<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
March 31, 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 May 8, 1996, 2,645,000 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 19 pages.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
- - -----------------------------
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995 *
(unaudited)
-------------- ------------
Assets (in thousands)
------
<S> <C> <C>
Cash $ 804 $ 778
Interest-bearing deposits in other financial institutions 1,232 2,358
Investment securities:
Available-for-sale 26,990 10,887
Held-to-maturity 3,206 1,798
Loans receivable (net of allowance for loan losses of $591 and
$515 at March 31, 1996 and June 30, 1995, respectively) 88,598 84,713
Federal Home Loan Bank stock, at cost 818 786
Premises and equipment 1,309 1,339
Prepaid expenses and other assets 1,890 1,354
----------- -----------
Total assets $ 124,847 $ 104,013
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits:
Non-interest bearing 1,765 1,672
Interest-bearing 71,527 75,073
----------- -----------
73,292 76,745
Advances from the Federal Home Loan Bank 13,750 13,000
Accrued expenses and other liabilities 641 622
----------- -----------
Total liabilities 87,683 90,367
Stockholders' Equity
--------------------
Common stock, no par value, 20,000,000 shares authorized;
2,645,000 shares issued and outstanding (note 2) 25,398 -
Unearned ESOP shares (2,626) -
Retained earnings, substantially restricted 14,594 13,624
Unrealized holding gains (losses) on available-for-sale securities (202) 22
----------- -----------
Total stockholders' equity 37,164 13,646
----------- -----------
Total liabilities and stockholders' equity $ 124,847 $ 104,013
=========== ===========
</TABLE>
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
2
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 1,878 $ 1,764 $ 5,708 $ 5,087
Interest on deposits in other financial institutions 41 14 209 44
Interest and dividends on investment securities: -
Taxable 322 193 753 548
Non-taxable 122 11 208 23
---------- ---------- ---------- ----------
Total interest income 2,363 1,982 6,878 5,702
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 852 776 2,771 2,228
Interest on borrowings 181 158 577 404
---------- ---------- ----------- ----------
Total interest expense 1,033 934 3,348 2,632
---------- ---------- ----------- ----------
Net interest income 1,330 1,048 3,530 3,070
Provision for loan losses 21 30 75 90
---------- ---------- ----------- ----------
Net interest income after provision for loan losses 1,309 1,018 3,455 2,980
---------- ---------- ----------- ----------
Other income:
Customer service and other fees 42 44 130 133
Mortgage loan servicing fees 22 29 71 85
Gain (loss) on sale of investment securities - - - (34)
Other 15 43 44 106
---------- ---------- ---------- ----------
Total other income 79 116 245 290
---------- ---------- ---------- ----------
Other expenses:
Compensation and fringe benefits 348 317 1,034 950
Data and items processing 63 55 181 153
Deposit insurance premiums 43 43 130 128
Occupancy expense 30 28 91 86
Furniture and equipment expense 29 30 72 85
Professional fees 31 34 82 77
Other 98 69 247 203
---------- ---------- ---------- ----------
Total other expenses 642 576 1,837 1,682
---------- ---------- ---------- ----------
Income before income tax expense 746 558 1,863 1,588
Income tax expense 243 234 649 655
---------- ---------- ---------- ----------
Net income $ 503 $ 324 $ 1,214 $ 933
========== ========== ========== ==========
Net income per share (note 7) $ 0.20 - $ 0.25 -
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
Unearned Unrealized Total
Shares Common ESOP Retained holding gains Stockholders'
Outstanding Stock Shares Earnings (losses) Equity
----------- ----- ------ -------- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 - $ - $ - $13,624 $ 22 $ 13,646
Net income - - - 1,214 - 1,214
Net proceeds from issuance of no par common stock 2,645,000 25,398 - - - 25,398
Common stock acquired by ESOP - - (2,731) - - (2,731)
Release of ESOP shares - - 105 - - 105
Cash dividends paid - - - (244) - (244)
Change in unrealized holding gains (losses),
net of income tax expense - - - - (224) (224)
----------- -------- ------- ------- -------- ---------
Balance at March 31, 1996 2,645,000 $25,398 $(2,626) $14,594 $ (202) $ 37,164
=========== ======== ======== ======= ======== =========
Balance at June 30, 1994 - $ - $ - $12,380 $ (185) $ 12,195
Net income - - - 933 - 933
