1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
-----------
FORM 10-QSB
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
X OF THE SECURITIES EXCHANGE ACT OF 1934
- ----------- FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
- ----------- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number 31277
PARK MERIDIAN FINANCIAL CORPORATION
(Exact name of small business issuer as specified in charter)
North Carolina
(State or other jurisdiction of incorporation or organization)
56-2196075
(I.R.S. Employer Identification Number)
6826 Morrison Boulevard
Charlotte, North Carolina 28211
(Address of principal executive offices)
(704) 366-7275
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by section 13 or 15(d) of the Securities Exchange Act during the preceding
12 months (or 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
----- -----
The number of shares outstanding of the registrant's common stock as of April
23, 2001 was 2,776,579, $.01 par value.
Transitional Small Business Disclosure Format
YES NO X
------ -----
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PARK MERIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
ASSETS
3/31/2001 12/31/2000
- -------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 4,787,257 $ 7,380,164
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits with banks 2,131,364 797,532
- -------------------------------------------------------------------------------------------------------------------
Federal funds sold 675,000 6,350,000
- -------------------------------------------------------------------------------------------------------------------
Securities available for sale 55,682,803 61,367,520
- -------------------------------------------------------------------------------------------------------------------
FHLB stock 2,981,000 2,981,000
- -------------------------------------------------------------------------------------------------------------------
Loans held for resale 9,948,065 4,711,355
- -------------------------------------------------------------------------------------------------------------------
Loans and leases, net of unearned income 199,809,808 194,390,091
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses (2,892,748) (2,763,447)
===================================================================================================================
Net loans and leases 196,917,060 191,626,644
- -------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 7,550,933 7,339,690
- -------------------------------------------------------------------------------------------------------------------
Interest receivable 1,687,629 1,717,242
- -------------------------------------------------------------------------------------------------------------------
Other assets 1,471,684 1,461,543
===================================================================================================================
TOTAL ASSETS $283,832,795 $285,732,690
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Deposits:
- -------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand $ 12,921,012 $ 13,131,506
- -------------------------------------------------------------------------------------------------------------------
Savings, NOW and money market accounts 39,654,574 36,222,064
- -------------------------------------------------------------------------------------------------------------------
Time, $100,000 and over 64,335,644 63,310,405
- -------------------------------------------------------------------------------------------------------------------
Other time 85,364,607 84,594,140
===================================================================================================================
TOTAL DEPOSITS 202,275,837 197,258,115
===================================================================================================================
Other borrowings 51,820,215 63,431,043
- -------------------------------------------------------------------------------------------------------------------
Trust preferred debt 3,000,000 -
- -------------------------------------------------------------------------------------------------------------------
Interest payable 1,470,055 1,522,716
- -------------------------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 1,456,282 1,253,672
===================================================================================================================
TOTAL LIABILITIES 260,022,389 263,465,546
===================================================================================================================
Minority interest 37,668 30,962
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
- -------------------------------------------------------------------------------------------------------------------
Common stock, $.01 par value, 25,000,000 authorized
2,776,579 and 2,764,579 shares issued and outstanding 27,766 27,646
- -------------------------------------------------------------------------------------------------------------------
Surplus 14,508,935 14,459,855
- -------------------------------------------------------------------------------------------------------------------
Retained earnings 8,694,426 7,938,175
- -------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) 541,611 (189,494)
===================================================================================================================
TOTAL STOCKHOLDERS' EQUITY 23,772,738 22,236,182
===================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $283,832,795 $285,732,690
===================================================================================================================
The accompanying notes are an integral part of
the consolidated financial statements.
