<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1996
_____________________
Commission File Number 001-14070
PIEDMONT BANCORP, INC.
------------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1936232
-------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
260 South Churton Street, Hillsborough, NC 27278
- ------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (919) 732-2143
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
As of October 31, 1996, 2,750,800 shares of the registrant's common stock, no
par value, were outstanding. The registrant has no other classes of securities
outstanding.
This Form 10-Q report has 17 pages.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
(unaudited) *
--------------- --------------
(in thousands, except shares outstanding)
<S> <C> <C>
Assets
------
Cash $ 1,130 $ 723
Interest-bearing deposits in other financial institutions 2,386 1,947
Investment securities:
Available-for-sale 26,081 27,098
Held-to-maturity 3,515 3,519
Loans receivable (net of allowance for loan losses of $629 and
$608 at September 30, 1996 and June 30, 1996, respectively) 94,488 91,187
Federal Home Loan Bank stock, at cost 863 863
Premises and equipment 1,303 1,324
Prepaid expenses and other assets 2,301 2,050
--------------- --------------
Total assets $ 132,067 $ 128,711
=============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits:
Non-interest bearing 2,186 1,643
Interest-bearing 73,695 71,718
--------------- --------------
75,881 73,361
Advances from the Federal Home Loan Bank 17,250 17,250
Accrued expenses and other liabilities 1,700 1,050
--------------- --------------
Total liabilities 94,831 91,661
--------------- --------------
Stockholders' Equity
--------------------
Common stock, no par value, 20,000,000 shares authorized;
2,750,800 and 2,645,000 shares issued and outstanding at
September 30, 1996 and June 30, 1996, respectively 26,985 25,398
Unearned ESOP shares (2,445) (2,552)
Unamortized deferred compensation (1,561) -
Retained earnings, substantially restricted (note 6) 14,661 14,783
Unrealized holding losses on available-for-sale securities (404) (579)
--------------- --------------
Total stockholders' equity 37,236 37,050
--------------- --------------
Total liabilities and stockholders' equity $ 132,067 $ 128,711
=============== ==============
</TABLE>
*Derived from audited financial statements
See accompanying notes to consolidated financial statements.
2
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------------
1996 1995
--------------- --------------
(in thousands, except per share data)
<S> <C> <C>
Interest income:
Interest on loans $ 1,970 $ 1,898
Interest on deposits in other financial institutions 16 18
Interest and dividends on investment securities:
Taxable 323 194
Non-taxable 154 27
--------------- --------------
Total interest income 2,463 2,137
--------------- --------------
Interest expense:
Interest on deposits 859 929
Interest on borrowings 252 195
--------------- --------------
Total interest expense 1,111 1,124
--------------- --------------
Net interest income 1,352 1,013
Provision for loan losses 21 30
--------------- --------------
Net interest income after provision for loan losses 1,331 983
--------------- --------------
Other income:
Customer service and other fees 51 43
Mortgage loan servicing fees 22 25
Gain (loss) on sale of investment securities (26) -
Other 55 16
--------------- --------------
Total other income 102 84
--------------- --------------
Other expenses:
SAIF recapitalization assessment 487 -
Compensation and fringe benefits (note 5) 416 327
Data and items processing 62 61
Deposit insurance premiums 45 43
Occupancy expense 30 29
Furniture and equipment expense 30 20
Professional fees 31 20
Other 113 73
--------------- --------------
Total other expenses 1,214 573
--------------- --------------
Income before income tax expense 219 494
Income tax expense 36 187
--------------- --------------
Net income $ 183 $ 307
=============== ==============
Net income per share (note 2 and 7) $ 0.07 N/A
===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
Unrealized
Unearned Unamortized holding Total
Shares Common ESOP Deferred Retained gains Stockholders'
Outstanding Stock Shares Compensation Earnings (losses) Equity
----------- -------- -------- ------------ -------- ---------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 2,645,000 $ 25,398 $ (2,552) $ - $ 14,783 $ (579) $ 37,050
Net income - - - - 183 - 183
Issuance of restricted stock 105,800 1,587 - (1,587) -
