U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
445 S. MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
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(Address of Principal Executive Offices) (Zip Code)
Registrant' s Telephone Number, Including Area Code (336) 227-8861
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N/A
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of February 2, 2000, 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 December 31, 2000
(unaudited) and September 30, 2000................................1
Consolidated Statements of Income for the Three Months Ended
December 31, 2000 and 1999 (unaudited)............................2
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Three Months Ended December 31, 2000 and
1999 (unaudited)..................................................3
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 2000 and 1999 (unaudited)............................4
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........11
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings..................................................12
Item 2. Changes in Securities and Use of Proceeds..........................12
Item 3. Defaults Upon Senior Securities....................................12
Item 4. Submission of Matters to a Vote of Security Holders................12
Item 5. Other Information..................................................12
Item 6. Exhibits and Reports on Form 8-K...................................12
SIGNATURES..................................................................13
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND SEPTEMBER 30, 2000
(IN THOUSANDS)
AT AT
DECEMBER 31, SEPTEMBER 30,
2000 2000
------------ -------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 20,776 33,107
Investment securities:
Held to maturity (fair value of $66,131 and $65,173
at December 31, 2000 and September 30, 2000, respectively) 66,705 67,232
Available for sale (cost of $9,961 and $10,019
at December 31, 2000 and September 30, 2000, respectively) 9,864 9,752
Loans held for sale, at lower of cost or fair value 3,753 5,533
Loans receivable (net of allowance for loan losses of $3,564
and $3,536 at December 31, 2000 and September 30, 2000, respectively) 229,785 223,595
Federal Home Loan Bank stock, at cost 1,650 1,650
Premises and equipment 8,709 8,453
Accrued interest receivable 2,563 2,653
Other assets 3,343 3,552
-------- --------
Total assets $347,148 355,527
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $258,070 254,405
Advances from Federal Home Loan Bank 25,000 20,000
Advance payments by borrowers for property taxes and insurance 354 151
Dividend payable 263 17,270
Other liabilities 3,166 4,492
-------- --------
Total liabilities 286,853 296,318
-------- --------
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 35,579 35,587
Unearned ESOP shares (4,813) (4,950)
Unearned compensation - management recognition plan (1,101) (1,296)
Deferred compensation 2,928 2,679
Treasury stock for deferred compensation (2,928) (2,679)
Retained income - substantially restricted 30,659 29,999
Accumulated other comprehensive loss - net unrealized
loss on investment securities available for sale (62) (164)
-------- --------
Total stockholders' equity 60,295 59,209
-------- --------
Total liabilities and stockholders' equity $347,148 355,527
======== ========
See accompanying notes to the consolidated financial statements.
1
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
--------- --------
Interest income:
Interest and fees on loans $ 5,090 4,392
Interest and dividends on investments 1,217 1,472
Overnight deposits 203 92
--------- -------
Total interest income 6,510 5,956
--------- -------
Interest expense:
Deposit accounts 2,977 2,334
Borrowings 303 356
--------- -------
Total interest expense 3,280 2,690
--------- -------
Net interest income 3,230 3,266
Provision for loan losses 60 60
--------- -------
Net interest income after provision for loan losses 3,170 3,206
--------- -------
Other income:
Service fees on loans sold 20 23
Customer service fees 156 141
Commissions from sales of annuities and mutual funds 111 80
Mortgage banking income (loss), net 128 (83)
Other 42 46
--------- -------
Total other income 457 207
--------- -------
Operating expenses:
Compensation and related benefits 1,543 1,176
Occupancy and equipment 277 245
Deposit insurance premiums 12 33
Other expenses 411 290
--------- -------
Total operating expenses 2,243 1,744
--------- -------
Income before income taxes 1,384 1,669
Income taxes 483 577
--------- -------
Net income $ 901 1,092
========= =======
Earnings per share:
Basic $ 0.30 $ 0.37
Diluted $ 0.29 $ 0.37
See accompanying notes to the consolidated financial statements.
