UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 25049
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to __________________
Commission File Number 1-14266
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Scotland Bancorp, Inc.
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(Exact name of small business issuer as specified in its charter)
North Carolina 56-1955133
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
505 South Main Street
Laurinburg, North Carolina 28352
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(Address of principal executive office) (Zip code)
(910)-276-2703
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(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check x whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No
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As of February 1, 1998 there were issued and outstanding 1,913,600 shares of the
Registrant's common stock, no par value
Transitional Small Business Disclosure Format: Yes No x
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SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONTENTS
Pages
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated statements of financial condition at September 30,
1997 and December 31, 1997 1
Condensed consolidated statements of income for the three months ended
December 31, 1996 and 1997 2
Condensed consolidated statements of cash flows for the three months
ended December 31, 1996 and 1997 3-4
Notes to condensed consolidated financial statements 5-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND DECEMBER 31, 1997
September 30, December 31,
ASSETS 1997 1997
- ------------------------------------------------------------------------------------------------------------
(Note 2) (Unaudited)
Cash and cash equivalents, including federal funds sold $ 6,758,248 $ 7,084,517
Securities held to maturity, at amortized cost 500,000 500,000
Securities available for sale, at fair value 8,460,850 7,138,799
Nonmarketable equity securities 599,400 599,400
Loans receivable, net 46,463,348 44,492,356
Mortgage-backed securities, held to maturity, at amortized cost 418,657 383,106
Accrued interest receivable 210,759 242,137
Property and equipment, net 792,359 781,175
Prepaid expenses and other assets 195,666 251,315
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TOTAL ASSETS $ 64,399,287 $61,472,805
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 43,139,725 $45,636,325
Note payable 5,500,000 -
Accounts payable and accrued expenses 447,422 231,347
Advance payments by borrowers for taxes and insurance 160,229 106,216
Deferred income taxes 553,766 619,856
Income taxes payable 37,383 84,060
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TOTAL LIABILITIES 49,838,525 46,677,804
==================================
Stockholders' Equity
Preferred stock, no par value, authorized 5,000,000 shares,
none issued - -
Common stock, no par value, authorized 20,000,000 shares,
1,913,600 shares issued - -
Additional paid-in capital 7,939,945 7,938,459
Note receivable from ESOP (1,708,545) (1,708,545)
Unrealized gain on securities available for sale, net of tax 518,552 626,384
Deferred management recognition plan (824,167) (766,667)
Unearned compensation (834,558) (834,558)
Retained earnings, substantially restricted 9,469,535 9,539,928
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TOTAL STOCKHOLDERS' EQUITY 14,560,762 14,795,001
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,399,287 $61,472,805
==================================
See Notes to Condensed Consolidated Financial Statements.
1
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended December 31, 1996 and 1997
1996 1997
- ---------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $ 962,484 $ 966,337
Investment securities 238,913 76,040
Mortgage-backed securities 14,454 11,661
Short-term cash investments 69,517 118,259
--------------------------------
Total interest income 1,285,368 1,172,297
--------------------------------
Interest expense:
Deposits 489,108 551,261
FHLB advances and note payable 897 1,986
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Total interest expense 490,005 553,247
--------------------------------
Net interest income 795,363 619,050
Provision for loan losses 6,000 6,000
--------------------------------
Net interest income after provision for loan losses 789,363 613,050
--------------------------------
Noninterest income:
Service charges and fees 13,291 12,220
Other 9,036 8,701
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22,327 20,921
--------------------------------
Noninterest expense:
Compensation and employee benefits 182,181 239,318
Occupancy 21,607 23,943
Insurance 26,778 9,473
Data processing 23,239 24,366
Furniture and fixture expense 6,285 4,750
Other 72,882 79,972
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332,972 381,822
--------------------------------
Income before income taxes 478,718 252,149
Income taxes 176,499 93,834
--------------------------------
Net income $ 302,219 $ 158,315
================================
Basic earnings per share $ 0.18 $ 0.09
================================
Diluted earnings per share $ 0.18 $ 0.09
================================
See Notes to Condensed Consolidated Financial Statements.
