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 June 30, 1999
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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 August 11, 1999
$0.10 Par Value Common Stock 3,449,974 Shares
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Class Outstanding
Transitional Small Business Disclosure Format (check one)
Yes No X
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SKIBO FINANCIAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Financial Condition (As of
June 30, 1999 (unaudited) and March 31, 1999)..............................1
Consolidated Statements of Income (For the three
months ended June 30, 1999 and 1998 (unaudited))...........................2
Consolidated Statement of Stockholders' Equity (For the
three months ended June 30, 1999 (unaudited)...............................3
Consolidated Statements of Cash Flows (For the three
months ended June 30, 1999 and 1998 (unaudited))...........................4
Notes to Consolidated Financial Statements................. ...............5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................8
PART 11. 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)
June 30, March 31,
1999 1999
---- ----
ASSETS (Unaudited)
------
Cash and amounts due from depository institutions $ 514 $ 1,288
Interest-bearing deposits with other institutions 8,343 1,211
Investment securities:
Held-to-maturity (market value $23,315 and $24,703) 24,296 25,087
Mortgage-backed securities:
Held-to-maturity (market value $52,698 and $54,605) 53,244 54,365
Loans receivable, net 60,877 65,309
Accrued interest receivable:
Investment securities 313 400
Mortgage-backed securities 363 382
Loans receivable 580 726
Federal Home Loan Bank stock, at cost 2,465 2,465
Premises and equipment, net 680 695
Prepaid expenses and other assets 3,159 3,128
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Total Assets $ 154,834 $ 155,056
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Savings deposits $ 76,516 $ 76,917
Federal Home Loan Bank advances 49,300 49,300
Bonds payable 1,299 1,299
Advances from borrowers for taxes and insurance 198 143
Accrued expenses and other liabilities 2,187 2,267
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Total Liabilities 129,500 129,926
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 9,753 9,755
Treasury stock, at cost (7,863 shares at June 30, 1999
and 5,228 shares at March 31, 1999)(1) (82) (65)
Unearned employee stock ownership plan (ESOP) shares (404) (458)
Unearned restricted stock plan (RSP) shares (343) (392)
Retained earnings, substantially restricted 16,065 15,945
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Total Stockholders' Equity 25,334 25,130
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Total Liabilities and Stockholders' Equity $ 154,834 $ 155,056
======= =======
(1) For reporting purposes, shares held by the Bank for the Bank's RSP are
reported as treasury stock.
See accompanying notes to consolidated financial statements.
1
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended June 30, 1999 and 1998
(Dollar amounts in thousands, except per share data)
June 30, June 30,
1999 1998
---- ----
(Unaudited)
Interest income:
Loans receivable $ 1,149 $ 1,237
Mortgage-backed securities 835 891
Investment securities 404 262
Other 98 87
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Total interest income 2,486 2,477
Interest expense:
Savings deposits 816 879
Federal Home Loan Bank advances 626 576
Bonds payable 31 39
Other borrowings -- 14
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Total interest expense 1,473 1,508
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Net interest income 1,013 969
Provision for loan losses 1 3
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Net interest income after provision for loan losses 1,012 966
Other income:
Fees and service charges 19 13
Other 9 8
---- -----
Total other income 28 21
Other expenses:
Compensation and employee benefits 490 656
Premises and occupancy costs 54 56
Federal insurance premiums 11 12
Other operating expenses 84 107
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Total other expenses 639 831
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Income before income taxes 401 156
Provision for income taxes 174 60
--- --
Net income $ 227 $ 96
=== ==
Basic earnings per share $ .07 $ .03
Diluted earnings per share $ .07 $ .03
Weighted average shares outstanding - basic 3,348,686 3,357,244
Weighted average shares outstanding - diluted 3,348,686 3,357,244
See accompanying notes to consolidated financial statements.