Change in unrealized holding gains (losses),
net of income tax expense - - - - 57 57
----------- -------- -------- ------- -------- ---------
Balance at March 31, 1995 - $ - $ - $13,313 $ (128) $ 13,185
=========== ======== ======== ======= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------
1996 1995
---- ----
Operating activities: (in thousands)
<S> <C> <C>
Net income $ 1,214 $ 933
Adjustments to reconcile net income to net cash provided (used) by operating activities
Depreciation 68 64
Net amortization (accretion) 108 (54)
Provision for loan losses 75 90
Net loss on sale of investments and mortgage-backed securities - 34
Release of ESOP shares 105 -
Net decrease (increase) in mortgage loans held for sale (1,835) 1,039
Increase in other assets (429) (76)
Increase in other liabilities 19 181
-------- --------
Net cash provided (used) by operating activities (675) 2,211
-------- --------
Investing activities:
Net increase in loans held for investment (2,186) (2,314)
Principal collected on mortgage-backed securities 507 97
Purchases of investment securities classified as available-for-sale (19,992) (1,479)
Purchases of investment securities classified as held-to-maturity (1,422) (506)
Purchases of mortgage-backed securities classified as available-for-sale (1,482) -
Proceeds from sales of investment securities classified as available for sale - 466
Proceeds from investment securities called by issuer 4,500 -
Purchases of Federal Home Loan Bank stock (32) -
Purchases of premises and equipment (38) (49)
-------- --------
Net cash used by investing activities (20,145) (3,785)
-------- --------
Financing activities:
Net increase (decrease) in time deposits (4,608) 2,340
Net increase (decrease) in other deposits 1,155 (843)
Proceeds from borrowings 8,250 8,000
Repayments of borrowings (7,500) (7,000)
Proceeds from issuance of no par common stock 25,398 -
Purchase of common stock for ESOP (2,731) -
Cash dividends paid to shareholders (244) -
-------- --------
Net cash provided by financing activities 19,720 2,497
-------- --------
Increase (decrease) in cash and cash equivalents (1,100) 923
Cash and cash equivalents at beginning of period 3,136 1,944
-------- --------
Cash and cash equivalents at end of period $ 2,036 $ 2,867
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,351 $ 2,666
-------- --------
Income taxes $ 693 $ 580
-------- --------
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on available-for-sale securities,
net of deferred taxes of $(136) and $38 $ (224) $ 57
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
1) Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Piedmont Bancorp,
Inc. (the "Company") and its wholly-owned subsidiary, Hillsborough Savings
Bank, Inc., SSB ("Hillsborough Savings"). All intercompany transactions and
balances are eliminated in consolidation. 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 March 31, 1996 and for the three and nine month
periods ended March 31, 1996 and March 31, 1995 in conformity with generally
accepted accounting principles. Operating results for the three and nine month
periods ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 1996.
2) Formation of Piedmont Bancorp, Inc.
-----------------------------------
On December 7, 1995, Hillsborough Savings completed its conversion from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank. The conversion occurred through the sale of 2,645,000 shares of
common stock (no par value) of Piedmont Bancorp, Inc., a newly formed holding
company. Total proceeds of $26,450,000 were reduced by conversion expenses of
$1,052,395. Piedmont Bancorp, Inc. retained 50% of the net conversion proceeds
after deducting the proceeds of the loan to the Employee Stock Option Plan
("ESOP") and paid the balance of $11,353,464 to Hillsborough Savings in
exchange for the common stock of Hillsborough Savings issued in the conversion.
The transaction was recorded as an "as-if" pooling with assets and liabilities
recorded at historical cost.
At the time of conversion, Hillsborough Savings 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 Hillsborough Savings 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.
Hillsborough Savings 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, Hillsborough will be
required, under existing North Carolina regulations, to
6
<PAGE>
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, Hillsborough cannot pay a dividend in excess of
$621,000 without the approval of the Administrator.