Release of ESOP shares - - 107 - - - 107
Amortization of unearned compensation 26 26
Cash dividends declared - - - - (305) - (305)
Change in unrealized holding gains (losses),
net of income tax expense - - - - - (122) (122)
----------- -------- -------- ------------ -------- ---------- -------------
Balance at September 30, 1996 2,750,800 $ 26,985 $ (2,445) $ (1,561) $ 14,661 $ (701) $ 36,939
=========== ======== ======== ============ ======== ========== =============
Balance at June 30, 1995 - $ - $ - $ - $ 13,624 $ 22 $ 13,646
Net income - - - - 307 - 307
Change in unrealized holding gains (losses),
net of income tax expense - - - - - 34 34
----------- -------- -------- ------------ -------- ---------- -------------
Balance at September 30, 1995 - $ - $ - $ - $ 13,931 $ 56 $ 13,987
=========== ======== ======== ============ ======== ========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Operating activities:
Net income $ 183 $ 307
Adjustments to reconcile net income to net cash provided (used) by operating actitivites
Depreciation 24 23
Net amortization (accretion) 39 24
Provision for loan losses 21 30
Net loss on sale of investments and mortgage-backed securities 26 -
Release of ESOP shares 107 -
Compensation earned under MRP 26 -
Net decrease (increase) in mortgage loans held for sale 3 (1,883)
Increase in other assets (370) (197)
Increase in other liabilities 637 230
---------- ----------
Net cash provided (used) by operating activities 696 (1,466)
---------- ----------
Investing activities:
Net (increase) decrease in loans held for investment (3,354) 109
Principal collected on mortgage-backed securities 164 151
Purchases of investment securities classified as held-to-maturity - (668)
Proceeds from sales of investment securities classified as available-for-sale 1,115 -
Purchases of premises and equipment (3) (14)
---------- ----------
Net cash used by investing activities (2,078) (422)
---------- ----------
Financing activities:
Net increase (decrease) in time deposits 556 (870)
Net increase in other deposits 1,964 1,949
Proceeds from borrowings 5,000 4,000
Repayments of borrowings (5,000) (3,500)
Cash dividends paid to shareholders (292) -
---------- ----------
Net cash provided by financing activities 2,228 1,579
---------- ----------
Increase (decrease) in cash and cash equivalents 846 (309)
Cash and cash equivalents at beginning of period 2,670 3,136
---------- ----------
Cash and cash equivalents at end of period $ 3,516 $ 2,827
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,113 $ 1,126
========== ==========
Income taxes $ 79 $ -
========== ==========
Supplemental disclosure of noncash transactions:
Unrealized gains on available-for-sale securities, net of deferred taxes of $113 and $22 $ 175 $ 34
========== ==========
Dividends declared but unpaid $ 305 $ _
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
1) Organization and Operations
---------------------------
In December, 1995, pursuant to a Plan of Conversion approved by its members
and regulators, Hillsborough Savings Bank, Inc., SSB (the "Bank") amended and
restated its charter to effect its conversion from a North Carolina chartered
mutual savings bank to a North Carolina chartered stock savings bank (the
"Conversion") and became a wholly-owned subsidiary of Piedmont Bancorp, Inc.,
(the "Parent"), a holding company formed in connection with the Conversion.
The Bank is primarily engaged in the business of obtaining savings deposits
and providing loans to the general public. The principal activity of the
Parent is ownership of the Bank.
2) Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Parent and the
Bank, together referred to as "the Company". All significant intercompany
transactions and balances are eliminated in consolidation. 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 disclosure of contingent
assets and liabilities as of the date of the balance sheets and the reported
amounts of income and expenses for the period presented. Actual results could
differ significantly from those estimates. In management's opinion, the
financial information, which is unaudited, reflects all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the financial information as of September 30, 1996 and for
the three month periods ended September 30, 1996 and September 30, 1995 in
conformity with generally accepted accounting principles. Operating results
for the three month period ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ending
June 30, 1997.
