SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2003
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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
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SEC File Number: 000-25009
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SKIBO FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
United States 25-1820465
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
242 East Main Street, Carnegie, Pennsylvania 15106
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(Address of principal executive offices) (Zip Code)
(412) 276-2424
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(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock
as of October 31, 2003
$0.10 Par Value Common Stock 3,153,344
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Class Shares Outstanding
Transitional Small Business Disclosure Format (check one)
Yes No X
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SKIBO FINANCIAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2003 (unaudited) and March 31, 2003...............1
Consolidated Statements of Income for the three and
six months ended September 30, 2003 and 2002 (unaudited)...2
Consolidated Statement of Stockholders' Equity for the
six months ended September 30, 2003 (unaudited).................3
Consolidated Statements of Cash Flows for the six
months ended September 30, 2003 and 2002 (unaudited)............4
Notes to Consolidated Financial Statements......................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................7
Item 3. Controls and Procedures...........................................12
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings.................................................13
Item 2. Changes in Securities.............................................13
Item 3. Defaults Upon Senior Securities ..................................13
Item 4. Submission of Matters to a Vote of Security-Holders...............13
Item 5. Other Information.................................................13
Item 6. Exhibits and Reports on Form 8-K .................................13
Signatures
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollar amounts in thousands, except per share data)
September 30, March 31,
2003 2003
-------------- ----------
ASSETS (Unaudited)
------
Cash and amounts due from depository institutions $ 687 $ 828
Interest-bearing deposits with other institutions 1,897 3,800
Investment securities:
Held-to-maturity (market value $12,600 and $8,465) 12,664 8,356
Mortgage-backed securities:
Held-to-maturity (market value $98,179 and $97,570) 96,094 95,305
Real estate owned, net - 28
Loans receivable, net 35,420 39,672
Accrued interest receivable:
Investment securities 132 91
Mortgage-backed securities 460 506
Loans receivable 313 354
Federal Home Loan Bank stock, at cost 2,926 2,879
Premises and equipment, net 486 505
Prepaid expenses and other assets 5,019 4,935
--------- ---------
Total Assets $ 156,098 $ 157,259
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
- ------------
Deposits $ 80,550 $ 81,842
Federal Home Loan Bank advances 48,000 48,000
Advances from borrowers for taxes and insurance 12 77
Accrued expenses and other liabilities 4,069 3,863
--------- ---------
Total Liabilities 132,631 133,782
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized; none issued - -
Common stock, $0.10 par value; 10,000,000 shares authorized;
3,449,974 shares issued 345 345
Additional paid-in capital 9,777 9,777
Treasury stock, at cost (308,470 shares at both September 30, 2003
and March 31, 2003)(1) (2,149) (2,149)
Retained earnings, substantially restricted 15,494 15,504
--------- ---------
Total Stockholders' Equity 23,467 23,477
--------- ---------
Total Liabilities and Stockholders' Equity $ 156,098 $ 157,259
========= =========
(1)Included are shares held by the Bank's RSP totaling 11,840 at both September
30, 2003 and March 31, 2003.
See accompanying notes to consolidated financial statements.
1
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three and Six Months Ended September 30, 2003 and 2002
(Dollar amounts in thousands, except per share data)
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Interest income:
Loans receivable $ 519 $ 768 $ 1,112 $ 1,552
Mortgage-backed securities 990 1,112 2,035 2,226
Investment securities 131 193 236 438
Other 21 36 49 66
----------- ----------- ----------- -----------
Total interest income 1,661 2,109 3,432 4,282
Interest expense:
Deposits 527 701 1,104 1,411
Federal Home Loan Bank advances 671 671 1,334 1,334
----------- ----------- ----------- -----------
Total interest expense 1,198 1,372 2,438 2,745
----------- ----------- ----------- -----------
Net interest income 463 737 994 1,537
Provision for loan losses - - - -
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 463 737 994 1,537
Other income:
Fees and service charges 13 12 24 28
Other 492 33 531 68
----------- ----------- ----------- -----------
Total other income 505 45 555 96
Other expenses:
Compensation and employee benefits 508 534 997 1,070
Premises and occupancy costs 44 43 88 92
Federal insurance premiums 4 3 7 7
Other operating expenses 83 74 198 150
----------- ----------- ----------- -----------
Total other expenses 639 654 1,290 1,319
----------- ----------- ----------- -----------
Income before income taxes 329 128 259 314
(Benefit from) Provision for income taxes (25) 30 (45) 101
----------- ----------- ----------- -----------
Net income 354 98 304 213
Other comprehensive income:
Unrealized gain on securities available-for-
sale, net of tax - - - -
----------- ----------- ----------- -----------
Total comprehensive income $ 354 $ 98 $ 304 $ 213
=========== =========== =========== ===========
Basic earnings per share $ .11 $ .03 $ .10 $ .07
Diluted earnings per share $ .11 $ .03 $ .09 $ .07
Weighted average shares outstanding - Basic 3,153,344 3,140,633 3,153,344 3,140,004
Weighted average shares outstanding - Diluted 3,227,437 3,212,631 3,226,338 3,212,585
See accompanying notes to consolidated financial statements.