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, Hillsborough Savings 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 Hillsborough Saving's financial condition
or results of operations.
5) Defined Contribution Retirement Plan
------------------------------------
In conjunction with the mutual to stock conversion, Hillsborough Savings'
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.
6) Employee Stock Option Plan ("ESOP")
-----------------------------------
The Company has an ESOP whereby an aggregate number of shares amounting to
211,600 or 8% of the stock issued in the conversion were purchased for future
allocation to employees. Contributions to the ESOP are made by Hillsborough
Savings 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 Hillsborough
Savings in December 1995 and a loan from the Company in the amount of
$2,690,677. The loan is secured by shares of stock purchased by the ESOP and
is not guaranteed by Hillsborough Savings. Principal and interest payments on
this loan are funded primarily from discretionary contributions by
Hillsborough Savings. Dividends, if any, paid on shares held by the ESOP may
also be used to reduce the loan. The $40,000 cash contribution was used to
release 3,100 shares to ESOP participants in December 1995. In addition,
5,081 shares were considered committed to be released to ESOP participants
during the three months ended March 31, 1996 which resulted in approximately
$65,000 in compensation expense.
7
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
7) Earnings per Share
------------------
The conversion discussed in note 2 was effective December 7, 1995.
Accordingly, earnings per share for the nine months ended March 31, 1996 is
comprised solely of net income and shares outstanding for the post-conversion
period.
<TABLE>
<CAPTION>
December 8, 1995 January 1, 1996
through March 31, 1996 through March 31, 1996
---------------------- ----------------------
<S> <C> <C>
Net income $ 621,000 $ 503,000
Weighted average shares
outstanding 2,446,891 2,436,612
Earnings per share $ 0.25 $ 0.20
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - -------
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Nine Months Ended March 31, 1996 and
1995
Summary
- - -------
Net income for the nine months ended March 31, 1996 was $1,214,000 compared to
$933,000 for the nine months ended March 31, 1995. A $460,000 increase in net
interest income offset by a $155,000 increase in other expenses for the nine
months ended March 31, 1996 as compared to the nine months ended March 31, 1995
were the primary reasons for the improvement in earnings.
Net Interest Income
- - -------------------
The following table reflects significant components of net interest income for
the nine month periods ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
Nine Months Ended March 31,
------------------------------------------------------------------------------
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 $ 5,431 $ 209 5.12% $ 1,562 $ 44 3.70%
FHLB common stock 787 43 7.27 786 41 6.96
Investments, net (2) (3) (4) 19,932 918 6.14 10,728 530 6.59
Loans Receivable 87,191 5,708 8.73 82,868 5,087 8.18
-------- ------ ---- ------- ------ ----
Total interest-earning assets 113,341 6,878 8.09 95,944 5,702 7.92
------ ---- ------ ----
Non-interest-earning assets 3,296 3,344
-------- -------
Total $116,637 $99,288
======== =======
Liabilities and Retained Earnings
Interest-bearing liabilities:
Deposit accounts 76,649 2,771 4.81 74,900 2,228 3.97
FHLB Advances 12,629 577 6.09 10,264 404 5.25
-------- ------ ---- ------- ------ ----
Total interest-bearing liabilities 89,278 3,348 4.99 85,164 2,632 4.12
------ ---- ------ ----
Non-interest-bearing liabilities 4,071 1,454
Stockholders' equity (3) 23,288 12,670
-------- -------
Total $116,637 $99,288
======== =======
Net interest income and interest rate
spread (5) $3,530 3.10% $3,070 3.80%
====== ======
Net interest-earning assets and net
interest margin (6) $ 24,063 4.15% $10,780 4.27%
======== =======
Ratio of interest-earning assets to
interest-bearing liabilities 126.95% 112.66%
</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) Includes investment and mortgage-backed securities.
(3) The Bank adopted FAS 115 effective July 1, 1993. After adoption, investments
classified available-for-sale are reported at fair value and investments
classified held-to-maturity are reported at historical cost. Unrealized gains
(losses), net of tax, are included in stockholders' equity.