2
1ST STATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
ADDITIONAL UNEARNED UNEARNED
COMMON PAID-IN ESOP COMPENSATION
STOCK CAPITAL SHARES MRP
------- --------- -------- ------------
Balance at September 30, 1999 $ 32 49,216 (4,470) --
Comprehensive income:
Net income -- -- -- --
Other comprehensive income-unrealized
loss on securities available-for-sale net
of income taxes of $45 -- -- -- --
Total comprehensive income
Release of ESOP shares -- 2 142 --
Deferred compensation -- -- -- --
Treasury stock held for deferred compensation -- -- -- --
Cash dividend declared -- -- -- --
Cash dividend on unallocated ESOP shares -- -- -- --
---- ------ ------ ------
Balance at December 31, 1999 $ 32 49,218 (4,328) --
==== ====== ====== ======
Balance at September 30, 2000 $ 33 35,587 (4,950) (1,296)
Comprehensive income:
Net income -- -- -- --
Other comprehensive income-unrealized
loss on securities available-for-sale net
of income taxes of $68 -- -- -- --
Total comprehensive income
Release of ESOP shares -- (8) 137 --
Deferred compensation -- -- -- --
Treasury stock held for deferred compensation -- -- -- --
MRP share amortization -- -- -- 195
Cash dividend declared -- -- -- --
Cash dividend on unallocated ESOP shares -- -- -- --
---- ------ ------ ------
Balance at December 31, 2000 $ 33 35,579 (4,813) (1,101)
==== ====== ====== ======
TREASURY
STOCK FOR OTHER TOTAL
DEFERRED DEFERRED RETAINED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION COMPENSATION INCOME INCOME (LOSS) EQUITY
------------ ------------ -------- ------------- ------------
Balance at September 30, 1999 2,373 (2,373) 26,960 (123) 71,615
Comprehensive income:
Net income -- -- 1,092 -- 1,092
Other comprehensive income-unrealized
loss on securities available-for-sale net
of income taxes of $45 -- -- -- (67) (67)
------
Total comprehensive income 1,025
Release of ESOP shares -- -- -- -- 144
Deferred compensation 217 -- -- -- 217
Treasury stock held for deferred compensation -- (217) -- -- (217)
Cash dividend declared -- -- (253) -- (253)
Cash dividend on unallocated ESOP shares -- -- 18 -- 18
------ ------ ------ ---- ------
Balance at December 31, 1999 2,590 (2,590) 27,817 (190) 72,549
====== ====== ====== ==== ======
Balance at September 30, 2000 2,679 (2,679) 29,999 (164) 59,209
Comprehensive income:
Net income -- -- 901 -- 901
Other comprehensive income-unrealized
loss on securities available-for-sale net
of income taxes of $68 -- -- -- 102 102
------
Total comprehensive income 1,003
Release of ESOP shares -- -- -- -- 129
Deferred compensation 249 -- -- -- 249
Treasury stock held for deferred compensation -- (249) -- -- (249)
MRP share amortization -- -- -- -- 195
Cash dividend declared -- -- (263) -- (263)
Cash dividend on unallocated ESOP shares -- -- 22 -- 22
------ ------ ------ ---- ------
Balance at December 31, 2000 2,928 (2,928) 30,659 (62) 60,295
====== ====== ====== ==== ======
See accompanying notes to the consolidated financial statements.
