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, 1999
[ ] 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
- --------------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
242 East Main Street, Carnegie, Pennsylvania 15106
- -------------------------------------------- -----
(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 November 5, 1999
$0.10 Par Value Common Stock 3,411,206 Shares
- ---------------------------- --------------------
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
Item 1. Financial Statements
Consolidated Statements of Financial Condition (As of
September 30, 1999 (unaudited) and March 31, 1999)................1
Consolidated Statements of Income (For the three and
six months ended September 30, 1999 and 1998 (unaudited)).........2
Consolidated Statement of Stockholders' Equity (For the
six months ended September 30, 1999 (unaudited)...................3
Consolidated Statements of Cash Flows (For the six months
ended September 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.................................7
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,
1999 1999
---- ----
ASSETS (Unaudited)
Cash and amounts due from depository institutions $ 553 $ 1,288
Interest-bearing deposits with other institutions 473 1,211
Investment securities:
Held-to-maturity (market value $24,866 and $24,703) 26,177 25,087
Mortgage-backed securities:
Held-to-maturity (market value $58,706 and $54,605) 59,362 54,365
Loans receivable, net 60,084 65,309
Accrued interest receivable:
Investment securities 424 400
Mortgage-backed securities 402 382
Loans receivable 546 726
Federal Home Loan Bank stock, at cost 2,520 2,465
Premises and equipment, net 664 695
Prepaid expenses and other assets 3,457 3,128
--------- ---------
Total Assets $ 154,662 $ 155,056
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $ 76,358 $ 76,917
Federal Home Loan Bank advances 50,300 49,300
Bonds payable -- 1,299
Advances from borrowers for taxes and insurance 53 143
Accrued expenses and other liabilities 2,356 2,267
--------- ---------
Total Liabilities 129,067 129,926
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 9,750 9,755
Treasury stock, at cost (7,863 shares at September 30, 1999
and 5,228 shares at March 31, 1999)(1) (82) (65)
Unearned employee stock ownership plan (ESOP) shares (367) (458)
Unearned restricted stock plan (RSP) shares (295) (392)
Retained earnings, substantially restricted 16,244 15,945
--------- ---------
Total Stockholders' Equity 25,595 25,130
--------- ---------
Total Liabilities and Stockholders' Equity $ 154,662 $ 155,056
========= =========
(1) For reporting purposes, shares held by the Bank for the Bank's RSP are
included in treasury stock.
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, 1999 and 1998
(Dollar amounts in thousands, except per share data)
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
Interest income:
Loans receivable $ 1,081 $ 1,198 $ 2,230 $ 2,435
Mortgage-backed securities 899 833 1,734 1,724
Investment securities 431 255 835 517
Other 105 82 203 169
---------- ---------- ---------- ----------
Total interest income 2,516 2,368 5,002 4,845
Interest expense:
Savings deposits 817 872 1,633 1,751
Federal Home Loan Bank advances 636 501 1,262 1,077
Bonds payable 32 39 63 78
Other borrowings -- 14 -- 28
---------- ---------- ---------- ----------
Total interest expense 1,485 1,426 2,958 2,934
---------- ---------- ---------- ----------
Net interest income 1,031 942 2,044 1,911
Provision for loan losses 1 12 2 15
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,030 930 2,042 1,896
Other income:
Fees and service charges 11 12 30 25
Other 10 14 19 22
---------- ---------- ---------- ----------
Total other income 21 26 49 47
Other expenses:
Compensation and employee benefits 460 377 950 1,033
Premises and occupancy costs 56 55 110 111
Federal insurance premiums 11 12 22 24
Other operating expenses 97 81 181 188
---------- ---------- ---------- ----------
Total other expenses 624 525 1,263 1,356
---------- ---------- ---------- ----------
Income before income taxes 427 431 828 587
Provision for income taxes 141 180 315 240
---------- ---------- ---------- ----------
Net income $ 286 $ 251 $ 513 $ 347
========== ========== ========== ==========
Basic earnings per share $ .08 $ .07 $ .15 $ .10
Diluted earnings per share $ .08 $ .07 $ .15 $ .10
Weighted average shares outstanding - Basic 3,354,208 3,362,294 3,351,462 3,359,783
Weighted average shares outstanding - Diluted 3,354,208 3,362,294 3,351,462 3,359,783
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, 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
($.15 per share) -- -- -- -- -- (214) (214)
