U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________________
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission File Number 0-28446
_______
MITCHELL BANCORP, INC.
______________________________________________________
(Exact name of Registrant as specified in its Charter)
North Carolina 56-1966011
_______________________________ ______________________________________
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
210 Oak Avenue, Spruce Pine, North Carolina 29621
____________________________________________ __________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 765-7324
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X Yes No
___ ___
As of September 30, 1996, there were 979,897 shares of the Registrant's
common stock, par value $0.01 per share, outstanding. The Registrant has no
other classes of common equity outstanding.
Transitional small business disclosure format:
Yes X No
___ ___
1
MITCHELL BANCORP, INC.
AND SUBSIDIARY
Spruce Pine, North Carolina
Index
PART I. Page(s)
FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets-(Unaudited) as of June 30, 1996
and September 30, 1996 ..................................... 3
Consolidated Statements of Income - (Unaudited) for the three
month periods ended September 30, 1995 and 1996 ............ 4
Consolidated Statements of Stockholders' Equity (unaudited)... 5
Consolidated Statements of Cash Flows - (Unaudited) for the
three months ended September 30, 1995 and 1996.............. 6
Notes to (Unaudited) Consolidated Financial Statements........ 7-10
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................11-13
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings...................................... 14
Item 2. Changes in Securities.................................. 14
Item 3. Defaults Upon Senior Securities........................ 14
Item 4. Submission of Matters to a Vote of Security Holders.... 14
Item 5. Other Information...................................... 14
Item 6. Exhibits and Reports on Form 8-K....................... 14
Signatures..................................................... 15
2
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
(in thousands)
June 30, September 30,
Assets 1996 1996
Cash on hand $ 133 $ 138
Interest earning deposits in
other banks 11,996 7,618
Investment securities:
Available for sale (amortized
cost of $13,000) 285 326
Loans receivable, net 23,568 26,041
Real estate owned 84 84
Premises and equipment, net 70 69
Federal Home Loan Bank stock 291 291
Accrued interest receivable 5 5
Deferred income taxes 230 214
Prepaid expenses and other assets 114 194
________ _______
Total assets $ 36,776 $34,980
======== =======
Liabilities and Stockholders' Equity
Deposits $ 20,346 $19,188
Accounts payable--conversion cost 347 -
Stock oversubscription 523 -
Accrued interest payable 60 51
Accrued expenses and other liabilities 818 951
Current income taxes payable 48 72
_______ _______
Total liabilities 22,142 20,262
_______ _______
Stockholders' equity:
Preferred stock ($.01 par value,
500,000 shares authorized;
none outstanding) - -
Common stock ($.01 par value,
3,000,000 shares authorized;
979,897 shares issued and
outstanding ) 10 10
Paid-in capital 9,204 9,206
Retained earnings, substantially
restricted 6,038 6,082
Unrealized gain on securities
available for sale, net of
income taxes 166 191
Unearned compensation:
Employee stock ownership plan (784) (771)
_______ _______
Total stockholders' equity 14,634 14,718
_______ _______
Total liabilities and
stockholders' equity $36,776 $34,980
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share)
For Three Months Ended
September 30,
1995 1996
Interest income:
Loans $ 500 $ 518
Investments 6 6
Interest earning deposits 62 143
______ ______
Total interest income 568 667
Interest expense:
Deposits 292 274
______ ______
Net interest income 276 393
Provision for loan losses 6 6
______ ______
Net interest income after
provision for loan losses 270 387
Non-interest income:
Other 1 1
______ ______
Total non-interest income 1 1
______ ______
Non-interest expenses:
Compensation 62 78
Other employee benefits 29 41
Net occupancy expense 6 6
Deposit insurance premiums 12 150
Data processing 8 7
Provision for real estate losses - -
Other 20 38
______ ______
Total non-interest expenses 137 320
______ ______
Income before income taxes 134 68
Income tax expense 48 24
______ ______
Net income $ 86 $ 44
====== ======
Weighted average common equivalent
share outstanding: N/A 902
Net income per share N/A $ .05
The accompanying notes are an integral part of these consolidated financial
statements.