3
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
--------- --------
Cash flows from operating activities:
Net income $ 901 $ 1,092
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 60 60
Depreciation 146 118
Deferred tax expense (38) (30)
Amortization of premiums and discounts, net (5) (9)
Release of ESOP shares 129 144
Vesting of MRP shares 263 --
Loan origination fees and unearned discounts
deferred, net of current amortization 44 31
Net loss on sale of loans 63 152
Proceeds from loans held for sale 6,195 2,519
Originations of loans held for sale (5,164) (3,288)
Decrease (increase) in other assets 111 (61)
Decrease in accrued interest receivable 90 207
Decrease in other liabilities (1,326) (2,207)
------- -------
Net cash provided by (used in) operating activities 1,469 (1,272)
------- -------
Cash flows from investing activities:
Purchase of FHLB stock -- (290)
Purchases of investment securities held to maturity -- (1,996)
Proceeds from maturities of investment securities available for sale 60 1,106
Proceeds from maturities of investment securities
held to maturity 530 2,004
Net increase in loans receivable (5,608) (6,843)
Purchases of premises and equipment (402) (63)
------- -------
Net cash used in investing activities (5,420) (6,082)
------- -------
(Continued)
4
1ST STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
--------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 3,665 $ (5,304)
Advances from the Federal Home Loan Bank 5,000 11,000
Repayments of advances from Federal Home Loan Bank -- (2,000)
Return of capital dividend payment (17,007) --
Dividends paid on common stock (241) (235)
Increase in advance payments by borrowers for
property taxes and insurance 203 157
-------- --------
Net cash provided by (used in) financing activities (8,380) 3,618
-------- --------
Net decrease in cash and cash equivalents (12,331) (3,736)
Cash and cash equivalents at beginning of period 33,107 15,657
-------- --------
Cash and cash equivalents at end of period $ 20,776 $ 11,921
======== ========
Payments are shown below for the following:
Interest $ 3,342 $ 2,622
======== ========
Income taxes $ 27 $ 261
======== ========
Noncash investing and financing activities:
Deferred compensation to be settled in Company's stock $ 249 $ 217
======== ========
Unrealized gains (losses) on investment securities
available for sale $ 170 $ (112)
======== ========
Cash dividends declared but not paid $ 241 $ 235
======== ========
Cash dividends on unallocated ESOP and MRP shares $ 22 $ 18
======== ========
Transfer from loans held for sale to loans receivable $ 686 $ --
======== ========
See accompanying notes to consolidated financial statements.
5
1ST STATE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 (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 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 month period ended December 31,
2000 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 earnings per share for the three month period ended December
31, 2000 is based on basic and diluted weighted average shares of 3,007,030 and
3,152,285,respectively, of common stock outstanding, excluding ESOP and MRP
benefit plan shares not committed to be released or granted. For the three month
period ended December 31, 1999, both basic and diluted weighted average shares
were 2,935,902.
2000 1999
Average shares outstanding, excluding MRP shares 3,163,125 3,163,125
Add: weighted average vested MRP shares issued 42,163 --
Less: weighted average unallocated ESOP shares (198,258) (227,223)
--------- ---------
Basic shares for earnings per share 3,007,030 2,935,902
Add: unvested MRP shares 84,319 --
Add: potential common stock pursuant to stock
option plan (See Note 7) 60,936 --
--------- ---------
Dilutive shares for earnings per share 3,152,285 2,935,902
========= =========
NOTE 4. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The Company sponsors an employee stock ownership plan (the "ESOP")
whereby an aggregate number of shares amounting to 253,050 or 8% of the stock
issued in the conversion was purchased for future allocation to employees. The
ESOP was funded by an 11 year term loan from the Company in the amount of
$4,899,000. The loan is secured by the shares of stock
6
purchased by the ESOP. During the three months ended December 31, 2000 and 1999,
7,097 and 7,331 shares of stock were committed to be released and approximately
$129,000 and $144,000 of compensation expense was recognized, respectively.
NOTE 5. DEFERRED COMPENSATION
Directors and certain executive officers participate in a deferred
compensation plan, which was approved by the Board of Directors on September 24,
1997. This plan generally provides for fixed payments beginning after the
participant retires. Each participant is fully vested in his account balance
under the plan. Directors may elect to defer their directors' fees and executive
officers may elect to defer 25% of their salary and 100% of bonus compensation.
Prior to the Conversion, amounts deferred by each participant accumulated
interest at a rate equal to the highest rate of interest paid on the Bank's
one-year certificates of deposit. In connection with the Conversion,
participants in the plan were given the opportunity to prospectively elect to
have their deferred compensation balance earn a rate of return equal to the
total return of the Company's stock. All participants elected this option
concurrent with the Conversion, so the Company purchases its common stock to
fund this obligation. 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 months ended December 31,
2000 and 1999 was $68,000 and $39,000, 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 associated with the MRP was
recorded during the quarter ended December 31, 2000.
