EX-13 5 0005.txt 1ST STATE BANCORP, INC. [LOGO] 2000 ANNUAL REPORT 1ST STATE BANCORP, INC. -------------------------------------------------------------------------------- 1st State Bancorp, Inc. serves as the holding company for its wholly owned subsidiary, 1st State Bank. 1st State Bancorp is primarily engaged in the business of directing, planning and coordinating the business activities of 1st State Bank. Founded in 1914, 1st State Bank is a community and customer oriented North Carolina-chartered commercial bank headquartered in Burlington, North Carolina. We operate seven full service offices located in north central North Carolina on the Interstate 85 corridor between the Piedmont Triad and Research Triangle Park. We conduct most of our business in Alamance County, North Carolina. Our business consists principally of attracting deposits from the general public and investing these funds in loans secured by single-family residential and commercial real estate, secured and unsecured commercial loans and consumer loans. Our profitability depends primarily on our net interest income, which is the difference between the income we receive on our loan and investment securities portfolios and our cost of funds, which consists of the interest we pay on deposits and borrowed funds. We also earn income from miscellaneous fees related to our loans and deposits, mortgage banking income and commissions from sales of annuities and mutual funds. MARKET INFORMATION -------------------------------------------------------------------------------- 1st State Bancorp's common stock began trading under the symbol "FSBC" on the Nasdaq National Market System on April 26, 1999. There are currently 3,289,607 shares of common stock outstanding and approximately 1,546 holders of record of the common stock. Following are the high and low closing prices, by fiscal quarter, as reported on the Nasdaq National Market System during the periods indicated, as well as dividends declared on the common stock during each quarter.
Special Cash High Low Dividends Per Share Distribution ---- --- ------------------- ------------ Fiscal 2000 ----------- First quarter............................. $ 20.00 $ 19.00 $ 0.08 Second quarter............................ 19.50 17.56 0.08 Third quarter............................. 20.50 18.00 0.08 Fourth quarter............................ 23.25 19.50 0.08 $ 5.17 Fiscal 1999 ----------- Third quarter............................. $ 19.63 $ 19.00 $ 0.08 Fourth quarter............................ 19.75 19.19 0.08
The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company's capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized" under prompt corrective action regulations. The Company declared a $5.17 per share special non-recurring cash distribution on September 5, 2000. The distribution was paid on October 2, 2000. The special cash distribution is accounted for as a return of capital for financial statement purposes. We anticipate that most of the payment will be considered a return of capital dividend for tax purposes. The Bank obtained the FDIC's approval prior to declaration as the Bank had not included such a distribution in the business plan filed at the time of conversion. TABLE OF CONTENTS -------------------------------------------------------------------------------- 1st State Bancorp, Inc........................................................1 Market Information............................................................1 Letter to Stockholders........................................................2 Selected Consolidated Financial and Other Data................................3 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................5 Consolidated Financial Statements............................................19 Corporate Information........................................................56 1 To Our Depositors, Shareholders and Friends, We are pleased to report to you the results of 1st State Bancorp, Inc. (Nasdaq symbol: FSBC) for the year ended September 30, 2000. Our financial results for our first full year of operations were encouraging. Net income for the year ended September 30, 2000 was $3,986,000 or basic and diluted earnings per share of $1.35 and $1.32, respectively. These results represent an increase of $451,000 or 12.8% over the previous year's net income of $3,535,000 before the one-time charge to fund the 1st State Bank Foundation, Inc. Lending continues to be the foundation of our success. Net loans receivable increased 14.5% over the prior year or $28.3 million to $224 million at year-end. During 2000, we continued to emphasize commercial, construction, mortgage, consumer and equity line loans. The quality of our loan portfolio remains sound. The majority of our loans are to customers in our local market that we know and understand. We will continue to grow loans and maintain high credit quality through prudent underwriting. We currently have loan loss reserves of $3.5 million, or 1.56% of net loans receivable at year-end. One of the most significant events of the past year was the decision to declare a return of capital dividend. At the time of our stock conversion, the net proceeds from our stock sale were $46.2 million. This addition to our existing capital base resulted in capital of $73.7 million. While this strong capital base has allowed us to grow loans and investments, we have been operating since April 1999 in an over capitalized position for a bank of our size. In response to this situation, the Board of Directors approved a special one-time cash distribution of $5.17 per share, which was paid to stockholders on October 2, 2000. The Board believes that returning a part of our capital to our stockholders in the form of a special cash distribution was the best choice to enhance the total value of our shareholders' investment. After this $17 million distribution, the Company still maintains a very strong capital position. We continue to operate as a full service community bank with an emphasis on customer service. While some of our competitors have de-emphasized the value of face-to-face customer service, we believe that quality customer service is the core of our competitive advantage. We gain customers by taking the time to listen and understand their needs. We are committed to investing in the communities in which we serve. In September 2000, we opened our seventh full-service branch office on Highway 87 in Graham. This office will complement our other Alamance County branches and will enable us to better serve our customers in southern Alamance County. On behalf of our staff, officers and directors, thank you for being a stockholder of 1st State Bancorp, Inc. We believe that our Company has a bright future. We look forward to continuing to serve our customers and to enhance shareholder value through growth, profitability and capital management. Very truly yours, /s/ James C. McGill James C. McGill President 2 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA --------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA At September 30, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----- ------ ------ ------ ----- (In thousands) Total assets................................. $ 355,527 $ 332,926 $288,223 $258,509 $ 235,138 Loans receivable............................. 223,595 195,292 196,782 197,122 173,849 Loans held for sale, at lower of cost or fair value................................. 5,533 12,143 7,540 684 2,377 Cash and cash equivalents.................... 33,107 15,657 31,077 14,990 9,754 Investment securities: Available for sale....................... 9,752 11,036 9,858 11,320 16,024 Held to maturity......................... 67,232 84,228 30,195 23,482 21,685 Deposit accounts............................. 254,405 234,095 235,694 229,341 209,707 Advances from Federal Home Loan Bank......... 20,000 22,000 20,000 1,000 1,000 Stockholders' equity......................... 59,209 71,615 25,966 23,277 20,629
SELECTED OPERATING DATA Year Ended September 30, ------------------------------------------------------------- 2000 1999 1998 1997 1996 ----- ------ ------ ------ ----- (Dollars in thousands, except per share data) Total interest income........................ $ 24,784 $ 21,474 $ 20,708 $ 19,061 $ 17,395 Total interest expense....................... 11,596 10,640 11,071 9,799 9,453 ---------- --------- -------- -------- --------- Net interest income.......................... 13,188 10,834 9,637 9,262 7,942 Provision for loan losses.................... 240 245 477 261 281 ---------- --------- -------- -------- --------- Net interest income after provision for loan losses............................ 12,948 10,589 9,160 9,001 7,661 Other income................................. 1,703 1,654 1,497 1,468 1,179 Operating expenses........................... 8,525 9,818 6,774 6,473 6,403 ---------- --------- -------- -------- --------- Income before income taxes................... 6,126 2,425 3,883 3,996 2,437 Income taxes................................. 2,140 870 1,362 1,447 841 ---------- --------- -------- -------- --------- Net income................................... $ 3,986 $ 1,555 $ 2,521 $ 2,549 $ 1,596 ========== ========= ======== ======== ========= Net income (loss) per share - basic.......... $ 1.35 $ (0.10) $ -- $ -- $ -- ========== ========= ======== ======== ========= Net income (loss) per share - diluted........ $ 1.32 $ (0.10) $ -- $ -- $ -- ========== ========= ======== ======== =========
Per share data is shown only for periods subsequent to the stock conversion in April 1999. 3
SELECTED FINANCIAL RATIOS AND OTHER DATA Year Ended September 30, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----- ------ ------ ------ ----- PERFORMANCE RATIOS: Return on average assets (net income divided by average total assets)......... 1.17% 0.50% 0.92% 1.03% 0.70% Return on average equity (net income divided by average equity)............... 5.50 3.30 10.20 11.34 7.92 Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)................................ 3.16 3.11 3.45 3.70 3.41 Net interest margin (net interest income divided by average interest-earning assets)................................... 4.10 3.71 3.77 4.00 3.68 Ratio of average interest-earning assets to average interest-bearing liabilities... 125.93 116.58 107.42 106.99 106.25 Ratio of operating expenses to average total assets.............................. 2.49 3.14 2.48 2.62 2.80 ASSET QUALITY RATIOS: Nonperforming assets to total assets at end of period.......................... 0.82 0.11 0.09 0.10 0.12 Nonperforming loans to total loans at end of period.......................... 1.27 0.18 0.13 0.13 0.16 Allowance for loan losses to total loans at end of period.................... 1.52 1.74 1.61 1.38 1.42 Allowance for loan losses to nonperforming loans at end of period.................... 121.93 943.82 1,227.38 1,063.32 866.67 Provision for loan losses to total loans..... 0.10 0.12 0.24 0.13 0.16 Net charge-offs to average loans outstanding................................ 0.07 0.01 -- -- -- CAPITAL RATIOS: Shareholders' equity to total assets at end of period................................. 16.65 21.51 9.01 9.00 8.77 Average equity to average assets............. 21.19 15.09 9.05 9.10 8.80
4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- References in this document to the "Bank," "we," "us," and "our" refer to 1st State Bank. Where appropriate, "us" or "our" refers collectively to 1st State Bancorp, Inc. and 1st State Bank. References in this document to "the Company" refer to 1st State Bancorp, Inc. GENERAL 1st State Bancorp, Inc. was formed in November 1998 and became the holding company for 1st State Bank on April 23, 1999. As a result, portions of this discussion (as of dates and for periods prior to April 23, 1999) relate to the financial condition and results of operations of 1st State Bank. Our business consists principally of attracting deposits from the general public and investing these funds in loans secured by single-family residential and commercial real estate, secured and unsecured commercial loans and consumer loans. Our profitability depends primarily on our net interest income which is the difference between the income we receive on our loan and investment securities portfolios and our cost of funds, which consists of interest paid on deposits and borrowed funds. Net interest income also is affected by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. Our profitability also is affected by the level of other income and operating expenses. Other income consists of miscellaneous fees related to our loans and deposits, mortgage banking income and commissions from sales of annuities and mutual funds. Operating expenses consist of compensation and benefits, occupancy related expenses, federal deposit insurance premiums, data processing, advertising and other expenses. Our operations are influenced significantly by local economic conditions and by policies of financial institution regulatory authorities. Our cost of funds is influenced by interest rates on competing investments and by rates offered on similar investments by competing financial institutions in our market area, as well as general market interest rates. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered. Our business emphasis has been to operate as a well-capitalized, profitable and independent community-oriented financial institution dedicated to providing quality customer service. We are committed to meeting the financial needs of the communities in which we operate. We believe that we can be more effective in servicing our customers than many of our nonlocal competitors because of our ability to quickly and effectively provide senior management responses to customer needs and inquiries. Our ability to provide these services is enhanced by the stability of our senior management team. Beginning in the late 1980's, we have sought to gradually increase the percentage of our assets invested in commercial real estate loans, commercial loans and consumer loans, which have higher interest rates and shorter terms and adjust more frequently to changes in interest rates than single-family residential mortgage loans. At September 30, 2000, commercial real estate, commercial and consumer loans totaled $46.5 million, $42.9 million and $6.8 million, respectively, which represented 19.6%, 18.1% and 2.9%, respectively, of gross loans. At September 30, 2000, $98.0 million, or 41.3% of gross loans, consisted of residential real estate mortgage loans. FORWARD-LOOKING STATEMENTS When used in this Annual Report, 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, competition and 5 information provided by third-party vendors that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We wish to advise readers 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. LIQUIDITY AND CAPITAL RESOURCES 1st State Bancorp has no business other than that of 1st State Bank and investing its assets. We believe that our current assets, consisting of invested cash and short-term investments, earnings on those assets and principal and interest payments on 1st State Bancorp's loan to the employee stock ownership plan, together with dividends that may be paid from 1st State Bank to 1st State Bancorp, will provide sufficient funds for its initial operations and liquidity needs; however, it is possible that 1st State Bancorp may need additional funds in the future. We cannot assure you, however, that 1st State Bancorp's sources of funds will be sufficient to satisfy its liquidity needs in the future. 1st State Bank is subject to certain regulatory limitations on the payment of dividends to 1st State Bancorp. For a discussion of these regulatory dividend limitations, see "Market Information." At September 30, 2000, we had stockholders' equity of $59.2 million, as compared to $71.6 million at September 30, 1999. We reported net income for the year ended September 30, 2000 of $4.0 million, as compared to $1.6 million and $2.5 million for the years ended September 30, 1999 and 1998, respectively. At September 30, 2000 and 1999, we had a Tier 1 risk-based capital to risk-weighted assets ratio of 27.0% and 36.6%, respectively. At September 30, 2000, we had Tier 1 leverage capital, Tier 1 risk-based capital, and total risk-based capital of $59.3 million, $59.3 million and $62.0 million, respectively. At September 30, 2000, we exceeded all regulatory minimum capital requirements. The decrease in stockholders' equity at September 30, 2000 compared to September 30, 1999, results primarily from the special cash distribution of $17.0 million which was declared on September 5, 2000. The Company declared a $5.17 per share one-time, non-recurring dividend to stockholders of record as of September 15, 2000. At September 30, 2000, the Bank had stockholders' equity of $52.0 million, as compared to $47.7 million at September 30, 1999. At September 30, 2000 and 1999, the Bank had a Tier 1 risk-based capital to risk-weighted assets ratio of 24.0% and 24.8%, respectively. At September 30, 2000, the Bank had Tier 1 leverage capital, Tier 1 risk-based capital, and total risk-based capital of $52.0 million, $52.3 million, and $54.8 million, respectively, and was classified as a "well-capitalized" institution pursuant to FDIC capital regulations. 