2
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended December 31, 1996 and 1997
1996 1997
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Cash Flows From Operating Activities
Net income $ 302,219 $ 158,315
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 10,522 11,184
ESOP compensation expense (income) 2,186 (1,486)
Amortization of deferred management recognition plan -- 57,500
Changes in assets and liabilities:
Increase in:
Prepaid expenses and other assets (18,941) (55,649)
Accrued interest receivable (28,484) (31,378)
Increase (decrease) in:
Accrued expenses and other liabilities 15,094 (170,909)
Special SAIF assessment (320,750) --
Income taxes payable 54,721 46,677
---------------------------------
Net cash provided by operating activities 16,567 14,254
---------------------------------
Cash Flows From Investing Activities
Net (increase) decrease in loans receivable (994,874) 1,970,992
Principal payments received on mortgage-backed securities 68,658 35,551
Net decrease in investment securities 208,198 1,495,973
Purchase of property and equipment (9,343) --
---------------------------------
Net cash provided by (used in) investing activities (727,361) 3,502,516
---------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits (621,009) 2,496,600
Cash dividends paid (127,219) (133,088)
Principal payment on note payable -- (5,500,000)
Decrease in advance payments by borrowers
for taxes and insurance (53,608) (54,013)
---------------------------------
Net cash used in financing activities (801,836) (3,190,501)
---------------------------------
Net increase (decrease) in cash and cash equivalents (1,512,630) 326,269
Cash and cash equivalents, including federal funds sold:
Beginning 5,105,923 6,758,248
---------------------------------
Ending $ 3,593,293 $ 7,084,517
=================================
3
SCOTLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended December 31, 1996 and 1997
1996 1997
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Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 461,424 $ 563,707
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Cash payments for income taxes $ 136,090 $ 129,822
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Supplemental Disclosure of Noncash Financing Transactions
Dividends declared, accrued and deducted from retained earnings $ 127,317 $ 87,922
====================================
See Notes to Condensed Consolidated Financial Statements.
4
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Note 1. Nature of Business
Scotland Bancorp, Inc. (the "Company") was incorporated under the laws of the
State of North Carolina for the purpose of becoming the bank holding company of
Scotland Savings Bank, Inc. (the "Bank" or "Scotland Savings Bank") in
connection with the Bank's conversion from a state chartered mutual savings bank
to a state chartered stock savings bank, pursuant to its amended and restated
Plan of Conversion. The Company was organized in 1995 to acquire all of the
common stock of Scotland Savings Bank upon its conversion to stock form, which
occurred on March 29, 1996. A subscription offering of the Company's shares
closed on March 29, 1996, at which time the Company acquired all of the shares
of the Bank and commenced operations.
The Company has no operations and conducts no business of its own other than
owning Scotland Savings Bank, investing its portion of the net proceeds received
in the Conversion, and lending funds to the Employee Stock Ownership Plan (the
"ESOP") which was formed in connection with the Conversion. The principal
business of the Bank is accepting deposits from the general public and using
those deposits and other sources of funds to make loans secured by real estate
and other forms of collateral located in the Bank's primary market area of
Scotland and Moore counties in North Carolina.
Scotland Savings Bank's results of operations depend primarily on its net
interest income, which is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities.
The Bank's operations are also affected by noninterest income, such as
miscellaneous income from loans, customer deposit account service charges, and
other sources of revenue. The Bank's principal operating expenses, aside from
interest expense, consist of compensation and associated benefits, federal
deposit insurance premiums, occupancy costs, furniture and fixture expense, data
processing charges, and other general and administrative expenses.
Note 2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (except
for the condensed consolidated statement of financial condition at September 30,
1997, which is has been taken from the audited financial statements at that
date) have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(none of which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included. The financial statements of the Company are
presented on a consolidated basis with those of Scotland Savings Bank. The
results of operations for the three month period ended December 31, 1997 are not
necessarily indicative of the results of operations that may be expected for the
year ended September 30, 1998. The accounting policies followed are as set forth
in Note 1 of the Notes to Consolidated Financial Statements in the 1997 annual
report of the Company.