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PARK MERIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS JANUARY 1 THROUGH MARCH 31, 2001 AND 2000
(UNAUDITED)
3/31/2001 3/31/2000
- -----------------------------------------------------------------------------------------------------------------
Interest income:
- -----------------------------------------------------------------------------------------------------------------
Interest and fees on loans and leases $ 4,591,665 $ 3,707,491
- -----------------------------------------------------------------------------------------------------------------
Interest on federal funds sold 27,322 1,294
- -----------------------------------------------------------------------------------------------------------------
Interest on investment securities:
- -----------------------------------------------------------------------------------------------------------------
U.S. Treasury securities 29,730 47,513
- -----------------------------------------------------------------------------------------------------------------
Obligations of other U.S. government agencies,
mortgage-backed securities and corporations 663,839 693,599
- -----------------------------------------------------------------------------------------------------------------
Other securities 249,227 244,639
=================================================================================================================
TOTAL INTEREST INCOME 5,561,783 4,694,536
=================================================================================================================
Interest expense:
- -----------------------------------------------------------------------------------------------------------------
Interest on savings, NOW and money market accounts 351,928 327,379
- -----------------------------------------------------------------------------------------------------------------
Interest on time certificates of $100,000 or more 1,083,808 719,035
- -----------------------------------------------------------------------------------------------------------------
Interest on other time deposits 1,418,410 898,733
- -----------------------------------------------------------------------------------------------------------------
Interest on borrowings 789,150 861,970
=================================================================================================================
TOTAL INTEREST EXPENSE 3,643,296 2,807,117
=================================================================================================================
NET INTEREST INCOME 1,918,487 1,887,419
- -----------------------------------------------------------------------------------------------------------------
Provision for loan losses 140,000 252,000
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 1,778,487 1,635,419
- -----------------------------------------------------------------------------------------------------------------
Other income:
- -----------------------------------------------------------------------------------------------------------------
Mortgage banking fees 294,059 155,678
- -----------------------------------------------------------------------------------------------------------------
Gain (loss) on sale of investments 40,974 (4,871)
- -----------------------------------------------------------------------------------------------------------------
Unrealized gains on derivatives 176,684 -
- -----------------------------------------------------------------------------------------------------------------
Rental income 77,715 53,647
- -----------------------------------------------------------------------------------------------------------------
Other lease financing income 79,323 102,930
- -----------------------------------------------------------------------------------------------------------------
Other income 22,490 6,981
=================================================================================================================
TOTAL OTHER INCOME 691,245 314,366
=================================================================================================================
Other expenses:
- -----------------------------------------------------------------------------------------------------------------
Salaries & employee benefits 768,902 696,641
- -----------------------------------------------------------------------------------------------------------------
Occupancy expense 65,034 61,044
- -----------------------------------------------------------------------------------------------------------------
Equipment expense 73,659 76,196
- -----------------------------------------------------------------------------------------------------------------
Advertising and business development 60,281 45,024
- -----------------------------------------------------------------------------------------------------------------
Printing and supplies 94,895 64,008
- -----------------------------------------------------------------------------------------------------------------
Professional fees 79,057 55,236
- -----------------------------------------------------------------------------------------------------------------
Mortgage processing costs 51,567 29,950
- -----------------------------------------------------------------------------------------------------------------
Other operating expense 138,707 129,872
=================================================================================================================
TOTAL OTHER EXPENSES 1,332,102 1,157,971
=================================================================================================================
Net income before minority interest and income taxes 1,137,630 791,814
- -----------------------------------------------------------------------------------------------------------------
Minority interest (6,706) 3,661
- -----------------------------------------------------------------------------------------------------------------
Income tax expense 374,673 250,601
=================================================================================================================
NET INCOME $ 756,251 $ 544,874
=================================================================================================================
Net income per common share - basic $ 0.28 $ 0.20
=================================================================================================================
Net income per common share - diluted $ 0.28 $ 0.19
=================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
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PARK MERIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS JANUARY 1 THROUGH MARCH 31, 2001 AND 2000
(UNAUDITED)
3/31/01 3/31/00
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 756,251 $ 544,874
- ----------------------------------------------------------------------------------------------------------------------
Adjustment to reconcile net income to net cash (used in) provided by
operations:
- ----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 75,211 40,975
- ----------------------------------------------------------------------------------------------------------------------
Minority interest 6,706 (31,978)
- ----------------------------------------------------------------------------------------------------------------------
Provision for loan losses 140,000 252,000
- ----------------------------------------------------------------------------------------------------------------------
Deferred income tax expense (benefit) (33,811) 5,620
- ----------------------------------------------------------------------------------------------------------------------