2
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Six Months Ended September 30, 2003 (unaudited)
(Dollar amounts in thousands, except per share data)
Additional
Common Paid-in Treasury Retained
Stock Capital Stock Earnings Total
----- ------- ----- -------- -----
Balance at March 31, 2003 $345 $9,777 $(2,149) $15,504 $23,477
Cash dividends declared, net
($.12 per share regular,
$.13 per share special) - - - (314) (314)
Net income - - - 304 304
--------------------------------------------------
Balance at September 30, 2003 $345 $9,777 $(2,149) $15,494 $23,467
==================================================
See accompanying notes to consolidated financial statements.
3
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended September 30, 2003 and 2002
(Dollar amounts in thousands)
2003 2002
-------- --------
(Unaudited)
Operating activities:
Net income $ 304 $ 213
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 21 26
Compensation expense - RSP - 4
Net accretion of premiums and discounts (54) (97)
Decrease in accrued interest receivable 46 86
Increase in prepaid expenses (84) (212)
Increase in accrued interest payable 270 268
(Decrease) increase in accrued income taxes (136) 84
Other, net 49 526
-------- --------
Net cash provided by operating activities 416 898
-------- --------
Investing activities:
Purchases of premises and equipment (2) (2)
Purchases of investment securities held-to maturity (7,665) (715)
Purchases of mortgage-backed securities held-to-maturity (20,892) (21,919)
Proceeds from maturities/calls and principal repayments of:
Investment securities held-to-maturity 3,355 5,887
Mortgage-backed securities held-to-maturity 20,129 13,145
Loans purchased (7,103) (4,259)
Acquisition of interest in Real Estate Owned 28 -
Net principal repayments on loans 11,408 4,940
Increase in Federal Home Loan Bank stock (47) (35)
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Net cash used in investing activities (789) (2,958)
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Financing activities:
Net (decrease) increase in deposits (1,292) 1,514
Net decrease in mortgage escrow (65) (113)
Treasury stock purchased - (10)
Cash dividends paid (314) (845)
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Net cash (used in) provided by financing activities (1,671) 546
-------- --------
Net decrease in cash and cash equivalents (2,044) (1,514)
Cash and cash equivalents, beginning of period 4,628 4,577
-------- --------
Cash and cash equivalents, end of period $ 2,584 $ 3,063
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,168 $ 2,477
======== ========
Income taxes $ 177 $ 136
======== ========
See accompanying notes to consolidated financial statements
4
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - Basis of Presentation and Principles of Consolidation
-----------------------------------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Skibo Financial Corp., its wholly- owned subsidiary First Carnegie
Deposit (the "Bank"), and the Bank's wholly-owned subsidiary, Fedcar, Inc.
Fedcar, Inc. is a service corporation that is currently inactive.
These statements have been prepared in accordance with instructions for Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, such information presented reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of
the Company's management, necessary for a fair statement of results for the
interim period. All significant intercompany transactions and balances have been
eliminated in consolidation.
The results of operations for the three months and six months ended September
30, 2003 are not necessarily indicative of the results to be expected for the
year ending March 31, 2004 or any other period. The unaudited consolidated
financial statements and notes thereto should be read in conjunction with the
audited financial statements and notes thereto for the year ended March 31,
2003.