3) Cash and Cash Equivalents
- ----------------------------
For purposes of reporting cash flows, the Company considers cash and
interest-bearing deposits in other financial institutions with original
maturities of three months or less to be cash equivalents.
4) Adoption of Statement of Financial Accounting Standards ("SFAS")
----------------------------------------------------------------
Effective July 1, 1995, as required, the Bank adopted the provisions of SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan", and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan: Income Recognition
and Disclosures". The adoption of SFAS 114 and SFAS 118 did not have a
material impact on the Company's financial condition or results of
operations.
6
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
5) Employee and Director Benefit Plans
-----------------------------------
In conjunction with the mutual to stock conversion, the Bank's defined
contribution retirement plan was terminated as of July 31, 1995. Funds were
distributed in October 1995. There was no gain or loss upon the termination
of the defined contribution retirement plan.
The Company has an employee stock ownership plan ("ESOP") whereby an
aggregate number of shares amounting to 211,600 were purchased for future
allocation to employees. Contributions to the ESOP are made by the Bank on a
discretionary basis, and are allocated among ESOP participants on the basis
of relative compensation in the year of allocation. Benefits will vest in
full upon five years of service with credit given for years of service prior
to the conversion. The ESOP has been funded by a $40,000 cash contribution
from the Bank in December 1995 and a loan from the Parent in the amount of
$2,690,677. The loan is secured by shares of stock purchased by the ESOP and
is not guaranteed by the Bank. Principal and interest payments on this loan
are funded primarily from discretionary contributions by the Bank. Dividends,
if any, paid on shares held by the ESOP may also be used to reduce the loan.
At September 30, 1996, 24,702 shares were considered committed to be released
to ESOP participants, and compensation expense of $107,000 associated with
those shares was recorded during the quarter ended September 30, 1996.
Dividends on unallocated shares are used by the ESOP to repay debt to the
Parent and are not reported as dividends in the consolidated financial
statements. Dividends on allocated shares are credited to the accounts of the
participants and reported as dividends in the consolidated financial
statements.
The Bank has a management recognition plan ("MRP") which serves as a means of
providing existing directors and employees of the Bank with an ownership
interest in the Company. On August 29, 1996, restricted stock awards of
105,800 shares were made to 38 directors, officers, and employees of the
Bank. The shares awarded under the MRP were issued from authorized but
unissued shares of common stock at no cost to recipients. The shares granted
vest at a rate of 20% each year on the anniversary of the initial award of
shares so that the shares will be completely vested at the end of five years.
Compensation expense of $26,000 associated with the MRP was recorded during
the quarter ended September 30, 1996.
7
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
6) Regulatory Restrictions
-----------------------
At the time of conversion, the Bank established a liquidation account in an
amount equal to its net worth at June 30, 1995. The liquidation account will
be maintained for the benefit of eligible deposit account holders who
continue to maintain their deposit accounts in the Bank after conversion.
Only in the event of a complete liquidation will each eligible deposit
account holder be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance for deposit accounts then held before any liquidation distribution
may be made with respect to common stock. Dividends paid subsequent to the
conversion cannot be paid from this liquidation account.
The Bank may not declare or pay a cash dividend on or repurchase any of its
common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations. In
addition, for a period of five years after the conversion, the Bank will be
required, under existing North Carolina regulations, to obtain prior written
approval of the Administrator before it can declare and pay a cash dividend
on its capital stock in an amount in excess of one-half of the greater of (i)
its net income for the most recent fiscal year, or (ii) the average of its
net income after dividends for the most recent fiscal year and not more than
two of the immediately preceding fiscal years, if applicable. As a result of
this limitation, the Bank cannot pay a dividend in excess of $700,000 without
the approval of the Administrator.