2
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Three Months Ended June 30, 1999 (unaudited)
(Dollar amounts in thousands, except per share data)
Additional Unearned Unearned
Common Paid-in Treasury ESOP RSP Retained
Stock Capital Stock Shares Shares Earnings Total
--------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $345 $9,755 $ (65) $ (458) $ (392) $15,945 $25,130
Cash dividends declared net
($.075 per share) -- -- -- -- -- (107) (107)
Excess of fair value above cost of
ESOP shares released or
committed to be released -- (2) -- -- -- -- (2)
Amortization of ESOP liability -- -- -- 54 -- -- 54
Amortization of RSP liability -- -- -- -- 49 -- 49
Treasury stock purchased,
at cost (2,635 shares) -- -- (17) -- -- -- (17)
Net income -- -- -- -- -- 227 227
------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $345 $9,753 $ (82) $ (404) $ (343) $16,065 $25,334
================================================================================================
See accompanying notes to consolidated financial statements.
3
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended June 30, 1999 and 1998
(Dollar amounts in thousands)
1999 1998
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(Unaudited)
Operating activities:
Net income $ 227 $ 96
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses 1 3
Depreciation 20 22
Compensation expense-ESOP and RSP 101 295
Net amortization of premiums and discounts 71 63
Decrease (increase) in accrued interest receivable 252 (12)
Increase in prepaid expenses (31) (51)
Increase in accrued interest payable 175 339
Decrease in accrued income taxes (110) (185)
Other, net (155) (31)
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Net cash provided by operating activities 551 539
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Investing activities:
Purchases of premises and equipment (5) (20)
Purchases of investment securities held-to maturity (720) (1,152)
Purchases of mortgage-backed securities held-to-maturity (4,117) (1,385)
Proceeds from maturities/calls and principal repayments of:
Investment securities held-to-maturity 1,503 1,895
Mortgage-backed securities held-to-maturity 5,201 4,305
Loans purchased (547) (6,046)
Net principal repayments on loans 4,962 5,401
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Net cash provided by investing activities $ 6,277 $ 2,998
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Financing activities:
Net decrease in savings deposits (401) (604)
Proceeds from Federal Home Loan Bank advances -- 8,000
Repayment of Federal Home Loan Bank advances -- (10,500)
Net increase in mortgage escrow 55 84
Treasury stock purchased (17) --
Cash dividends paid (107) (71)
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Net cash used in financing activities (470) (3,091)
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Net increase in cash and cash equivalents 6,358 446
Cash and cash equivalents, beginning of period 2,499 3,271
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Cash and cash equivalents, end of period $ 8,857 $ 3,717
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,298 $ 1,170
======== ========
Income taxes $ 330 $ 245
======== ========
See accompanying notes to consolidated financial statements.
4
NOTE 1 - Corporate Reorganization
------------------------
On October 29, 1998, First Carnegie Deposit reorganized into a two-tier holding
company structure. First Carnegie Deposit formed a new mid-tier, federally
chartered, stock holding company, Skibo Financial Corp. (the "Company"), which
is 55% owned by Skibo Bancshares, M.H.C. As a result of this reorganization,
Skibo Financial Corp. became the parent company of First Carnegie Deposit and
owns 100% of First Carnegie Deposit's common stock. Upon surrender of First
Carnegie Deposit common stock, shareholders of record on October 29, 1998
received, on a three-for-two basis, shares of the new publicly traded entity,
Skibo Financial Corp.
The reorganization was accounted for in a manner similar to a pooling of
interests. Accordingly, the prior years' consolidated financial statements of
the Company are identical to the prior periods' consolidated financial
statements of First Carnegie Deposit.
NOTE 2 - 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 subsidiaries, Fedcar, Inc. and
Carnegie Federal Funding Corporation ("CFFC"). Fedcar, Inc. is a service
corporation that is currently inactive. CFFC is a special purpose subsidiary
that was formed for the issuance of collateralized mortgage obligations.
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 ended June 30, 1999 are not
necessarily indicative of the results to be expected for the year ending March
31, 2000 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, 1999.
NOTE 3 - Reclassification of Prior Period's Statements
---------------------------------------------
Certain amounts reported in the prior period's consolidated financial statements
have been reclassified to conform with the current period's reporting format.
The number of shares and related earnings per share have been restated to
reflect the Company's reorganized structure and three-for-two exchange of stock
in fiscal year 1999.
