 46
------------- ------------- -----------
Balance at March 31, 2001 31,195 12 61,230
============= ============= ===========
See accompanying notes to the consolidated financial statements.
4
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED
MARCH 31,
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 1,676 2,208
Adjustment to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 120 120
Depreciation 305 239
Deferred tax benefit (325) (115)
Amortization of premiums and discounts, net (12) (17)
Release of ESOP shares 260 276
Vesting of MRP shares 389 --
Loan origination fees and unearned discounts
deferred, net of current amortization (11) 33
Net loss on sale of loans 50 361
Proceeds from loans held for sale 17,646 9,209
Originations of loans held for sale (18,707) (6,278)
Decrease (increase) in other assets 25 (574)
Decrease (increase) in accrued interest receivable 212 (87)
Increase/(decrease) in other liabilities 1,127 (1,523)
-------- --------
Net cash provided by operating activ 2,755 3,852
-------- --------
Cash flows provided by (used in) investing activities:
Purchase of FHLB stock -- (431)
Redemption of FHLB stock -- 290
Purchases of investment securities held to maturity -- (3,996)
Purchase of investment securities available for sale (6,999) --
Proceeds from maturities of investment securities available for sale 3,108 2,040
Proceeds from maturities of investment securities held to maturity 17,532 4,300
Net increase in loans receivable (5,812) (12,043)
Purchases of premises and equipment (544) (76)
-------- --------
Net cash provided by (used in) investing activities 7,285 (9,916)
-------- --------
(Continued)
5
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED
MARCH 31,
2001 2000
-------- --------
Cash flows from financing activities:
Net increase in deposits $ 8,306 $ 5,901
Advances from the Federal Home Loan Bank 5,000 16,000
Repayments of advances from Federal Home Loan Bank (5,000) (10,000)
Return of capital dividend payment (17,007) --
Dividends paid on common stock (480) (469)
Increase in advance payments by borrowers for
property taxes and insurance 390 347
-------- --------
Net cash (used in) provided by financing activities (8,791) 11,779
-------- --------
Net increase in cash and cash equivalents 1,249 5,715
Cash and cash equivalents at beginning of period 33,107 15,657
-------- --------
Cash and cash equivalents at end of period $ 34,356 $ 21,372
======== ========
Payments are shown below for the following:
Interest $ 6,598 $ 5,429
======== ========
Income taxes $ 937 $ 1,317
======== ========
Noncash investing and financing activities:
Deferred compensation to be settled in Company's stock $ 1,136 $ 230
======== ========
Unrealized gains (losses) on investment securities
available for sale $ 286 $ (143)
======== ========
Cash dividends declared but not paid $ 241 $ 235
======== ========
Cash dividends on unallocated ESOP shares, used to repay the
Company's loan to ESOP, and on unallocated MRP shares $ 46 $ 36
======== ========
Transfer from loans held for sale to loans receivable $ 686 $ 5,099
======== ========
Transfer of land from other assets to premises and equipment $ -- $ 545
======== ========
Transfer from loans to real estate acquired in settlement of loans $ 2,106 $ --
======== ========
See accompanying notes to consolidated financial statements.