NOTE 2 - Dividends on Common Stock
-------------------------
On July 10, 2003, the Board of Directors of the Company declared a $0.12 per
share regular cash dividend and a $0.13 per share special cash dividend on the
Company's outstanding shares of common stock, payable to stockholders of record
as of July 21, 2003. Skibo Bancshares, M.H.C. (the "M.H.C.") waived the receipt
of dividends on its 1,897,500 shares. The cash dividends on the outstanding
shares held by persons other than the M.H.C. were paid on July 30, 2003. Under
current regulations of the Office of Thrift Supervision (the "OTS"), any waiver
of dividends by the M.H.C. will no longer cause an adjustment to the ratio
pursuant to which shares of Company common stock are exchanged for shares of a
stock holding company should the M.H.C. convert from the mutual to stock form of
organization. Such an adjustment would have had the effect of diluting the
minority stockholders of the Company.
Skibo Financial Corp.'s common stock is currently listed on the Nasdaq SmallCap
Market, traded under the symbol of "SKBO" and listed in the Wall Street Journal
as "SkiboFn".
NOTE 3 - Comprehensive Income
--------------------
For the three months ended September 30, 2003 and 2002, the Company's total
comprehensive income was $354,000 and $98,000, respectively, and $304,000 and
$213,000, respectively, for the six months ended September 30, 2003 and 2002.
Total comprehensive income is comprised of net income and other comprehensive
income. For both three and six month periods ended September 30, 2003 and 2002,
there was no other comprehensive income.
NOTE 4 - Earnings Per Share (EPS)
-----------------------
Basic EPS is computed by dividing net income applicable to common stock by the
weighted average number of common shares outstanding during the period, without
considering any dilutive items. Diluted EPS is computed by dividing net income
applicable to common stock by the weighted average number of common shares and
common stock equivalents for items that are dilutive, net of shares assumed to
be repurchased using the treasury stock method at the average share price for
the Company's common stock during the period. Common stock equivalents arise
from the assumed conversion of outstanding stock options.
5
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The computation of basic and diluted earnings per share is shown in the table
below:
Three Months Ended Six Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- --------------
Basic EPS computation:
Numerator-Net Income $354,000 $98,000 $304,000 $213,000
Denominator-Wt Avg common
shares outstanding 3,153,344 3,140,633 3,153,344 3,140,004
Basic EPS $.11 $.03 $.10 $.07
=== == === ===
Diluted EPS computation:
Numerator-Net Income $354,000 $98,000 $304,000 $213,000
Denominator-Wt Avg
common shares outstanding 3,153,344 3,140,633 3,153,344 3,140,004
Dilutive Stock Options 74,093 71,998 72,994 72,581
------ ------ ------ ------
Weighted avg common shares
and common stock
equivalents 3,227,437 3,212,631 3,226,338 3,212,585
Diluted EPS $.11 $.03 $.09 $.07
=== === === ===
NOTE 5 - Income Taxes
------------
The Company joins with its wholly owned subsidiary, First Carnegie Deposit, in
filing a consolidated federal income tax return and accounts for income taxes
using the asset and liability method. The objective of the asset and liability
method is to establish deferred tax assets and liabilities for temporary
differences between the financial reporting and tax basis of the Company's
assets and liabilities based on enacted tax rates expected to be in effect when
such amounts are realized and settled.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's results of operations are primarily dependent upon net interest
income, which is the difference between the interest income earned on
interest-earning assets, primarily loans, mortgage-backed securities, and
investments, and the interest expense on interest-bearing liabilities, primarily
deposits and borrowings. Net interest income may be affected significantly by
general economic and competitive conditions and policies of regulatory agencies,
particularly those with respect to market interest rates. The results of
operations are also significantly influenced by the level of noninterest
expenses, such as employee salaries and benefits, noninterest income, such as
loan-related fees and fees on deposit-related services, and the Company's
provision for loan losses.
The Management Discussion and Analysis section of this Form 10-QSB contains
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may involve
risks and uncertainties. Although management believes that the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ from the results in these forward-looking statements.
Changes in Financial Condition
The Company's total assets of $156,098,000 at September 30, 2003, are reflective
of a decrease of $1,161,000 or 0.7%, as compared to $157,259,000 at March 31,
2003. The decrease in total assets was due to decreases in loans receivable,
cash and amounts due from depository institutions, accrued interest receivable,
real estate owned and premises and equipment, offset by increases in investment
securities, mortgage-backed securities, Federal Home Loan Bank stock and prepaid
expenses and other assets.