NOTE 4 - Dividends on Common Stock
-------------------------
On June 10, 1999, the Board of Directors of the Company declared a $0.075 per
share cash dividend on the Company's outstanding shares of common stock, payable
to stockholders of record as of June 30, 1999. 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 remaining outstanding shares were paid on July 15, 1999. There
can be no assurance that the Office of Thrift Supervision ("OTS") will permit
future dividend waivers, or of the terms of such permitted waivers. Furthermore,
any waiver of dividends by the M.H.C. may result in 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 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".
5
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 5 - 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 and unvested RSP
shares.
The computation of basic and diluted earnings per share is shown in the table
below:
Three Months Ended
-------------------------
June 30, June 30,
1999 1998
---- ----
Basic EPS computation:
Numerator-Net Income $ 227,000 $ 96,000
Denominator-Wt Avg common shares outstanding 3,348,686 3,357,244
Basic EPS $ .07 $ .03
=========== =========
Diluted EPS computation:
Numerator-Net Income $ 227,000 $ 96,000
========= =========
Denominator-Wt Avg common shares outstanding 3,348,686 3,357,244
Dilutive Stock Options -- --
Dilutive Unvested RSP -- --
----------- -----------
Weighted avg common shares and common stock
equivalents 3,348,686 3,357,244
Diluted EPS $ .07 $ .03
=========== ===========
For the quarter ended June 30, 1999, 30,946 RSP shares and 155,246 Option shares
were excluded from the diluted EPS computation due to their anti-dilutive
effect. Shares outstanding for the three months ended June 30, 1999 and 1998 do
not include ESOP shares that were unallocated in accordance with Statement of
Position ("SOP") 93-6, "Employers' Accounting for Employees Stock Ownership
Plans". Unallocated ESOP shares amounted to 60,585 and 90,675 at June 30, 1999
and 1998, respectively.
NOTE 6 - Comprehensive Income
--------------------
For the three months ended June 30, 1999 and 1998, the Company's total
comprehensive income was $227,000 and $96,000, respectively. Total comprehensive
income is comprised of net income and other comprehensive income. For both three
month periods, there was no other comprehensive income.
NOTE 7 - Recent Accounting, Regulatory and Other Matters
-----------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires that all
derivatives be recognized as either assets or liabilities in the balance sheet
and that those instruments be measured at fair value. The accounting for changes
in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and resulting designation. SFAS No. 133 also
permits certain reclassification of securities among the available for sale and
held to maturity classifications. This statement was originally intended to be
effective for fiscal years beginning after June 15, 1999, with earlier adoption
permitted. However, in June, 1999, FASB issued SFAS No. 137 which delays the
effective date of SFAS No. 133 for one year, to fiscal years beginning after
June 15, 2000. The Company anticipates, based on current activities, that the
adoption of SFAS No. 133 will not have an effect on its financial position or
results of operations.
6
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage-Banking Enterprise," which amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the accounting for such securities by a
nonmortgage banking enterprise. This statement was effective for the first
quarter beginning January 1, 1999, and has no impact on the Company's financial
position or results of operations as the Company does not currently securitize
mortgage loans.
NOTE 8 - Income Taxes
------------
Income tax expense is recognized after giving effect to special rules applicable
to thrift institutions. The Company joins with its wholly owned subsidiary,
First Carnegie Deposit, in filing a consolidated federal income tax return.
The Company 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 or settled.
7
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 $154,834,000 at June 30, 1999, are reflective of a
decrease of $222,000 or 0.1% as compared to $155,056,000 at March 31, 1999. The
decrease in total assets was primarily due to decreases in cash, investment and
mortgage-backed securities, loans receivable, premises and equipment and accrued
interest, partially offset by increases in interest-bearing deposits with other
institutions and prepaid expenses.
The decrease in the Company's liabilities was primarily due to decreases in
savings deposits and accrued expenses, offset by an increase in advances from
borrowers for taxes and insurance. Changes in the components of assets,
liabilities and equity are discussed herein.
Loans Receivable, net. Net loans receivable at June 30, 1999 totalled
$60,877,000, a decrease of $4,432,000 or 6.8%, as compared to $65,309,000 at
March 31, 1999. The decrease was primarily due to principal repayments totalling
$5.0 million, partially offset by the origination of $24,000 one- to four-family
and $58,000 consumer loans, and purchases of $247,000 farm mortgages and
$301,000 Small Business Administration (SBA) loans. The Company continued to
experience refinancings in its mortgage portfolio due to low market rates of
interest and continued competition.