6
1ST STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 (UNAUDITED) AND SEPTEMBER 30, 2000
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 Converted 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, 2000,
which is derived from the September 30, 2000 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, 2001 are not necessarily indicative of the results of operations that
may be expected for the year ended September 30, 2001. 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
The Company's basic earnings per share were computed by dividing net
income by the weighted average shares outstanding, excluding ESOP and MRP
benefit plan shares not committed to be released or granted. Diluted earnings
per share includes the potentially dilutive effects of the Company's benefit
plans. A reconciliation of the denominators of the basic and diluted EPS
computations is as follows:
Three Months Ended
March 31,
2001 2000
---- ----
Shares outstanding, excluding MRP shares granted 3,163,125 3,163,125
Add: vested MRP shares issued 42,163 --
Less: unallocated ESOP shares (191,213) (219,932)
--------- ---------
Basic shares for earnings per share 3,014,075 2,943,193
Add: unvested MRP shares 84,319 --
Add: potential common stock pursuant to stock
option plan (See Note 7) 67,269 --
--------- ---------
Diluted shares for earnings per share 3,165,663 2,943,193
========= =========
7
Six Months Ended
March 31,
2001 2000
---- ----
Shares outstanding, excluding MRP shares granted 3,163,125 3,163,125
Add: vested MRP shares issued 42,163 --
Less: unallocated ESOP shares (194,774) (223,597)
--------- ---------
Basic shares for earnings per share 3,010,514 2,939,528
Add: unvested MRP shares 84,319 --
Add: potential common stock pursuant to stock
option plan (See Note 7) 64,165 --
--------- ---------
Diluted shares for earnings per share 3,158,998 2,939,528
========= =========
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
$4,899,000. The loan is secured by the shares of stock purchased by the ESOP.
During the three and six months ended March 31, 2001, 6,992 and 14,089 shares of
stock were committed to be released and approximately $131,000 and $260,000 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. 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 purchases its common stock to
fund this obligation as additional amounts are deferred. Refer to the Company's
notes to consolidated financial statements, incorporated by reference in the
Company's 2000 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 six months ended
March 31, 2001 was $68,000 and $135,000, respectively. This expense 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 a one-third immediate vest on the
date of the grant. Compensation expense of $263,000 and $527,000 associated with
the MRP was recorded during the three and six months ended March 31, 2001.
NOTE 7. STOCK OPTION AND INCENTIVE PLAN
On June 6, 2000 the Company's stockholders approved the 1st 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 granted 316,312 options to purchase its $0.01 par
value common stock in fiscal year 2000. The exercise price per share is equal to
the fair market value per share on the date of the grant of the stock.
8
NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities." In June 1999 the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. Changes in the fair values of those derivatives
will be reported in earnings or other comprehensive income depending on the use
of the derivative and whether the derivative qualifies for hedge accounting.
SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all
fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133, as
amended by SFAS No. 138, on October 1, 2000.
On October 1, 2000, the Company had no embedded derivative instruments
requiring separate accounting treatment and had identified fixed rate conforming
loan commitments as its only freestanding derivative instrument. The Company
does not currently engage in hedging activities. The commitments to originate
fixed rate conforming loans totaled $2,410,000 and $ 1,114,000 at March 31, 2001
and October 1, 2000, respectively. The fair value of these commitments was
immaterial on these dates and therefore the adoption of SFAS 133 on October 1,
2000 as well as the impact of applying SFAS 133 at March 31, 2001 was not
material to the Company's consolidated financial statements.
9
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, 2001 AND SEPTEMBER 30, 2000
Total assets decreased by $5.1 million or 1.5% from $355.5 million at
September 30, 2000 to $350.4 million at March 31, 2001. Assets grew by $11.8
million during the six months ended March 31, 2001 but this growth was largely
offset by the $17.0 million return of capital dividend which was paid to
stockholders on October 2, 2000.
Investment securities available for sale increased $4.1 million from
$9.8 million at September 30, 2000 to $13.9 million at March 31, 2001.
Investment securities held to maturity decreased $17.5 million from $68.9
million at September 30, 2000 to $51.4 million at March 31, 2001. As market
interest rates fell during the six months ended March 31, 2001, many of the
Company's callable investment securities were called by the issuers.