4
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Unaudited)
(in thousands)
Unearned
Unrealized Compen-
Common Paid-In Retained Gain on sation
Stock Capital Earnings Securities for ESOP Total
Balance at June
30, 1995 $ - $ - $ 5,947 $ 131 $ - $ 6,078
Net income - - 91 - - 91
Unrealized gain
on securities
available for
sale, net of
income taxes - - - 35 - 35
Sale of common
stock (979,897
shares) 10 9,204 - - (784) 8,430
_____ ______ _______ ________ ______ _______
Balance at June
30, 1996 10 9,204 6,038 166 (784) 14,634
Net income - - 44 - - 44
Unrealized gain
on securities
available for
sale, net of
income taxes - - - 25 - 25
Compensation
Earned - 2 - - 13 15
_____ ______ _______ ________ ______ _______
Balance at
September 30,
1996 $10 $9,206 $ 6,082 $ 191 $(771) $14,718
===== ====== ======= ======== ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
September 30,
1995 1996
Operating activities:
Net income $ 86 $ 44
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation 3 3
Provision for loan losses 6 6
Increase (decrease) in reserve
for uncollected interest 6 8
Net increase in deferred loan
fees - 21
Amortization of unearned
compensation - 15
(Increase) decrease in prepaid
expenses and other assets (21) (78)
Increase (decrease) in accrued
interest payable (12) (9)
Increase in accrued expenses
and other liabilities 9 157
_________ ________
Net cash provided by
operating activities 77 167
_________ ________
Investing activities:
Net increase in loans (350) (2,508)
Purchase of premises and equipment - (2)
Investment in life insurance cash
surrender value (3) (2)
Net cash used by investing
activities (353) (2,512)
_________ ________
Financing activities:
Net increase (decrease) in deposits 376 (1,158)
Repayment of stock oversubscriptions - (523)
Payment of accrued conversion cost - (347)
_________ ________
Net cash provided (used) by
financing activities 376 (2,028)
_________ ________
Increase (decrease) in cash and cash
equivalents 100 (4,373)
Cash and cash equivalents at beginning
of period 4,241 12,129
_________ ________
Cash and cash equivalents at end of
period $ 4,341 $ 7,756
========= ========
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $ 304 $ 283
Income taxes 79 -
Noncash transactions:
Unrealized gain on securities
available for sale, net of
deferred tax liability $ 2 $ 25
The accompanying notes are an integral part of these consolidated financial
statements.
6
MITCHELL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Mitchell Bancorp, Inc.
Mitchell Bancorp, Inc. (the "Company") was incorporated under the laws of
the State of North Carolina for the purpose of becoming the savings and
loan holding company of Mitchell Savings Bank, SSB (the "Savings Bank") in
connection with the Savings Bank's conversion from a state chartered
mutual savings bank to a state chartered stock savings bank, pursuant to
its Plan of Conversion. The Company commenced on May 8, 1996, a
Subscription Offering of its shares in connection with the conversion of
the Savings Bank (the "Conversion"). At July 12, 1996, the Conversion was
complete (see Note 4). The financial statements of the Savings Bank are
presented on a consolidated basis with those of the Company.
The consolidated financial statements included herein are for the Company,
the Savings Bank and the Savings Bank's wholly owned subsidiary, Mitchell
Mortgage and Investment Co.(MMI). The impact of MMI on the consolidated
financial statements is insignificant. MMI has no operating activity
other than to own stock in the third-party service bureau.
2. Basis of Preparation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and therefore, do not
include all disclosures necessary for a complete presentation of the
consolidated balance sheets, consolidated statements of income,
consolidated statements of stockholders' equity, and consolidated
statements of cash flows in conformity with generally accepted accounting
principles. However, all adjustments which are, in the opinion of
management, necessary for the fair presentation of the interim financial
statements have been included. All such adjustments are of a normal
recurring nature. The statement of income for the three month period
ended September 30, 1996 is not necessarily indicative of the results
which may be expected for the entire year.
It is suggested that these consolidated financial statements be read in
conjunction with the audited consolidated financial statements and note
thereto for the Company for the year ended June 30, 1996.