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 primary investing activities have been the origination of loans and the purchase of investment securities. During the years ended September 30, 2000, 1999 and 1998, we had $92.6 million, $113.8 million and $105.4 million, respectively, of loan originations. During the years ended September 30, 2000, 1999 and 1998, we purchased investment securities in the amounts of $4.0 million, $77.7 million and $34.6 million, respectively. Our primary financing activities are the attraction of savings deposits and, during the year ended September 30, 2000, obtaining FHLB advances. FDIC policy requires that banks maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances and specified United States government, state, or federal agency obligations) in an amount which it deems adequate to protect the safety and soundness of the bank. The FDIC currently has no specific level which it requires. Under the FDIC's calculation method, management calculated the Bank's liquidity ratio as 23.9% of total assets at September 30, 2000, which management believes is adequate. 6 North Carolina banks must maintain a reserve fund in an amount and/or ratio set by the Banking Commission to account for the level of liquidity necessary to assure the safety and soundness of the State banking system. As of September 30, 2000, the Bank's liquidity ratio was in excess of the level established by North Carolina regulations. 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 September 30, 2000 and 1999, cash and cash equivalents totaled $33.1 million and $15.7 million, respectively. We have other sources of liquidity should we need additional funds. During the years ended September 30, 2000, 1999 and 1998, we sold loans totaling $19.0 million, $40.4 million and $27.8 million, respectively. Additional sources of funds include FHLB of Atlanta advances. During the year ended September 30, 1998, we obtained $20 million of FHLB of Atlanta advances with maturities matched to the repricing of a comparable amount of loans to reduce our exposure to potentially rising interest rates. For more information regarding this strategy, see " -- Asset/Liability Management." At September 30, 2000, we had $20.0 million of FHLB of Atlanta advances outstanding, compared to $22.0 million at September 30, 1999. Other sources of liquidity include loans and investment securities designated as available for sale, which totaled $5.5 million and $9.8 million, respectively, at September 30, 2000. We anticipate that we will have sufficient funds available to meet our current commitments. At September 30, 2000, we had $7.9 million in commitments to originate new loans, $51.2 million in unfunded commitments to extend credit under existing equity line and commercial lines of credit and $1.6 million in standby letters of credit. At September 30, 2000, certificates of deposit which are scheduled to mature within one year totaled $133.2 million. We believe that a significant portion of such deposits will remain with us. ASSET/LIABILITY MANAGEMENT Net interest income, the primary component of our net income, is derived from the difference or "spread" between the yield on interest-earning assets and the cost of interest-bearing liabilities. We strive to achieve consistent net interest income and to reduce our exposure to changes in interest rates by matching the terms to repricing of our interest-sensitive assets and liabilities. The matching of our assets and liabilities may be analyzed by examining the extent to which our assets and liabilities are interest rate sensitive and by monitoring the expected effects of interest rate changes on our net interest income. Factors beyond our control, such as market interest rates and competition, may also have an impact on our interest income and interest expense. In the absence of any other factors, the overall yield or return associated with our earning assets generally will increase from existing levels when interest rates rise over an extended period of time, and conversely interest income will decrease when interest rates decrease. In general, interest expense will increase when interest rates rise over an extended period of time, and conversely interest expense will decrease when interest rates decrease. Therefore, by controlling the increases and decreases in its interest income and interest expense which are brought about by changes in market interest rates, we can significantly influence our net interest income. Our President reports to our board of directors on a regular basis on interest rate risk and trends, as well as liquidity and capital ratios and requirements. The board of directors reviews the maturities of our assets and liabilities and establishes policies and strategies designed to regulate our flow of funds and to coordinate the sources, uses and pricing of such funds. The first priority in structuring and pricing our assets and liabilities is to maintain an acceptable interest rate spread while reducing the net effects of changes in interest rates. Our management is responsible for administering the policies and determinations of the board of directors with respect to our asset and liability goals and strategies. Our principal strategy in managing our interest rate risk has been to increase interest rate sensitive assets such as commercial loans and consumer loans. At September 30, 2000, we had $42.9 million of commercial loans and $6.8 million of consumer loans, which amounted to 18.1% and 2.9%, respectively, of our gross loan portfolio, as compared to $32.5 million of commercial loans and $6.7 million of consumer loans, respectively, at September 30, 1999, which amounted to 15.8% and 3.2%, respectively, of our gross loan portfolio at that date. In addition, in managing our portfolio of investment securities in recent periods we emphasized the purchase of short-term securities so as to reduce our exposure to increases in interest rates. In addition, at September 30, 2000, we had $5.5 million of loans held for sale, and, pursuant to Statement of Financial Accounting Standards No. 115, "Accounting 7 for Certain Investments in Debt and Equity Securities", we had investment securities with an aggregate amortized cost of $10.0 million and an aggregate fair value of $9.8 million as available for sale. We are holding these loans and investment securities as available for sale so that they may be sold if needed for liquidity or asset and liability management purposes. We also have shortened the average repricing period of our assets by retaining in our portfolio single-family residential mortgage loans only in cases where the loan carries an adjustable rate or the loan has an interest rate that is sufficient to compensate us for the risk of maintaining long-term, fixed-rate loans in our portfolio. During the past two years, we have sold a significant portion of our fixed-rate, single-family residential mortgage loans with terms of 15 years or more that we have originated, and at September 30, 2000, most of our single-family residential mortgage loans classified as held for investment were originated at least three years previously when market interest rates were higher. At September 30, 2000, we held approximately $33.6 million of adjustable-rate residential mortgage loans, which represented approximately 14.1% of our gross loan portfolio. Depending on conditions existing at any given time, as part of our interest rate risk management strategy, we may sell newly originated fixed-rate residential mortgage loans with original maturities of 15 years or more in the secondary market. In addition, in early 1998, as market interest rates were falling and our yields on newly originated loans were decreasing, we became increasingly concerned that if interest rates were to increase significantly from the low rates then prevailing our cost of funds could be expected to increase while we would continue to earn the same low yield on our fixed-rate loans. To reduce our interest rate risk, in February 1998, we obtained $20.0 million in fixed-rate FHLB of Atlanta advances. These advances were structured with maturities estimated to coincide with the expected repricing of approximately $20.0 million of our loans. Through this strategy, we were able to establish a positive interest rate spread on the $20.0 million of assets and FHLB of Atlanta advances. The strategy of obtaining FHLB advances with maturities matched to a comparably sized portfolio of interest-earning assets has helped us to significantly reduce our interest rate risk in times of rising interest rates with respect to that portion of our assets and liabilities. MARKET RISK Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. The risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. We do not maintain a trading account for any class of financial instrument nor do we engage in hedging activities or purchase high-risk derivative instruments. Furthermore, we are not subject to foreign currency exchange rate risk or commodity price risk. We measure our interest rate risk by computing estimated changes in net interest income and the net portfolio value of cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. These computations estimate the effect on our net interest income and net portfolio value of sudden and sustained 1% to 3% increases and decreases in market interest rates. Our board of directors has adopted an interest rate risk policy which establishes maximum decreases in our estimated net interest income of 10%, 15% and 25% in the event of 1%, 2% and 3% increases and 10%, 20% and 30% in the event of 1%, 2% and 3% decreases in the market interest rates, respectively. Limits have also been established for changes in net portfolio value of decreases of 10%, 15% and 25% in the event of 1%, 2% and 3% increases in market interest rates, respectively, and decreases of 10%, 15% and 20% in the event of 1%, 2% and 3% decreases in market interest rates, respectively. The following table presents the projected change in net interest income and net portfolio value for the various rate shock levels at September 30, 2000. 8
Net Portfolio Value Net Interest Income Change ----------------------------------------- ------------------------------------------- in Rates $ Amount $ Change % Change $ Amount $ Change % Change -------- -------- -------- -------- -------- -------- -------- (Dollars in thousands) + 300 bp $ 49,364 $ (6,483) (11.6)% $14,942 $ 2,398 19.1% + 200 bp 51,571 (4,276) (7.7) 14,206 1,662 13.2 + 100 bp 53,794 (2,053) (3.7) 13,412 868 6.9 Base 55,847 12,544 - 100 bp 56,740 893 1.6 11,537 (1,007) (8.0) - 200 bp 55,337 (510) (0.9) 10,429 (2,115) (16.9) - 300 bp 54,222 (1,625) (2.9) 9,391 (3,153) (25.1)
The above table indicates that at September 30, 2000, in the event of sudden and sustained increases in prevailing market interest rates, we would expect our estimated net interest income to increase and our net portfolio value to decrease, and that in the event of sudden and sustained decreases in prevailing market interest rates, we would expect our estimated net interest income and net portfolio value to decrease, except that we would expect our net portfolio value to increase in the event of a sudden and sustained decrease in interest rates of 100 basis points. Our board of directors reviews our net interest income and net portfolio value position quarterly, and, if estimated changes in net interest income and net portfolio value are not within the targets established by the board, the board may direct management to adjust the asset and liability mix to bring interest rate risk within board approved targets. At September 30, 2000, our estimated changes in net interest income and net portfolio value were within the targets established by the board of directors. Computations of prospective effects of hypothetical interest rate changes, such as the above computations, are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the above table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in our portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Also, borrowers may have difficulty in repaying their adjustable-rate debt if interest rates increase. 9 ANALYSIS OF NET INTEREST INCOME Net interest income represents the difference between income derived from interest-earning assets and the interest expense on interest-bearing liabilities. Net interest income is affected by the difference between the rates of interest earned on interest-earning assets and the rates paid on interest-bearing liabilities, known as "interest rate spread," and the relative volume of interest-earning assets and interest-bearing liabilities. The following table sets forth certain information relating to our consolidated statements of income for the years ended September 30, 2000, 1999 and 1998 and reflects the average yield on assets and average cost of liabilities at the date and for the periods indicated. We derived yields and costs by dividing income or expense by the average balance of assets and liabilities, respectively, for the periods shown. Average balances are derived from daily balances.
Year Ended September 30, ------------------------------------------------------------- At September 30, 2000 2000 1999 --------------------- ----------------------------- ----------------------------- Average Average Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost -------- ------ -------- ------- -------- ------- -------- ------- (Dollars in thousands) Assets: Loans receivable (1).................... $ 229,128 8.61% $ 219,381 $ 18,500 8.43% $198,603 $16,113 8.11% Investment securities (2)............... 76,984 6.16 90,133 5,509 6.11 68,182 4,160 6.10 Interest-bearing overnight deposits..... 26,054 6.64 12,401 775 6.25 25,139 1,201 4.78 ----------- --------- --------- -------- ------- Total interest-earning assets ........ 332,166 7.89 321,915 24,784 7.70 291,924 21,474 7.36 --------- ------- Non-interest-earning assets............... 23,361 19,999 20,290 ----------- --------- -------- Total assets.......................... $ 355,527 $ 341,914 $312,214 =========== ========= ======== Liabilities and net worth: Deposits................................ $ 242,514 4.86 $ 230,165 $ 10,158 4.41 $230,363 $ 9,540 4.14 FHLB advances........................... 20,000 5.39 25,467 1,438 5.65 20,044 1,100 5.49 ----------- --------- --------- -------- ------- Total interest-bearing liabilities.... 262,514 4.90 255,632 11,596 4.54 250,407 10,640 4.25 ------ --------- ----- ------- ------ Non-interest-bearing liabilities.......... 33,804 13,826 14,696 ----------- --------- -------- Total liabilities..................... 296,318 269,458 265,103 Net worth................................. 59,209 72,456 47,111 ----------- --------- -------- Total liabilities and net worth ...... $ 355,527 $ 341,914 $312,214 =========== ========= ======== Net interest income....................... $ 13,188 $10,834 ========= ======= Interest rate spread...................... 2.99% 3.16% 3.11% ====== ====== ====== Net interest margin (3)................... 4.10% 3.71% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities............................. 126.53% 125.93% 116.58% ====== ====== ====== Year Ended September 30, ------------------------------ 1998 ----------------------------- Average Average Yield/ Balance Interest Cost ------- -------- -------- (Dollars in thousands) Assets: Loans receivable (1).................... $199,203 $ 17,185 8.63% Investment securities (2)............... 35,938 2,320 6.46 Interest-bearing overnight deposits..... 20,409 1,203 5.89 --------- -------- Total interest-earning assets ........ 255,550 20,708 8.10 -------- Non-interest-earning assets............... 17,499 --------- Total assets.......................... $ 273,049 ========= Liabilities and net worth: Deposits................................ $ 224,334 10,331 4.61 FHLB advances........................... 13,559 740 5.46 --------- -------- Total interest-bearing liabilities.... 237,893 11,071 4.65 -------- ------ Non-interest-bearing liabilities.......... 10,436 --------- Total liabilities..................... 248,329 Net worth................................. 24,720 --------- Total liabilities and net worth ...... $ 273,049 ========= Net interest income....................... $ 9,637 ======== Interest rate spread...................... 3.45% ====== Net interest margin (3)................... 3.77% ====== Ratio of average interest-earning assets to average interest-bearing liabilities............................. 107.42% ====== _____________ (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.
10 RATE/VOLUME ANALYSIS The table below sets forth certain information regarding changes in our interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, we have provided information on changes attributable to: o changes in volume, which are changes in volume multiplied by old rate o changes in rates, which are changes in rate multiplied by old volume o changes in rate-volume, which are changes in rate multiplied by the changes in volume and o total change, which is the sum of the previous columns.