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.
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 $664,000 and $ 1,114,000 at December 31,
2000 and October 1, 2000, respectively. The fair value of these commitments was
less than $ 5,000 on these dates and therefore the adoption of SFAS 133 on
October 1, 2000 as well as the impact of applying SFAS 133 at December 31, 2000
was not material to the Company's consolidated financial statements.
7
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 DECEMBER 31, 2000 AND SEPTEMBER 30, 2000
Total assets decreased by $8.4 million or 2.4% from $355.5 million at
September 30, 2000 to $347.1 million at December 31, 2000. This decrease was
largely a result of the $17.0 million return of capital dividend which was paid
to stockholders on October 2, 2000.
Cash and cash equivalents decreased $12.3 million, or 37.2%, from $33.1
million at September 30, 2000 to $20.8 million at December 31, 2000. The
decrease in cash and cash equivalents resulted primarily from the payment of the
$17.0 million return of capital dividend on October 2, 2000. This decrease was
partially offset by an increase in cash and cash equivalents from an increase of
$5.0 million in borrowed money. Investment securities, both available for sale
and held to maturity, were relatively unchanged. Investments decreased a
combined total of $400,000, or 0.5%, from $77.0 million at September 30, 2000 to
$76.6 million at December 31, 2000.
Loans receivable, net increased by $6.2 million, or 2.8%, from $223.6
million at September 30, 2000 to $229.8 million at December 31, 2000. This
increase was offset somewhat by a $1.7 million decrease in loans held for sale.
Loans held for sale decreased 30.9% from $5.5 million at September 30, 2000 to
$3.8 million at December 31, 2000. Commercial loans increased $6.0 million, or
14.0%, compared to September 30, 2000 levels reflecting current loan demand.
Interest rates declined during the quarter and we sold more of our mortgage
production. We continue to emphasize commercial, commercial real estate,
consumer loans and equity lines of credit that carry variable rates and/or short
term maturities.
Stockholders' equity increased by $1.1 million from $59.2 million at
September 30, 2000 to $60.3 million at December 31, 2000 as a result of net
income of $901,000, release of ESOP shares of $129,000, vesting of MRP shares of
$195,000, and a decrease in unrealized losses on available for sale securities
of $102,000. These increases were offset by dividends declared of $241,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND
1999
Net Income. We recorded net income of $901,000 for the quarter ended
December 31, 2000, as compared to $1,092,000 for the quarter ended December 31,
1999, representing a decrease of $191,000, or 17.5%. For the three months ended
December 31, 2000 basic and diluted earnings per share were $0.30 and $0.29,
respectively. The Company reported basic and diluted earnings per share for the
quarter ended December 31, 1999 of $0.37 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 impact of the
decline in cash equivalents used to fund 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 126.2% for
the three months ended December 31, 1999 to 121.0% for the three months ended
December 31, 2000.
Net Interest Income. Net interest income, the difference between interest
earned on loans and investments and interest paid on interest-bearing
liabilities, decreased by $36,000 or 1.1% for the three months ended December
31, 2000, compared to the same quarter in the prior year. This decrease reflects
a $554,000 increase in interest income that was more than offset by the $590,000
8
increase in total interest expense. The average net interest margin decreased 15
basis points from 4.16% for the three months ended December 31, 1999 to 4.01%
for the quarter ended December 31, 2000.
Interest Income. The increase in interest income for the three months ended
December 31, 2000 was due to an increase of $8.6 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 0.49% from 7.59% for the three
months ended December 31, 1999 to 8.08% for the three months ended December 31,
2000. The increased volume of average interest-earning assets increased interest
income by approximately $250,000 and the increased yield increased interest
income by approximately $304,000. An increase in average loans outstanding of
$20.4 million coupled with an increase in average interest-bearing overnight
funds of $5.5 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 $17.3 million. Average investments decreased to provide cash to
pay the special return of capital dividend.