The decrease in the Company's liabilities was due to decreases in savings
deposits and advances from borrowers for taxes and insurance, offset by an
increase in accrued expenses and other liabilities. Changes in the components of
assets, liabilities and equity are discussed herein.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits, totaled $2,584,000, a
decrease of $2,044,000 or 44.2%, as compared to $4,628,000 at March 31, 2003.
This decrease was due to decreased interest-bearing deposits maintained at the
Federal Home Loan Bank and non-interest bearing deposits maintained at the
Federal Reserve Bank of Cleveland, partially offset by an increase of
non-interest bearing deposits at a local bank and cash on hand.
Investment Securities. Investment securities totaled $12,664,000 at September
30, 2003, an increase of $4,308,000 or 51.6%, as compared to $8,356,000 at March
31, 2003. The increase was primarily due to purchases of $7.7 million of U.S.
Agency securities, REMICs and certificates of deposits, partially offset by
proceeds from maturities, calls and payments totaling $3.4 million.
Mortgage-backed Securities. Mortgage-backed securities totaled $96,094,000 at
September 30, 2003, an increase of $789,000 or 0.8%, as compared to $95,305,000
at March 31, 2003. The increase was primarily due to purchases of $20.9 million,
partially offset by principal repayments and maturities totaling $20.1 million.
Loans Receivable, net. Net loans receivable at September 30, 2003 totaled
$35,420,000, a decrease of $4.3 million or 10.7%, as compared to $39,672,000 at
March 31, 2003. The decrease was primarily due to principal repayments totaling
$11.5 million, offset by originations of $64,000 and purchases of $7.1 million.
The Company originated $64,000 consumer loans within its normal lending area.
The Company purchased $3.6 million conventional one- to four-family mortgage
loans and $160,000 insured Federal Housing Administration ("FHA") one- to
four-family mortgage loans within its normal lending area. The Company also
purchased $27,000 Government National Mortgage Association ("GNMA") project
loans and $4.6 million United States Department of Agriculture ("USDA") mortgage
loans primarily outside its normal lending area.
Deposits. Total deposits, after interest credited, decreased $1.3 million or
1.6% to $80,550,000 at September 30, 2003, as compared to $81,842,000 at March
31, 2003. The decrease was due to decreases in certificates of deposit, Money
Market and non-interest bearing checking accounts, partially offset by increases
in passbook and interest bearing checking accounts.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FHLB Advances. FHLB advances totaled $48,000,000 at both September 30, 2003 and
March 31, 2003. The Company uses FHLB advances as a supplement to deposits to
fund its purchase of loans and investments.
Stockholders' Equity. Stockholders' equity totaled $23,467,000 at September 30,
2003, as compared to $23,477,000 at March 31, 2003. The decrease of $10,000 or
0.04% was primarily due to the payment of a $0.12 regular cash dividend and a
$.13 special cash dividend, partially offset by earnings for the six months
ended September 30, 2003.
Results of Operations for the Three Months Ended September 30, 2003 and 2002
Net Income. The Company recorded net income of $354,000 for the three months
ended September 30, 2003, as compared to net income of $98,000 for the three
months ended September 30, 2002. The $256,000 or 261.2% increase in net income
for the three months ended September 30, 2003 was the result of an increase in
other income and decreases in other expenses and the provision for income taxes,
partially offset by a decrease in net interest income. Changes in the components
of income and expense are discussed herein.
Net Interest Income. Net interest income decreased $274,000 or 37.2% for the
three months ended September 30, 2003, as compared to the three month period
ended September 30, 2002. Although there was a slight increase in the average
balance of interest-earning assets, the average yield earned thereon decreased
121 basis points. The average balance of interest-bearing liabilities increased
by $1.0 million or 0.8%, however, the average rate paid thereon decreased 58
basis points.
The net interest rate spread, which is the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities, decreased to 0.70% for the three month period ended September 30,
2003 from 1.33% for the three month period ended September 30, 2002. The
decrease in the net interest rate spread was primarily the result of decreased
yields on the average balances of interest earning assets, partially offset by
decreased rates paid on the average balance of deposits.
Interest Income. Interest income decreased $448,000 or 21.2% to $1,661,000 for
the three month period ended September 30, 2003, as compared to $2,109,000 for
the three month period ended September 30, 2002.