Mortgage-backed Securities. Mortgage-backed securities were $53,244,000 at June
30, 1999, a decrease of $1,121,000 or 2.1%, as compared to $54,365,000 at March
31, 1999. The decrease was due to principal repayments and maturities totalling
$5.2 million, partially offset by purchases of $4.1 million.
Investment Securities. Investment securities totalled $24,296,000 at June 30,
1999, a decrease of $791,000 or 3.2%, as compared to $25,087,000 at March 31,
1999. The decrease was primarily due to proceeds received from maturities, calls
and payments totalling $1.5 million, offset by purchases of $720,000 of U.S.
Agency securities.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits, totalled $8,857,000, an
increase of $6,358,000 or 254.4% from the prior quarter. This increase was
primarily due to increased interest-bearing deposits maintained at the Federal
Home Loan Bank ("FHLB") in anticipation of utilizing these funds for repayment
of FHLB advances and purchases of loans and investments in the event of a higher
interest rate environment.
Deposits. Total deposits, after interest credited, decreased by $401,000 or 0.5%
to $76,516,000 at June 30, 1999, as compared to $76,917,000 at March 31, 1999.
The decrease was primarily due to decreases in certificates of deposit and Money
Market accounts, partially offset by an increase in passbook and NOW accounts.
FHLB Advances. FHLB advances totalled $49,300,000 at both June 30, and March 31,
1999. The Company uses FHLB advances as a supplement to deposits to fund its
purchase of loans and investments.
Stockholders' Equity. Stockholders' equity totalled $25,334,000 at June 30,
1999, as compared to $25,130,000 at March 31, 1999. The increase of $204,000 or
0.8% was primarily due to earnings for the three months ended June 30, 1999.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended June 30, 1999 and 1998
Net Income. The Company recorded net income of $227,000 for the three months
ended June 30, 1999, as compared to net income of $96,000 for the three months
ended June 30, 1998. The $131,000 or 136.5% increase in net income for the three
months ended June 30, 1999 was primarily the result of a reduction in employee
benefits expense. Changes in the components of income and expense are discussed
herein.
Net Interest Income. Net interest income increased $44,000 or 4.5% for the three
months ended June 30, 1999, as compared to the three month period ended June 30,
1998. Although the average balance of interest-earning assets increased $5.9
million or 4.1%, the average yield earned thereon decreased 24 basis points. The
average balance of interest-bearing liabilities increased by $6.3 million or
5.2%, offset somewhat by a 35 basis point decrease in the average rate paid
thereon.
The interest rate spread, which is the difference between the yield on average
interest-earning assets and the cost of average interest-bearing liabilities,
increased to 2.00% for the three month period ended June 30, 1999 from 1.89% for
the three month period ended June 30, 1998. The increase in the interest rate
spread was primarily the result of FHLB advances at lower rates and a decrease
in the rates paid on certificates of deposit, due to the maturity of higher
yielding long term certificates of deposit.
Interest Income. Interest income increased $9,000 or 0.4% to $2,486,000 for the
three month period ended June 30, 1999, as compared to $2,477,000 for the three
month period ended June 30, 1998.
Interest on loans receivable decreased $88,000 or 7.1% for the three months
ended June 30, 1999, as compared to the three month period ended June 30, 1998.
This decrease was primarily the result of a $6.9 million decrease in the average
balance of loans receivable, offset by a 23 basis point increase in the average
yield earned thereon.
Interest income on mortgage-backed securities decreased $56,000 or 6.3% for the
three months ended June 30, 1999, as compared to the three months ended June 30,
1998. This decrease was primarily the result of a 55 basis point decrease in the
average yield earned thereon, offset by a $1.1 million increase in the average
balance of such securities.
Interest income on investment securities increased by $142,000 or 54.2% for the
three months ended June 30, 1999, as compared to the three months ended June 30,
1998. The increase in interest income on investment securities was primarily due
to an increase of $9.5 million in the average balance of such securities, offset
by a decrease in the average yield of 37 basis points.
Interest income on other interest-earning assets increased by $11,000 or 12.6%
for the three months ended June 30, 1999, as compared to the three months ended
June 30, 1998. The increase was primarily due a $2.3 million increase in the
average interest-earning assets at the FHLB, offset by a 95 basis point decrease
in the average yield earned thereon.