(4) Investments include tax-exempt securities; however, yields on investments
are not calculated on a tax-equivalent basis.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
9
<PAGE>
Net interest income for the first nine months of fiscal year 1996 was $3,530,000
compared to $3,070,000 for the first nine months of fiscal year 1995. The
increase was primarily due to a higher level of average net interest-earning
assets, partially offset by a decline in net interest margin from 4.27% to
4.15%. The increase in average net interest-earning assets is attributable to
growth in investment securities which increased by $9.2 million, loans which
increased by $4.3 million, and average interest-bearing deposits which increased
by $3.9 million. Growth in interest-earning assets was funded by growth in
deposits and advances which increased by a total of $4.1 million and from
proceeds of the stock conversion. The 12 basis point decline in net interest
margin was primarily attributable to the average rate paid on interest-bearing
deposits rising at a faster rate than the average yield on interest earning
assets.
Piedmont Bancorp's one year sensitivity gap as a percentage of total interest-
earning assets at March 31, 1996 was positive 1.58%. On March 31, 1996, Piedmont
Bancorp's three year cumulative interest rate sensitivity gap as a percentage of
total interest-earning assets was negative 2.57%, and its five year cumulative
interest rate sensitivity gap as a percentage of total interest-earning assets
was positive 0.08%. March's one year sensitivity gap continued to decline from
positive 18.89% at June 30, 1995 and 5.29% at December 31, 1995, in part, in
response to management's efforts to reduce the Company's one year positive gap
by investing conversion proceeds in fixed rate investment securities. March's
three year and five year cumulative interest rate sensitivity gap positions did
not change significantly from June 30, 1995 or December 31, 1995. Management
expects that the decline in positive gap position will stabilize the Company's
net interest income during periods of declining interest rates.
Provision for Loan Losses
- - -------------------------
The provision for loan losses for the nine months ended March 31, 1996 decreased
by $15,000 to $75,000. 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 declined $45,000 for the first nine months of fiscal 1996 as
compared to the same period of fiscal 1995. Principal components of the
decrease are: a $14,000 decline in mortgage loan servicing fees; a $62,000
decline in "Other" which includes gains on the sale of REO and lower-of-cost-or-
market recoveries on loans held-for-sale, both of which were recognized during
fiscal 1995. These declines in other income were offset by net losses of
$34,000 on the sale of investment securities which were recognized during the
nine months ended March 31, 1995.
Other Expenses
- - --------------
Total other expenses increased $155,000 or 9.2% during the nine months ended
March 31, 1996 compared to the same period last year. Compensation and fringe
benefits increased $84,000 or 8.8% primarily due to normal compensation
adjustments between the two periods combined with establishment of the ESOP
which provides a higher level of retirement benefits to employees than the
previous retirement plan. Retirement-related compensation expense totaled
$139,000 and $77,000 for the nine months ended March 31, 1996 and 1995,
respectively. The remaining increase was due to increases in data and items
processing expense and other expenses.
10
<PAGE>
Income Tax Expense
- - ------------------
Income tax expense decreased from $655,000 in the first nine months of fiscal
1995 to $649,000 in the first nine months of fiscal 1996, reflecting a higher
level of tax-exempt income. The effective tax rates for the nine months ended
March 31, 1996 and 1995 were 34.8% and 41.2%, respectively.
Comparison of Results of Operations for the Three Months Ended March 31, 1996
and 1995
Summary
- - -------
Net income for the three months ended March 31, 1996 was $503,000 compared to
$324,000 for the three months ended March 31, 1995. An increase in net interest
income for the three months ended March 31, 1996 as compared to the three months
ended March 31, 1995 was the primary reason for the increase in net income.