7) Earnings per Share
------------------
Earnings per share has been computed based on net income and the weighted
average number of shares outstanding, or 2,557,739 shares for the quarter
ended September 30, 1996. For purposes of this computation, the number of
shares purchased by the Bank's employee stock ownership plan which have not
been allocated to participant accounts are not assumed to be outstanding.
Earnings per share is not presented for the comparative quarter ended
September 30, 1995 since that quarter was prior to the conversion period.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1996 AND 1995
Summary
- -------
Net income for the three months ended September 30, 1996 was $183,000 compared
to $307,000 for the three months ended September 30, 1995. Earnings for the
quarter were adversely affected by a one-time FDIC special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF"). Net income before
the non-recurring SAIF assessment totaled $496,000 on an after tax basis.
Net Interest Income
- -------------------
Net interest income, the Company's primary source of earnings, continued its
trend of growth. The table below shows that tax-equivalent net interest income
increased by $411,000 to $1,435,000 for the quarter ended September 30, 1996
from $1,024,000 for the same period last year. Net interest income is analyzed
on a tax-equivalent basis to adjust for the nontaxable status of income earned
on certain investments such as municipal bonds.
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------------------------------------------------
1996 1995
------------------------------------------- --------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
----------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits $ 1,642 $ 16 3.87% $ 1,908 $ 18 3.75%
FHLB common stock 897 16 7.08 786 14 7.09
Taxable investment
securities 17,715 298 6.73 10,771 179 6.65
Tax-exempt investment
securities (2) 13,182 246 7.46 2,329 39 6.78
Loans receivable 93,110 1,970 8.45 86,107 1,898 8.81
-------- ------ ------- -------- ------ -------
Total interest-earning assets 126,546 2,546 8.04 101,901 2,148 8.42
------ ------- ------ -------
Non-interest-earning assets 3,277 2,923
-------- --------
Total $129,823 $104,824
======== ========
Liabilities and Retained
Earnings
Interest-bearing liabilities:
Deposit accounts $ 72,231 859 4.72 $74,833 929 4.94
FHLB advances 16,889 252 5.97 12,893 195 6.05
-------- ------ ------- ------- ------ -------
Total interest-bearing
liabilities 89,120 1,111 4.96 87,726 1,124 5.10
------ ------- ------ -------
Non-interest-bearing
liabilities 3,241 3,238
Stockholders' equity 37,462 13,860
-------- --------
Total $129,823 $104,824
======== ========
Net interest income and
interest rate spread $1,435 3.08% $1,024 3.32%
====== ======
Net interest-earning
assets and net interest
margin $ 37,426 4.53% $ 14,175 4.02%
======== ========
Ratio of interest-earning
assets to
interest-bearing
liabilities 142.00% 116.16%
</TABLE>
(1) All information presented in this column is annualized with the exception of
the ratio of interest-earning assets to interest bearing liabilities.
(2) Interest earned on tax-exempt investment securities has been adjusted to a
tax-equivalent basis using the applicable federal and state rates of 34% and
7.75%, respectively, and reduced by the nondeductible portion of interest
expense.
9
<PAGE>
The increase in net interest income was primarily due to a higher level of
average net interest-earning assets. Average investment securities increased by
$17.8 million and average loans increased by $7.0 million over the same quarter
last year. Growth in interest-earning assets was funded by proceeds of the
stock conversion and growth in advances. Interest rate spread (on a tax-
equivalent basis) declined to 3.08% for the quarter ended September 30, 1996
from 3.32% for the same quarter last year as the decline in the yield on
interest-earning assets outpaced the decline in the cost of interest-bearing
liabilities. Despite the decline in interest rate spread, net interest margin
(on a tax-equivalent basis) increased to 4.53% for the quarter ended September
30, 1996 from 4.02% for the quarter ended September 30, 1995. While Conversion
proceeds were invested at yields somewhat less than the weighted average yield
on total interest-earning assets, those investments contributed to the increase
in net interest margin.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the three months ended September 30, 1996
decreased by $9,000 to $21,000. The provision for loan losses is based on
management's evaluation of the loan portfolio as discussed under "Financial
Condition" below.