The average yield on the average balance of interest-earning assets was 6.66%
and 6.90% for the three month periods ended June 30, 1999 and 1998,
respectively.
Interest Expense. Interest expense totalled $1,473,000 for the three months
ended June 30, 1999, as compared to $1,508,000 for the three months ended June
30, 1998. The $35,000 or 2.3% decrease was primarily due to decreased average
balances in certificates of deposit, passbook savings, money market, and escrow
accounts and bonds payable and other borrowings, offset by increases in FHLB
advances and NOW accounts. The 35 basis point decrease in the average rate paid
on the total average interest-bearing liabilities also contributed to the
decrease.
Interest expense on deposits (including escrows) decreased $63,000 or 7.2% for
the three months ended June 30, 1999, as compared to the three months ended June
30, 1998. The decrease was primarily due to a 34 basis point decrease in the
average rate paid on deposits and escrows, offset by an increase of $125,000 in
the average balance of such deposits.
Interest on FHLB advances increased $50,000 or 8.7% for the three months ended
June 30, 1999, as compared to the three months ended June 30, 1998. The increase
was primarily due to an increase of $7.2 million in the average balance of
advances, offset by a 39 basis point decrease in the rate paid thereon. The
Company uses FHLB advances as a funding source and has in the past used
borrowings to supplement deposits, which are the Company's primary source of
funds.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest on bonds payable and other borrowings, a less significant portion of
interest expense, decreased by $22,000 or 41.5%, as the average principal amount
of other borrowings decreased by $985,000. The average rate paid on bonds
payable and other borrowings increased 27 basis points.
Provision for Loan Losses. During the three month periods ended June 30, 1999
and 1998, the Company established provisions for loan losses of $1,000 and
$3,000, respectively. This reflected management's evaluation of the underlying
credit risk of the loan portfolio and the level of allowance for loan losses.
At June 30, 1999, the allowance for loan losses totalled $577,000 or .94% and
164.9% of total loans and total non-performing loans, respectively, as compared
to $575,000 or .88% and 70.3%, respectively, at March 31, 1999. The Company's
non-performing loans (non-accrual loans and accruing loans 90 days or more
overdue) totalled $350,000 and $818,000 at June 30, 1999 and March 31, 1999
respectively, which represented 0.6% and 1.3% of the Company's total loans,
respectively. The non-performing loans, however, include one Farm Service Agency
(FSA) guaranteed loan at June 30, 1999 and two at March 31, 1999, which
represent 91.7% and 75.4% of the total non-performing loans at June 30, 1999 and
March 31, 1999, respectively. The Company's ratio of non-performing loans to
total assets was .23% and .53% at June 30, 1999 and March 31, 1999,
respectively.
Other Income. During the three months ended June 30, 1999, other income
increased $7,000 or 33.3%, as compared to the three months ended June 30, 1998,
primarily due to increased loan fees.
Other Expenses. Total other expenses decreased by $192,000 or 23.1% during the
three months ended June 30, 1999, as compared to the three months ended June 30,
1998. The decrease was primarily attributable to a decrease of $166,000 in
compensation and employee benefits expense. The reduction in compensation
expense was due to a $207,000 reduction in RSP expense, as compared to the prior
year's quarter, which reflected the implementation of the restricted stock plan,
including the immediate vesting of a portion of such awards, offset by a $6,000
increase in compensation and employee benefits expense, a $11,000 increase in
ESOP expense, and a $24,000 increase in the Company's defined benefit plan,
Supplemental Employee Retirement Plan (SERP) and Director's Retirement Plan
(DRP) costs.
Income Tax Expense. The provision for income tax totalled $174,000 for the three
months ended June 30, 1999, as compared to $60,000 for the three months ended
June 30, 1998. The $114,000 or 190.0% increase was due to increased income.