Loans receivable, net increased by $3.6 million, or 1.6%, from $223.6
million at September 30, 2000 to $227.2 million at March 31, 2001. Loans held
for sale also increased $1.0 million from $5.5 million at September 30, 2000 to
$6.5 million at March 31, 2001. With the lower interest rate environment, we
have continued to sell most of the long term fixed rate mortgage loans that we
originate. We sold $17.7 million in fixed rate mortgage loans during the six
months ended March 31, 2001 compared to $9.2 million for the six months ended
March 31, 2000. We continue to emphasize commercial, commercial real estate,
consumer loans and equity lines of credit that carry variable rates and/or short
term maturities. At March 31, 2001, commercial loans totaled $52.6 million and
account for 22.8% of gross loans compared to $42.9 million and 18.9% at
September 30, 2000. One to four family residential loans at March 31, 2001
totaled $91.8 million or 39.8% of gross loans compared to $97.6 million or 43.0%
at September 30, 2000.
Deposits increased $8.3 million from $254.4 million at September 30,
2000 to $262.7 million at March 31, 2001. Certificates of deposit at March 31,
2001 totaled $170.8 million or 65.0% of total deposits. At September 30, 2000,
certificates of deposit totaled $168.3 million or 66.2% of total deposits. We
continue to emphasize transaction accounts, which carry lower interest rates
than certificates of deposit. Transaction accounts account for 61.3% of the
deposit growth during the six months ended March 31, 2001.
Stockholders' equity increased by $2.0 million from $59.2 million at
September 30, 2000 to $61.2 million at March 31, 2001 as a result of net income
of $1.7 million, release of ESOP shares of $260,000, vesting of MRP shares of
$389,000, and an increase in unrealized gains on available for sale securities
of $176,000. These increases were offset by dividends declared of $480,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND
2000
Net Income. We recorded net income of $775,000 for the quarter ended
March 31, 2001, as compared to $1,115,000 for the quarter ended March 31, 2000,
representing a decrease of $340,000, or 30.5%. For the three months ended March
31, 2001 basic and diluted earnings per share were $0.26 and $0.24,
respectively. The Company reported basic and diluted earnings per share for the
quarter ended March 31, 2000 of $0.38 per share. The decrease in net income
resulted primarily from decreased net interest income and increased operating
expenses that were offset partially by increased other income and decreased
income taxes. The decline in net interest income resulted from the decrease in
average earning assets that resulted from the special return of capital dividend
of $17.0 million, which was paid on October 2, 2000 and decreased net interest
margins. The return of capital dividend decreased the ratio of average
interest-earning assets to average interest-bearing liabilities from 126.5% for
the three months ended March 31, 2000 to 119.0% for the three months ended March
31, 2001.
10
Net Interest Income. Net interest income, the difference between
interest earned on loans and investments and interest paid on interest-bearing
liabilities, decreased by $235,000 or 7.4% for the three months ended March 31,
2001, compared to the same quarter in the prior year. This decrease reflects a
$253,000 increase in interest income that was more than offset by the $488,000
increase in total interest expense. The average net interest margin decreased 32
basis points from 3.99% for the three months ended March 31, 2000 to 3.67% for
the quarter ended March 31, 2001.
Interest Income. The increase in interest income for the three months
ended March 31, 2001 was due to an increase of $2.4 million in average
interest-earning assets compared to the same quarter in the prior year and an
increase in yield on interest-earning assets of 0.26% from 7.50% for the three
months ended March 31, 2000 to 7.76% for the three months ended March 31, 2001.
The increased volume of average interest-earning assets increased interest
income by approximately $44,000 and the increased yield increased interest
income by approximately $209,000. An increase in average loans outstanding of
$15.1 million coupled with an increase in average interest-bearing overnight
funds of $6.2 million increased interest-earning assets for the quarter compared
to the prior year. These increases were offset in part by a decrease in average
investments of $18.9 million. Average investments decreased to provide cash to
pay the special return of capital dividend and as a result of the $20.0 million
of bonds that were called.