Net Interest Income
- - -------------------
The following table reflects significant components of net interest income for
the three month periods ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------------------
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 $ 2,689 $ 41 6.13% $ 1,293 $ 14 4.39%
FHLB common stock 790 14 7.13 786 14 7.22
Investments, net (2) (3) (4) 28,390 430 6.06 11,332 190 6.71
Loans Receivable 87,818 1,878 8.56 83,175 1,764 8.51
-------- -------- ---- -------- ------ ----
Total interest-earning assets 119,687 2,363 7.90 96,586 1,982 8.23
-------- ---- ------ ----
Non-interest-earning assets 3,685 3,713
-------- --------
Total $123,372 $100,299
======== ========
Liabilities and Retained Earnings
Interest-bearing liabilities:
Deposit accounts 70,387 852 4.87 73,223 776 4.30
FHLB Advances 11,912 181 6.08 11,063 158 5.71
-------- -------- ---- -------- ------ ----
Total interest-bearing liabilities 82,299 1,033 5.04 84,286 934 4.48
-------- ---- ------ ----
Non-interest-bearing liabilities 3,751 3,127
Stockholders' equity (3) 37,322 12,886
-------- --------
Total $123,372 $100,299
======== ========
Net interest income and interest
rate spread (5) $ 1,330 2.86% $ 1,048 3.75%
======== =======
Net interest-earning assets and
net interest margin (6) $ 37,388 4.44% $ 12,300 4.34%
======== ========
Ratio of interest-earning assets
to interest-bearing liabilities 145.43% 114.59%
</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) Includes investment and mortgage-backed securities.
(3) The Bank adopted FAS 115 effective July 1, 1993. After adoption, investments
classified available-for-sale are reported at fair value and investments
classified held-to-maturity are reported at historical cost. Unrealized gains
(losses), net of tax, are included in stockholders' equity.
(4) Investments include tax-exempt securities; however, yields on investments
are not calculated on a tax-equivalent basis.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
11
<PAGE>
Net interest income for the third quarter of fiscal year 1996 was $1,330,000
compared to $1,048,000 for the third quarter of fiscal year 1995. The increase
was primarily due to a higher level of average net interest-earning assets. The
increase in average net interest-earning assets is attributable to growth in
investment securities which increased by $17.1 million, and in loans which
increased by $4.6 million. Growth in interest-earning assets was funded by
proceeds of the stock conversion.
Other Income
- - ------------
Other income decreased $37,000 for the third quarter of fiscal 1996 as compared
to the same quarter of fiscal 1995. The $28,000 decrease in "Other" income
includes lower-of-cost-or-market writedowns on loans held-for-sale for the
quarter ending March 31, 1996 while lower-of-cost-or-market recoveries were
recorded during the quarter ending March 31, 1995.
Other Expenses
- - --------------
Total other expenses increased $66,000 or 11.5% during the quarter ended March
31, 1996 compared to the same period last year. Compensation and fringe
benefits increased $31,000 or 9.8% primarily due to expenses of the ESOP which
provides a higher level of retirement benefits to employees than the retirement
plan which was in place during the quarter ended March 31, 1995. Retirement-
related compensation totaled $69,000 and $24,000 for the three months ended
March 31, 1996 and 1995, respectively. The remaining increase was primarily due
to increases in data and items processing expense and other expenses.
Income Tax Expense
- - ------------------
Income tax expense increased from $234,000 in the third quarter of fiscal 1995
to $243,000 in the third quarter of fiscal 1996, reflecting a higher level of
pre-tax income offset by a higher level of tax-exempt income. The effective tax
rates for the three months ended March 31, 1996 and 1995 were 32.6% and 41.9%,
respectively.
Regulatory Matters
Various proposals are currently being considered by committees of the United
States Congress concerning a possible merger of the FDIC's Savings Association
Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF"). One of the
principal issues under discussion is the amount of additional funds needed to
capitalize the SAIF prior to such merger. Substantially all of the proposals
under consideration include a special assessment of 85 to 90 basis points to be
levied on SAIF-insured deposits. As a SAIF-insured institution, Hillsborough
Savings may be subject to a special assessment on its deposits under the
proposals which have been published. Based upon the Bank's deposits as of March
31, 1996, the approximate proposed one-time fee would range from $678,000 to
$718,000.