Interest on loans receivable decreased $249,000 or 32.4% for the three months
ended September 30, 2003, as compared to the three month period ended September
30, 2002. This decrease was primarily the result of a $9.2 million decrease in
the average balance of loans receivable and a 103 basis point decrease in the
average yield earned thereon.
Interest income on mortgage-backed securities decreased $122,000 or 11.0% for
the three months ended September 30, 2003, as compared to the three months ended
September 30, 2002. Although the average balance of mortgage-backed securities
increased $11.3 million, the average yield earned thereon decreased 113 basis
points.
Interest income on investment securities decreased $62,000 or 32.1% for the
three months ended September 30, 2003, as compared to the three months ended
September 30, 2002. The decrease in interest income on investment securities was
primarily due to a $2.0 million decrease in the average balance of such
securities and a 115 basis point decrease in the average yield earned thereon.
Interest income on other interest-earning assets decreased $15,000 or 41.7% for
the three months ended September 30, 2003, as compared to the three months ended
September 30, 2002. Although the average balance of other interest-earning
assets increased $241,000, the average yield earned thereon decreased 114 basis
points.
The average yield on the average balance of interest-earning assets was 4.45%
and 5.66% for the three month periods ended September 30, 2003 and 2002,
respectively.
Interest Expense. Interest expense decreased $174,000 or 12.7% to $1,198,000 for
the three month period ended September 30, 2003, as compared to $1,372,000 for
the three month period ended September 30, 2002. Although the average balance of
interest-bearing liabilities increased $1.0 million, the average rate paid
thereon decreased 58 basis points.
Interest expense on deposits (including escrows) totaled $527,000 for the three
months ended September 30, 2003 as compared to $701,000 for the three months
ended September 30, 2002. The $174,000 or 24.8% decrease was primarily due
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to a 92 basis point decrease in the average rate paid on deposits, partially
offset by a $1.0 million increase in the average balance of deposits and
escrows.
Interest on FHLB advances totaled $671,000 for both three month periods ended
September 30, 2003 and 2002. The Company uses FHLB advances as a funding source
and to supplement deposits, which are the Company's primary source of funds.
Allowance for Loan Losses. Based upon management's evaluation of the underlying
credit risk of the loan portfolio and the level of allowance for loan losses,
the Company established no provisions for loan losses during the three month
periods ending September 30, 2003 and 2002.
At September 30, 2003, the allowance for loan losses totaled $405,000 or 1.1%
and 125.0% of total loans and total non- performing loans, respectively, as
compared to $425,000 or 1.1% and 904.3%, respectively, at March 31, 2003. The
Company's non-performing loans (non-accrual loans and accruing loans 90 days or
more overdue) totaled $325,000 and $47,000 at September 30, 2003 and March 31,
2003, respectively, which represented 0.9% and 0.12% of the Company's total
loans at September 30, 2003 and March 31, 2003, respectively. The Company's
ratio of non-performing loans to total assets was 0.2% and 0.03% at September
30, 2003 and March 31, 2003, respectively.
Other Income. During the three months ended September 30, 2003, other income
increased $460,000 or 1022.2%, as compared to the three months ended September
30, 2002. In September 2003, the Company received a taxable cash distribution of
approximately $454,000 from the parent of General American Life Insurance
Company ("GALIC"), which was sold to Metropolitan Life Insurance Company in
2000. The Company owns various life insurance policies with GALIC. This
distribution represented the Company's ownership interest in the life insurance
policies. It is possible that additional distributions could be made in the
future, but are not able to be estimated at this time. This cash distribution
was the primary cause for the increase in other income. The increase was also
partially attributable to increases in the cash surrender values of insurance
policies held on the participants of the Supplemental Executive Retirement Plan
("SERP").
Other Expenses. Total other expenses decreased by $15,000 or 2.3% during the
three months ended September 30, 2003, as compared to the three months ended
September 30, 2002. The decrease was attributable to a decrease of $26,000 in
compensation and employee benefits expense, offset increases of $9,000 in other
operating expense, $1,000 in premises and occupancy costs and $1,000 in federal
insurance premiums.
Income Tax Expense. The benefit from income tax totaled $25,000 for the three
months ended September 30, 2003, as compared to a provision for income tax of
$30,000 for the three months ended September 30, 2002. The $55,000 or 183.3%
decrease was due to an adjustment made to the tax accrual to reflect actual
taxes paid.