(Gain) loss on sale of investments (40,974) 4,871
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gain on derivatives (176,684) -
- ----------------------------------------------------------------------------------------------------------------------
Net increase in loans held for sale (5,236,710) (228,847)
- ----------------------------------------------------------------------------------------------------------------------
Changes in operating assets and liabilities:
- ----------------------------------------------------------------------------------------------------------------------
Interest receivable and other assets 229,966 (377,832)
- ----------------------------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities (151,363) 27,555
======================================================================================================================
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (4,431,408) 236,568
======================================================================================================================
Cash flows from investing activities:
- ----------------------------------------------------------------------------------------------------------------------
Purchase of securities available for sale (949,511) (2,706,180)
- ----------------------------------------------------------------------------------------------------------------------
Proceeds from sale of securities available for sale 3,929,229 3,304,423
- ----------------------------------------------------------------------------------------------------------------------
Proceeds from maturities of securities available for sale 3,778,231 274,033
- ----------------------------------------------------------------------------------------------------------------------
Net increase in loans & leases (5,430,416) (21,537,431)
- ----------------------------------------------------------------------------------------------------------------------
Purchase of premises and equipment (286,292) (60,166)
======================================================================================================================
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,041,241 (20,725,321)
======================================================================================================================
Cash flows from financing activities:
- ----------------------------------------------------------------------------------------------------------------------
Net increase in deposit accounts 5,017,722 4,005,183
- ----------------------------------------------------------------------------------------------------------------------
Issuance of common stock 49,200 12,300
- ----------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of trust preferred debt 3,000,000 -
- ----------------------------------------------------------------------------------------------------------------------
Proceeds (net of repayments) from other borrowings (11,610,828) 15,305,105
======================================================================================================================
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,543,908) 19,322,588
======================================================================================================================
Net decrease in cash and cash equivalents (6,934,075) (1,166,165)
======================================================================================================================
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,527,696 6,009,496
======================================================================================================================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,593,621 $ 4,843,331
======================================================================================================================
Supplemental disclosure of cash flow information:
- ----------------------------------------------------------------------------------------------------------------------
INTEREST PAID $ 3,690,090 $ 2,682,000
======================================================================================================================
INCOME TAXES PAID $ 29,552 $ 235,000
======================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
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PARK MERIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIODS JANUARY 1 THROUGH MARCH 31, 2001 AND 2000
(UNAUDITED)
ACCUMULATED
COMMON COMMON OTHER TOTAL
STOCK STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 2,764,579 $27,646 $14,459,855 $7,938,175 $ (189,494) $22,236,182
- ----------------------------------------------------------------------------------------------------------------------------------
Net income - - - 756,251 - 756,251
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain on available for - - - - 651,184 651,184
sale securities
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized transition gains on - - - - 65,009 65,009
derivatives arising from the
adoption of SFAS 133
- ----------------------------------------------------------------------------------------------------------------------------------
Net transfer of SFAS 133 transition - - - - 14,912 14,912
gain to net income
==================================================================================================================================
Total comprehensive income - - - - 731,105 1,487,356
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 12,000 120 49,080 - - 49,200
==================================================================================================================================
BALANCE, MARCH 31, 2001 2,776,579 $27,766 $14,508,935 $8,694,426 $ 541,611 $23,772,738
==================================================================================================================================
FOR THE PERIOD JANUARY 1 THROUGH MARCH 31, 2000
ACCUMULATED
COMMON COMMON OTHER TOTAL
STOCK STOCK RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 2,738,765 $27,388 $14,346,315 $5,467,527 $ (1,709,961) $18,131,269
- ----------------------------------------------------------------------------------------------------------------------------------
Net income - - - 544,874 - 544,874
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain on available for - - - - 10,908 10,908
sale securities
==================================================================================================================================
Other comprehensive income 555,782
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 3,000 30 12,270 - - 12,300
- ----------------------------------------------------------------------------------------------------------------------------------
Net income - - - 544,874 - 544,874
==================================================================================================================================
BALANCE, MARCH 31, 2000 2,741,765 $27,418 $14,358,585 $6,012,401 $ (1,699,053) $18,699,351
==================================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
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PARK MERIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Park Meridian Bank (the "Bank") was organized and incorporated under the laws of
the State of North Carolina on July 12, 1990, and began banking operations on
August 20, 1991. The Bank operates two branches in Charlotte, North Carolina.
The Bank's primary source of revenue is derived from loans and leases to
customers, who are predominately small-to-medium-size businesses and upper
income individuals in Mecklenburg County, North Carolina.