Excess of fair value above cost of
ESOP shares released
or committed to be released -- (5) -- -- -- -- (5)
Amortization of ESOP liability -- -- -- 91 -- -- 91
Amortization of RSP liability -- -- -- -- 97 -- 97
Treasury stock purchased,
at cost (2,635 shares) -- -- (17) -- -- -- (17)
Net income -- -- -- -- -- 513 513
---------------------------------------------------------------------------------
Balance at September 30, 1999 $ 345 $ 9,750 $ (82) $ (367) $ (295) $ 16,244 $ 25,595
=================================================================================
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, 1999 and 1998
(Dollar amounts in thousands)
1999 1998
---- ----
(unaudited)
Operating activities:
Net income $ 513 $ 347
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses 2 15
Depreciation 40 44
Compensation expense-ESOP and RSP 183 309
Net amortization of premiums and discounts 143 120
Decrease in accrued interest receivable 136 70
Increase in prepaid expenses (329) (330)
Increase in accrued interest payable 268 316
Decrease in accrued income taxes (110) (13)
Other, net (81) 70
-------- --------
Net cash provided by operating activities 765 948
-------- --------
Investing activities:
Purchases of premises and equipment (9) (21)
Purchases of investment securities held-to maturity (4,332) (5,598)
Purchases of mortgage-backed securities held-to-maturity (13,598) (3,028)
Proceeds from maturities/calls and principal repayments of:
Investment securities held-to-maturity 3,234 5,213
Mortgage-backed securities held-to-maturity 8,533 8,501
Loans purchased (2,662) (6,920)
Net principal repayments on loans 7,830 9,749
Increase in Federal Home Loan Bank stock (55) --
-------- --------
Net cash provided by (used in) investing activities (1,059) 7,896
-------- --------
Financing activities:
Net decrease in savings deposits (559) (1,294)
Proceeds from Federal Home Loan Bank advances 1,100 13,000
Repayment of Federal Home Loan Bank advances (100) (16,500)
Principal repayment of bonds payable (1,299) (177)
Net decrease in mortgage escrow (90) (100)
Treasury stock purchased (17) --
Cash dividends paid (214) (142)
-------- --------
Net cash used in financing activities (1,179) (5,213)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,473) 3,631
Cash and cash equivalents, beginning of period 2,499 3,271
-------- --------
Cash and cash equivalents, end of period $ 1,026 $ 6,902
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,689 $ 2,618
======== ========
Income taxes $ 515 $ 253
======== ========
See accompanying notes to consolidated financial statements
4
SKIBO FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 and six months ended September
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 including a three-for-two exchange
stock completed on October 29, 1998.
NOTE 4 - Dividends on Common Stock
-------------------------
On September 9, 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 September 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 October 15,
1999. 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. 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.
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 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. Potentially dilutive common stock
equivalents arise from the assumed conversion of outstanding stock options and
unvested RSP shares.
5
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,
------------- -----------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Basic EPS computation:
Numerator-Net Income $ 286,000 $ 251,000 $ 513,000 $ 347,000
========== ========== ========== ==========
Denominator-Wt Avg common
shares outstanding 3,354,208 3,362,294 3,351,462 3,359,783
Basic EPS $ .08 $ .07 $ .15 $ .10
========== ========== ========== ==========
Diluted EPS computation:
Numerator-Net Income 286,000 251,000 513,000 347,000
========== ========== ========== ==========
Denominator-Wt Avg
common shares outstanding 3,354,208 3,362,294 3,351,462 3,359,783
Dilutive Stock Options -- -- -- --
Dilutive Unvested RSP -- -- -- --
---------- ---------- ---------- ----------
Weighted avg common shares
and common stock
equivalents 3,354,208 3,362,294 3,351,462 3,359,783
Diluted EPS $ .08 $ .07 $ .15 $ .10
========== ========== ========== ==========
For the three and six months ended September 30, 1999 and 1998, 30,946 and 0 RSP
shares and 155,246 and 77,619 Option shares, respectively, were excluded from
the diluted EPS computation due to their anti-dilutive effect. Shares
outstanding for the three and six months ended September 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 55,110 and 81,570 at September 30,
1999 and 1998, respectively.