Interest Expense. Interest expense increased in the three months ended
December 31, 2000 due to an increase in average interest-bearing liabilities of
$17.7 million and an increase in the cost of interest-bearing liabilities of 60
basis points from 4.33% for the three months ended December 31, 1999 to 4.93%
for the three months ended December 31, 2000. Average deposits increased by
$21.6 million while average FHLB advances decreased $3.9 million for the three
months ended December 31, 2000 compared to the same quarter in the prior year.
The increase in average interest-bearing liabilities increased interest expense
by approximately $183,000 while the increase in the average cost of
interest-bearing liabilities increased interest expense by approximately
$407,000.
The following table presents average balances and average rates earned/paid
by the Company for the quarter ended December 31, 2000 compared to the quarter
ended December 31, 1999.
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
DOLLARS IN THOUSANDS
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------ ------- -------- ------
Assets:
Loans receivable (1) 231,424 5,090 8.80% 211,028 4,392 8.32%
Investment securities (2) 78,560 1,217 6.20 95,831 1,471 6.14
Interest-bearing overnight deposits 12,340 203 6.58 6,875 93 5.41
------- ----- ------- -----
Total interest-earning assets 322,324 6,510 8.08 313,734 5,956 7.59
Non interest-earning assets 21,881 21,182
------- -------
Total assets 344,205 334,916
Liabilities and stockholders' equity:
Deposits 244,755 2,977 4.87% 223,112 2,334 4.18%
FHLB advances 21,630 303 5.60 25,565 356 5.57
------- ----- ------- -----
Total interest-earning liabilities 266,385 3,280 4.93 248,677 2,690 4.33
Non interest-earning liabilities 17,995 14,214
------- -------
Total liabilities 284,380 262,891
Stockholders' equity 59,825 72,025
------- -------
Total liabilities and stockholders'
equity 344,205 334,916
Net interest income 3,230 3,266
Interest rate spread 3.15% 3.26%
Net interest margin (3) 4.01% 4.16%
Ratio of average interest-earning assets
to average interest-bearing liabilities 121.00% 126.16%
(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.
9
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 December 31, 2000 and 1999.
Other Income. Other income increased $250,000, or 120.8%, from $207,000 for
the quarter ended December 31 1999 to $457,000 for the quarter ended December
31, 2000. Mortgage banking income, net increased $211,000 from a loss of $83,000
for the quarter ended December 31, 1999 to income of $128,000 for the quarter
ended December 31, 2000. During the quarter ended December 31, 2000, we sold
fixed-rate mortgage loans held for sale of $6.2 million and recognized a
$108,000 gain on the sale. The Bank was also 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 December 31, 1999, we sold fixed-rate mortgage
loans held for sale of $2.5 million and recognized a gain of $36,000 from the
sale of these loans; however, the increase in interest rates during this quarter
required a $119,000 charge to earnings to record the loans held for sale to the
lower of cost or fair value. Customer service fees increased $15,000, or 10.6%
from $141,000 for the quarter ended December 31, 1999 to $156,000 for the
quarter ended December 31, 2000. This increase results primarily from growth in
the number of transaction accounts. In addition, during the quarter ended
December 31, 2000, commissions from sales of annuities and mutual funds
increased $31,000 or 38.8% from $80,000 for the quarter ended December 31, 1999
to $111,000 for the quarter ended December 31, 2000. The increase resulted from
a slightly higher volume of sales of annuities and mutual fund products.
Operating Expenses. Total operating expenses were $2.2 million for the
quarter ended December 31, 2000, an increase of $500,000, or 29.4% over the $1.7
million recorded for the three months ended December 31, 1999. Compensation and
related benefits expense increased $300,000, or 25.0% from $1.2 million for the
quarter ended December 31, 1999 to $1.5 million for the quarter ended December
31, 2000. This increase was primarily the result of the MRP expense of $263,000
for the quarter ended December 31, 2000, which was not present in 1999. 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 $94,000 from tax expense
of $577,000 for the quarter ended December 31, 1999 to $483,000 for the quarter
ended December 31, 2000. The decrease resulted from a $285,000 decrease in
income before income taxes. The effective tax rates were 34.9% and 34.6% for the
quarters ended December 31, 2000 and 1999, respectively.