Liquidity and Capital Requirements
The Company's subsidiary bank, First Carnegie Deposit, is subject to various
requirements administered by the federal banking agencies. The Bank is required
by Section 6 of the Home Owners' Loan Act ("HOLA") to hold a prescribed amount
of statutorily defined liquid assets. The Director of the OTS may, by
regulation, vary the amount of the liquidity requirement, but only within
pre-established statutory limits. The requirement must be no less than four
percent and no greater than ten percent of the Bank's net withdrawable accounts
and borrowings payable on demand or with unexpired maturities of one year or
less. The minimum required liquidity is currently 4%. The Bank's average
liquidity ratio was 113.13% and 129.98%, at June 30, 1999 and March 31, 1999,
respectively.
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 June 30, 1999, the Bank was in compliance with its
three regulatory capital requirements as follows:
Amount Percent
------ -------
(Dollars in thousands)
Tangible capital.............................. $24,207 15.68%
Tangible capital requirement.................. 2,316 1.50%
------- ------
Excess over requirement....................... $21,891 14.18%
====== =====
Core capital.................................. $24,207 15.68%
Core capital requirement...................... 4,631 3.00%
------- ------
Excess over requirement....................... $19,576 12.68%
====== =====
Risk based capital............................ $24,783 52.32%
Risk based capital requirement................ 3,789 8.00%
------- ------
Excess over requirement....................... $20,994 44.32%
====== =====
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
At June 30, 1999, the most recent notification from the OTS, the Bank was
categorized as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum Tier I (leverage), Tier I risk-basked, and total risk-based capital
ratios of 5.0%, 6.0%, and 10.0%, respectively. At June 30, 1999, the Bank's Tier
I (leverage), Tier I risk-based, and total risk-basked capital ratios amounted
to 15.68%, 51.10%, and 52.32%, respectively. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are presented at
March 31, 1999 in the Company's 1999 Annual Report. See "Market Risk &
Asset/Liability Management". Management believes there have been no material
changes in the Company's market risk since March 31, 1999.
Year 2000 (Y2K) Readiness Disclosure
Rapid and accurate data processing is essential to the Company's operations.
Many computer programs that can only distinguish the final two digits of the
year entered (a common programming practice in prior years) are expected to read
entries for the Y2K as the year 1900 or as zero and incorrectly attempt to
compute payment, interest, delinquency and other data.
The following discussion of the implications of the Y2K problem for the Company
contains numerous forward looking statements based on inherently uncertain
information. The cost of the project is based on management's best estimates,
which are derived utilizing a number of assumptions of future events including
the continued availability of internal and external resources, third party
modifications and other factors. However, there can be no guarantee that these
statements will be achieved and actual results could differ. Moreover, although
management believes it will be able to make the necessary modifications in
advance, there can be no guarantee that failure to modify the systems would not
have a material adverse effect on the Company.
The Company utilizes an in-house computer system, with all software applications
being developed and modified internally. The Company first acknowledged and
addressed the potential problem associated with the Y2K early in 1990. The
Company completed renovation of its in-house data processing system prior to
testing in October 1992. The Company has also received vender certification
confirming Y2K compliance for its hardware and operating system. With the
exception of on-going testing and additional contingency planning, management
believes nothing more is required with regard to its in-house system. Management
believes that remaining efforts towards Y2K compliance will require minimal
expense and, therefore, will not have a material impact on the Company's
financial condition or results of operations.
The Company formed a committee to implement an action plan designed to ensure
that the Company's computer systems, software applications and other date
reliant equipment would function properly after December 31, 1999. This process
involved identifying all equipment, software and third party providers deemed
critical to the Company's daily operations, and ascertained that these products
and product providers are Y2K compliant. The Company places a high degree of
reliance on computer systems of third parties, such as customers, suppliers, and
other financial and governmental institutions. Although the Company has been
assessing the readiness of these third parties and preparing contingency plans,
there can be no guarantee that the failure of these third parties to modify
their systems in advance of December 31, 1999 would not have a material adverse
affect on the Company. The Company has completed testing with the Federal
Reserve Bank of Cleveland. The Federal Reserve Bank of Cleveland has been deemed
critical by the Company in its daily operations.