NOTE 6 - Comprehensive Income
--------------------
For the three months ended September 30, 1999 and 1998, the Company's total
comprehensive income was $286,000 and $251,000, respectively, and $513,000 and
$347,000, respectively, for the six months ended September 30, 1999 and 1998.
Total comprehensive income is comprised of net income and other comprehensive
income. For both three and six 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 a material effect on its financial
position or results of operations.
NOTE 8 - 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 $154,662,000 at September 30, 1999, are reflective
of a decrease of $394,000 or 0.3% as compared to $155,056,000 at March 31, 1999.
The decrease in total assets was primarily due to decreases in cash and amounts
due from depository institutions, interest bearing deposits with other financial
institutions, and loans receivable, partially offset by increases in investment
and mortgage-backed securities.
The decrease in the Company's liabilities was primarily due to decreases in
savings deposits and bonds payable, offset by an increase in Federal Home Loan
Bank ("FHLB") advances. Changes in the components of assets, liabilities and
equity are discussed herein.
Loans Receivable, net. Net loans receivable at September 30, 1999 totaled
$60,084,000, a decrease of $5,225,000 or 8.0%, as compared to $65,309,000 at
March 31, 1999. The decrease was primarily due to principal repayments totaling
$8.1 million, offset by originations of $288,000 and purchases of $2.6 million.
The Company purchased $1.8 million one -to four-family mortgages and $247,000
farm mortgages in its normal lending area. The Company also purchased $84,000
farm mortgages and $442,000 Small Business Administration (SBA) loans outside
its normal lending area, primarily in Pennsylvania.
Mortgage-backed Securities. Mortgage-backed securities were $59,362,000 at
September 30, 1999, an increase of $4,997,000 or 9.2%, as compared to
$54,365,000 at March 31, 1999. The increase was due to purchases of $13.5
million, offset by principal repayments and maturities totaling $8.5 million.
Investment Securities. Investment securities totaled $26,177,000 at September
30, 1999, an increase of $1,090,000 or 4.3%, as compared to $25,087,000 at March
31, 1999. This was primarily a result of purchases of $4.3 million of U.S.
Agency securities, offset by the proceeds from maturities, calls and payments
totaling $3.2 million.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits, totaled $1,026,000, a
decrease of $1,473,000 or 58.9% from the prior quarter. This decrease was
primarily due to decreased interest-bearing deposits maintained at the Federal
Home Loan Bank ("FHLB")and non-interest bearing deposits maintained at the
Federal Reserve Bank of Cleveland.
Deposits. Total deposits, after interest credited, decreased by $559,000 or 0.7%
to $76,358,000 at September 30, 1999, as compared to $76,917,000 at March 31,
1999. The decrease was primarily due to a decrease in Money Market and passbook
accounts.
FHLB Advances. FHLB advances, at September 30, 1999, totaled $50,300,000, an
increase of $1.0 million or 2.0%, as compared to $49,300,000 at 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 totaled $25,595,000 at September 30,
1999, as compared to $25,130,000 at March 31, 1999. The increase of $465,000 or
1.9% was primarily due to earnings for the six months ended September 30, 1999.
The Company has received regulatory approval to purchase up to 10% of the shares
of common stock held by persons other than Skibo Bancshares, M.H.C. Any future
purchases will decrease stockholders' equity.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Results of Operations for the Three Months Ended September 30, 1999 and 1998
Net Income. The Company recorded net income of $286,000 for the three months
ended September 30, 1999, as compared to net income of $251,000 for the three
months ended September 30, 1998. The $35,000 or 13.9% increase in net income for
the three months ended September 30, 1999 was primarily the result of an
increase in net interest income and a decrease in provision for income taxes,
offset by increases in other expenses. Changes in the components of income and
expense are discussed herein.