5
SCOTLAND BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Note 3. Earnings Per Share
Earnings per share has been calculated in accordance with Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share," and Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans." For
purposes of this computation, the number of shares of common stock purchased by
the Bank's employee stock ownership plan which have not been allocated to
participant accounts are not assumed to be outstanding. The following are
reconciliations of the amounts used in the per share calculations:
For the Three Months Ended December 31, 1997
---------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------
Basic EPS
Income available to stockholders $ 158,315 1,718,521 $ 0.09
=================
Effect of dilutive securities
MRP restricted stock awards $ -- 51,518
Stock options -- 5,076
-----------------------------------------
Diluted EPS
Income available to stockholders $ 158,315 1,775,115 $ 0.09
===============================================================
For the Three Months Ended December 31, 1996
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Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------
Basic and Diluted EPS
Income available to stockholders $ 302,219 1,698,096 $ 0.18
===============================================================
Note 4. Dividends Declared
On December 16, 1997, the Board of Directors of Scotland Bancorp, Inc. declared
a dividend of $.05 per share for stockholders of record as of January 16, 1998
and payable on January 30, 1998. The dividends declared were accrued and
reported as other liabilities in the December 31, 1997 consolidated statement of
financial condition.
6
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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Comparison of Financial Condition at December 31, 1997 and September 30, 1997:
Total assets decreased by $2.9 million to $61.5 million at December 31, 1997
from $64.4 million at September 30, 1997. Net loans receivable decreased by $2.0
million to $44.5 million at December 31, 1997 from $46.5 million at September
30, 1997. Cash and cash equivalents, including federal funds sold, increased by
$326,000 to $7.1 million at December 31, 1997 from $6.8 million at September 30,
1997. Investment securities decreased by $1.4 million to $8.6 million at
December 31, 1997 from $10.0 million at September 30, 1997. During the quarter
ended December 31, 1997, investment securities totaling $5.1 million were sold
in order to pay off the Company's note payable described below, $3.6 million of
securities were purchased, and the fair value of the securities available for
sale portfolio increased by $174,000. Deposits increased by $2.5 million to
$45.6 million at December 31, 1997 from $43.1 million at September 30, 1997. The
Company repaid the $5.5 million note payable which was incurred in September of
1997, thus eliminating the Company's external debt as of December 31, 1997.
Retained earnings increased by $70,000 during the current quarter to $9.5
million at December 31, 1997, which is attributable to the Company's earnings of
$158,000 for the three months ended December 31, 1997, less cash dividends
declared of $88,000.
At December 31, 1997, the Company's capital amounted to $14.8 million, which as
a percentage of total consolidated assets was 24.1%, and was considerably in
excess of the regulatory capital requirements at such date.
The Bank considers all loans past due 90 days or more to be nonperforming, even
though a loan may have sufficient collateral and/or the Bank ultimately expects
to receive all delinquent payments. The Bank had no loans which were
nonperforming at December 31, 1997. The Bank's nonperforming loans as a
percentage of total loans outstanding was .00% and .06% at December 31, 1997 and
September 30, 1997, respectively. During the three month period ended December
31, 1997, the Bank's level of nonperforming loans has remained consistently low
in relation to prior periods and total loans outstanding, and the Bank only
incurred $550 in loan charge-offs during the quarter ended December 31, 1997. As
a result, and based on management's analysis of the adequacy of its allowances,
only $6,000 during the three month period ended December 31, 1997 was provided
to the loan loss allowance. Such amounts were added as a general valuation
allowance primarily due to the increase in the Bank's loan portfolio during the
period.
7
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Comparison of Operating Results for the Three Months Ended December 31, 1997 and
1996:
General. Net income for the three months ended December 31, 1997 was $158,000
compared to $302,000 earned during the same quarter in 1996. As discussed below,
the decrease in net income was primarily attributable to a decrease in net
interest income for the three month period ended December 31, 1997, as compared
to the same period in 1996, due to a lower level of investment securities and
moderate deposit growth. In October 1997, the Company liquidated certain
investment securities and utilized the cash to repay a $5.5 million note payable
incurred in September 1997 due to a $6.00 per share return of capital dividend.
Interest income. Interest income decreased by $113,000 from $1.3 million for the
three months ended December 31, 1996 to $1.2 million for the three months ended
December 31, 1997. The decrease was attributable to a lower level of
interest-earning assets, primarily loans receivable and investment securities,
which were outstanding during the first quarter of this year in comparison to
the same quarter a year earlier. Interest-earning assets amounted to $59.2
million at December 31, 1997 as compared to $66.7 million at December 31, 1996.
The Company utilized investment securities as the funding source to pay a $11.5
million return of capital dividend. Approximately 96% of the Company's assets
were interest-earning at December 31, 1997, and approximately 72% of such
interest-earning assets were held in the form of loans receivable.