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------------------------------- 2000 VS. 1999 1999 VS. 1998 --------------------------------------- ----------------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO --------------------------------------- ----------------------------------------- RATE/ RATE/ VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL ------ ---- ------ ----- ------ ---- ------ ----- (IN THOUSANDS) Interest income: Loans receivable (1)........... $ 1,686 $ 635 $ 66 $ 2,387 $ (52) $(1,023) $ 3 $(1,072) Investment securities (2)...... 1,339 8 2 1,349 2,081 (127) (114) 1,840 Other interest-earning assets.. (609) 370 (187) (426) 279 (228) (53) (2) ------- --------- ----- -------- ------ ------- ------ ------- Total interest-earning assets..................... 2,416 1,013 (119) 3,310 2,308 (1,378) (164) 766 ------- --------- ----- -------- ------ ------- ------ ------- Interest expense: Deposits....................... (8) 627 (1) 618 278 (1,041) (28) (791) FHLB advances.................. 297 32 9 338 354 4 2 360 ------- --------- ----- -------- ------ ------- ------ ------- Total interest-bearing liabilities............. 289 659 8 956 632 (1,037) (26) (431) ------- --------- ----- -------- ------ ------- ------ ------- Change in net interest income.... $ 2,127 $ 354 $(127) $ 2,354 $1,676 $ (341) $ (138) $ 1,197 ======= ========= ===== ======== ====== ======= ====== ======= --------------- (1) Includes nonaccrual loans and loans held for sale net of discounts, fees and allowance for loan losses. (2) Includes FHLB of Atlanta stock.
11 COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND 1999 Total assets increased by $22.6 million or 6.8%, from $332.9 million at September 30, 1999 to $355.5 million at September 30, 2000. The increase in assets was due primarily to loan growth which was funded by an increase in deposits. Loans receivable, net increased $28.3 million, or 14.5% from $195.3 million at September 30, 1999 to $223.6 million at September 30, 2000. Loans held for sale decreased $6.6 million, or 54.4% from $12.1 million at September 30, 1999 to $5.5 million at September 30, 2000. The Company mitigated its exposure to rising interest rates during the year by decreasing its loans held for sale. The Company continued its strategy of originating commercial and consumer loans (including equity lines of credit). These loans offer variable interest rates and shorter maturities for asset liability management purposes. Total investments decreased $18.3 million, or 23.8% from $95.3 million at September 30, 1999 to $77.0 million at September 30, 2000. Cash and cash equivalents increased $17.5 million, or 111.5% from $15.7 million at September 30, 1999 to $33.1 million at September 30, 2000 as we accumulated liquidity for the $17 million special cash distribution to shareholders declared by the board of directors on September 5, 2000. Stockholders' equity decreased by $12.4 million, or 17.3% from $71.6 million at September 30, 1999 to $59.2 million at September 30, 2000. Stockholders' equity decreased as a result of the $17.0 million special cash distribution and the $1.0 million regular cash dividends, which were declared during the year ended September 30, 2000. These charges to stockholders' equity were partially offset by net income of $4.0 million, $1.0 million associated with vesting of MRP shares, and $567,000 from the allocation of ESOP shares. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999 Net Income. We had $4.0 million of net income for the year ended September 30, 2000, compared to $1.6 million of net income for the year ended September 30, 1999, representing an increase of $2.4 million, or 156.3%. During the year ended September 30, 2000, net interest income increased $2.4 million while operating expenses decreased $1.3 million and income taxes increased $1.3 million. Operating expenses for the year ended September 30, 1999 included the $3.0 million contribution expense to fund the 1st State Bank Foundation, Inc. For the year ended September 30, 2000, operating expenses included increased compensation and benefits expense of $1.4 million most of which was related to the implementation of the MRP. Net Interest Income. Net interest income was $13.2 million for the year ended September 30, 2000, as compared to $10.8 million for the year ended September 30, 1999, representing an increase of $2.4 million, or 21.7%. During the year ended September 30, 2000, we were able to increase our net interest income by increasing our levels of interest-earning assets and interest-bearing liabilities. The average balance of interest-earning assets increased by $30.0 million, or 10.3%, from $291.9 million for the year ended September 30, 1999 to $321.9 million for the year ended September 30, 2000 primarily due to increases in the average balances of loans and investment securities which were slightly offset by a decrease in interest-bearing overnight deposits. In addition, the average balance of interest-bearing liabilities increased by $5.2 million, or 2.1%, from $250.4 million for the year ended September 30, 1999 to $255.6 million for the year ended September 30, 2000 primarily due to increases in the average balance of FHLB advances. Net interest income was also boosted by an increase in our interest rate spread from 3.11% for the year ended September 30, 1999 to 3.16% for the year ended September 30, 2000. The $24.8 million increase in average net earning assets for fiscal 2000 compared to fiscal 1999 resulted from the Company having the net proceeds of $46.2 million from the issuance of common stock for the full year in fiscal 2000 compared to a partial year in fiscal 1999. During the year ended September 30, 2000, the Federal Reserve raised interest rates four times, and the prime interest rate increased from 8.25% on September 30, 1999 to 9.50% on September 20, 2000. The average prime rate for the year ended September 30, 2000 was 8.95%, an increase of 1.07% from 7.88%, the average for the year ended September 30, 1999. These higher interest rates increased the yields which we earned on loans and interest-bearing deposits as well as the rates we paid on deposits and borrowed money during the year ended September 30, 2000. Interest Income. Total interest income was $24.8 million for the year ended September 30, 2000, as compared to $21.5 million for the year ended September 30, 1999, representing an increase of $3.3 million, or 15.4%. This increase was attributable to the $30.0 million, or 10.3% increase in the average balance of interest-earning assets during the year and the 34 basis point increase in the average yield on interest-earning assets. 12 Interest on loans receivable increased by $2.4 million, or 14.8%, from $16.1 million for the year ended September 30, 1999 to $18.5 million for the year ended September 30, 2000. The average yield on loans receivable increased 32 basis points from 8.11% for the year ended September 30, 1999 to 8.43% for the year ended September 30, 2000. The increase resulted primarily from increases in the prime rate. The average balance of loans receivable for the year September 30, 2000 increased by $20.8 million, or 10.5%, from $198.6 million for the year ended September 30, 1999 to $219.4 million for the year ended September 30, 2000. Interest on investment securities increased by $1.3 million, or 32.4%, from $4.2 million for the year ended September 30, 1999 to $5.5 million for the year ended September 30, 2000. The increase was attributable to a $21.9 million, or 32.2%, increase in the average balance of investment securities from $68.2 million for the year ended September 30, 1999 to $90.1 million for the year ended September 30, 2000. The increase in the average balance of investment securities resulted from the investment of the conversion proceeds into short-term government agency securities. The average yield on investment securities increased from 6.10% for the year ended September 30, 1999 to 6.11% for the year ended September 30, 2000. Interest on interest-bearing overnight deposits decreased by $400,000, or 35.5%, from $1.2 million for the year ended September 30, 1999 to $800,000 for the year ended September 30, 2000. The average balance of interest-bearing deposits decreased $12.7 million, or 50.7%, from $25.1 million for the year ended September 30, 1999 to $12.4 million for the year ended September 30, 2000. The average balance of interest-bearing overnight deposits decreased as we invested the conversion proceeds into short-term government agency securities. The volume decrease was offset by an increase of 147 basis points in the yield on other interest-earning assets. Interest Expense. Total interest expense was $11.6 million for the year ended September 30, 2000, as compared with $10.6 million for the year ended September 30, 1999, representing an increase of $1.0 million, or 9.0%. Such increase was due primarily to a $5.2 million increase in average interest-bearing liabilities and a 29 basis point increase in the average cost of funds. Average interest-bearing liabilities increased from $250.4 million for the year ended September 30, 1999 to $255.6 million for the year ended September 30, 2000. Interest on deposits increased by $700,000, or 6.5%, from $9.5 million for the year ended September 30, 1999 to $10.2 million for the year ended September 30, 2000. The increase was attributable to a 27 basis point increase in the average cost of deposits. As market interest rates increased we raised the interest rates on our deposit products. Offsetting the increased cost of funds was a decrease in average deposits of $200,000, or 0.1%, from $230.4 million for the year ended September 30, 1999 to $230.2 million for the year ended September 30, 2000. Interest expense on borrowings increased $300,000, or 30.7%, from $1.1 million for the year ended September 30, 1999 to $1.4 million for the year ended September 30, 2000. The increase was primarily due to a $5.5 million, or 27.5%, increase in average borrowings from $20.0 million for the year ended September 30, 1999 to $25.5 million for the year ended September 30, 2000. Outstanding for both years was a long-term fixed rate advance of $20 million from the FHLB Atlanta. During the year ended September 30, 2000, we used short-term variable rate borrowings on an as needed basis to fund loan growth. The average cost of borrowed money increased 16 basis points. Provision for Loan Losses. We charge provisions for loan losses to earnings to maintain the total allowance for loan losses at a level we consider adequate to provide for probable loan losses, based on prior loss experience, volume and type of lending we conduct, industry standards and past due loans in our loan portfolio. Our policies require the review of assets on a regular basis, and we appropriately classify loans as well as other assets if warranted. We believe we use the best information available to make a determination with respect to the allowance for loan losses, recognizing that future adjustments may be necessary depending upon a change in economic conditions. The provision for loan losses was $240,000, charge-offs were $164,000 and recoveries were $6,000 for the year ended September 30, 2000 compared with a provision of $245,000, charge-offs of $23,000 and recoveries of $4,000 for the year ended September 30, 1999. Nonperforming loans at September 30, 2000 and 1999 were $2.9 million and $366,000, respectively. The increase in non-performing loans resulted from two unrelated, unique credits which are not necessarily indicative of the credit quality of the entire portfolio. There was no significant impact on the provision as a result of these two credits as we had already anticipated the loans' performance in setting the allowance for loan losses in the previous year. 13 The allowance for loan losses was $3.5 million at September 30, 2000 and September 30, 1999 which we think is adequate to absorb probable losses in the loan portfolio. The ratio of the allowance for the loan losses to total loans, net of loans in process and deferred loan fees was 1.56% and 1.74% at September 30, 2000 and 1999, respectively. In fiscal 1999, the Company was concerned about the impact of the local economy on the credit risk of its borrowers. While there are still concerns over recent economic conditions in the local, state and national economy, including the impact of rising interest rates on borrowers, management concluded that this impact may not be as great as once expected. This was the primary factor contributing to the decrease in the percentage of the allowance for loan losses to loans during fiscal 2000. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the recognition of adjustments to the allowance for loan losses based on their judgments of information available to them at the time of their examinations. Other Income. Total other income was $1.7 million for each of the years ended September 30, 2000 and 1999. Commissions from sales of annuities and mutual funds increased $81,000, or 16.2% from $500,000 for the year ended September 30, 1999 to $581,000 for the year ended September 30, 2000. This increase results from a change in the mix of sales of annuities and mutual funds. Annuity and mutual fund sales for the year ended September 30, 2000 were $5.1 million and $4.6 million, respectively. During the year ended September 30, 1999, annuity and mutual fund sales were $3.3 million and $8.3 million, respectively. We earn a higher front-end commission on annuity sales compared to mutual fund sales. Commissions on the higher annuity sales more than offset the decline in mutual fund sales. During the year ended September 30, 2000, mortgage banking income, net decreased by $190,000, or 58.5% from $325,000 for fiscal 1999 to $135,000 for fiscal 2000. This decrease was a result of lower volume of loan sales for the year ended September 30, 2000. During the years ended September 30, 2000 and 1999, we sold $17.5 million and $45.0 million of mortgage loans, respectively. Customer service fees on loan and deposit accounts increased by $29,000, or 5.4%, from $540,000 for the year ended September 30, 1999 to $569,000 for the year ended September 30, 2000. This increase results primarily from growth in the number of transaction accounts. We recognized a gain of $149,000 on the disposition of REO during the year ended September 30, 2000. This was an increase of $144,000 over the prior year. Operating Expenses. Total operating expenses decreased by $1.3 million, or 13.2%, from $9.8 million for the year ended September 30, 1999 to $8.5 million for the year ended September 30, 2000. Included in the $9.8 million of operating expenses for the year ended September 30, 1999 is the $3.0 million contribution to establish the 1st State Bank Foundation, Inc. Excluding this one-time nonrecurring expense, operating expenses would have been $6.8 million, which is $1.7 million less than the $8.5 million of operating expenses recorded in the year ended September 30, 2000. Compensation and related benefits increased by $1.4 million, or 33.4%, from $4.5 million for the year ended September 30, 1999 to $5.9 million for the year ended September 30, 2000. The increase in compensation expense was primarily a result of the adoption of the Management Recognition Plan (MRP) in the year ended September 30, 2000. Total compensation expense recognized for the MRP for fiscal 2000 was $1.1 million. ESOP expense increased $137,000, or 31.8% from $430,000 for the year ended September 30, 1999 to $567,000 for the year ended September 30, 2000. This increase resulted from more shares being allocated to participants and an increase in market price in 2000. Salaries and other benefits increased $299,000, or 7.4% from $4.0 million in fiscal 2000 to $4.3 million in fiscal 1999. This increase results from growth in personnel to accommodate the Company's growth. The increase in other categories of operating expenses is generally attributable to the growth of the Company and the increased cost of being a public company. Income Taxes. Income tax expense was $2.1 million for the year ended September 30, 2000 compared to $870,000 for the year ended September 30, 1999. The increase was primarily the result of higher pretax income. Our effective tax rate was 34.9% for the year ended September 30, 2000 and 35.9% for the year ended September 30, 1999. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998 Net Income. We had $1.6 million of net income for the year ended September 30, 1999, compared to $2.5 million of net income for the year ended September 30, 1998, representing a decrease of $967,000, or 38.3%. During the year ended September 30, 1999, increases in net interest income and other income were offset by 14 increases in operating expenses. Included in operating expenses for the year ended September 30, 1999 was the $3.0 million contribution to fund the charitable foundation. Net Interest Income. Net interest income was $10.8 million for the year ended September 30, 1999, as compared to $9.6 million for the year ended September 30, 1998, representing an increase of $1.2 million, or 12.5%. During the year ended September 30, 1999, we were able to increase our net interest income by increasing our levels of interest-earning assets and interest-bearing liabilities. The average balance of interest-earning assets increased by $36.3 million, or 14.2%, from $255.6 million for the year ended September 30, 1998 to $291.9 million for the year ended September 30, 1999 primarily due to increases in the average balances of investment securities and interest-bearing overnight deposits. These increase primarily resulted from the investment of the funds received in the April 1999 stock offering. In addition, the average balance of interest-bearing liabilities increased by $12.5 million, or 5.3%, from $237.9 million for the year ended September 30, 1998 to $250.4 million for the year ended September 30, 1999 primarily due to increases in the average balance of deposits and FHLB advances. The effect of the increases in the average balances of assets and liabilities was offset in part by a decrease in our interest rate spread from 3.45% for the year ended September 30, 1998 to 3.11% for the year ended September 30, 1999. During the quarter ended December 31, 1998 the Federal Reserve lowered interest rates three times, and the prime interest rate decreased from 8.50% on September 29, 1998 to 7.75% on November 18, 1998. The Federal Reserve boosted rates twice during the quarter ended September 30, 1999. The average prime rate for the year ended September 30, 1999 was 7.88%, a decrease of 0.62% from 8.50%, the average for the year ended September 30, 1998. These lower interest rates decreased the yields which we earned on loans, investments and interest-bearing deposits during the year ended September 30, 1999. We were able to lower our cost of funds by decreasing the rates of interest paid on our deposits to partially offset this decrease. Interest Income. Total interest income was $21.5 million for the year ended September 30, 1999, as compared to $20.7 million for the year ended September 30, 1998, representing an increase of $765,000, or 3.7%. This increase was attributable to the $36.3 million, or 14.2% increase in the average balance of interest-earning assets during the year and offset in part by a 74 basis point decrease in the average yield on interest-earning assets. Interest on loans receivable decreased by $1.1 million, or 6.4%, from $17.2 million for the year ended September 30, 1998 to $16.1 million for the year ended September 30, 1999. The average yield on loans receivable decreased 52 basis points during the year ended September 30, 1999. The decrease was due primarily to a 0.62% decrease in the average prime rate from 8.50% for the year ended September 30, 1998 to 7.88% for the year ended September 30, 1999. The average balance of loans receivable for the year September 30, 1998 decreased by $600,000, or 0.3%, from $199.2 million to $198.6 million for the year ended September 30, 1999 despite increases in loan originations. In response to lower market interest rates, we sold a higher percentage of single family residential loans and many of our mortgage loan customers refinanced their existing mortgage loans. Interest on investment securities increased by $1.9 million, or 82.6%, from $2.3 million for the year ended September 30, 1998 to $4.2 million for the year ended September 30, 1999. The increase was attributable to a $32.3 million, or 90.0%, increase in the average balance of investment securities from $35.9 million for the year ended September 30, 1998 to $68.2 million for the year ended September 30, 1999. Offsetting the increased average balances of investment securities was a 36 basis point decrease in the average yield on investment securities due to falling market interest rates during the first half of the year ended September 30, 1999. As rates declined, a higher than normal level of our investment securities were called by the issuers and we were faced with lower reinvestment rates. Interest on interest-bearing overnight deposits was $1.2 million for each of the years ended September 30, 1999 and 1998. The average balance of interest-bearing deposits increased $4.7 million, or 23.0%, from $20.4 million for the year ended September 30, 1998 to $25.1 million for the year ended September 30, 1999. The volume increase was offset by a decrease of 111 basis points in the yield on other interest-earning assets. Interest Expense. Total interest expense was $10.6 million for the year ended September 30, 1999, as compared with $11.1 million for the year ended September 30, 1998, representing a decrease of $432,000, or 3.9%. Such decrease was due primarily to a 40 basis point decrease in the average cost of funds which was partially offset by a $12.5 million, or 5.3%, increase in average interest-bearing liabilities from $237.9 million for the year ended September 30, 1998 to $250.4 million for the year ended September 30, 1999. 15 Interest on deposits decreased by $791,000, or 7.7%, from $10.3 million for the year ended September 30, 1998 to $9.5 million for the year ended September 30, 1999. The decrease was attributable to a 47 basis point decrease in the average cost of deposits. As market interest rates decreased we lowered the interest rates on our deposit products. Offsetting the decreased cost of funds was an increase in average deposits of $6.1 million, or 27%, from $224.3 million for the year ended September 30, 1998 to $230.4 million for the year ended September 30, 1999. Interest expense on borrowings increased $360,000, or 48.6%, from $740,000 for the year ended September 30, 1998 to $1.1 million for the year ended September 30, 1999. The increase was primarily due to a $6.4 million, or 47.1%, increase in average borrowings from $13.6 million for the year ended September 30, 1998 to $20.0 million for the year ended September 30, 1999. We borrowed $20 million from the FHLB Atlanta in February 1998. The long-term advance was outstanding for all of the year ended September 30,1999 which accounts for the majority of the increase in the average balance. Provision for Loan Losses. We provided $245,000 and $477,000 for loan losses during the years ended September 30, 1999 and 1998, respectively. The decreased provision during the year ended September 30, 1999 reflects slower loan growth and a change in the mix of our commercial, construction, and commercial real estate loans compared to the prior year. At September 30, 1999, construction loans and asset based loans were $16.5 million and $8.6 million, respectively, which amounted to 8.0% and 4.2%, respectively, of the gross loan portfolio. Comparatively, at September 30, 1998, construction loans and asset based loans were $18.6 million and $9.4 million, respectively, which amounted to 9.0% and 4.5%, respectively, of the gross loan portfolio. The allowance for loan losses was $3.5 million at September 30, 1999, as compared to $3.2 million at September 30, 1998. The ratio of the allowance for loan losses to total loans, net of loans in process and deferred loan fees was 1.74% and 1.61% at September 30, 1999 and 1998, respectively. In 1999, we continued to see signs that our local economy was softening. We continued to make loans to smaller businesses, churches and non-profit organizations. We believed that these borrowers are more vulnerable to changes in the economy than larger, more diversified companies whose revenues are supported by customers in a variety of locations. We continued to see the negative impact of the NAFTA legislation on the textile industry and borrowers employed by local textile companies. Finally, we continued to see increased consumer debt levels and rising consumer bankruptcy rates nationally and in North Carolina. These factors had a negative effect on our consumer and mortgage loan portfolios during 1999. Collectively, these factors prompted us to increase the allowance for loan losses during 1999. Other Income. Total other income increased by $156,000, or 10.43%, from $1.5 million for the year ended September 30, 1998 to $1.7 million for the year ended September 30, 1999. Of such increase, $64,000 was attributable to increased commissions from sales of annuities and mutual funds. Our sales of annuities and mutual funds were $11.6 million and $10.1 million for the years ended September 30, 1999 and 1998, respectively. During the year ended September 30, 1999, mortgage banking income, net decreased by $112,000. As interest rates increased during the second half of the year, we recorded a $328,397 lower of cost or market adjustment on the loans held for sale. At September 30, 1999, we had loans held for sale with a carrying value of $12.1 million. During the years ended September 30, 1999 and 1998, we recognized net losses of $198,000 and $119,000 on the sale of $40.4 million and $27.8 million of mortgage loans, respectively. Of these loans sold, the Bank retained the servicing rights on $7.8 million and $4.1 million, respectively. We received fees to compensate us for releasing the servicing rights on the remaining loans sold. These fees, which amounted to $850,000 and $351,000 for the years ended September 30, 1999 and 1998, respectively, more than offset the aforementioned losses recognized on the sale of these loans. Customer service fees on loan and deposit accounts decreased by $26,000, or 4.6%, from $566,000 for the year ended September 30, 1998 to $540,000 for the year ended September 30, 1999. During the year ended September 30, 1998 we recognized net securities losses of $246,000 from an other than temporary decline in the value of an investment in marketable equity securities. The fair value of the marketable equity securities depends largely on changes in interest rates as the underlying securities are debt securities. At September 30, 1999, we had an unrealized loss of $134,000 on our marketable equity securities. These unrealized losses were the result of increased interest rates and are not considered an other than temporary decline in value. However, future changes in interest rates could cause additional declines in values that are other than temporary. Operating Expenses. Total operating expenses increased by $3.0 million, or 44.1%, from $6.8 million for the year ended September 30, 1998 to $9.8 million for the year ended September 30, 1999. Included in the $9.8 16 million of operating expenses for the year ended September 30, 1999 is the $3.0 million contribution to establish the 1st State Bank Foundation, Inc. Excluding this one-time nonrecurring expense, operating expenses would have been $6.8 million which was $43,000, or 0.6%, over the prior year. Compensation and related benefits decreased by $155,000, or 3.4%, from $4.6 million for the year ended September 30, 1998 to $4.5 million for the year ended September 30, 1999. Deferred compensation expense decreased $697,000, or 70.7%, from $987,000 for the year ended September 30, 1999 to $289,000 for the year ended September 30, 1998 due to a decrease in expense attributable to the implementation and vesting of a Deferred Compensation Plan for directors and executive officers. Partially offsetting this decrease were increased benefit expenses of $286,000 from the implementation of the ESOP. Salaries and wages, including incentives and bonuses, increased $371,000, or 12.3%, from $3.0 million for the year ended September 30, 1998 to $3.4 million for the year ended September 30, 1999. Occupancy and equipment expense decreased $86,000 or 8.2%, from $1.0 million for the year ended September 30, 1998 to $959,000 for the year ended September 30, 1999. We converted to an inhouse data processing system during April 1998. The higher expense in 1998 included a writedown of $85,000 for obsolete equipment which was replaced in the computer conversion. Other expenses increased $348,000 from $870,000 for the year ended September 30, 1999 to $1.2 million for the year ended September 30, 1999. This increase was primarily due to added expenses from being a public company including increased audit fees, legal fees, office supplies, marketing expenses and stockholder relations expense. Income Taxes. Our income tax expense was $870,000 and $1.4 million for the years ended September 30, 1999 and 1998, respectively. Our effective tax rate was 35.9% for the year ended September 30, 1999 and 35.1% for the year ended September 30, 1998. In 1999, we did not recognize any state tax benefit on the charitable contribution to fund the Foundation because North Carolina tax law does not provide for the carryforward of charitable contributions. This increased our effective tax rate for 1999. IMPACT OF INFLATION AND CHANGING PRICES Our financial statements and the accompanying notes have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of our operations. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. ACCOUNTING MATTERS On October 1, 2000, the Company adopted Statement of Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities", as further amended by Statement of Financial Accounting Standards 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 138" (collectively referred to as "SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. There was no impact on the Company's consolidated financial statements as the Company does not hold any derivative instruments as defined by SFAS 133. During Fiscal 2000 the Company adopted Statement of Financial Accounting Standards 134, "Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). This statement establishes accounting and reporting standards for certain mortgage banking activities. It also conforms the subsequent accounting for securities retained after the securitization to the accounting used for other types of similar assets. The adoption of SFAS 134 had no material impact on 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 125 ("Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"), and revises 17 the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without consideration. SFAS 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 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 2001. Adoption of SFAS 140 is not expected to have a material impact on the Company's consolidated financial statements. From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts. 18 The Board of Directors 1st State Bancorp, Inc. Burlington, North Carolina We have audited the accompanying consolidated balance sheets of 1st State Bancorp, Inc. and subsidiary as of September 30, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended September 30, 2000. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1st State Bancorp, Inc. and subsidiary as of September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP November 6, 2000 Raleigh, North Carolina 19 1ST STATE BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets September 30, 2000 and 1999
ASSETS 2000 1999 ------------ ---------- (DOLLARS IN THOUSANDS) Cash and cash equivalents $ 33,107 15,657 Investment securities (note 3): Held to maturity (fair value of $65,173 and $82,541 at September 30, 2000 and 1999, respectively) 67,232 84,228 Available for sale (cost of $10,019 and $11,242 at September 30, 2000 and 1999, respectively) 9,752 11,036 Loans held for sale, at lower of cost or fair value 5,533 12,143 Loans receivable (net of allowance for loan losses of $3,536 and $3,454 at September 30, 2000 and 1999, respectively) (notes 4, 5 and 9) 223,595 195,292 Federal Home Loan Bank stock, at cost (notes 6 and 9) 1,650 1,260 Premises and equipment (note 7) 8,453 7,283 Accrued interest receivable 2,653 2,652 Other assets (note 11) 3,552 3,375 ------------ ---------- Total assets $ 355,527 332,926 ============ ========== LIABILITIES AND NET WORTH Liabilities: Deposit accounts (note 8) 254,405 234,095 Advances from Federal Home Loan Bank (note 9) 20,000 22,000 Advance payments by borrowers for property taxes and insurance 151 233 Dividend payable 17,270 253 Other liabilities (note 12) 4,492 4,730 ------------ ---------- Total liabilities 296,318 261,311 ------------ ---------- Stockholders' equity (notes 10, 12 and 15): Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued -- -- Common stock, $0.01 par value, 7,000,000 shares authorized; 3,289,607 and 3,163,125 shares issued and outstanding at September 30, 2000 and 1999, respectively 33 32 Additional paid-in capital 35,587 49,216 Unallocated ESOP shares (4,950) (4,470) Unearned compensation - management recognition plan (1,296) -- Deferred compensation 2,679 2,373 Treasury stock for deferred compensation (2,679) (2,373) Retained income - substantially restricted 29,999 26,960 Accumulated other comprehensive loss - net unrealized loss on investment securities available for sale (164) (123) ------------ ---------- Total stockholders' equity 59,209 71,615 ------------ ---------- Total liabilities and stockholders' equity $ 355,527 332,926 ============ ==========
See accompanying notes to consolidated financial statements. 20 1ST STATE BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income For the years ended September 30, 2000, 1999 and 1998