Net Interest Income. Net interest income increased $89,000 or 9.4% for the three
months ended September 30, 1999, as compared to the three month period ended
September 30, 1998. The increase was primarily due to a $10.7 million increase
in the average interest-earning assets, offset by a 10 basis point decrease in
the average yield earned thereon. The average balance of interest-bearing
liabilities increased by $11.6 million or 10.2% with a 27 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 2.05% for the three month period ended September 30, 1999 from
1.88% for the three month period ended September 30, 1998. The increase in the
interest rate spread was primarily the result of decreases in the interest paid
on the average balance of certificates of deposits and FHLB advances. Maturing
certificates of deposit renewed at lower rates of interest, and as FHLB advances
matured, they were replaced with advances at lower rates of interest.
Interest Income. Interest income increased $148,000 or 6.3% to $2,516,000 for
the three month period ended September 30, 1999, as compared to $2,368,000 for
the three month period ended September 30, 1998.
Interest on loans receivable decreased $117,000 or 9.8% for the three months
ended September 30, 1999, as compared to the three month period ended September
30, 1998. This decrease was primarily the result of a $6.1 million decrease in
the average balance of loans receivable and a 5 basis point decrease in the
average yield earned thereon.
Interest income on mortgage-backed securities increased $66,000 or 7.9% for the
three months ended September 30, 1999, as compared to the three months ended
September 30, 1998. This increase was primarily the result of a $7.5 million
increase in the average balance of such securities, offset by a 42 basis point
decrease in the average yield earned thereon.
Interest income on investment securities increased by $176,000 or 69.0% for the
three months ended September 30, 1999, as compared to the three months ended
September 30, 1998. The increase in interest income on investment securities was
primarily due to a $10.6 million higher average balance of such securities.
Interest income on other interest-earning assets increased by $23,000 or 28.0%
for the three months ended September 30, 1999, as compared to the three months
ended September 30, 1998. The increase was primarily due to a 290 basis point
increase in the average yield earned thereon, offset by a $1.3 million decrease
in the average interest-earning assets at the FHLB.
The average yield on the average balance of interest-earning assets was 6.76%
and 6.86% for the three month periods ended September 30, 1999 and 1998,
respectively.
Interest Expense. Interest expense totaled $1,485,000 for the three months ended
September 30, 1999, as compared to $1,426,000 for the three months ended
September 30, 1998. The $59,000 or 4.1% increase was primarily due to increased
average balances in NOW, passbook, certificate of deposit accounts and FHLB
advances, offset by decreases in Money Market accounts, escrows and bonds
payable and a 27 basis point decrease in the average rate paid on the total
average interest-bearing liabilities.
Interest expense on deposits (including escrows) decreased $55,000 or 6.3% for
the three months ended September 30, 1999, as compared to the three months ended
September 30, 1998. The decrease was primarily due to a 32 basis point decrease
in the average rate paid thereon.
Interest on FHLB advances increased $135,000 or 26.9% for the three months ended
September 30, 1999, as compared to the three months ended September 30, 1998.
The increase was primarily due to a $12.5 million increase in the average
balance of advances, offset by a 27 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.
Interest on bonds payable and other borrowings, a less significant portion of
interest expense, decreased by $21,000 or 39.6%, as the average principal amount
of other borrowings decreased by $1.4 million, primarily due to the repayment of
the bond in its entirety.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Allowance for Loan Losses. During the three month periods ended September 30,
1999 and 1998, the Company established provisions for loan losses of $1,000 and
$12,000, respectively. This reflected management's evaluation of the underlying
credit risk of the loan portfolio and the level of allowance for loan losses.
At September 30, 1999, the allowance for loan losses totaled $577,000 or .95%
and 915.9% 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) totaled $63,000 and $818,000 at September 30, 1999 and March 31,
1999 respectively, which represented 0.1% and 1.3% of the Company's total loans,
respectively. The non-performing loans at March 31, 1999, included two Farm
Service Agency (FSA) guaranteed loans in the amount of $618,000, which have now
been paid off. The Company's ratio of non-performing loans to total assets was
.04% and .53% at September 30, 1999 and March 31, 1999, respectively.
Other Income. During the three months ended September 30, 1999, other income
decreased $5,000 or 19.2%, as compared to the three months ended September 30,
1998. Other income in the prior quarter included a final payment of $10,000 from
the sale of property in a real estate judgement.
Other Expenses. Total other expenses increased by $99,000 or 18.9% during the
three months ended September 30, 1999, as compared to the three months ended
September 30, 1998. The increase was primarily attributable to increases of
$83,000 or 22.0% in compensation and employee benefits expense due to
adjustments which reflect fluctuations in the market price of the stock benefit
plans, and $16,000 or 10.8% in other expenses due primarily to an increase in
legal expenses.