Interest Expense. Interest expense increased in the three months ended
March 31, 2001 due to an increase in average interest-bearing liabilities of
$18.0 million and an increase in the cost of interest-bearing liabilities of 43
basis points from 4.44% for the three months ended March 31, 2000 to 4.87% for
the three months ended March 31, 2001. Average deposits increased by $23.9
million while average FHLB advances decreased $5.9 million for the three months
ended March 31, 2001 compared to the same quarter in the prior year. The
increase in average interest-bearing liabilities increased interest expense by
approximately $200,000 while the increase in the average cost of
interest-bearing liabilities increased interest expense by approximately
$289,000.
The following table presents average balances and average rates
earned/paid by the Company for the quarter ended March 31, 2001 compared to the
quarter ended March 31, 2000.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
DOLLARS IN THOUSANDS
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------ ------- -------- ------
Assets:
Loans receivable (1) 232,084 4,927 8.49% 216,993 4,442 8.19%
Investment securities (2) 75,511 1,119 5.93 94,449 1,433 6.07
Interest-bearing overnight deposits 14,129 195 5.53 7,930 113 5.69
------- ----- ------- -----
Total interest-earning assets 321,724 6,241 7.76 319,372 5,988 7.50
Non interest-earning assets 26,125 19,509
------- -------
Total assets 347,849 338,881
Liabilities and stockholders' equity:
Deposits 249,938 3,013 4.82% 226,086 2,437 4.31%
FHLB advances 20,444 277 5.41 26,297 365 5.56
------- ----- ------- -----
Total interest-earning liabilities 270,382 3,290 4.87 252,383 2,802 4.44
Non interest-earning liabilities 16,641 13,469
------- -------
Total liabilities 287,023 265,852
Stockholders' equity 60,826 73,029
------- -------
Total liabilities and stockholders' equity 347,849 338,881
Net interest income 2,951 3,186
Interest rate spread 2.89% 3.06%
Net interest margin (3) 3.67% 3.99%
Ratio of average interest-earning assets
to average interest-bearing liabilities 118.99% 126.54%
(1) Includes nonaccrual loans and loans held for sale, net of discounts and
allowance for loan losses.
(2) Includes FHLB of Atlanta stock.
(3) Represents net interest income divided by the average balance of
interest-earning assets.
11
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, 2001 and 2000. During the quarter we foreclosed on a $2.1
million loan resulting in an increase to real estate owned. The fair value of
the collateral for the loan, less costs to sell, is estimated to exceed the
balance of the loan. Accordingly, upon foreclosure there was no charge off
against the allowance for loan losses. See further discussion of nonperforming
assets at "Asset Quality".
Other Income. Other income increased $179,000, or 52.5%, from $341,000
for the quarter ended March 31, 2000 to $520,000 for the quarter ended March 31,
2001. Mortgage banking income, net increased $168,000 from $25,000 for the
quarter ended March 31, 2000 to $193,000 for the quarter ended March 31, 2001.
During the quarter ended March 31, 2001, we sold fixed-rate mortgage loans held
for sale of $11.4 million and recognized a $193,000 gain on the sale. During the
quarter ended March 31, 2000, we sold fixed-rate mortgage loans held for sale of
$6.7 million and recognized a gain of $25,000 from the sale of these loans.
Customer service fees increased $22,000, or 15.7% from $140,000 for the quarter
ended March 31, 2000 to $162,000 for the quarter ended March 31, 2001. This
increase results primarily from growth in the number of transaction accounts.
During the quarter ended March 31, 2001, the Company incurred net losses from
real estate operations of $6,000, which were not present in the prior year.
Operating Expenses. Total operating expenses were $2.2 million for the
quarter ended March 31, 2001, an increase of $456,000, or 26.2% over the $1.7
million recorded for the three months ended March 31, 2000. Compensation and
related benefits expense increased $323,000, or 29.2% from $1.1 million for the
quarter ended March 31, 2000 to $1.4 million for the quarter ended March 31,
2001. This increase was primarily the result of the MRP expense of $263,000 for
the quarter ended March 31, 2001, which was not present in 2000. Occupancy and
equipment expense increased $76,000 or 29.8% from $255,000 for the quarter ended
March 31, 2000 to $331,000 for the quarter ended March 31, 2001. Most of this
increase was depreciation expense from the new branch and the check imaging
hardware and software, which were not present in the same quarter in the prior
year. The increases in other categories of operating expenses generally are
attributable to the growth of the Company including the operating expenses
associated with the Bank's seventh branch, which opened on September 27, 2000.