2000 1999 1998 -------- ------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income: Interest and fees on loans $ 18,500 16,113 17,185 Interest and dividends on investments 5,509 4,160 2,320 Overnight deposits 775 1,201 1,203 -------- -------- -------- Total interest income 24,784 21,474 20,708 -------- -------- -------- Interest expense: Deposit accounts (note 8) 10,158 9,540 10,331 FHLB advances (note 9) 1,438 1,100 740 -------- -------- -------- Total interest expense 11,596 10,640 11,071 -------- -------- -------- Net interest income 13,188 10,834 9,637 Provision for loan losses (note 5) (240) (245) (477) -------- -------- -------- Net interest income after provision for loan losses 12,948 10,589 9,160 -------- -------- -------- Other income: Loan servicing fees (note 4) 91 99 103 Customer service fees 569 540 566 Commission from sales of annuities and mutual funds 581 500 437 Real estate operations, net 149 5 (2) Mortgage banking income, net 135 325 436 Securities losses, net (note 3) -- -- (246) Other 178 185 203 -------- -------- -------- Total other income 1,703 1,654 1,497 -------- -------- -------- Operating expenses: Compensation and related benefits (note 12) 5,944 4,457 4,612 Occupancy and equipment (notes 7 and 13) 1,037 959 1,044 Deposit insurance premiums 70 144 142 Other expenses 1,460 1,218 870 Contributions (note 2) 14 3,040 106 -------- -------- -------- Total operating expenses 8,525 9,818 6,774 -------- -------- -------- Income before income taxes 6,126 2,425 3,883 Income taxes (note 11) 2,140 870 1,362 -------- -------- -------- Net income $ 3,986 1,555 2,521 ======== ======== ======== Net income (loss) per share - basic $ 1.35 (0.10) -- ======== ======== ======== Net income (loss) per share - diluted $ 1.32 (0.10) -- ======== ======== ========
See accompanying notes to consolidated financial statements. 21 1ST STATE BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity and Comprehensive Income For the years ended September 30, 2000, 1999 and 1998 (dollars in thousands, except per share amounts)
ADDITIONAL UNALLOCATED UNEARNED COMMON PAID-IN ESOP COMPENSATION DEFERRED STOCK CAPITAL SHARES MRP COMPENSATION ------ ---------- ----------- ------------ ------------ Balance at September 30, 1997 $ -- -- -- -- -- Comprehensive income: Net income -- -- -- -- -- Other comprehensive income-unrealized gain on securities available-for-sale net of income taxes of $107 -- -- -- -- -- Total comprehensive income ---- ------- ------- ------- ------ Balance at September 30, 1998 -- -- -- -- -- Comprehensive income: Net income -- -- -- -- -- Other comprehensive loss-unrealized loss on securities available-for-sale net of income tax benefit of $143 -- -- -- -- -- Total comprehensive income Net proceeds from issuance of common stock 32 49,215 -- -- -- Common stock acquired by ESOP (note 12) -- -- (4,899) -- -- Allocation of ESOP shares (note 12) -- 1 429 -- -- Deferred compensation (note 12) -- -- -- -- 2,373 Treasury stock held for deferred compensation (note 12) -- -- -- -- -- Cash dividends declared ($.16 per share) -- -- -- -- -- Cash dividends on unallocated ESOP shares -- -- -- -- -- ---- ------- ------- ------- ------ Balance at September 30, 1999 32 49,216 (4,470) -- 2,373 Comprehensive income: Net income -- -- -- -- -- Other comprehensive loss-unrealized loss on securities available-for-sale net of income tax benefit of $21 -- -- -- -- -- Total comprehensive income -- -- -- -- -- Shares issued for MRP 1 2,331 -- (2,332) -- Vesting of MRP shares (note 14) -- -- -- 1,036 -- Allocation of ESOP shares (note 12) -- 4 563 -- -- Deferred compensation (note 12) -- -- -- -- 306 Treasury stock held for deferred compensation (note 12) -- -- -- -- -- Return of capital dividend ($5.17 per share) (note 10) -- (15,964) (1,043) -- -- Cash dividend declared ($.32 per share) -- -- -- -- -- Cash dividend on unallocated ESOP and unvested MRP shares -- -- -- -- -- ---- ------- ------- ------- ------ Balance at September 30, 2000 $ 33 35,587 (4,950) (1,296) 2,679 ==== ======= ======= ======= ====== TREASURY ACCUMULATED STOCK FOR OTHER TOTAL DEFERRED RETAINED COMPREHENSIVE STOCKHOLDERS' COMPENSATION INCOME INCOME (LOSS) EQUITY ------------ -------- ------------- ------------- Balance at September 30, 1997 -- 23,352 (74) 23,278 Comprehensive income: Net income -- 2,521 -- 2,521 Other comprehensive income-unrealized gain on securities available-for-sale net of income taxes of $107 -- -- 167 167 -------- Total comprehensive income 2,688 ------- ------- ----- -------- Balance at September 30, 1998 -- 25,873 93 25,966 Comprehensive income: Net income -- 1,555 -- 1,555 Other comprehensive loss-unrealized loss on securities available-for-sale net of income tax benefit of $143 -- -- (216) (216) -------- Total comprehensive income 1,339 -------- Net proceeds from issuance of common stock -- -- -- 49,247 Common stock acquired by ESOP (note 12) -- -- -- (4,899) Allocation of ESOP shares (note 12) -- -- -- 430 Deferred compensation (note 12) -- -- -- 2,373 Treasury stock held for deferred compensation (note 12) (2,373) -- -- (2,373) Cash dividends declared ($.16 per share) -- (506) -- (506) Cash dividends on unallocated ESOP shares -- 38 -- 38 ------- ------- ----- -------- Balance at September 30, 1999 (2,373) 26,960 (123) 71,615 Comprehensive income: Net income -- 3,986 -- 3,986 Other comprehensive loss-unrealized loss on securities available-for-sale net of income tax benefit of $21 -- -- (41) (41) -------- Total comprehensive income -- -- -- 3,945 Shares issued for MRP -- -- -- -- Vesting of MRP shares (note 14) -- -- 1,036 Allocation of ESOP shares (note 12) -- -- -- 567 Deferred compensation (note 12) -- -- -- 306 Treasury stock held for deferred compensation (note 12) (306) -- -- (306) Return of capital dividend ($5.17 per share) (note 10) -- -- -- (17,007) Cash dividend declared ($.32 per share) -- (1,032) -- (1,032) Cash dividend on unallocated ESOP and unvested MRP shares -- 85 -- 85 ------- ------- ----- -------- Balance at September 30, 2000 (2,679) 29,999 (164) 59,209 ======= ======= ===== ========
See accompanying notes to consolidated financial statements. 22 1ST STATE BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows For the years ended September 30, 2000, 1999 and 1998
2000 1999 1998 -------- ------ ------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income $ 3,986 1,555 2,521 Adjustments to reconcile net income to net cash provided (used) in operating activities: Provision for loan losses 240 245 477 Depreciation 477 463 425 Deferred income tax expense (benefit) 153 (1,138) (601) Amortization of premiums and discounts, net (27) (33) 25 Contribution of common shares to the Foundation (note 2) -- 3,000 -- Release of ESOP shares 567 430 -- Vesting of MRP shares 1,036 -- -- Loan origination fees and unearned discounts deferred, net of current amortization 150 61 2 Net loss on loans available for sale 305 604 119 Gain on sale of other real estate (148) -- -- Securities losses, net -- -- 246 Proceeds from loans held for sale 18,696 39,803 27,635 Originations of loans held for sale (17,490) (45,010) (34,609) Decrease (increase) in other assets (850) 9 (308) Increase in accrued interest receivable (1) (845) (251) Increase (decrease) in other liabilities (238) (1,516) 1,761 -------- -------- -------- Net cash provided (used) in operating activitives 6,856 (2,372) (2,558) -------- -------- -------- Cash flows from investing activities: Proceeds from sale of FHLB stock 290 87 -- Purchase of FHLB stock (680) -- (65) Purchases of investment securities held to maturity (3,996) (73,705) (32,614) Purchases of investment securities available for sale -- (4,000) (2,003) Proceeds from sales of investment securities available for sale -- -- 2,880 Proceeds from maturities of investment securities available for sale 1,228 2,463 588 Proceeds from maturities of investment securities held to maturity 21,014 19,705 25,900 Net (increase) decrease in loans receivable (23,594) 1,184 (140) Proceeds from disposal of real estate acquired in settlement of loans 148 -- -- Purchases of premises and equipment (1,102) (232) (1,166) -------- -------- -------- Net cash used in investing activities (6,692) (54,498) (6,620) -------- -------- -------- (Continued)
23 1ST STATE BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows For the years ended September 30, 2000, 1999 and 1998
2000 1999 1998 -------- -------- ------- (DOLLARS IN THOUSANDS) Cash flows from financing activities: Net increase (decrease) in deposits $ 20,310 (1,599) 6,353 Decrease in advance payments by borrowers for property taxes and insurance (82) (66) (88) Advances from Federal Home Loan Bank 36,000 2,000 20,000 Repayments of advances from Federal Home Loan Bank (38,000) -- (1,000) Net proceeds from sale of common stock -- 46,247 -- Purchase of stock for ESOP -- (4,899) -- Dividends paid on common stock (942) (233) -- -------- -------- ------- Net cash provided by financing activities 17,286 41,450 25,265 -------- -------- ------- Net increase (decrease) in cash and cash equivalents 17,450 (15,420) 16,087 Cash and cash equivalents at beginning of year 15,657 31,077 14,990 -------- -------- ------- Cash and cash equivalents at end of year $ 33,107 15,657 31,077 ======== ======== ======= Payments are shown below for the following: Interest $ 11,450 10,583 10,947 ======== ======== ======= Income taxes $ 2,755 1,587 2,301 ======== ======== ======= Noncash investing and financing activities: Deferred compensation to be settled in Company's stock $ 306 2,373 -- ======== ======== ======= Cash dividends declared but not paid $ 240 235 -- ======== ======== ======= Cash dividends on unallocated ESOP shares $ 85 39 -- ======== ======== ======= Return of capital dividend declared but not paid (note 10) $ 17,007 -- -- ======== ======== ======= Common stock issued for MRP $ 2,332 -- -- ======== ======== ======= Unrealized gains (losses) on available for sale securities $ (62) (359) 274 ======== ======== ======= Transfer from loans held for sale to loans receivable $ 5,099 -- -- ======== ======== ======= Transfer of land from other assets to premises and equipment $ 545 -- -- ======== ======== =======
See accompanying notes to consolidated financial statements. 24 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (1) SIGNIFICANT ACCOUNTING POLICIES (A) ORGANIZATION AND DESCRIPTION OF BUSINESS 1st State Bancorp, Inc. (the "Company" or the "Parent") is a bank holding company formed in connection with the April 1999 conversion (the "Conversion") of 1st State Bank from a North Carolina-chartered mutual savings bank to a North Carolina-chartered commercial bank, which now operates as a wholly owned subsidiary of the Parent under the name of 1st State Bank (the "Bank"). The Bank has one wholly owned subsidiary, First Capital Services Company, LLC ("First Capital"). The Bank is primarily engaged in the business of obtaining deposits and providing mortgage, commercial and consumer loans to the general public. First Capital is engaged primarily in the sale of annuities, mutual funds and insurance products on an agency basis. The principal activity of the Parent is ownership of the Bank. (B) BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Parent, the Bank and the Bank's subsidiary, First Capital. All significant intercompany transactions and balances are eliminated in consolidation. (C) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. (D) CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash and interest-bearing overnight deposits with the Federal Home Loan Bank ("FHLB") of Atlanta. At September 30, 2000 and 1999, interest-bearing overnight deposits were $26,054,000 and $7,246,000, respectively. 25 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (E) INVESTMENT SECURITIES Investment securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. Investment securities held for current resale are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings. Investment securities not classified either as securities held to maturity or trading securities are classified as available for sale and reported at fair value, with net unrealized gains and losses net of related taxes excluded from earnings and reported as accumulated other comprehensive income (loss) within stockholders' equity. The classification of investment securities as held to maturity, trading or available for sale is determined at the date of purchase. Realized gains and losses from sales of investment securities are determined based upon the specific identification method. Premiums and discounts are amortized as an adjustment to yield over the remaining lives of the securities using the level-yield method. Management periodically evaluates investment securities for other than temporary declines in value and records any losses through an adjustment to earnings. (F) LOANS HELD FOR SALE Loans held for sale are carried at the lower of cost or fair value in the aggregate as determined by outstanding commitments from investors or current investor yield requirements. Gains and losses on loan sales are determined by the difference between the selling price and the carrying value of the loans sold. (G) LOANS RECEIVABLE Interest on loans, including impaired loans, that are contractually ninety days or more past due is generally either charged off or reserved through an allowance for uncollected interest account. The allowance for uncollected interest is established by a charge to interest income equal to all interest previously accrued. In certain circumstances, interest on loans that are contractually ninety days or more past due is not charged off or reserved through an allowance account when management determines that the loan is both well secured and in the process of collection. If amounts are received on loans for which the accrual of interest has been discontinued, a determination is made as to whether payments received should be recorded as a reduction of the principal balance or as interest income depending on management's judgment as to the collectibility of principal. The loan is returned to accrual status when, in management's judgment, the borrower has demonstrated the ability to make periodic interest and principal payments on a timely basis. 26 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (H) LOAN ORIGINATION FEES AND RELATED COSTS Loan origination fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment of the loan yield using the level-yield method over the contractual life of the related loans (I) ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. Management's evaluation of the adequacy of the allowance is based on a review of individual loans, historical loan loss experience, the value and adequacy of collateral, and economic conditions in the Company's market area. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations. For all specifically reviewed loans for which it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement, the Company determines impairment by computing a fair value either based on discounted cash flows using the loans' initial interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogenous loans that are collectively evaluated for impairment (such as residential mortgage and consumer installment loans) are excluded from specific impairment evaluation, and their allowance for loan losses is calculated in accordance with the allowance for loan losses policy described above. (J) REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS Real estate acquired in settlement of loans by foreclosure or deed in lieu of foreclosure is initially recorded at the lower of cost (unpaid loan balance plus costs of obtaining title and possession) or fair value less estimated costs to sell at the time of acquisition. Subsequent costs directly related to development and improvement of property are capitalized, whereas costs relating to holding the property are expensed. 27 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 When the carrying value of real estate exceeds its fair value, less cost to sell, an allowance for loss on real estate is established and a provision for loss on real estate is charged to other expenses. At September 30, 2000 and 1999, the Company had no real estate acquired in settlement of loans. (K) PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed generally by the straight-line method over the estimated useful lives of the related assets. Estimated lives are 15 to 50 years for buildings and 3 to 15 years for furniture, fixtures and equipment. (L) INCOME TAXES Deferred income taxes are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an adjustment to the income tax expense in the period that includes the enactment date. (M) EMPLOYEE STOCK OWNERSHIP PLAN The Company has an employee stock ownership plan (the"ESOP") which covers substantially all of it employees. The ESOP purchased shares of the Company's common stock after the Conversion using funds from a loan by the Company to the ESOP. The shares purchased by the ESOP are held in a suspense account as collateral for the loan, and are released from the suspense account and allocated to participants as scheduled principal and interest payments are made. The Company makes an annual contribution to the ESOP in an amount sufficient to make the scheduled principal and interest payments on the loan. The Company records a charge to its income statement in an amount equal to the fair value of the shares that are committed to be released from the suspense account each period in accordance with the terms of the ESOP and the related ESOP loan agreement. 28 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (N) EARNINGS PER SHARE Earnings per share computations have been made only for the periods subsequent to the Conversion. For purposes of computing basic and diluted earnings per share, weighted average shares outstanding excludes unallocated ESOP shares that have not been committed to be released. The deferred compensation obligation discussed in note 12 that is funded with shares of the Company's common stock has no net impact on the Company's earnings per share computations.