Other Income
- ------------
Other income increased $18,000 for the first three months of fiscal 1997 as
compared to the same period of fiscal 1996. Principal components of the
increase are: an $8,000 increase in customer service and other fees associated
with the July 1, 1996 implementation of a new fee schedule for deposit-related
services; and a $39,000 increase in "Other" which includes lower-of-cost-or-
market recoveries on loans held-for-sale. These increases in other income were
offset by net losses of $26,000 on the sale of investment securities which were
recognized during the three months ended September 30, 1996.
Other Expenses
- --------------
Total other expenses increased $641,000 or 112% during the three months ended
September 30, 1996 compared to the same period last year. The $487,000 FDIC
special assessment for the recapitalization of the SAIF accounted for
approximately 76% of the increase. The assessment was levied on all depository
institutions with SAIF-insured deposits and was calculated as 65.7 basis points
on assessable deposits as of March 31, 1995. It is anticipated that all SAIF-
insured institutions, including the Bank, will see the benefit of a reduction in
deposit insurance premiums beginning January 1, 1997.
Without the effect of the non-recurring SAIF assessment, other expenses totaled
$727,000, an increase of $154,000 over the same quarter last year. Compensation
and fringe benefits increased $89,000 or 27% primarily due to the establishment
of the ESOP which provides a higher level of retirement benefits to employees
than the previous retirement plan. Such retirement-related compensation expense
totaled $111,000 and $13,000 for the three months ended September 30, 1996 and
1995, respectively. Also contributing to the increase in compensation expense
was $26,000 of amortization of deferred compensation associated with the MRP.
The remaining increase was due to increases in professional fees and other
expenses.
Income Tax Expense
- ------------------
Income tax expense of $36,000 for the quarter ended September 30, 1996 reflects
the decline in income before income tax expense.
10
<PAGE>
FINANCIAL CONDITION
CHANGES IN FINANCIAL CONDITION
- ------------------------------
Total assets increased to $132.1 million at September 30, 1996 from $128.7
million at June 30, 1996. The $3.4 million increase in assets resulted
primarily from growth in loans. Loan growth was funded largely with deposits
which increased by $2.5 million to $75.9 million at September 30, 1996 from
$73.4 million at June 30, 1996. $17.25 million of advances were outstanding at
both September 30 and June 30, 1996.
Stockholders' equity increased from $37.0 million at June 30, 1996 to $37.2
million at September 30, 1996. On August 29, 1996, restricted stock awards of
105,800 shares were made to directors, officers, and employees under the Bank's
management recognition plan. Such shares were issued from authorized but
unissued shares at no cost to recipients. MRP shares are expected to be fully
vested at the end of five years. The Company declared cash dividends of
$305,000, or twelve cents per share, for the quarter ended September 30, 1996.
ASSET QUALITY
- -------------
Nonperforming Assets
- --------------------
Nonperforming assets include nonaccrual loans, restructured loans and real
estate owned. The following table presents information on nonperforming assets
and loans contractually past due but still accruing at September 30, 1996 and
June 30, 1996
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- -------------
(in thousands)
<S> <C> <C>
Total nonaccrual loans $ 731 $ 758
Total restructured loans - -
-------- --------
Total nonperforming loans 731 758
-------- --------
Real estate owned - -
-------- --------
Total nonperforming assets $ 731 $ 758
======== ========
Accruing loans, delinquent 90 days or more $ 268 $ 302
======== ========
Nonperforming loans to total loans 0.77% 0.83%
Nonperforming assets to total assets 0.55% 0.59%
Total assets $132,067 $128,711
Total loans, net $ 94,488 $ 91,187
</TABLE>
There were no significant changes in nonperforming assets from June 30, 1996 to
September 30, 1996. Management has reviewed the collateral for nonperforming
loans and believes that collateral values related to such loans exceed the loan
balances. Management has included this review among the factors considered in
the evaluation of the allowance for possible loan losses.