The Company has contacted all material vendors and suppliers regarding their Y2K
readiness. Each of these third parties has delivered written assurance to the
Company that Y2K will not be an issue or that the issue will be satisfactorily
resolved prior to the end of 1999. Appropriate testing, if possible, and any
related contingency plans were performed in the second quarter and will be
performed in the third quarter of fiscal 1999. The Company has contacted all
significant customers and non-information technology suppliers (i.e. utility
systems, telephone systems, etc.) regarding their Y2K state of readiness. Such
parties have indicated that they have established Y2K plans and are in various
stages of remediation and testing. We are unable to test the Y2K readiness of
our significant suppliers of utilities. We are relying on the utility companies'
internal testing and representations to provide the required services that drive
our data systems. The Company is determining what recourse it would have from
such parties if they do not resolve the Y2K issues. Furthermore, the Company is
reviewing alternative procedures and contingency plans for all mission critical
systems in the unlikely event of their failure at the turn of the century.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Approximately 82.4% of the Company's loans are serviced by banks and bank
subsidiaries, mortgage corporations and loan servicing companies. The majority
of the loan servicing is provided by five major servicing companies. The Company
cannot contact these customers directly; however, it has contacted the agencies
servicing these loans. Approximately 68.7% of loans the Company services are
residential mortgage loans and consumer loans. The Company did not contact these
customers because it was deemed to be beyond the scope of the testing parameters
in that the collateral for these loans would not be affected. The Company has
contacted by phone its material commercial mortgage customers. Commercial
mortgage and non-mortgage customers represent approximately 31.3% of the loans
serviced by the Company. The Company reviewed with its customers questions based
on Appendix A of Guidance Concerning the Year 2000 Impact on Customers, Federal
Financial Institutions Examination Council (FFIEC) Interagency Statement, March
17, 1998. The Company's Y2K Committee members reviewed the responses to rate the
customers' risk levels based on the type of business and the type of loan and
collateral. The Company has received favorable responses from its borrowers.
Borrowers have established Y2K plans and are testing software and contacting
vendors and suppliers and plan to be ready for Y2K. Any customers with greater
than low risk level will receive follow-up attention. The Company has made
savings customers aware of Y2K issues through the use of account statement
inserts in October 1998 and May 1999.
Successful and timely completion of the Y2K project is based on management's
best estimates derived from various assumptions of future events, which are
inherently uncertain, including the progress and results of the testing plans,
and all vendors, suppliers and customer readiness. The most likely worst case
scenario is that some areas where the Company has branch offices located will
experience blackouts if utility service companies are unable to provide
necessary service to drive our data systems or provide sufficient sanitary
conditions to our offices. In the event that this would happen, the Company
would be unable to open the affected branches, and customers would be directed
to other branch locations and business would be transacted manually.
The Company concluded that despite the best efforts of management to address its
financial exposure to Y2K issues, the vast number of external entities that have
direct and indirect business relationships with the Company make it impossible
to assure that a failure to achieve compliance by one or more of these entities
would not have a material adverse impact on the operations of the Company.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Company was not engaged in any legal proceeding of a material
nature at June 30, 1999. From time to time, the Company is a party to
routine legal proceedings in the ordinary course of business, such as
claims to enforce liens, condemnation proceedings on properties in
which the Company holds security interest, claims involving the making
and servicing of real property loans, and other issues incident to the
business of the Company. There were no lawsuits pending or known to be
contemplated against the Company at June 30, 1999 that would have a
material effect on the operations or income of 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) Exhibits
2.0 Agreement and Plan of Reorganization *
3.1 Charter of Skibo Financial Corp. *
3.2 Bylaws of Skibo Financial Corp. *
4.0 Form of Stock Certificate of Skibo Financial Corp. *
10.1 Supplemental Executive Retirement Plan **
10.2 Directors' Retirement Plan **
10.3 Form of Employment Agreement **
10.4 1998 Stock Option Plan *
13
10.5 1998 Restricted Stock Plan *
11.0 Earnings Per Share Calculation (see note 5 to the Notes
to the Unaudited Consolidated Financial Statements in
this Form 10-QSB)
27 Financial Data Schedule (in electronic filing only)
b) Reports on Form 8-K
Not applicable.
* Incorporated by reference to the registrant's Form 10-QSB filed with the
SEC on November 16, 1998.
** Incorporated by reference to the registrant's Form 10-KSB filed with the
SEC on June 25, 1999.
14
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: August 12, 1999 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
(Duly Authorized Representative) and Treasurer (Principal Financial and
Accounting Officer)
Date: August 12, 1999 Date: August 12, 1999