2000 1999 ------------------------------------ (DOLLARS IN THOUSANDS) Net income (loss) $ 3,986 (304) =============== ================ Average shares issued and outstanding 3,163,125 3,163,125 Add: Weighted average vested MRP shares issued 13,441 -- Less: Weighted average unallocated ESOP shares (216,353) (237,149) --------------- ---------------- Average basic shares for earnings per share 2,960,213 2,925,976 Add: Weighted average unvested MRP shares 26,724 -- Add: Potential common stock pursuant to stock option plan 38,598 -- --------------- ---------------- Average diluted shares for earnings per share 3,025,535 2,925,976 =============== ================
The earnings per share computation for 1999 only reflects the earnings from the date of the conversion through September 30, 1999. (O) STOCK OPTION PLAN The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. 29 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (P) COMPREHENSIVE INCOME On October 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and other comprehensive income and is presented in the statements of stockholders' equity and comprehensive income. SFAS No. 130 requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. The Company's other comprehensive income for the years ended September 30, 2000, 1999 and 1998 and accumulated other comprehensive income as of September 30, 2000 and 1999 are comprised solely of unrealized gains and losses on investments in available for sale securities. Other comprehensive income for the years ended September 30, 2000, 1999 and 1998 follows:
2000 1999 1998 --------------- --------------- ---------------- (DOLLARS IN THOUSANDS) Unrealized holding gains (losses) arising during period, net of tax $ (41) (216) 7 Reclassification adjustment for realized losses, net of tax -- -- 160 --------------- --------------- ---------------- Unrealized gains (losses) on securities, net of applicable income taxes $ (41) (216) 167 =============== =============== ================
(Q) DISCLOSURES REGARDING SEGMENTS The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, in 1999. SFAS No. 131 establishes standards for the way that public businesses report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and other major customers. The Company adopted SFAS No. 131 without any impact on the consolidated financial statements as the chief operating decision-maker reviews the results of operations of the Company and its subsidiaries as a single enterprise. 30 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (R) RECLASSIFICATIONS Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform with the presentation adopted in 2000. Such reclassifications did not change net income or stockholders' equity as previously reported. (2) CONVERSION TO STOCK FORM OF OWNERSHIP On August 11, 1998, the Board of Directors of the Bank adopted the Plan of Conversion (the "Plan"). Immediately upon completion of the Conversion, 1st State Bank converted from a state chartered mutual savings bank to a state chartered stock savings bank and subsequently converted from a state chartered stock savings bank to a state chartered commercial bank and became the wholly-owned subsidiary of 1st State Bancorp, Inc. The Company was incorporated in November 1998 as a Virginia corporation to serve as the Bank's holding company, and prior to April 23, 1999 had no operations and insignificant assets and liabilities. In addition, pursuant to the Plan of Conversion, the Company sold 2,975,625 shares of its $.01 par value common stock for $16.00 per share. Gross proceeds of the offering totaled $47,610,000, and expenses associated with the Conversion totaled approximately $1,363,000. In addition, pursuant to the Plan, the Company established 1st State Bank Foundation, Inc. (the "Foundation"). In connection with the Conversion, 187,500 additional shares of common stock of the Company (valued at $3,000,000) were issued and donated to the Foundation. The Foundation is dedicated to charitable and educational purposes within the Bank's market area. 31 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (3) INVESTMENT SECURITIES Investment securities consist of the following:
SEPTEMBER 30, 2000 ---------------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------------- --------------- -------------- --------------- (DOLLARS IN THOUSANDS) Held to maturity: U.S. Government and agency securities $ 67,179 3 2,063 65,119 Collateralized mortgage obligations 53 1 -- 54 -------------- --------------- -------------- --------------- Total $ 67,232 4 2,063 65,173 ============== =============== ============== =============== Available for sale: U.S. Government and agency securities $ 5,000 -- 159 4,841 Marketable equity securities 3,993 -- 152 3,841 FHLMC mortgage-backed securities 309 10 -- 319 GNMA mortgage-backed securities 717 34 -- 751 -------------- --------------- -------------- --------------- Total $ 10,019 44 311 9,752 ============== =============== ============== =============== SEPTEMBER 30, 1999 ---------------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------------- --------------- -------------- --------------- (DOLLARS IN THOUSANDS) Held to maturity: U.S. Government and agency securities $ 81,160 31 1,718 79,473 Other 3,000 -- -- 3,000 Collateralized mortgage obligations 68 -- -- 68 -------------- --------------- -------------- --------------- Total $ 84,228 31 1,718 82,541 ============== =============== ============== ===============
32 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998
SEPTEMBER 30, 1999 ---------------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------------- --------------- -------------- --------------- (DOLLARS IN THOUSANDS) Available for sale: U.S. Government and agency securities $ 6,000 7 140 5,867 Marketable equity securities 3,993 -- 134 3,859 FHLMC mortgage-backed securities 460 17 -- 477 GNMA mortgage-backed securities 789 44 -- 833 -------------- --------------- -------------- --------------- Total $ 11,242 68 274 11,036 ============== =============== ============== ===============
Following is a summary of investments in debt securities by maturity at September 30, 2000. Marketable equity securities, mortgage-backed securities and collateralized mortgage obligations do not have single maturity dates and are not included below.
AMORTIZED FAIR COST VALUE --------------- ----------------- (DOLLARS IN THOUSANDS) Held to maturity: Within one year $ 2,493 2,491 After one but within five years 46,692 45,387 After five but within ten years 17,994 17,241 --------------- ----------------- Total $ 67,179 65,119 =============== ================= Available for sale: Within one year 1,000 999 After one but within five years 2,000 1,930 After five but within ten years 2,000 1,912 --------------- ----------------- Total $ 5,000 4,841 =============== =================
There were no sales of securities during 2000 or 1999. During the year ended September 30, 1998, the Company recognized gross gains on the sale of investment securities available for sale of approximately $23,000. The Company also recognized a loss of approximately $269,000 on the write-down of marketable equity securities for an other than temporary decline in value during the year ended September 30, 1998. At September 30, 2000, U.S. Government securities with an amortized cost of approximately $22,750,000 were pledged as collateral for certain deposit accounts. 33 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (4) LOANS RECEIVABLE Loans receivable are summarized as follows:
SEPTEMBER 30, ------------------------------------ 2000 1999 --------------- ----------------- (DOLLARS IN THOUSANDS) Real estate loans: One-to-four family residential $ 97,989 90,883 Commercial real estate and other properties 46,525 40,816 Home equity and property improvement 21,225 18,888 Construction loans 21,991 16,496 --------------- ----------------- Total real estate loans 187,730 167,083 --------------- ----------------- Other loans: Commercial 42,949 32,502 Consumer 6,782 6,658 --------------- ----------------- Total other loans 49,731 39,160 --------------- ----------------- Less: Loans in process (9,972) (7,289) Net deferred loan origination fees (358) (208) --------------- ----------------- Net loans receivable before allowance for loan losses 227,131 198,746 Allowance for loan losses (3,536) (3,454) --------------- ----------------- Loans receivable, net $ 223,595 195,292 =============== =================
At September 30, 2000, the Company had impaired loans with two borrowers of approximately $2.6 million which are on nonaccrual status. The related reserve for loan losses on the impaired loans totaled $245,000. The average carrying value of impaired loans was $1.7 million for the year ended September 30, 2000. Gross interest income of $48,000 was recognized during the year ended September 30, 2000. The interest income represents payments that were made on the loans before they were impaired. There were no impaired loans at September 30, 1999. 34 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 The Company grants residential, construction, commercial real estate, home equity and other loans to customers primarily throughout its market area of Alamance County which includes the cities of Burlington, Mebane and Graham. As reflected in the summary of loans receivable at September 30, 2000, the largest component of the Company's loan portfolio consists of lower-risk, one-to-four family residential loans. The higher risk components of the loan portfolio consist of real estate construction loans, commercial real estate loans and commercial loans for which repayment is dependent on the current real estate market and general economic conditions. The consumer portfolio generally consists of smaller loans to individuals in the Company's primary market area and can also be affected by general economic conditions. The Company's nonaccrual loans amounted to approximately $2.9 million and $366,000 at September 30, 2000 and 1999, respectively. If the Company's nonaccrual loans had been current in accordance with their original terms, gross interest income of approximately $265,000, $27,000 and $10,000 would have been recorded for the years ended September 30, 2000, 1999 and 1998, respectively. Interest income on these loans included in net income was approximately $58,000, $13,000 and $15,000 for the years ended September 30, 2000, 1999 and 1998, respectively. Loans serviced for others at September 30, 2000 and 1999 were approximately $34,000,000 and $35,000,000, respectively. Mortgage servicing rights were not material for any of the periods presented. The Company grants residential, construction, commercial and consumer loans to its officers, directors, and employees for the financing of their personal residences and for other personal purposes. The Company also offers commercial loans to companies affiliated with directors. These loans are made in the ordinary course of business and, in management's opinion, are made on substantially the same terms, including interest rates and collateral, prevailing at the time for comparable transactions with other persons and companies. Management does not believe these loans involve more than the normal risk of collectibility or present other unfavorable features. The following is a summary of the activity of loans outstanding to certain executive officers, directors and their affiliates for the year ended September 30:
2000 1999 --------------- ----------------- (DOLLARS IN THOUSANDS) Balance at beginning of year $ 8,215 7,520 New loans 3,490 2,218 Repayments (1,616) (1,523) --------------- ----------------- Balance at end of year $ 10,089 8,215 =============== =================
35 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 The Company is a party to financial instruments with off-balance sheet risk including commitments to extend credit under existing lines of credit and commitments to sell loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Off-balance sheet financial instruments whose contract amount represents credit and interest rate risk are summarized as follows:
SEPTEMBER 30, ------------------------------------ 2000 1999 --------------- ----------------- (DOLLARS IN THOUSANDS) Commitments to originate new loans $ 7,763 6,389 Commitments to originate new loans held for sale 133 -- Unfunded commitments to extend credit under existing equity line and commercial lines of credit 51,353 43,915 Commercial letters of credit 1,643 469 Commitments to sell loans held for sale 1,755 487
Commitments to originate new loans or to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Commitments to sell loans held for sale are agreements to sell loans to a third party at an agreed upon price. At September 30, 2000, the aggregate fair value of these commitments exceeded the book value of the loans to be sold. 36 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (5) ALLOWANCE FOR LOAN LOSSES The following is a summary of the activity in the allowance for loan losses:
YEARS ENDED SEPTEMBER 30, ------------------------------------------------------- 2000 1999 1998 --------------- --------------- ----------------- (DOLLARS IN THOUSANDS) Balance at beginning of year $ 3,454 3,228 2,754 Provision for loan losses 240 245 477 Charge-offs (164) (23) (4) Recoveries 6 4 1 --------------- --------------- ----------------- Net charge-offs (158) (19) (3) --------------- --------------- ----------------- Balance at end of year $ 3,536 3,454 3,228 =============== =============== =================
(6) INVESTMENT IN FHLB STOCK As a member of the FHLB of Atlanta, the Company is required to maintain an investment in the stock of the FHLB. This stock is carried at cost since it has no quoted fair value. See also note 9. (7) PREMISES AND EQUIPMENT Premises and equipment consist of the following:
SEPTEMBER 30, ------------------------------------ 2000 1999 --------------- ----------------- (DOLLARS IN THOUSANDS) Land $ 2,777 2,232 Building and improvements 6,027 5,194 Furniture and equipment 4,440 4,171 --------------- ----------------- 13,244 11,597 Less accumulated depreciation (4,791) (4,314) --------------- ----------------- Total $ 8,453 7,283 =============== =================
37 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (8) DEPOSIT ACCOUNTS A comparative summary of deposit accounts follows:
SEPTEMBER 30, 2000 ------------------------------------ WEIGHTED BALANCE AVERAGE RATE --------------- ----------------- (DOLLARS IN THOUSANDS) Transactions accounts: Noninterest bearing accounts $ 11,891 -- Interest bearing accounts: Checking accounts 29,223 1.80% Money market accounts 19,072 4.51% Passbook and statement savings accounts 25,930 2.36% Certificates of deposit 168,289 5.81% --------------- ----------------- Total $ 254,405 4.63% =============== ================= SEPTEMBER 30, 1999 ------------------------------------ WEIGHTED BALANCE AVERAGE RATE --------------- ----------------- (DOLLARS IN THOUSANDS) Transactions accounts: Noninterest bearing accounts $ 8,219 -- Interest bearing accounts: Checking accounts 26,094 1.84% Money market accounts 14,770 3.62% Passbook and statement savings accounts 27,276 2.36% Certificates of deposit 157,736 4.85% --------------- ----------------- Total $ 234,095 3.98% =============== =================
Time deposits with balances of $100,000 or greater totaled approximately $48,200,000 and $37,400,000 at September 30, 2000 and 1999, respectively. At September 30, 2000, the scheduled maturities of certificate accounts were as follows (dollars in thousands): YEAR ENDING SEPEMBER 30, ------------------------ 2001 $133,213 2002 21,131 2003 7,508 2004 3,899 2005 2,538 -------- Total $168,289 ======== Interest expense on deposit accounts is summarized below: 38 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998