We expect that other operating expenses will continue to increase in subsequent
periods as a result of increased cost associated with operating a public
company.
Income Tax Expense. Income tax expense decreased $172,000 from tax
expense of $608,000 for the quarter ended March 31, 2000 to $436,000 for the
quarter ended March 31, 2001. The decrease resulted from a $512,000 decrease in
income before income taxes. The effective tax rates were 36.0% and 35.3% for the
quarters ended March 31, 2001 and 2000, respectively.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000
Net Income. We recorded net income of $1.7 million for the six months
ended March 31, 2001, as compared to $2.2 million for the six months ended March
31, 2000, representing a decrease of $532,000, or 24.1%. For the six months
ended March 31, 2001 basic and diluted earnings per share were $0.56 and $0.53,
respectively. The Company reported basic and diluted earnings per share for the
six months ended March 31, 2000 of $0.75 per share. The decrease in net income
resulted primarily from decreased net interest income and increased operating
expenses that were offset partially by increased other income and decreased
income taxes. The decline in net interest income resulted from the decrease in
average earning assets that resulted from the special return on capital dividend
of $17.0 million, which was paid on October 2, 2000 and decreased net interest
margins. The return of capital dividend decreased the ratio of average
interest-earning assets to average interest-bearing liabilities from 126.7% for
the six months ended March 31, 2000 to 120.0% for the six months ended March 31,
2001.
Net Interest Income. Net interest income, the difference between
interest earned on loans and investments and interest paid on interest-bearing
liabilities, decreased by $272,000 or 4.2% for the six months ended March 31,
2001, compared to the same six months in the prior year. This decrease reflects
a $807,000 increase in interest income that was more than offset by the $1.1
million increase in total interest expense. The average net interest margin
decreased 23 basis points from 4.07% for the six months ended March 31, 2000 to
3.84% for the six months ended March 31, 2001.
Interest Income. The increase in interest income for the six months
ended March 31, 2001 was due to an increase of $4.8 million in average
interest-earning assets compared to the same six months in the prior year and an
increase in yield on interest-earning assets of 0.39% from 7.53% for the six
months ended March 31, 2000 to 7.92% for the six months ended March 31, 2001.
The increased volume of average interest-earning assets increased interest
income by approximately $180,000 and the increased yield increased interest
income by approximately $628,000. An increase in average loans outstanding of
$17.8 million coupled with an increase in average interest-bearing overnight
funds of $5.7 million increased interest-earning assets for the six months
compared to the prior year. These increases were offset in part by a decrease in
average investments of $18.7 million. Average investments decreased to provide
cash to pay the special return of capital
12
dividend and as a result of the $20.0 million of bonds that were called.
Interest Expense. Interest expense increased in the six months ended
March 31, 2001 due to an increase in average interest-bearing liabilities of
$18.0 million and an increase in the cost of interest-bearing liabilities of 51
basis points from 4.39% for the six months ended March 31, 2000 to 4.90% for the
six months ended March 31, 2001. Average deposits increased by $22.8 million
while average FHLB advances decreased $4.9 million for the six months ended
March 31, 2001 compared to the same six months in the prior year. The increase
in average interest-bearing liabilities increased interest expense by
approximately $394,000 while the increase in the average cost of
interest-bearing liabilities increased interest expense by approximately
$685,000.
The following table presents average balances and average rates
earned/paid by the Company for the six months ended March 31, 2001 compared to
the six months ended March 31, 2000.