Results of Operations for the Six Months Ended September 30, 2003 and 2002
Net Income. The Company recorded net income of $304,000 for the six months ended
September 30, 2003, as compared to net income of $213,000 for the six months
ended September 30, 2002. The $91,000 or 42.7% increase in net income for the
six months ended September 30, 2003 was the result of an increase in other
income and decreases in other expenses and the provision for income taxes,
partially offset by a decrease in net interest income. Changes in the components
of income and expense are discussed herein.
Net Interest Income. Net interest income decreased $543,000 or 35.3% for the six
months ended September 30, 2003, as compared to the six month period ended
September 30, 2002. Although the average balance of interest-earning assets
increased $1.4 million or 1.0%, the average yield earned thereon decreased 119
basis points. The average balance of interest-bearing liabilities increased by
$2.2 million or 1.7%, however, the average rate paid thereon decreased 55 basis
points.
The net interest rate spread decreased to 0.78% for the six month period ended
September 30, 2003 from 1.42% for the six month period ended September 30, 2002.
The decrease in the net interest rate spread was primarily the result of
decreased yields on the average balances of interest earning assets, partially
offset by decreased rates paid on the average balance of interest-bearing
liabilities.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Income. Interest income decreased $850,000 or 19.9% to $3,432,000 for
the six month period ended September 30, 2003, as compared to $4,282,000 for the
six month period ended September 30, 2002.
Interest on loans receivable decreased $440,000 or 28.4% for the six months
ended September 30, 2003, as compared to the six month period ended September
30, 2002. This decrease was primarily the result of a $7.6 million decrease in
the average balance of loans receivable and a 96 basis point decrease in the
average yield earned thereon.
Interest income on mortgage-backed securities decreased $191,000 or 8.6% for the
six months ended September 30, 2003, as compared to the six months ended
September 30, 2002. Although the average balance of mortgage-backed securities
increased $12.7 million, the average yield earned thereon decreased 112 basis
points.
Interest income on investment securities decreased $202,000 or 46.1% for the six
months ended September 30, 2003, as compared to the six months ended September
30, 2002. The decrease in interest income on investment securities was primarily
due to a $5.0 million decrease in the average balance of such securities and a
117 basis point decrease in the average yield earned thereon.
Interest income on other interest-earning assets decreased $17,000 or 25.8% for
the six months ended September 30, 2003, as compared to the six months ended
September 30, 2002. The decrease was primarily due to a 109 basis point decrease
in the average yield earned on those assets, partially offset by a $1.3 million
increase in their average balance.
The average yield on the average balance of interest-earning assets was 4.58%
and 5.77% for the six month periods ended September 30, 2003 and 2002,
respectively.
Interest Expense. Interest expense decreased $307,000 or 11.2% to $2,438,000 for
the six months ended September 30, 2003, as compared to $2,745,000 for the six
months ended September 30, 2002. Although the average balance of interest-
bearing liabilities increased $2.2 million, the average rate paid thereon
decreased 55 basis points.
Interest expense on deposits (including escrows) totaled $1,104,000 for the six
months ended September 30, 2003, as compared to $1,411,000 for the six months
ended September 30, 2002. The $307,000 or 21.8% decrease was primarily due to an
86 basis point decrease in the average rate paid on deposits, offset by a $2.2
million increase in the average balance of deposits and escrows.
Interest on FHLB advances totaled $1,334,000 for both six month periods ended
September 30, 2003 and 2002.
Provision for Loan Losses. Based upon management's evaluation of the underlying
credit risk of the loan portfolio and the level of allowance for loan losses,
the Company established no provisions for loan losses during the six month
periods ending September 30, 2003 and 2002.
Other Income. During the six months ended September 30, 2003, other income
increased $459,000 or 478.1%, as compared to the six months ended September 30,
2002. In September 2003, the Company received a taxable cash distribution of
approximately $454,000 from the parent of General American Life Insurance
Company ("GALIC"), which was sold to Metropolitan Life Insurance Company in
2000. The Company owns various life insurance policies with GALIC. This
distribution represented the Company's ownership interest in the life insurance
policies. It is possible that additional distributions could be made in the
future, but are not able to be estimated at this time. This cash distribution
was the primary cause for the increase in other income. The increase was also
partially attributable to increases in the cash surrender values of insurance
policies held on the participants of the Supplemental Executive Retirement Plan
("SERP").