3. Earnings Per Share
Earnings per share amounts for the three month period ended September 30,
1996 are based on the average number of shares outstanding throughout the
period, except that the initial issue has been given an effective date of
June 30, 1996. No comparative amounts have been presented
7
MITCHELL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements, Continued
for the three month period ended September 30, 1995 because no shares were
outstanding during that period. Unallocated ESOP shares are not
considered as outstanding for purposes of this calculation.
4. Stockholders' Equity
The Company was incorporated under North Carolina law in February 1996 to
acquire and hold all the outstanding common stock of the Savings Bank, as
part of the Savings Bank's conversion from a North Carolina-chartered
mutual savings bank to a North Carolina-chartered stock savings bank. In
connection with the conversion, which was consummated on July 12, 1996,
the Company issued and sold 979,897 shares of common stock at a price of
$10.00 per share for total net proceeds of approximately $9.2 million
after conversion expenses of approximately $585,000. The Company retained
one-half of the net proceeds and used the remaining net proceeds to
purchase the newly issued capital stock of the Savings Bank. The net
conversion proceeds of approximately $9.2 million and over-subscription
proceeds of approximately $523,000 were held in withdrawable accounts at
the Savings Bank at June 30, 1996. Since, the conversion was essentially
consummated prior June 30, 1996, the conversion has been accounted for as
being effective as of June 30, 1996, with the net conversion offering
proceeds of approximately $9.2 million shown on the statements of
stockholders' equity as proceeds from the sale of common stock and stock
oversubscription proceeds of approximately $523,000 recorded as a
liability. The oversubscription proceeds were refunded, with accrued
interest, by July 12, 1996.
The Company currently intends to ask stockholders of the Company to
approve a proposed stock option plan and a proposed management recognition
plan at a meeting of the stockholders after the conversion. Shares issued
to directors and employees under these plans may be from authorized but
unissued shares of common stock or they may be purchased in the open
market. In the event that options or shares are issued under these plans
such issuances will be included in the earnings per share calculation,
thus, the interests of existing stockholders would be diluted.
The Savings Bank may not declare or pay a cash dividend if the effect
thereof would cause its net worth to be reduced below either the amounts
required for the liquidation account discussed below or the regulatory
capital requirements imposed by federal and state regulations.
At the time of conversion, the Savings Bank established a liquidation
account in an amount equal to its retained income as reflected in the
latest consolidated balance sheet used in the final conversion prospectus.
The liquidation account is maintained for the benefit of eligible account
holders who continue to maintain their deposit accounts in the Savings
Bank after conversion. In the event of a complete liquidation of the
Savings Bank (and only in such an event), eligible depositors who continue
to maintain accounts shall be entitled to receive a distribution from the
liquidation account before any liquidation may be made with respect to
common stock.
8
MITCHELL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements, Continued
5. Employee Stock Ownership Plan (ESOP)
As part of the conversion discussed in Note 4, an Employee Stock Ownership
Plan (ESOP) was established for all employees who have attained the age of
21 and have been credited with at least 500 hours of service during a
12-month period. The ESOP borrowed approximately $784,000 from the
Company and used the funds to purchase 78,391 shares of common stock of
the Company issued in the conversion. The loan will be repaid principally
from the Company's discretionary contributions to the ESOP over a period
of 15 years. On September 30, 1996, the loan had an outstanding balance
of approximately $784,000 and an interest rate of 8.25%. The loan
obligation of the ESOP is considered unearned compensation and, as such,
recorded as a reduction of the Company's stockholders' equity. Both the
loan obligation and the unearned compensation are reduced by an amount of
the loan repayments made by the ESOP. Shares purchased with the loan
proceeds are held in a suspense account for allocation among participants
as the loan is repaid. Contributions to the ESOP and shares released from
the suspense account are allocated among participants on the basis of
compensation in the year of allocation. Benefits become fully vested at
the end of seven years of service under the terms of the ESOP Plan.
Benefits may be payable upon retirement, death, disability, or separation
from service. Since the Company's annual contributions are discretionary,
benefits payable under the ESOP cannot be estimated.
Compensation expenses are recognized to the extent of the fair value of
shares committed to be released.
For the three months month ending September 30, 1996, compensation from
the ESOP of approximately $15,000 was expensed. Compensation is
recognized at the average fair value of the ratably released shares during
the accounting period as the employees performed services. At September
30, 1996, the ESOP had approximately 1,300 allocated shares and 77,091
unallocated shares.