11
<PAGE>
At September 30, 1996, compared to June 30, 1996, the recorded investment in
loans that are considered to be impaired under SFAS No. 114 remained at
$826,000, comprised of two loans. One of the loans totaling $457,000 was in
non-accrual status at both September 30, 1996 and June 30, 1996. There was no
related allowance for credit losses associated with these loans as determined in
accordance with SFAS No. 114.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table summarizes the activity in the allowance for loan losses for
the three months ended September 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1996 1995
------ ------
<S> <C> <C>
Balance at the beginning of period $ 608 $ 515
Provision for loan losses 21 30
Recoveries - 1
Loans charged off - -
----- -----
Balance at the end of period $ 629 $ 546
----- -----
</TABLE>
At September 30, 1996, the allowance for loan losses was 0.66% of total loans,
compared to 0.66% of total loans at June 30, 1996 and 0.64% of total loans at
September 30, 1995.
The levels of the provision and allowance for loan losses are based on
management's ongoing evaluation of the risk characteristics of the loan
portfolio considering current economic conditions, financial condition of
borrowers, growth and composition of the loan portfolio, collateral values, the
relationship of the allowance for loan losses to outstanding loans, the level of
nonperforming loans that have been identified as potential problems, past and
expected loss experience, results of the most recent regulatory examinations,
and other factors deemed relevant by management.
Based on management's evaluation of the loan portfolio as described above, the
fiscal 1997 provision for loan losses was less than the provision made during
the corresponding period of fiscal 1996, largely due to slower growth in the
loan portfolio and an improved level of the relationship of the allowance to
outstanding loans.
12
<PAGE>
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
- -------------------------------------------
Liquidity is the ability to raise funds or convert assets to cash in order to
meet customer and operating needs. The Company's primary sources of liquidity
are its portfolio of investment securities available-for-sale, principal and
interest payments on loans and mortgage-backed securities, interest income from
investment securities, maturities of investment securities held-to-maturity,
increases in deposits, and advances from the FHLB of Atlanta. At September 30,
1996, the Bank had $7,750,000 of credit available from the FHLB which would be
collateralized by a blanket lien on qualifying loans secured by first mortgages
on 1-4 family residences. Additional amounts may be made available under this
blanket floating lien or by using investment securities as collateral.
Management believes that it will have sufficient funds available to meet its
anticipated future loan commitments as well as other liquidity needs.
Interest rate risk is the sensitivity of interest income and interest expense to
changes in interest rates. Management has structured its assets and liabilities
in an attempt to protect net interest income from large fluctuations associated
with changes in interest rates. At September 30, 1996, the Company had a
cumulative one year asset-sensitive gap position of $2.0 million or 1.53% of
interest-earning assets compared to a cumulative one year asset-sensitive gap
position of $3.7 million or 2.95% of interest-earning assets at June 30, 1996.
This generally indicates that net interest income would increase in a rising
rate environment and would experience downward pressure in a declining rate
environment.
It should be noted that these measures reflect the interest-sensitivity of the
balance sheet as of a specific date and are not necessarily indicative of future
results. Because of this and other limitations, management also monitors
interest rate sensitivity through the use of a model which estimates the change
in net portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest sensitivity measures as of
September 30, 1996, management believes that its interest rate risk is at an
acceptable level.