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
DOLLARS IN THOUSANDS
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------ ------- -------- ------
Assets:
Loans receivable (1) 231,747 10,017 8.64% 213,994 8,834 8.26%
Investment securities (2) 77,118 2,336 6.06 95,838 2,905 6.06
Interest-bearing overnight deposits 13,143 398 6.07 7,399 205 5.55
------- ------ ------- ------
Total interest-earning assets 322,008 12,751 7.92 317,231 11,944 7.53
Non interest-earning assets 23,977 19,656
------- -------
Total assets 345,985 336,887
Liabilities and stockholders' equity:
Deposits 247,303 5,990 4.84% 224,454 4,770 4.25%
FHLB advances 21,050 580 5.51 25,929 721 5.56
------- ------ ------- ------
Total interest-earning liabilities 268,353 6,570 4.90 250,383 5,491 4.39
Non interest-earning liabilities 17,311 13,912
------- -------
Total liabilities 285,664 264,295
Stockholders' equity 60,321 72,592
------- -------
Total liabilities and stockholders' equity 345,985 336,887
Net interest income 6,181 6,453
Interest rate spread 3.02% 3.14%
Net interest margin (3) 3.84% 4.07%
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.99% 126.70%
(1) Includes nonaccrual loans and loans held for sale, net of discounts and
allowance for loan losses.
(2) Includes FHLB of Atlanta stock.
(3) Represents net interest income divided by the average balance of
interest-earning assets.
13
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, 2001 and 2000. During the quarter we foreclosed on a $2.1
million loan resulting in an increase to real estate owned. The fair value of
the collateral for the loan, less costs to sell, is estimated to exceed the
balance of the loan. Accordingly, upon foreclosure there was no charge off
against the allowance for loan losses. See further discussion of nonperforming
assets at "Asset Quality".
Other Income. Other income increased $429,000, or 78.3%, from $548,000
for the six months ended March 31, 2000 to $977,000 for the six months ended
March 31, 2001. Mortgage banking income, net increased $379,000 from a loss of
$58,000 for the six months ended March 31, 2000 to income of $321,000 for the
six months ended March 31, 2001. During the six months ended March 31, 2001, we
sold fixed-rate mortgage loans held for sale of $17.7 million and recognized a
$301,000 gain on the sale as well as a recovery of $20,000 from previous
writedowns on loans held for sale. During the six months ended March 31, 2000,
we sold fixed-rate mortgage loans held for sale of $9.2 million and recognized a
gain of $122,000 from the sale of these loans; however, the increase in interest
rates during this six months required a $180,000 charge to earnings to record
the loans held for sale at the lower of cost or fair value. Customer service
fees increased $37,000, or 13.2% from $281,000 for the six months ended March
31, 2000 to $318,000 for the six months ended March 31, 2001. This increase
results primarily from growth in the number of transaction accounts. In
addition, during the six months ended March 31, 2001, commissions from sales of
annuities and mutual funds increased $24,000 or 12.3% from $195,000 for the six
months ended March 31, 2000 to $219,000 for the six months ended March 31, 2001.
This increase resulted from a shift in the mix of products sold that earned the
Company higher commissions. During the six months ended March 31, 2001, the
Company incurred net losses from real estate operations of $6,000, which were
not present in the prior year.
Operating Expenses. Total operating expenses were $4.4 million for the
six months ended March 31, 2001, an increase of $955,000, or 27.4% over the $3.5
million recorded for the six months ended March 31, 2000. Compensation and
related benefits expense increased $691,000, or 30.3% from $2.3 million for the
six months ended March 31, 2000 to $3.0 million for the six months ended March
31, 2001. This increase was primarily the result of the MRP expense of $527,000
for the six months ended March 31, 2001, which was not present in 2000.