Interest Expense. Interest expense increased by $63,000 from $490,000 for the
three months ended December 31, 1996 to $553,000 for the three months ended
December 31, 1997. The increase was attributable to a higher level of
interest-bearing liabilities outstanding during the first quarter of this year
in comparison to the same quarter a year earlier, while the cost of funds
remained fairly stable.
Net interest income. Net interest income decreased by $176,000 from $795,000 for
the three months ended December 31, 1996 to $619,000 for the three months ended
December 31, 1997. This decrease resulted from the combination of an decrease in
the volume of interest-earning assets and a increase in the volume of
interest-bearing liabilities between the quarters.
Provision for loan losses. The Bank added $6,000 in loan loss provisions during
the quarters ended December 31, 1997 and 1996. Provisions, which are charged to
operations, and the resulting loan loss allowances are amounts the Bank's
management believes will be adequate to absorb losses on existing loans that may
become uncollectible. Loans are charged off against the allowance when
management believes that collectibility is unlikely. The evaluation to increase
or decrease the provision and resulting allowances is based both on prior loan
loss experience and other factors, such as changes in the nature and volume of
the loan portfolio, overall portfolio quality, and current economic conditions.
8
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- ----------------------------------------------------------------------------
The Bank's loan loss provisions were relatively minor during the three month
periods ended December 31, 1997 and 1996 because the Bank's level of
nonperforming loans has remained consistently low (or the Bank had no
nonperforming loans) in relation to prior periods and total loans outstanding.
At December 31, 1997, the Bank's level of general valuation allowances for loan
losses amounted to $255,000, which management believes is adequate to absorb
potential losses in its loan portfolio.
Noninterest expense. Noninterest expense increased by $49,000 to $382,000 for
the three month period ended December 31, 1997 from $333,000 for the comparable
quarter in 1996, principally as a result of an increase in compensation expense
resulting from the establishment of the Bank's Management Recognition Plan as
discussed below. Other categories of noninterest expense fluctuated by
insignificant amounts between the periods, except for insurance expense which
decreased by $17,000 during the current quarter as compared to the same quarter
a year earlier. This was due to the Bank receiving a lower rate in 1997 after
the Savings Association Insurance Fund was recapitalized in 1996.
On April 17, 1997, the Company's stockholders approved the Bank's Management
Recognition Plan ("MRP") which reserved for issuance 73,600 shares of common
stock to all officers, directors, and employees at the time of adoption. The
restricted common stock under the MRP vests at the rate of 20% annually
beginning at the date of grant. The expense associated with the MRP amounted to
$58,000 for the quarter ended December 31, 1997 and is included in compensation
expense on the consolidated statement of income.
Capital Resources and Liquidity:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-bearing deposits.
One form of liquidity, which is made up of cash and cash equivalents and federal
funds sold, increased by $326,000 million during the three month period ended
December 31, 1997. As reported in the consolidated statement of cash flows, such
increase occurred as a result of deposit growth and sales of investment
securities.
As a state chartered stock savings bank, Scotland Savings Bank must maintain
liquidity in the form of cash and cash equivalents and investment securities,
including mortgage-backed securities, equal to at least 10% of total assets. The
Bank's liquidity ratio at December 31, 1997 was considerable in excess of such
requirements. Given its excess liquidity and its ability to borrow from the
Federal Home Loan Bank, the Bank believes that it will have sufficient funds
available to meet anticipated future loan commitments, unexpected deposit
withdrawals, and other cash requirements.
9
SCOTLAND BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
Year 2000:
At the turn of the century, computer-based information systems will be faced
with the problems potentially affecting hardware, software, networks, processing
platforms, as well as customer and vendor interdependencies. The Company has
established a committee and is in the process of assessing the effect of Year
2000 on the Bank's operating plans and systems. The Company is developing a plan
for identifying, renovating, testing and implementing its systems for Year 2000
processing and internal control requirements. The cost for becoming Year 2000
compliant has not been determined, however, management feels it will not be
material to the Company's financial statements.
10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings at the
present time. From time to time, the Bank is a party to legal
proceedings within the normal course of business wherein it
enforces its security interest in loans made by it, and other
matters of a like kind.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Not applicable
(b) Not applicable
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCOTLAND BANCORP, INC.
Dated February 1, 1998 By: /s/ William C. Fitzgerald, III
------------------------------ ------------------------------
William C. Fitzgerald, III
President and CEO
Dated February 1, 1998 By: /s/ Debora B. Steagall
------------------------------ ------------------------------
Debora B. Steagall
Assistant Treasurer
12