On August 4, 2000, Park Meridian Financial Corporation (the "Company") completed
a share exchange (the "Share Exchange") with the Bank, in which one share of
common stock of the Bank was exchanged for the right to receive one share of
common stock of the Company. As a result of the Share Exchange, the Bank became
a wholly owned subsidiary of the Company. The Company was organized by the
members of the board of directors of the Bank for the purpose of forming a
holding company for the Bank. Prior to the completion of the Share Exchange, the
Company had no assets and conducted no business. The consolidated financial
statements of the Company reflect the historical operations of the Bank prior to
the Share Exchange.
During the first quarter of 2001 the Company organized a subsidiary, Park
Meridian Statutory Trust I, which issued $3,000,000 face amount of trust
preferred securities, at a rate of 10.2%, in a pooled trust preferred issue
completed on February 22, 2001. The trust preferred securities have a maturity
date of March 1, 2031. The net proceeds of the offering of the trust preferred
securities have been loaned by the trust subsidiary to Park Meridian Financial
Corporation to be used for general corporate purposes.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of consolidated financial
statements the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 - ADOPTION OF NEW ACCOUNTING STANDARD
In 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137 and SFAS 138, which establishes
accounting and reporting standards for derivatives and hedging activities. SFAS
133 was adopted by the Company on January 1, 2001. SFAS 133 requires that all
derivatives be recognized as assets or liabilities in the balance sheet and that
these instruments be measured at fair value through adjustments to either other
comprehensive income or to current earnings, depending on the purpose for which
the derivative is held.
As of January 1, 2001, the Company's derivatives consisted of interest rate cap
and floor agreements and fixed rate conforming mortgage loan commitments, none
of which have been designated as hedges under SFAS 133. These derivative
financial instruments are reflected at fair value, with changes in the fair
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value during each period reflected in the consolidated statement of income.
Prior to the adoption of SFAS 133, the differential to be paid or received under
the terms of the agreements was accrued as an adjustment to interest income as
interest rates change, and the fair values of interest rate cap and floor
agreements were not recognized in the financial statements.
As of January 1, 2001, the net fair value of the interest rate cap and floor
agreements was $98,000, and the fair value of the fixed rate conforming mortgage
loan commitments was not material. On adoption of SFAS 133 the Company recorded
a net transition adjustment gain of $98,000 (net of related income taxes of
$33,000), as a cumulative effect of a change in accounting principle, which was
included in other comprehensive income. Since the interest rate cap and floor
agreements mature in early 2002, this net transition gain will be substantially
transferred into net income during 2001. During the first quarter of 2001,
approximately $22,000 of this transition gain (before taxes) was reclassified
into income and is included in interest income in the accompanying consolidated
statement of income for the three months ended March 31, 2001.
The Company uses the interest rate cap and floor agreements for interest rate
risk protection. These agreements have been used by the Company to protect its
adjustable rate loan portfolio from decreases in interest rates. The Company is
an end-user of derivatives and does not conduct trading activities for
derivatives.
The Company entered into the interest rate cap and floor agreements in 2000, and
the agreements mature in early 2002. Under the agreements, the Company receives
cash on a notional amount of $20 million if the prime rate is less than 9% and
pays cash on a notional amount of $15 million if the prime rate is greater than
10%. As of March 31, 2001, the fair value of the agreements was $275,000 which
is included in other assets in the accompanying consolidated balance sheet. The
Company recorded an unrealized gain on derivatives of $177,000 in the
accompanying consolidated statement of income for the three months ended March
31, 2001, representing the change in the agreements' fair value during that
period. The time value component of these derivatives' fair value was not
considered material.
The Company is exposed to loss if the counterparty fails to perform; however,
the Company does not anticipate such nonperformance. The Company does not obtain
or pledge any collateral under its interest rate agreements, but monitors the
credit standing of the counterparty. The Company also assesses interest rate
risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and net interest
income.
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of nonowner changes in equity. Other
comprehensive income is defined as comprehensive income exclusive of net income.