Occupancy and equipment expense increased $107,000 or 21.4% from $501,000 for
the six months ended March 31, 2000 to $608,000 for the six months ended March
31, 2001. Most of this increase was depreciation expense from the new branch and
the check imaging hardware and software, which were not present in the same, six
months in the prior year. The increases in other categories of operating
expenses generally are attributable to the growth of the Company including the
operating expenses associated with the Bank's seventh branch, which opened on
September 27, 2000. We expect that other operating expenses will continue to
increase in subsequent periods as a result of increased cost associated with
operating a public company.
Income Tax Expense. Income tax expense decreased $266,000 from tax
expense of $1.2 million for the six months ended March 31, 2000 to $919,000 for
the six months ended March 31, 2001. The decrease resulted from a $798,000
decrease in income before income taxes. The effective tax rates were 35.4% and
34.9% for the six months ended March 31, 2001 and 2000, respectively. The higher
effective tax rate results from the losses at the holding company level for
which no state tax benefit is received.
ASSET QUALITY
At March 31, 2001, the Company's non-performing assets (nonaccrual
loans and real estate owned) were $2.9 million or 0.83% of total assets. At
September 30, 2000, non-performing assets consisted entirely of loans, which
were approximately $2.9 million or 0.82% of total assets. At March 31, 2001,
impaired loans totaled $493,000 as defined by Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," compared
to $2.6 million at September 30, 2000. The decrease is attributable to a single
$2.1 million loan that was foreclosed during the quarter. See further discussion
below. The impaired loans at March 31, 2001 result from one borrower and are
secured by several one to four family dwellings that are used as income
properties in Alamance County. At March 31, 2001, all of the $493,000 of
impaired loans are on non-accrual status, and their related reserve for loan
losses totaled $45,000. The average carrying value of impaired loans was $1.8
million during the six months ended March 31, 2001. No interest income was
recognized on these impaired loans during the six months ended March 31, 2001.
All amounts received on these impaired loans have been recorded as a reduction
of the principal balance of the loan. At March 31, 2001 real estate owned
totaled $2.1 million, compared to zero one at September 30, 2000. The increase
is attributable to foreclosing on two loans secured by real estate during the
quarter ended March 31, 2001. Within real estate owned is a 53 unit apartment
complex in Burlington, N. C. with a carrying value of $2.0 million. We have
engaged a management company to rent and operate the complex while we own it.
The Company is undertaking steps to liquidate the real
14
estate owned properties. The Bank's net chargeoffs for the six months ended
March 31, 2001 and 2000 were $36,000 and $1,000, respectively. The allowance for
loan losses was $3.6 million or 1.57% of outstanding loans at March 31, 2001.
This compares to 1.56 % at September 30, 2000 and 1.66% at March 31, 2000.
Regulations require that we classify our assets on a regular basis.
There are three classifications for problem assets: substandard, doubtful and
loss. We regularly review our assets to determine whether any assets require
classification or re-classification. At March 31, 2001, we had $ 3.3 million in
classified assets consisting entirely of $3.3 million in substandard assets.
In addition to regulatory classifications, we also classify as
"special mention" assets that are currently performing in accordance with their
contractual terms but may become classified or nonperforming assets in the
future. At March 31, 2001, we have identified approximately $37.8 million in
assets classified as special mention or watch. Included in this amount are five
loans with an aggregate outstanding balance of $4.3 million at March 31, 2001 to
a company affiliated with one of our directors. In addition, the director has
the ability to borrow an additional $174,000 from us under a line of credit. All
the loans are secured by a first lien on all company assets, including accounts
receivable, inventory, equipment, furniture and real property occupied by the
borrower. In addition, the director has personally guaranteed repayment of the
loans. At March 31, 2001, such loans were current with respect to their payment
terms and were performing in accordance with the related loan agreements. Based
on an analysis of the borrower's current financial statements received in May
2001, management has concerns that the borrower may have difficulty in complying
with the present loan repayment terms on an ongoing basis. Accordingly, this
loan may become a nonperforming asset in future periods. Management will
continue to closely monitor the performance of these loans in future periods.