Income Tax Expense. The provision for income tax totaled $141,000 for the three
months ended September 30, 1999, as compared to $180,000 for the three months
ended September 30, 1998. The $39,000 or 21.7% decrease was due to a lower level
of taxable income due to favorable permanent tax differences.
Results of Operations for the Six Months Ended September 30, 1999 and 1998
Net Income. The Company recorded net income of $513,000 for the six months ended
September 30, 1999, as compared to net income of $347,000 for the six months
ended September 30, 1998. The $166,000 or 47.8% increase in net income for the
six months ended September 30, 1999 was primarily the result of increases in net
interest income and decreases in other expenses and provision for loan losses,
offset by an increase in provision for income taxes. Changes in the components
of income and expense are discussed herein.
Net Interest Income. Net interest income increased $133,000 or 7.0% for the six
months ended September 30, 1999, as compared to the six month period ended
September 30, 1998. The increase was primarily due to a $8.3 million increase in
the average interest-earning assets, offset by a 17 basis point decrease in the
average yield earned thereon. The average balance of interest-bearing
liabilities increased by $9.0 million, offset by a 32 basis point decrease in
the average rate paid thereon.
The interest rate spread increased to 2.03% for the six month period ended
September 30, 1999 from 1.88% for the six month period ended September 30, 1998.
The increase in the interest rate spread was primarily the result of decreases
in the average interest paid on the average balance of certificates of deposits
and FHLB advances. Maturing certificates of deposit renewed at lower rates of
interest, and as FHLB advances matured, they were replaced with advances at
lower rates of interest.
Interest Income. Interest income increased $157,000 or 3.2% to $5,002,000 for
the six month period ended September 30, 1999, as compared to $4,845,000 for the
six month period ended September 30, 1998.
Interest on loans receivable decreased $205,000 or 8.4% for the six months ended
September 30, 1999, as compared to the six month period ended September 30,
1998. This decrease was primarily the result of a $6.5 million decrease in the
average balance of loans receivable , offset by a 9 basis point increase earned
thereon.
Interest income on mortgage-backed securities increased $10,000 or 0.6% for the
six months ended September 30, 1999, as compared to the six months ended
September 30, 1998. This increase was primarily the result of a $4.3 million
increase in the average balance of such securities, offset by a 48 basis point
decrease in the average yield earned thereon.
9
Interest income on investment securities increased by $318,000 or 61.5% for the
six months ended September 30, 1999, as compared to the six months ended
September 30, 1998. The increase in interest income on investment securities was
primarily due to a $10.0 million increase in the average balance of such
securities, offset by a decrease in the average yield of 18 basis points.
Interest income on other interest-earning assets increased by $34,000 or 20.1%
for the six months ended September 30, 1999, as compared to the six months ended
September 30, 1998. The increase was primarily due a $470,000 increase in the
average interest-earning deposits at other financial institutions and a 62 basis
point increase in the average yield earned thereon.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The average yield on the average balance of interest-earning assets was 6.71%
and 6.88% for the six month periods ended September 30, 1999 and 1998,
respectively.
Interest Expense. Interest expense totaled $2,958,000 for the six months ended
September 30, 1999, as compared to $2,934,000 for the six months ended September
30, 1998. The $24,000 or 0.8% increase was primarily due to increased average
balances in NOW, passbook, certificate of deposit accounts and FHLB advances,
offset by decreased average balances of bonds payable and other borrowings,
Money Market accounts and escrows and a 32 basis point decrease in the average
rate paid on the total average interest-bearing liabilities.
Interest expense on deposits (including escrows) decreased $118,000 or 6.7% for
the six months ended September 30, 1999, as compared to the six months ended
September 30, 1998. The decrease was primarily due to a 33 basis point decrease
in the average rate paid thereon.
Interest on FHLB advances increased $185,000 or 17.2% for the six months ended
September 30, 1999, as compared to the six months ended September 30, 1998. The
increase was primarily due to a $9.8 million increase in the average balance of
advances, offset by a 33 basis point decrease in the average rate paid on
advances.