Unrealized gains on available-for-sale securities and unrealized transition
gains on derivatives from adoption of SFAS 133 represent the components of the
Company's other comprehensive income. Other comprehensive income consists of the
following:
FOR THE THREE MONTHS ENDED MARCH 31: 2001 2000
- -----------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) on securities arising during the period $986,643 $ 16,527
- -----------------------------------------------------------------------------------------------------------
Unrealized transition gains on derivatives arising from the adoption of FAS 133 98,498 -
- -----------------------------------------------------------------------------------------------------------
Transfer of SFAS 133 transition gain to net income 22,594 -
===========================================================================================================
OTHER COMPREHENSIVE INCOME BEFORE TAX 1,107,735 16,527
===========================================================================================================
Income tax expense related to other comprehensive income (376,630) (5,619)
===========================================================================================================
OTHER COMPREHENSIVE INCOME (LOSS) $ 731,105 $10,908
===========================================================================================================
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NOTE 4 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used to calculate basic and
diluted earnings per share for the three-month periods ended March 31 are as
follows:
Average
Income Shares
FOR THE THREE MONTHS ENDED MARCH 31, 2001 (Numerator) (Denominator) Per Share
- --------------------------------------------------------------------------------------------------------
Basic
Income available to common shareholders $ 756,251 2,665,925 $ .28
- --------------------------------------------------------------------------------------------------------
Diluted
Effect of dilutive securities - stock options - 55,459
- --------------------------------------------------------------------------------------------------------
Income available to common shareholders
and assumed conversions $ 756,251 2,721,384 $ .28
- --------------------------------------------------------------------------------------------------------
Average
Income Shares
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (Numerator) (Denominator) Per Share
- --------------------------------------------------------------------------------------------------------
Basic
Income available to common shareholders $ 544,874 2,739,819 $ .20
- --------------------------------------------------------------------------------------------------------
Diluted
Effect of dilutive securities - stock options - 80,711
- --------------------------------------------------------------------------------------------------------
Income available to common shareholders
and assumed conversions $ 544,874 2,820,530 $ .19
- --------------------------------------------------------------------------------------------------------
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PART I
FINANCIAL INFORMATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
On August 4, 2000, Park Meridian Financial Corporation (the "Company") completed
a share exchange (the "Share Exchange") with Park Meridian Bank, a North
Carolina banking association (the "Bank"), in which one share of common stock of
the Bank was exchanged for the right to receive one share of common stock, $0.01
par value, of the Company. As a result of the Share Exchange, the Bank became a
wholly owned subsidiary of the Company. The Company was organized by the members
of the board of directors of the Bank for the purpose of forming a holding
company for the Bank. Prior to the completion of the Share Exchange, the Company
had no assets and conducted no business. The consolidated financial statements
of the Company reflect the historical operations of the Bank prior to the Share
Exchange.
The interim period ended March 31, 2001 represents the thirty-eighth quarter of
operations of the Bank. The Charlotte metropolitan area and the states of North
and South Carolina continue to have very favorable economic conditions and
robust growth, providing a positive environment for the growth of the Company.
The Company has a substantial capital base provided by an additional secondary
offering in the second quarter of 1997, the exercise of options in the first and
second quarters of 1998, and the continued growth in earnings. This capital
provides a good base to support current and future growth.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2001 was $756,000 a 38.8%
increase over the $545,000 reported for the first three months of 2000. Basic
earnings per share for the three months ended March 31, 2001 increased 40.0% to
$.28 compared to $.20 reported for the same three month period in 2000. Earnings
per share on a diluted basis amounted to $.28 per share for the three months
ended March 31, 2001 compared to $.19 for the three months ended March 31, 2000.
The Company uses interest rate cap and floor agreements, known as derivative
financial instruments, for interest rate risk protection. These agreements have
been used by the Company to protect its adjustable rate loan portfolio from
decreases in interest rates. The differential to be paid or received is accrued
as an adjustment to interest income as interest rates change. The Company is an
end-user of derivatives and does not conduct trading activities for derivatives.
On January 1, 2001 the Company adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires the Company to recognize
the change in value of its derivatives on a quarterly basis. Upon adoption of
SFAS 133, the Company made a transition adjustment of $65,000 to other
comprehensive income to record the derivatives at their fair value on January 1,
2001. This transition adjustment will be recognized into interest income over
the remaining life of the derivatives. Additionally, the Company recognized pre
tax income of $177,000 to record the derivatives at their fair value at March
31, 2001. Excluding the effect of the Company applying SFAS 133, first quarter
operating earnings were $634,000, or $.23 per diluted share, a 16.3% and 21.0%
increase, respectively over prior year net income and diluted earnings per share
of $545,000 and $.19, respectively. The Company expects the market value of the
Company's derivatives to decline over the last three quarters of the year as the
derivatives approach their maturity date of January 21, 2002, at which point
they will have no value.