CAPITAL RESOURCES
- -----------------
The Parent is regulated by the Board of Governors of the Federal Reserve System
("FRB") and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the Administrator,
Savings Institutions Division, North Carolina Department of Commerce, (the
"Administrator"). The Bank is subject to the capital requirements of the FDIC
and the Administrator. The FDIC requires the Bank to maintain minimum ratios of
Tier 1 capital to total risk-weighted assets and total capital to risk-weighted
assets of 4% and 8%, respectively. Tier 1 capital consists of total
shareholders' equity calculated in accordance with generally accepted accounting
principles less intangible assets, and total capital is comprised of Tier 1
capital plus certain adjustments, the only one of which applicable to the Bank
is the allowance for possible loan losses. Risk-weighted assets refer to the
on- and off-balance sheet exposures of the Bank adjusted for their relative risk
levels using formulas set forth in FDIC regulations. The Bank is also subject
to a FDIC leverage capital requirement, which calls for a minimum ratio of Tier
1 capital (as defined above) to quarterly average total assets of 3% to 5%,
depending on the institution's composite ratings as determined by its
regulators. The Administrator requires a net worth equal to at least 5% of
total assets.
At September 30, 1996, the Bank was in compliance with all of the aforementioned
capital requirements.
13
<PAGE>
CURRENT ACCOUNTING ISSUES
The FASB has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of". SFAS 121 requires that long-
lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in the
circumstances indicate that the carrying amount of an asset may not be
recoverable. In evaluating recoverability, if estimated future cash flows,
undiscounted and without interest charges, are less than the carrying amount of
the asset, an impairment loss is recognized. SFAS 121 also requires that
certain long-lived assets and certain identifiable intangibles to be disposed of
be reported at the lower of carrying amount or fair value less cost to sell.
SFAS 121 applies prospectively for fiscal years beginning after December 15,
1995. As required, the Company adopted the provisions of this statement in the
quarter ended September 30, 1996, but the impact of such adoption was
immaterial.
The FASB has also issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65," which provides guidance for the
capitalization of originated as well as purchased mortgage servicing rights and
the measurement of impairment of those rights. SFAS 122 requires that an entity
recognize as separate assets the rights to service mortgage loans for others,
however those servicing rights are acquired. SFAS 122 also requires that an
entity assess its capitalized mortgage servicing rights for impairment based on
the fair value of those rights. It should stratify its mortgage servicing
rights based on one or more predominant risk characteristics of the underlying
loans, and recognize impairment through a valuation allowance for each impaired
stratum. SFAS 122 applies prospectively for fiscal years beginning after
December 15, 1995. As required, the Company adopted the provisions of this
statement in the quarter ended September 30, 1996, but the impact of such
adoption was immaterial.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The statement defines a fair value method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. It also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed in
Accounting Principles Board Opinion Number 25 ("APB No. 25"), "Accounting for
Stock Issued to Employees". SFAS No. 123 requires that an employers' financial
statements include certain disclosures about stock-based compensation
arrangements regardless of the method used to account for them. Entities
electing to remain with the accounting in APB No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share, as if the fair
value based method of accounting defined in SFAS No. 123 had been applied. The
disclosure requirements of the statement are effective for financial statements
for fiscal years beginning after December 15, 1995, or for an earlier fiscal
year for which this statement is initially adopted for recognizing compensation
cost. Pro forma disclosures required for entities that elect to continue to
measure compensation cost using APB No. 25 must include the effects of all
awards granted in fiscal years that begin after December 15, 1994. Management
anticipates that the adoption of the statement should have no material impact on
its consolidated financial statements.
14
<PAGE>
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued in June 1996. This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of collateral.
This statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Management anticipates that the adoption of the
statement should have no material impact on its consolidated financial
statements.
15
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
None
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
None
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
16
<PAGE>
SIGNATURES
----------
Under the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized
Date: November 7, 1996 By: /s/ D. Tyson Clayton
-----------------------
President
Date: November 7, 1996 By: /s/ Gina B. Riggins
-----------------------
Vice President and principal
financial officer
17
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<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
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0
0
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