Interest on bonds payable and other borrowings, a less significant portion of
interest expense, decreased by $43,000 or 40.6%, as the average principal amount
of other borrowings decreased by $1.2 million , primarily due to the repayment
of the bond in its entirety.
Provision for Loan Losses. During the six month periods ended September 30, 1999
and 1998, the Company established provisions for loan losses of $2,000 and
$15,000, respectively. This reflected management's evaluation of the underlying
credit risk of the loan portfolio and the level of allowance for loan losses.
Other Income. During the six months ended September 30, 1999, other income
increased $2,000 or 4.3%, as compared to the six months ended September 30,
1998.
Other Expenses. Total other expenses decreased by $93,000 or 6.9% during the six
months ended September 30, 1999, as compared to the six months ended September
30, 1998. The decrease was primarily attributable to an $83,000 decrease in
compensation and employees benefit expense and $10,000 in other expenses. The
decrease in compensation and employees benefit expense was due to decreases of
$85,000 in RSP expense due to the implementation of a stockholder approved
restricted stock plan (RSP) in the prior period, $43,000 in ESOP expense and
$2,000 in employee benefits expense primarily due to a change in hospitalization
coverage, offset by an increase of $47,000 in Supplemental Employee Pension Plan
(SERP) and Director's Retirement Plan (DRP) costs.
Income Tax Expense. The provision for income tax totaled $315,000 for the six
months ended September 30, 1999, as compared to $240,000 for the six months
ended September 30, 1998. The $75,000 or 31.3% increase was due to increased
taxable 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 137.45% and 129.98%, at September 30, 1999 and March 31,
1999, respectively.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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, 1999, the Bank was in compliance with its
three regulatory capital requirements as follows:
Amount Percent
------ -------
(Dollars in thousands)
Tangible capital $24,574 15.93%
Tangible capital requirement 2,314 1.50%
----- ----
Excess over requirement $22,260 14.43%
====== =====
Core capital $24,574 15.93%
Core capital requirement 4,628 3.00%
----- ----
Excess over requirement $19,946 12.93%
====== =====
Risk based capital $25,151 52.80%
Risk based capital requirement 3,811 8.00%
----- ----
Excess over requirement $21,340 44.80%
====== =====
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 September 30 1999, under OTS regulations, the Bank would be 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 September 30, 1999, the Bank's Tier 1
(leverage), Tier I risk-based, and total risk-based capital ratios amounted to
15.93%, 51.58%, and 52.80%, 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 Compliance Issues
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 vendor certification
confirming Y2K compliance for its hardware and operating system. With the
exception of on-going testing and additional remediation and contingency
planning, management
11
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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 assessed
the readiness of these third parties and prepared 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. Testing was performed in the second quarter of fiscal 1999 and
additional testing will be performed in the third quarter of fiscal 1999. The
Company has completed testing with the Federal Reserve Bank of Cleveland. The
Federal Reserve Bank of Cleveland has been deemed mission 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. 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 their final
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. Any prolonged disruption in
utility service could disrupt the ability of the Company to service its
customers on a timely basis.
Approximately 82.7% 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 64.5% 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 35.5% of the loans
serviced by the Company.
Furthermore, the Company is continually reviewing alternative procedures and
contingency plans for all mission critical systems in the unlikely event of
their failure at the turn of the century. The Company is currently verifying
contingency plans that address the Year 2000 issues of the Company which could
negatively affect the Company or necessitate transacting business manually.
Among other things, failure of utility companies to provide necessary service,
failure of the primary software and other third party providers is addressed in
the plan. The Company will attempt to monitor these uncertainties by continuing
to request updates on all critical providers throughout the remainder of 1999.
If the Company identifies any concern related to any critical application, the
contingency plans will be implemented immediately to assure continued service to
the Company's customers.
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
September 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 September 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) Not applicable
b) On September 23, 1999, the Company filed a current report on Form 8-K
announcing the adoption of a stock repurchase plan whereby the Company
will purchase up to 10% of the shares of common stock held by persons
other than Skibo Bancshares, M.H.C.
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: November 5, 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 and Treasurer
(Duly Authorized Representative) (Principal Financial and Accounting Officer)
Date: November 5, 1999 Date: November 5, 1999
14