The increase in net income for the three month period ended March 31, 2001 is
primarily due to an increase in net interest income combined with a decrease in
the provision for loan and lease losses. Net interest income increased $31,000,
or 1.6%, and provision for loan and lease loss decreased $112,000, or
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44.4% for the three month period ended March 31, 2001, when compared to the same
three month period in 2000. The decrease in provision for loan and lease losses
is primarily attributable to slower loan growth and management's review of the
loan and lease portfolio.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established through a provision for
loan and lease losses charged to expense. Loans and leases are charged against
the allowance for loan and lease losses when management believes that the
collection of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb probable losses on existing loans
and leases that may become uncollectible, based on evaluations of the
collectibility of loans and leases. The evaluations take into consideration such
factors as changes in the nature and volume of the loan and lease portfolio,
overall portfolio quality, review of specific problem loans and leases and
current economic conditions and trends that may affect the borrowers' ability to
pay. The evaluation is inherently subjective as it requires material estimates,
including the amounts and timing of future cash flows on impaired loans, which
may be susceptible to significant change in the future.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for loan and
lease losses and losses on real estate owned. Such agencies may require the Bank
to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
The provision for loan losses is the charge to operating earnings that
management believes is necessary to maintain the allowance for loan and lease
losses at an adequate level. For the three months ended March 31, 2001 the
provision charged to expense was $140,000. This decrease of $112,000 from the
comparable period in 2000 is a result of slower growth in the loan portfolio and
management's review of the loan and lease portfolio. Asset quality remains sound
and essentially unchanged from the prior year.
At March 31, 2001 the Bank had two nonaccrual leases totaling $181,000. At March
31, 2000 the Bank had one nonaccrual loan and one nonaccrual lease totaling
$138,000. The bank had no real estate owned at either period end. The following
table presents changes in the allowance for loan and lease losses for the three
months ended March 31, 2001 and 2000, respectively.
MARCH 31, 2001 MARCH 31, 2000
- ------------------------------------------------------------------------------------
Beginning balance $ 2,763,447 $ 1,997,453
- ------------------------------------------------------------------------------------
Provision charged to operations 140,000 252,000
- ------------------------------------------------------------------------------------
Loan and lease charge-offs (11,824) -
- ------------------------------------------------------------------------------------
Less loan and lease recoveries 1,125 -
====================================================================================
ENDING BALANCE $ 2,892,748 $ 2,249,453
====================================================================================
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NONINTEREST INCOME
Noninterest income during the three months ended March 31, 2001 was $691,000, an
increase of $377,000, from $314,000 during the comparable period in 2000. The
increase is primarily due to an increase in mortgage banking income caused by
the decline in interest rates for the year. In addition, the company adopted
SFAS 133 resulting in recording unrealized gains on derivatives of $177,000.
NONINTEREST EXPENSE
Total noninterest expense for the three months ended March 31, 2001 was
$1,332,000, or 15.0% higher than the $1,158,000 for the three months ended March
31, 2000. The largest increase was in salaries and employee benefits, which
increased $72,000, or 10.4%, to $769,000. The increase in salaries and employee
benefits is attributable to normal pay increases as well as the hiring of
additional personnel. Printing and supplies also increased $31,000, or 48.3%, to
$95,000 compared to $64,000 for the same period in 2000. The increase in
printing and supplies expense is due to the planned opening of the new branch at
Lake Norman during the quarter ended June 30, 2001.
ASSETS AND LIABILITIES
For the three months ended March 31, 2001, total assets decreased $1,900,000, or
.7%, to $283,833,000 compared to December 31, 2000 total assets of $285,733,000.
The primary reason for the decrease in total assets was the decrease in
securities available for sale. With the declining interest rates the company had
securities called and the Company sold securities during the first quarter of
2001. Securities decreased $5,685,000, or 9.3%, compared to December 31, 2000.
Fed Funds sold also decreased $5,675,000 or 89.4% compared to December 31, 2000.
Loans and leases increased $5,290,000 and loans held for resale increased
$5,237,000 with the funding coming from the decrease in Fed Funds and the
decrease in securities available for sale. Deposits increased by $5,018,000 to
$202,276,000 at March 31, 2001 compared to $197,258,000 at December 31, 2000.
Money market accounts represented most of the growth as customers responded
positively to the new money market campaign. Other borrowings decreased by
approximately $8,611,000, or 13.6%, to $54,820,000 at March 31, 2001 compared to
$63,431,000 at the end of the year, primarily related to the company paying down
advances from the Federal Home Loan Bank.