The ESOP administrators will determine whether dividends on allocated and
unallocated shares will be used for debt service. Any allocated dividends
used will be replaced with common stock of equal value. For the purpose
of computing earnings per share, all ESOP shares committed to be released
have been considered outstanding.
6. Deposit Insurance Assessment
The Company has recorded a liability at September 30, 1996 for the
one-time special assessment levied by the omnibus appropriation bill to
recapitalize the SAIF insurance fund. The special assessment for deposit
insurance premiums of approximately $137,000 has been reflected in
operations for the quarter ending September 30, 1996 with an after tax
impact on net income of approximately $85,000. The FDIC will collect the
assessment in late November and effective January 1, 1997 the Company will
begin paying reduced premium assessments in accordance with the BIF/SAIF
legislation.
9
MITCHELL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements, Continued
7. Tax Bad Debt Reserves
With the repeal of the reserve method of accounting for thrift bad debt
reserves for tax years beginning after December 31, 1995, the Company will
have to recapture its post-1987 excess reserves over a six-year period.
The amount of the post-1987 excess is approximately $55,000. The tax
effect of this excess had been previously recorded as deferred income
taxes and, therefore, will have no impact on income when recaptured.
10
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The following discussion and analysis is intended to assist in understanding
the financial condition and the results of operations of the Company.
References to the "Company" include Mitchell Bancorp, Inc. and/or Mitchell
Savings Bank, SSB, as appropriate.
Comparison of Financial Condition at June 30, 1996 and September 30, 1996
The Company's total consolidated assets decreased by approximately $1.8
million or 4.9% from $36.8 million at June 30, 1996 to $35.0 million at
September 30, 1996. The decrease in assets for the period was primarily
attributable to the decrease in deposits and the repayment of stock
oversubscriptions.
The composition of the Company's balance sheet has not been materially
affected by market conditions between June 30, 1995 and September 30, 1996.
Net loans increased $2.5 million, or 10.5%. This increase resulted from the
Company's origination of loans to satisfy increased demand for fixed rate
mortgage loans , as well as funding a $1.2 million commercial loan, and was
funded with cash provided from the stock conversion.
Consistent with its historical lending practices, virtually all of the
Company's loan portfolio at September 30, 1996 consisted of fixed rate loans
with maturities up to sixteen (16) years. Consequently, the Company is exposed
to a high degree of interest rate risk in a rising interest rate environment.
The Company has historically accepted this risk in light of its relatively
high capital levels. See "Liquidity and Capital Resources" discussion below.
Deposits decreased $1.1 million or 5.7%, from $20.3 million at June 30, 1996
to $19.2 million at September 30, 1996. The decrease in deposits was
primarily attributable to the withdraw of deposits in certificate accounts.
The Company also repaid approximately $500,000 in stock oversubscription and
$350,000 in accounts payable for stock conversion cost.
Comparison of Results of Operations for the Three Months Ended September 30,
1995 and 1996
Net Income. Net income decreased $42,000 or 48.8% from $86,000 for the three
months ended September 30, 1995 to $44,000 for the three months ended
September 30, 1996. Included in operations for the three months ending
September 30, 1996 was $137,000 for the SAIF premium assessment signed into
law on September 30, 1996. The after tax effect of the one-time assessment
11
was approximately $85,000. The return on average assets was 1.25% for the
three months ended September 30, 1995 compared to .50% for the three months
ended September 30, 1996. This decrease resulted primarily from the SAIF
insurance assessment recorded as quarter end.
Net Interest Income. Net interest income increased $117,000 or 42.4% from
$276,000 for the three months ended September 30, 1995 to $393,000 for the
three months ended September 30, 1996. The improvement in net interest income
primarily reflects an increase in average interest-earning assets over average
interest-bearing liabilities for the Company of $8.8 million or 144% for the
three months ended September 30, 1996 as compared to 1995 as a result of the
proceed from the stock offering. The interest rate spread decreased from
2.82% for three months ending September 30, 1995 to 2.15% for the three months
ending September 30, 1996, primarily as a result of the conversion proceeds
being invested in overnight funds. In addition, interest earned on
investments in overnight funds held by the Company increased by $81,000 for
the three months ending September 30, 1996 over 1995.