YEARS ENDED SEPTEMBER 30, ------------------------------------------------------- 2000 1999 1998 --------------- --------------- ----------------- (DOLLARS IN THOUSANDS) Interest-bearing transaction accounts $ 1,125 999 1,004 Passbook and statement savings accounts 631 870 798 Certificates of deposit accounts 8,402 7,671 8,529 --------------- --------------- ----------------- Total $ 10,158 9,540 10,331 =============== =============== =================
(9) ADVANCES FROM FEDERAL HOME LOAN BANK OF ATLANTA Advances from the FHLB of Atlanta at September 30, 2000 and 1999 totaled $20,000,000 and $22,000,000, respectively, at a weighted average interest rate of 5.39% and 5.42%, respectively. The $20,000,000 advance at September 30, 2000 will mature on February 13, 2008 and is callable on February 13, 2003. At September 30, 2000 and 1999, the Company had pledged all of its stock in the FHLB (see note 6) and entered into a security agreement with a blanket floating lien pledging a substantial portion of its real estate loans to secure potential borrowings. Under an agreement with the FHLB, the Company must have qualifying, unencumbered collateral with principal balances, when discounted at 75% of the unpaid principal, at least equal to 100% of the Company's FHLB advances. (10) REGULATORY CAPITAL AND OTHER MATTERS (A) CAPITAL ADEQUACY The Company is regulated by the Board of Governors of the Federal Reserve Board ("FRB") and is subject to securities registration and public reporting regulations of the Securities and Exchange Commission. 39 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 The Bank is regulated by the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Commissioner of Banks ("Commissioner"). The Bank must comply with the capital requirements of the FDIC and the Commissioner. The FDIC requires the Bank to maintain minimum ratios of Tier I capital to risk-weighted assets and total capital to risk-weighted assets of 4% and 8%, respectively. To be "well capitalized," the FDIC requires ratios of Tier I capital to risk-weighted assets and total capital to risk-weighted assets of 6% and 10%, respectively. Tier I capital consists of total stockholders' equity calculated in accordance with generally accepted accounting principles less certain adjustments, and Total Capital is comprised of Tier I capital plus certain adjustments, the only one of which is applicable to the Company is the allowance for loan losses, subject to certain limitations. Risk-weighted assets reflect the Bank's on- and off-balance sheet exposures after such exposures have been adjusted for their relative risk levels using formulas set forth in FDIC regulations. The Bank is also subject to a leverage capital requirement, which calls for a minimum ratio of Tier I capital (as defined above) to quarterly average total assets of 3%, and a ratio of 5% to be "well capitalized." As summarized below, at September 30, 2000 and 1999, the Bank was in compliance with all of the aforementioned capital requirements. At September 30, 2000, the FDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. As of September 30:
MERGED RATIOS ---------------------------------- TO BE "WELL CAPITAL AMOUNT RATIO FOR CAPITAL CAPITALIZED" FOR ------------------------- -------------------- ADEQUACY PROMPT CORRECTIVE 2000 1999 2000 1999 PURPOSES ACTION PURPOSE ------------------------- -------- -------- ------------ ------------------ (DOLLARS IN THOUSANDS) Tier I Capital (to risk- weighted assets) $ 52,304 47,657 24.03% 24.77% 4.00% 6.00% Total Capital (to risk- weighted assets) 54,751 50,075 25.29% 26.03% 8.00% 10.00% Leverage - Tier I capital (to average assets) 52,034 47,657 16.10% 15.73% 4.00% 5.00%
At September 30, 2000, the Company was also in compliance with the regulatory capital requirements of the FRB, which are similar to those of the FDIC. 40 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (B) LIQUIDATION ACCOUNT At the time of Conversion, the Bank established a liquidation account in an amount equal to its September 30, 1998 net worth for the benefit of eligible account holders who continue to maintain their accounts at the Bank after the Conversion. The liquidation account will be reduced annually to the extent eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank, all remaining eligible account holders would be entitled, after all payments to creditors, to a distribution from the liquidation account before any distribution to stockholders. Dividends cannot be paid from this liquidation account. (C) DIVIDENDS Subject to applicable law, the Board of Directors of the Bank and the Company may each provide for the payment of dividends. Subject to regulations of the Commissioner and the FDIC, the Bank may not declare or pay a cash dividend on any of its common stock if its equity would thereby be reduced below either the aggregate amount then required for the liquidation account or the minimum regulatory capital requirements imposed by regulations. In addition, regulators of the Bank may prohibit the payment of dividends by the Bank to the Company if they determine such payment will constitute an unsafe or unsound practice. The Company has similar dividend limitations imposed by the FRB such that it is unable to declare a dividend that would reduce its capital below regulatory capital limitations or constitute an unsafe or unsound practice. On September 5, 2000, the Company declared a dividend of $5.17 per share, which was deemed to be a return-of-capital to shareholders. The dividend was payable on October 2, 2000 to shareholders of record on September 15, 2000. 41 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (11) INCOME TAXES Components of income tax expense (benefit) consist of the following:
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------- 2000 1999 1998 --------------- --------------- ----------------- (DOLLARS IN THOUSANDS) Current: Federal $ 1,874 1,840 1,804 State 113 168 159 --------------- --------------- ----------------- 1,987 2,008 1,963 --------------- --------------- ----------------- Deferred: Federal 137 (1,076) (486) State 16 (62) (115) --------------- --------------- ----------------- 153 (1,138) (601) --------------- --------------- ----------------- Total $ 2,140 870 1,362 =============== =============== =================
Other assets include current income taxes receivable of $486,000 and $243,000 at September 30, 2000 and 1999, respectively. A reconciliation of reported income tax expense for the years ended September 30, 2000 and 1999, to the amount of the income tax expense computed by multiplying income before income taxes by the statutory federal income tax rate of 34% follows:
2000 1999 1998 --------------- --------------- ----------------- (DOLLARS IN THOUSANDS) Income tax expense at statutory rate $ 2,083 824 1,320 Increase in income taxes, resulting from: State income taxes, net of federal benefit 85 70 29 Other (28) (24) 13 --------------- --------------- ----------------- Income tax expense $ 2,140 870 1,362 =============== =============== =================
42 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 The significant components of deferred tax assets (liabilities) which are included in other assets, at September 30, 2000 and 1999, respectively, are:
2000 1999 --------------- ----------------- (DOLLARS IN THOUSANDS) Deferred tax assets: Allowance for loan losses $ 1,316 1,272 Deferred compensation 1,128 994 Other than temporary declines in value of investment securities available for sale 104 104 Unrealized losses on investments securities available for sale 103 83 Accrued ESOP expense -- 167 Carryforward of charitable contributions 650 767 Other 2 1 --------------- ----------------- Total gross deferred tax assets 3,303 3,388 Less valuation allowance -- -- --------------- ----------------- Deferred tax assets net of valuation allowance 3,303 3,388 --------------- ----------------- Deferred tax liabilities: Depreciable basis of fixed assets (528) (434) Tax basis of FHLB stock (145) (180) Net loan fees (177) (205) Other (59) (42) --------------- ----------------- Total gross deferred tax liabilities (909) (861) --------------- ----------------- Net deferred tax asset $ 2,394 2,527 =============== =================
There is no valuation allowance for deferred tax assets as it is management's belief that realization of the deferred tax assets is more likely than not based upon the Company's history of taxable income and estimates of future taxable income. 43 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 The Company is permitted under the Internal Revenue Code to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. This addition differs significantly from the provisions for losses for financial reporting purposes. Under generally accepted accounting principles, the Company is not required to provide a deferred tax liability for the tax effect of additions to the tax bad debt reserve through 1987, the base year. Retained income at September 30, 2000, includes approximately $4,188,000 for which no provision for federal income tax has been made. These amounts represent allocations of income to bad debt deductions for tax purposes only. Reductions of such amounts for purposes other than tax bad debt losses could create income for tax purposes in certain remote instances, which would be subject to the then current corporate income tax rate. (12) EMPLOYEE BENEFIT PLANS (A) 401(K) PLAN The Bank sponsors a 401(k) plan that covers all eligible employees. The Bank matches 100% of employee contributions, with the Bank's contribution limited to 3% of each employee's salary. Matching contributions are funded when accrued. Matching expense totaled approximately $48,000 in 2000, $49,000 in 1999 and $45,000 in 1998. (B) MONEY PURCHASE PENSION PLAN The Bank previously had a defined contribution money purchase pension plan covering substantially all of its employees. The Bank's policy was to fund retirement costs as accrued. Contributions to the plan were determined based upon specified percentages of annual salaries. In conjunction with the Conversion, the defined contribution retirement plan was terminated effective as of September 30, 1998 and balances were distributed to participants. There was no gain or loss upon the termination of the plan. There was no retirement expense during 2000 and 1999. Retirement expense totaled approximately $146,000 in 1998. (C) DIRECTORS' AND EXECUTIVE OFFICERS' DEFERRED COMPENSATION PLAN 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. The plan provided for past service credits on September 24, 1997 for prior years' service up to nine years. Annual credits are made on September 30 provided that annual credits shall not be made for the benefit of non-employee directors after 12 years of service credits. Each participant is fully vested in his account balance under the plan. In future years, directors may elect to defer directors' fees and executive officers may 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 44 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 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 on the Company's common stock. All participants elected this option concurrent with the Conversion, so the Company purchased common stock in the Conversion on behalf of these participants to fund this obligation. The common stock purchased by the Company for this deferred compensation obligation is maintained in a rabbi trust (the "Trust") on behalf of the participants. The assets of the Trust are subject to the claims of general creditors of the Company. Dividends payable on the common shares held by the Trust will be reinvested in additional shares of common stock of the Company on behalf of the participants. Since the deferred compensation plan does not provide for diversification of the Trust's assets and can only be settled with a fixed number of shares of the Company's common stock, the deferred compensation obligation is classified as a component of stockholders' equity and the common stock held by the Trust is classified as treasury stock. Subsequent changes in the fair value of the common stock are not reflected in earnings or stockholders' equity of the Company. The expense related to these plans for the years ended September 30, 2000, 1999 and 1998 was $232,000, $289,000 and $987,000, respectively, and is included in compensation expense. (D) ESOP The ESOP is a noncontributory retirement plan adopted by the Company effective October 1, 1998 which covers all eligible employees. The ESOP purchased 253,050 shares of common stock with the proceeds of a loan from the Company in the amount of $4,899,000. The Bank makes annual cash contributions to the ESOP in an amount sufficient for the ESOP to make scheduled payments on the note payable to the Company. The note payable has a term of 11 years, bears interest at prime and requires annual payments. The note is secured by the stock purchased by the ESOP and is not guaranteed by the Bank. As the note is repaid, shares are released from collateral based on the proportion of the payment in relation to total payments required to be made on the loan. The shares released are allocated annually to participants based upon their relative compensation. Benefits under the ESOP vest 20% per year beginning with the third year of service. Up to five years of service has been credited for employment before October 1, 1998. 45 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 Compensation expense is determined by multiplying the per share market price of the Company's stock at the time the shares are committed to be released by the number of shares to be released. Compensation expense related to the ESOP for the years ended September 30, 2000 and 1999 was $567,000 and $430,000, respectively. The cost of the shares not yet committed to be released from collateral is shown as a reduction of stockholders' equity. Unallocated shares are not considered as outstanding shares for computation of earnings per share. Dividends on unallocated ESOP shares are reflected as a reduction in the note payable and not as a reduction in retained earnings. At September 30, 2000, a total of 29,069 shares have been committed to be released and there were 201,819 of unallocated ESOP shares with a market value of approximately $3,400,000, as adjusted for the estimated effect of the return of capital dividend on the fair value of the shares. (13) LEASING ARRANGEMENTS Rental expense was approximately $26,000, $30,000 and $33,000 for the years ended September 30, 2000, 1999 and 1998, respectively. All leases are accounted for as operating leases. Minimum annual rents under noncancelable operating leases with remaining terms in excess of one year at September 30, 2000 are as follows: OFFICE YEAR ENDING SEPTEMBER 30 PROPERTIES ----------------------------------------- ------------- (DOLLARS IN THOUSANDS) 2001 $ 20 2002 19 2003 18 2004 18 2005 20 Thereafter 89 ------------- Total $ 184 ============= 46 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (14) MANAGEMENT RECOGNITION PLAN ("MRP") The Bank's MRP was approved by stockholders of the Company on June 6, 2000. On this date 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 MRP serves as a means of providing existing directors and employees of the Bank with an ownership interest in the Company. Shares of the Company's common stock awarded under the MRP vest at a rate of 33-l/3% per year with one-third immediately vesting on the date of the grant. During fiscal 2000, 42,163 shares vested to participants. Total compensation expense associated with the MRP for the year ended September 30, 2000 was $1,036,000. (15) STOCK OPTION 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 has granted 316,312 options to purchase its $0.01 par value common stock. The exercise price per share is equal to the fair market value per share on the date of the grant. Options granted under the Stock Option Plan are 100% vested on the date of the grant. All options expire 10 years from the date of the grant. 47 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 The Company has elected to follow APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock options as permitted under SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation". In accordance with APB 25, no compensation cost is recognized by the Company when stock options are granted because the exercise price of the Company's stock options equals the market price of the underlying common stock on the date of grant. As required by SFAS 123, disclosures are presented below for the effect on the net income and net income per share for the year ended September 30, 2000, that would result from the use of the fair value based method to measure compensation cost related to stock option grants. The effects of applying the provisions of SFAS 123 are not necessarily indicative of future effects. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income: As reported $ 3,986 Pro forma 2,760 Net income per share: As reported - basic $ 1.35 Pro forma - basic 0.93 As reported - diluted $ 1.32 Pro forma - diluted 0.91 The fair value per share of options granted in 2000 was $5.96. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Risk-free interest rate 6.00% Expected dividend yield 1.80 Volatility 21.1 Expected life 8 years 48 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 A summary of the Company's stock option activity and related information for the year ended September 30, 2000 follows:
OUTSTANDING EXERCISABLE ------------------------------- -------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE OPTION EXERCISE OPTION EXERCISE SHARES PRICE SHARES PRICE -------------- ------------- ------------- --------------- At September 30, 1999 -- $ -- -- $ -- Granted 316,312 18.44 316,312 18.44 Became exercisable 316,312 18.44 316,312 18.44 Exercised -- -- -- -- Forfeited -- -- -- -- -------------- ------------- ------------- --------------- At September 30, 2000 316,312 $ 18.44 316,312 $ 18.44 ============== ============= ============= ===============
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires a company to disclose the fair value of its financial instruments, whether or not recognized in the balance sheet, where it is practical to estimate that value. The fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holding of a particular financial instrument. In cases where quoted market prices are not available, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Finally, the fair value estimates presented herein are based on pertinent information available to management as of September 30, 2000 and 1999, respectively. Such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 49 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: (A) CASH AND CASH EQUIVALENTS The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. (B) INVESTMENT SECURITIES Fair values were based on quoted market prices, where available. If quoted market prices were not available, fair values were based on quoted market prices of comparable instruments. (C) LOANS RECEIVABLE The carrying values of variable-rate loans and other loans with short-term characteristics were considered to approximate the fair values. For other loans, the fair values were calculated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality. (D) DEPOSIT ACCOUNTS The fair value of deposits with no stated maturity, such as noninterest-bearing accounts, interest-bearing checking accounts, money market accounts, passbook and statement savings, was, by definition, equal to the amount payable on demand as of September 30, 2000 and 1999, respectively. The fair value of certificates of deposit was estimated using discounted cash flow analyses, using interest rates currently offered for deposits of similar remaining maturities. 50 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 (E) ADVANCES FROM THE FHLB The fair value of advances from the FHLB was estimated using discounted cash flow analyses, using interest rates currently offered for advances of similar remaining maturities. The estimated fair values of financial instruments are as follows:
SEPTEMBER 30, 2000 ------------------------------------ CARRYING ESTIMATED VALUE FAIR VALUE --------------- ----------------- (DOLLARS IN THOUSANDS) Financial assets: Cash and cash equivalents $ 33,107 33,107 Investment securities 76,984 74,925 Loans held for sale 5,533 5,533 Loans receivable, net of allowance for loan losses 223,595 222,053 Federal Home Loan Bank stock 1,650 1,650 Accrued interest receivable 2,653 2,653 =============== ================= Financial liabilities: Deposit accounts $ 254,405 254,055 Advances from the Federal Home Loan Bank 20,000 18,917 =============== ================= SEPTEMBER 30, 1999 ------------------------------------ CARRYING ESTIMATED VALUE FAIR VALUE --------------- ----------------- (DOLLARS IN THOUSANDS) Financial assets: Cash and cash equivalents $ 15,657 15,657 Investment securities 95,264 93,577 Loans held for sale 12,143 12,143 Loans receivable, net of allowance for loan losses 195,292 192,898 Federal Home Loan Bank stock 1,260 1,260 Accrued interest receivable 2,652 2,652 =============== ================= Financial liabilities: Deposit accounts $ 234,095 234,129 Advances from the Federal Home Loan Bank 22,000 19,882 =============== =================
At September 30, 2000 and 1999, the Company had outstanding commitments to originate new loans and to extend credit. These off-balance sheet financial instruments were exercisable at the market rate prevailing at the date the underlying transaction will be completed and, therefore, they were deemed to have no material current fair value. 51 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. The disclosures do not include premises and equipment and certain intangible assets, such as customer relationships. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company. (17) PARENT COMPANY FINANCIAL DATA Condensed financial information for 1st State Bancorp, Inc. since its inception in 1999 is as follows:
CONDENSED BALANCE SHEET 2000 1999 --------------- ----------------- (DOLLARS IN THOUSANDS) Assets: Cash and cash equivalents $ 19,231 4,280 Investment securities: Held to maturity (fair value of $14,962 at September 30, 1999) -- 14,997 Due from bank subsidiary 4,830 4,899 Investment in bank subsidiary 52,022 47,662 Accrued interest receivable 7 201 Other 410 22 --------------- ----------------- Total assets $ 76,500 72,061 =============== ================= Liabilities and stockholders' equity: Accrued taxes and other liabilities 21 193 Dividends payable 17,270 253 --------------- ----------------- Total liabilities 17,291 446 --------------- ----------------- Stockholders' equity 59,209 71,615 --------------- ----------------- Total liabilities and stockholders' equity $ 76,500 72,061 =============== ================= CONDENSED STATEMENT OF INCOME Interest on loan from bank subsidiary $ 377 161 Interest on investment securities 606 271 Interest on overnight deposits 524 143 --------------- ----------------- Total income 1,507 575 Operating expenses 1,372 36 --------------- ----------------- Income before income taxes 135 539 Income tax expense 37 195 --------------- ----------------- Income before equity in undistributed net income of subsidiary 98 344 Equity in undistributed net income of bank subsidiary 3,888 1,211 --------------- ----------------- Net income $ 3,986 1,555 =============== =================
52 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998
CONDENSED STATEMENT OF CASH FLOWS 2000 1999 --------------- ----------------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income $ 3,986 1,555 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of bank subsidiary (3,888) (1,211) Contribution of common shares to Foundation -- 3,000 Deferred tax benefit (88) -- Release of MRP shares 1,036 -- Payments from subsidiary 446 -- Increase in due from subsidiary (377) -- Amortization of premiums and discounts, net (7) (32) (Increase) decrease in accrued interest receivable 194 (201) Increase in other assets (300) (23) Increase (decrease) in other liabilities (173) 211 Other operating activities 55 -- --------------- ----------------- Net cash provided by operating activities 884 3,299 --------------- ----------------- Cash flows from investing activities: Purchases of held-to-maturity investment securities (3,996) (16,964) Maturities of held-to-maturity investment securities 19,000 2,000 --------------- ----------------- Net cash provided (used) by investing activities 15,004 (14,964) --------------- ----------------- Cash flows from financing activities: Net proceeds from issuance of common stock -- 46,247 Purchase of common stock for ESOP -- (4,899) Capital contribution to 1st State Bank -- (25,170) Cash dividends paid on common stock (937) (233) --------------- ----------------- Net cash provided (used) by financing activities (937) 15,945 --------------- ----------------- Net increase in cash and cash equivalents 14,951 4,280 Cash and cash equivalents at beginning of year 4,280 -- --------------- ----------------- Cash and cash equivalents at end of year $ 19,231 4,280 =============== ================= 53 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 Supplemental disclosure of cash flow information: Cash paid during the year for income taxes $ 484 20 =============== ================= Supplemental disclosure of noncash transactions: Cash dividends declared but not paid $ 240 235 =============== ================= Cash dividends on unallocated ESOP shares $ 85 39 =============== ================= Return of capital dividend declared but not paid $ 17,007 -- =============== ================= Deferred compensation to be settled in Company's stock $ 306 2,373 =============== ================= Common stock issued for MRP $ 2,332 -- =============== =================
(18) QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized unaudited quarterly financial data for the year ended September 30, 2000 is as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------------- ------------- ------------- --------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating summary: Interest income $ 5,956 5,988 6,280 6,560 Interest expense 2,690 2,802 2,955 3,149 -------------- ------------- ------------- --------------- Net interest income 3,266 3,186 3,325 3,411 Provision for loan losses 60 60 60 60 -------------- ------------- ------------- --------------- Net interest income after provision for loan losses 3,206 3,126 3,265 3,351 Other income 207 341 580 575 Other expense 1,744 1,744 2,758 2,279 -------------- ------------- ------------- --------------- Income before income tax expense 1,669 1,723 1,087 1,647 Income taxes 577 608 380 575 -------------- ------------- ------------- --------------- Net income $ 1,092 1,115 707 1,072 ============== ============= ============= =============== Per share data: Earnings - basic $ 0.37 0.38 0.24 0.36 Earnings - diluted 0.37 0.38 0.24 0.34 ============== ============= ============= ===============
54 1ST STATE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2000, 1999 and 1998 Summarized unaudited quarterly financial data for the year ended September 30, 1999 is as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------------- ------------- ------------- --------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating summary: Interest income $ 5,124 5,190 5,468 5,692 Interest expense 2,846 2,708 2,556 2,530 -------------- ------------- ------------- --------------- Net interest income 2,278 2,482 2,912 3,162 Provision for loan losses 60 60 60 65 -------------- ------------- ------------- --------------- Net interest income after provision for loan losses 2,218 2,422 2,852 3,097 Other income 665 377 184 428 Other expense 1,718 1,479 4,835 1,786 -------------- ------------- ------------- --------------- Income (loss) before income tax expense (benefit) 1,165 1,320 (1,799) 1,739 Income taxes 414 453 (621) 624 -------------- ------------- ------------- --------------- Net income (loss) $ 751 867 (1,178) 1,115 ============== ============= ============= =============== Per share data: Earnings/(loss) - basic $ -- -- (0.48) 0.38 Earnings/(loss) - diluted -- -- (0.48) 0.38 ============== ============= ============= ===============
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BOARD OF DIRECTORS JAMES C. MCGILL RICHARD C. KEZIAH, CHAIRMAN T. SCOTT QUAKENBUSH President and Chief Executive Officer President of Monarch Hoisery Mills, Retired of 1st State Bancorp, Inc. and 1st Inc. State Bank RICHARD H. SHIRLEY ERNEST A. KOURY, JR. President of Dick Shirley Chevrolet, JAMES A. BARNWELL, JR. Vice President of Carolina Hosiery Inc. President of Huffman Oil Co., Inc. Mills, Inc. VIRGIL L. STADLER BERNIE C. BEAN JAMES G. MCCLURE Vice President of Stadler Country Retired President of Green & McClure Furniture Hams, Inc. Co. 1ST STATE BANK OFFICERS JAMES C. MCGILL A. CHRISTINE BAKER FAIRFAX C. REYNOLDS President and Chief Executive Officer Executive Vice President, Secretary Executive Vice President and Treasurer FRANK GAVIGAN DAN HANSELL THERESA L. JOYCE Senior Vice President Manager, First Capital Services, LLC Vice President ROBERT W. MALBURG, JR. L. MICHAEL DUNNING R. HOYLE VICKREY Vice President Vice President Vice President GAIL M. BARNETTE MICHELLE N. ISLEY SHERRY M. STEWART Assistant Vice President Assistant Vice President Assistant Vice President JULIE F. MILLER MONA S. GUNN PATTY G. BLAETZ Assistant Vice President Assistant Vice President Commercial Credit Officer JAMES C. MCGILL, JR. J. DOUG TAYLOR MYRA P. CATHEY Commercial Banking Officer General Auditor Bank Operations and Security Officer WARD PATILLO SHARON OAKLEY DIANE JEFFRIES Branch Officer Branch Officer Branch Officer RENE MCKINNEY GLENDA S. MADREN Branch Officer Assistant Secretary
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OFFICE LOCATIONS 455 S. Main Street 2294 N. Church Street 503 Huffman Mill Road Burlington, North Carolina 27215 Burlington, North Carolina 27215 Burlington, North Carolina 27215 102 S. 5th Street 211 N. Main Street 3466 S. Church Street Mebane, North Carolina 27302 Graham, North Carolina 27253 Burlington, North Carolina 27215 1203 S. Main Street Graham, North Carolina 27253 CORPORATE INFORMATION AUDITORS TRANSFER AGENT AND REGISTRAR ANNUAL REPORT ON FORM 10-K KPMG LLP Registrar & Transfer Company 150 Fayetteville Street Mall 10 Commerce Drive A COPY OF 1ST STATE BANCORP, Suite 1200 Cranford, New Jersey 07016 INC.'S ANNUAL REPORT ON FORM 10-K Raleigh, North Carolina 27601 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 AS FILED WITH GENERAL COUNSEL ANNUAL MEETING THE SECURITIES AND EXCHANGE Wishart Norris Henninger & The Annual Meeting of Stockholders COMMISSION, WILL BE FURNISHED Pittman, PA will be held on January 30, 2001 at WITHOUT CHARGE TO STOCKHOLDERS AS 3120 South Church Street 5:30 p.m. at 1st State Bank's main OF THE RECORD DATE FOR THE 2000 Burlington, North Carolina 27215 office located at 445 S. Main Street, ANNUAL MEETING UPON WRITTEN Burlington, North Carolina 27215 REQUEST TO CORPORATE SECRETARY, SPECIAL COUNSEl 1ST STATE BANCORP, INC., 445 S. Stradley Ronon Housley Kantarian & MAIN STREET, BURLINGTON, NORTH Bronstein, LLP CAROLINA 27215 1220 19th Street, N.W., Suite 700 Washington, D.C. 20036