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CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to average assets (as
defined). Management believes, as of March 31, 2001, that the Bank meets all
capital adequacy requirements to which it is subject.
The Bank's actual capital amounts and ratios are also presented in the following
table. The Company's actual capital amounts and ratios are substantially the
same as those of the Bank presented below.
March 31, 2001
- -------------------------------------------------------------------------------------------------------
Actual For Capital Adequacy Well Capitalized
Amount Percent Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------
Total Capital (to Risk
Weighted Assets) $28,467,000 13.01% $16,812,000 8.00% $21,015,000 10.00%
- -------------------------------------------------------------------------------------------------------
Tier 1 Capital (to Risk
Weighted Assets) $25,840,000 11.76 $8,406,000 4.00 $12,609,000 6.00
- -------------------------------------------------------------------------------------------------------
Tier 1 Capital (to
Average Assets) $25,840,000 9.46 $10,932,000 4.00 $13,665,000 5.00
- -------------------------------------------------------------------------------------------------------
During the first quarter of 2001 the Company organized a subsidiary, Park
Meridian Statutory Trust I, which issued $3,000,000 face amount of trust
preferred securities, at a rate of 10.2%, in a pooled trust preferred issue
completed on February 22, 2001. The trust preferred securities have a maturity
date of March 1, 2031. The net proceeds of the offering of the trust preferred
securities have been loaned by the trust subsidiary to Park Meridian Financial
Corporation to be used for general corporate purposes.
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13
PART II
(c) On February 22, 2001, Park Meridian Statutory Trust I, a recently organized
subsidiary of the Company, issued $3,000,000 face amount trust preferred
securities in a pooled trust preferred issue. The proceeds of the offering of
the trust preferred securities, less $90,000 in placement agent fees and
approximately $10,000 in additional offering expenses, have been loaned by the
trust subsidiary to the Company to be used for general corporate purposes. The
offering of the trust preferred securities was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Regulation S thereof,
since the purchaser was not a U.S. person and was located outside of the United
States and the additional requirements of Rule 903 were satisfied.
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14
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
2.1 Agreement and Plan of Share Exchange dated
as of May 25, 2000 by and between Park
Meridian Bank and Park Meridian Financial
Corporation (incorporated by reference to
Exhibit 2.1 to the Company's Current Report
on Form 8-K filed with the Securities and
Exchange Commission on August 7, 2000)
3.1 Articles of Incorporation of Park Meridian
Financial Corporation (incorporated by
reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K filed with the
Securities and Exchange Commission on August
7, 2000)
3.2 Bylaws of Park Meridian Financial
Corporation (incorporated by reference to
Exhibit 3.2 to the Company's Current Report
on Form 8-K filed with the Securities and
Exchange Commission on August 7, 2000)
4.1 Section 7 of the Articles of Incorporation
of Park Meridian Financial Corporation
(incorporated by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K
filed with the Securities and Exchange
Commission on August 7, 2000)
4.2 Articles II and VII of the Bylaws of Park
Meridian Financial Corporation (incorporated
by reference to Exhibit 3.2 to the Company's
Current Report on Form 8-K filed with the
Securities and Exchange Commission on August
7, 2000)
10.1 Indenture dated as of February 22, 2001
between the Company and State Street Bank
and Trust Company of Connecticut, National
Association, as trustee
10.2 Amended and Restated Declaration of Trust by
and among State Street Bank and Trust
Company of Connecticut, National
Association, as institutional trustee, the
Company, and Kevin T. Kennelly, Bryan F.
Kennedy, III and Joseph M. Dodson, as
administrators
21.1 List of subsidiaries
(b) 8-K filings
o February 26, 2001 - The Company filed a current report on Form
8-K to report a financing completed through a newly organized
trust subsidiary.
o March 19, 2001 - The Company filed a current report on Form
8-K to report the announcement of a share repurchase program.
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15
SIGNATURES
Pursuant to the requirement 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.
PARK MERIDIAN FINANCIAL CORPORATION
/s/ Joseph M. Dodson Date: May 11, 2001
- -------------------------------------------------------- -------------
Joseph M. Dodson, Chief Financial Officer
/s/ Kevin T. Kennelly Date: May 11, 2001
- -------------------------------------------------------- -------------
Kevin T. Kennelly, President and Chief Executive Officer
15