Interest Income. Total interest income increased $99,000 from $568,000 for
the three months ended September 30, 1995 to $667,000 for the three months
ended September 30, 1996. Interest on loans increased $18,000, or 3.7%. A
significant portion of the increase was attributable to the additional funds
invested in the overnight funds at the Federal Home Loan Bank. Interest on
investments remained constant.
Interest Expense. Interest expense decreased $18,000 from $292,000 for the
three months ended September 30, 1995 to $274,000 for the three months ended
September 30, 1996. The decrease for the three months ending September 30,
1996 was the result of a $1.6 million decrease in the average deposit
outstanding offset by a 9 basis point increase in the average cost of funds.
Provision for Loan Losses. The provision for loan losses for both three month
periods ended September 30 was $6,000. Historically, management has
emphasized the Company's loss experience over other factors in establishing
provisions for loan losses. However, management has reviewed the allowance
for loan losses in relation to the Company's composition of its loan portfolio
and observations of the general economic climate and loan loss expectations.
The ratio of allowance to non-performing loans at September 30, 1996 was
19.50%.
Non-Interest Income. Non-interest income continues to be an insignificant
source of income for the Company. This income remained at consistently the
same level during both periods.
Non-Interest Expense. Non-interest expense increased by $183,000 from
$137,000 for the three months ending September 30, 1995 to $320,000 for 1996.
This increase was the direct result of additional operating expense as a
public company, the effect of increased compensation from the recognition of
allocated ESOP shares at fair market value and the recognition of the SAIF
special assessment. During the three month period ending September 30, 1996,
the Company recognized $15,000 of compensation expense related to the Employee
Stock Ownership Plan and $137,000 of additional deposit insurance premiums.
Other non-interest expense items remained relatively stable with anticipated
inflationary increases. Non-interest expense could increase in future periods
if
12
certain contemplated benefit plans are adopted by the board of directors and
approved by the stockholders.
Income Taxes. Income tax expense for the three months ending September 30,
1996 was $24,000 compare to $48,000 for the same period in 1995. The decrease
was the result of pre-tax income being approximately 50% less for the three
months in 1996.
Liquidity and Capital Resources. The Company's primary sources of funds are
deposits and proceeds from principal and interest payments on loans. While
maturities and scheduled amortization of loans are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Company's
primary investing activity is loan originations. The Company maintains
liquidity levels adequate to fund loan commitments, investment opportunities,
deposit withdrawals and other financial commitments. At September 30, 1996,
there were no material commitments for capital expenditures. At September 30,
1996, management had no knowledge of any trends, events or uncertainties that
will have or are reasonably likely to have material effects on the liquidity,
capital resources or operations of the Company. Further at September 30,
1996, management was not aware of any current recommendations by the
regulatory authorities which, if implemented, would have such an effect.
The Savings Bank exceeded all of its capital requirements at September 30,
1996. The Savings Bank had the following capital ratios at September 30,1996:
September 30, 1996
Tier I capital to adjusted total assets 32.4%
Tier I to risk-weighted assets 69.0%
Total capital to risk-weighted assets 70.1%
13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and any subsidiaries may be a party to
various legal proceedings incident to its or their business. At
September 30, 1996, there were no legal proceedings to which the
Company or any subsidiary was a party, or to which of any of their
property was subject, which were expected by management to result in
a material loss.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
3(a) Company's Articles of Incorporation (incorporated by reference
to the Company's Registration Statement on Form SB-2 File No.
333-1888).
3(b) Company's Bylaws (incorporated by reference to the Company's
Registration Statement on Form SB-2 File No. 333-1888).
27 Financial Data Schedule
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
14
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.
Mitchell Bancorp, Inc.
Date: _________________ By __________________________________________
Edward Ballew, Jr.
(Executive Vice President and Chief Executive
Officer)
15
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.
Mitchell Bancorp, Inc.
Date: November __, 1996 By /s/Edward Ballew, Jr.
_____________________________________________
Edward Ballew, Jr.
(Executive Vice President and Chief Executive
Officer)
15