Other Expenses. Total other expenses decreased by $29,000 or 2.2% during the six
months ended September 30, 2003, as compared to the six months ended September
30, 2002. The decrease was attributable primarily to decreases of $73,000 in
compensation and employee benefits expense and $4,000 in premises and occupancy
costs, offset by an increase of $48,000 in other expenses. The decrease in
compensation and employee benefits expense was due to decreases of $56,000 in
compensation and employee benefits expense, $13,000 in the Company's defined
benefit plan and SERP costs, and $4,000 in RSP expense due to the completion of
the RSP awards on April 16, 2002. The increase in other expense was primarily
due to an $85,000 increase in legal expense, partially offset by decreases of
$14,000 in professional services expense and $3,000 in stationary, printing and
office supplies.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Expense. The benefit from income tax totaled $45,000 for the six
months ended September 30, 2003, as compared to a provision for income tax of
$101,000 for the six months ended September 30, 2002. The $146,000 or 144.6%
decrease was due to an adjustment to the tax accrual to reflect actual taxes
paid.
Regulatory Capital Requirements
The Bank is subject to federal regulations that impose certain minimum capital
requirements. Quantitative measures, established by regulation to ensure capital
adequacy, require the Bank to maintain amounts and ratios of tangible and core
capital to adjusted total assets and of total risk-basked capital to
risk-weighted assets. On September 30, 2003, the Bank was in compliance with its
three regulatory capital requirements as follows:
Amount Percent
------ -------
(Dollars in thousands)
Tangible capital......................... $23,400 14.98%
Tangible capital requirement............. 2,343 1.50
------- -----
Excess over requirement.................. $21,057 13.48%
======= =====
Core capital............................. $23,400 14.98%
Core capital requirement................. 4,685 3.00
------- -----
Excess over requirement.................. $18,715 11.98%
======= =====
Risk based capital....................... $23,805 63.34%
Risk based capital requirement........... 3,006 8.00
------- -----
Excess over requirement.................. $20,799 55.34%
======= =====
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or a downturn in the
economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
11
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-QSB, the Registrant's principal executive officer
and principal financial officer have concluded that the Registrant's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
Changes in Internal Controls
There were no significant changes in the Registrant's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
There are various claims and lawsuits in which the Company is
periodically involved, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds
security interests, claims involving the making and servicing of
real property loans and other issues incident to the Company's
business.
In February 2003, the Company's subsidiary, First Carnegie
Deposit, was served as a defendant in a lawsuit regarding a
previously completed sale of foreclosed real estate and sheriff
sales of two other properties resulting from a deficiency
judgment in connection therewith. The complaint (Civil Action
No.: GD00-8816) was filed on February 28, 2003 in the Court of
Common Pleas of Allegheny County, Pennsylvania, Civil Division,
and amended on July 2, 2003. The complaint contains causes of
action against First Carnegie Deposit for Statutory Damages
Pursuant to 42 PA C.S.A. Sec. 8104 (Count I), Wrongful Use of
Civil Proceedings Pursuant to 42 PA C.S.A. Sec. 8351 (Count II),
Abuse of Civil Process (Count III), Conversion (Count IV) and
Civil Conspiracy (Count V). The plaintiffs seek damages for the
costs to defend the prior litigation related to the foreclosure
and sheriff sales of properties owned by the plaintiffs, loss of
reputation, loss of use of their properties and extreme emotional
distress, as well as punitive damages. The Company is unable to
express an opinion as to the outcome of this lawsuit or any
potential loss to the Company.
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.
a) On September 12, 2003, the Company filed a Form 8-K to
announce that on September 11, 2003 a merger agreement had
been entered into with Northwest Bancorp, Inc. under which
Northwest Bancorp, MHC would acquire Skibo Bancshares, MHC
and First Carnegie Deposit.
13
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
SKIBO FINANCIAL CORP.
Date: October 31, 2003
By: /s/ Walter G. Kelly
-------------------------------------
Walter G. Kelly
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Walter G. Kelly /s/ Carol A. Gilbert
- -------------------------------------- --------------------------------------
Walter G. Kelly Carol A. Gilbert
President and Chief Executive Officer Chief Financial and Operating Officer,
(Principal Executive Officer) Secretary and Treasurer
(Principal Financial and Accounting
Officer)
Date: October 31, 2003 Date: October 31, 2003