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, 2001, 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 March 31, 2001, cash and cash equivalents
totaled $34.4 million. We have other sources of liquidity should we need
additional funds. During the six months ended March 31, 2001 and 2000, we sold
loans totaling $17.7 million and $9.2 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
$13.9 million at March 31, 2001.
We anticipate that we will have sufficient funds available to meet our
current commitments. At March 31, 2001, we had $7.2 million in commitments to
originate new loans, $55.2 million in unfunded commitments to extend credit
under existing equity lines and commercial lines of credit and $266,000 in
standby letters of credit. At March 31, 2001, certificates of deposit, which are
scheduled to mature within one year, totaled $140.2 million. We believe that a
significant portion of such deposits will remain with us.
The FDIC requires the Bank to meet a minimum leverage capital
requirement of Tier I capital to assets ratio of 4%. The FDIC also requires the
Bank to meet a ratio of total capital to risk-weighted assets of 8%, of which 4%
must be in the form of Tier I capital. The Commissioner requires the Bank at all
times to maintain certain minimum capital levels. The Bank was in compliance
with all capital requirements of the FDIC and the Commissioner at March 31, 2001
and is deemed to be "well capitalized."
15
The Federal Reserve also mandates capital requirements on all bank
holding companies, including 1st State Bancorp, Inc. These capital requirements
are similar to those imposed by the FDIC on the Bank. At March 31, 2001, the
Company was in compliance with the capital requirements of the Federal Reserve.
ACCOUNTING ISSUES
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities." In June 2000 the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. Changes in the fair values of those derivatives
will be reported in earnings or other comprehensive income depending on the use
of the derivative and whether the derivative qualifies for hedge accounting.
SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all
fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133, as
amended by SFAS No. 138, on October 1, 2000.
On October 1, 2000, the Company had no embedded derivative instruments
requiring separate accounting treatment and had identified fixed rate conforming
loan commitments as its only freestanding derivative instrument. The Company
does not currently engage in hedging activities. The commitments to originate
fixed rate conforming loans totaled $2,410,000 and $1,114,000 at March 31, 2001
and October 1, 2000, respectively. The fair value of these commitments was less
than $ 12,000 on these dates and therefore the adoption of SFAS 133 on October
1, 2000 as well as the impact of applying SFAS 133 at March 31, 2001 was not
material to the Company's consolidated financial statements.
The FASB has issued Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 140"). This statement replaces SFAS No.
125 ("Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities") and revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of the provisions of SFAS
No. 125 without consideration. SFAS No. 140 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities, based on application of a financial components approach that
focuses on control. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 2001.
Adoption of SFAS No. 140 is not expected to have a material impact on the
Company's consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on interest-earning assets over interest expense on
interest-bearing liabilities.
The Company considers interest rate risk to be its most significant
market risk, which could potentially have the greatest impact on operating
earnings. The structure of the Company's loan and deposit portfolios is such
that a significant decline in interest rates may adversely impact net market
values and net interest income.
The Company monitors whether material changes in market risk have
occurred since September 30, 2000. The Company does not believe that any
material adverse changes in market risk exposures occurred since September 30,
2000.
16
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 30,
2001. At this meeting 2,859,452 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
James A. Barnwell, Jr. 2,854,864 4,588
James G. McClure, Jr. 2,854,864 4,588
T. Scott Quakenbush 2,854,864 4,588
Ernest A. Koury, Jr. 2,854,837 4,615
There were no broker nonvotes on the matter.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits. None.
--------
(b.) Reports on Form 8-K. During the quarter ended March 31, 2001,
-------------------
the registrant did not file any current reports on Form 8-K.
17
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: May 11, 2001 ----------------------------------------
James C. McGill
President and Chief Executive Officer
(Principal Executive Officer)
/s/ A. Christine Baker
Date: May 11, 2001 ----------------------------------------
A. Christine Baker
Executive Vice President
Treasurer and Secretary
(Principal Financial and Accounting Officer)
18