ASSET QUALITY
At December 31, 2000, we had approximately $3.0 million of loans in
nonaccrual status as compared with $2.9 million at September 30, 2000. At
December 31, 2000 and September 30, 2000, impaired loans totaled $2.5 million
and $2.6 million, respectively, as defined by Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan." The
impaired loans result from two unrelated loan customers, both of which have
loans secured by commercial real estate properties in Alamance County. At
December 31, 2000, all of the $2.5 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 $2.7 million during the three
months ended December 31, 2000. No interest income was recognized on these
impaired loans during the three months ended December 31, 2000. All amounts
received on these impaired loans have been recorded as a reduction of the
principal balance of the loan. The Bank's net chargeoffs for the three months
ended December 31, 2000 and 1999 were $32,000 and $1,000, respectively. The
allowance for loan losses was $3.6 million or 1.53% of outstanding loans at
December 31, 2000. This compares to 1.56 % at September 30, 2000 and 1.71% at
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Bank must meet certain liquidity requirements established by the State
of North Carolina Office of the Commissioner of Banks (the "Commissioner"). At
December 31, 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
10
that sufficient funds are available to meet deposit withdrawals, fund loan
commitments, maintain adequate reserve requirements, pay operating expenses,
provide funds for debt service, pay dividends to stockholders and meet other
general commitments.
Our primary sources of funds are deposits, principal and interest payments
on loans, proceeds from the sale of loans, and to a lesser extent, advances from
the FHLB of Atlanta. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and local competition.
Our most liquid assets are cash and cash equivalents. The levels of these
assets are dependent on our operating, financing, lending and investing
activities during any given period. At December 31, 2000, cash and cash
equivalents totaled $20.8 million. We have other sources of liquidity should we
need additional funds. During the three months ended December 31, 2000 and 1999,
we sold loans totaling $6.2 million and $2.5 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 $13.6 million at December 31, 2000.
We anticipate that we will have sufficient funds available to meet our
current commitments. At December 31, 2000, we had $5.9 million in commitments to
originate new loans, $56.2 million in unfunded commitments to extend credit
under existing equity lines and commercial lines of credit and $1.8 million in
standby letters of credit. At December 31, 2000, certificates of deposit, which
are scheduled to mature within one year, totaled $132.1 million. We believe that
a significant portion of such deposits will remain with us.
The FDIC requires the Bank to meet a minimum leverage capital requirement
of Tier I capital to assets ratio of 4%. The FDIC also requires the Bank to meet
a ratio of total capital to risk-weighted assets of 8%, of which 4% must be in
the form of Tier I capital. The Commissioner requires the Bank at all times to
maintain certain minimum capital levels. The Bank was in compliance with all
capital requirements of the FDIC and the Commissioner at December 31, 2000 and
is deemed to be "well capitalized."
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 December 31, 2000, 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 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 $664,000 and $ 1,114,000 at December 31,
2000 and October 1, 2000, respectively. The fair value of these commitments was
less than $ 5,000 on these dates and therefore the adoption of SFAS 133 on
October 1, 2000 as well as the impact of applying SFAS 133 at December 31, 2000
was not material to the Company's consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits. None.
--------
(b.) Reports on Form 8-K. During the quarter ended December 31,
--------------------
2000, the registrant did not file any current reports on
Form 8-K.
12
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: February 7, 2001 -------------------------------------
James C. McGill
President and Chief Executive Officer
(Principal Executive Officer)
/s/ A. Christine Baker
Date: February 7, 2001 -------------------------------------
A. Christine Baker
Executive Vice President
Treasurer and Secretary
(Principal Financial and Accounting
Officer)