Financial institutions such as Hillsborough Savings which are members of the
SAIF, are required to pay higher deposit insurance premiums than financial
institutions which are members of the BIF (primarily commercial banks), because
the BIF has higher reserves than the SAIF and has been responsible for fewer
troubled institutions. The FDIC Board of Directors has recently approved a new
risk-based premium schedule that will maintain assessment rates for SAIF-insured
financial institutions such as Hillsborough Savings at current levels, which
will increase the disparity between SAIF and BIF assessments. In announcing
this rule, the FDIC noted that the premium differential
12
<PAGE>
may have adverse consequences for SAIF members, including reduced earnings and
an impaired ability to raise funds in the capital markets. This premium
differential could continue to exist for a long period of time. In addition,
SAIF members, such as Hillsborough Savings, could be placed at a substantial
competitive disadvantage to BIF members, with respect to pricing of loans and
deposits and the ability to achieve lower operating costs. Several alternatives
to mitigate the effect of the BIF/SAIF premium disparity have been suggested by
federal banking regulators, by members of the United States Congress, and by
industry groups.
A significant increase in SAIF insurance premiums or a significant one-time fee
to recapitalize the SAIF would likely have an adverse effect on the operating
expenses and results of operations of Hillsborough Savings. Based upon the
current financial condition and capital level of Hillsborough Savings,
management does not expect the transitional risk-based assessment schedule will
have a material effect on its earnings. However, should a greater disparity
develop between deposit insurance premiums paid by members of the SAIF and
members of the BIF, Hillsborough Savings would be in a competitive disadvantage
due to being required to pay significantly higher premiums as a member of the
SAIF.
Financial Condition
CHANGES IN FINANCIAL CONDITION
- - ------------------------------
On December 7, 1995, Hillsborough Savings completed its conversion from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank. The conversion occurred through the sale of 2,645,000 shares of
common stock (no par value) of Piedmont Bancorp, Inc., a newly formed holding
company. Total proceeds of $26,450,000 were reduced by conversion expenses of
$1,052,395. Piedmont Bancorp retained 50% of the net conversion proceeds after
deducting the proceeds of the loan to the Employee Stock Option Plan ("ESOP")
and paid the balance to Hillsborough Savings in exchange for the common stock of
Hillsborough Savings issued in the conversion.
Total assets increased to $124.8 million at March 31, 1996 from $104.0 million
at June 30, 1995. The $20.8 million increase in assets is directly attributable
to the stock conversion which yielded net proceeds of approximately $25.4
million. Proceeds were invested primarily in investment securities which
increased by $17.5 million since June 30, 1995. Loans increased $3.9 million
from $84.7 at June 30, 1995 to $88.6 at March 31, 1996.
Deposits decreased to $73.3 million at March 31, 1996 from $76.7 million at June
30, 1995 as customers used deposits at the bank to purchase stock in the initial
offering. Advances increased by $0.75 million to $13.75 million for the same
period.
Stockholders' equity increased from $13.6 million at June 30, 1995 to $37.2
million at March 31, 1996, with the increase due to approximately $25.4 million
in net conversion proceeds and $1,214,000 in net income for the nine months
ended March 31, 1996. The increase was partially offset by the purchase of
211,600 shares of common stock for $2.7 million by the ESOP and cash dividends
paid on March 30, 1996 of $244,000.
13
<PAGE>
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 March 31, 1996 and June
30, 1995.
<TABLE>
<CAPTION> March 31, June 30,
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Total nonaccrual loans $ 546 $ 30
Total restructured loans - -
--- ---
Total nonperforming loans 546 30
--- ---
Real estate owned - -
--- ---
Total nonperforming assets $ 546 $ 30
=== ===
Accruing loans, delinquent 90 days or more $ 359 $ 571
=== ===
Nonperforming loans to total loans 0.62% 0.04%
Nonperforming assets to total assets 0.44% 0.03%
Total assets $124,847 $104,013
Total loans, net $ 88,598 $ 84,713
</TABLE>
The increase in nonaccrual loans at March 31, 1996 is primarily attributable to
placing one large credit in nonaccrual status during the quarter ended March 31,
1996 and several small credits in nonaccrual status during previous quarters of
the current fiscal year. Management has reviewed the collateral for nonaccrual
loans and believes that collateral values related to nonperforming loans exceed
the loan balances. Management has included this review among the factors
considered in the evaluation of the allowance for possible loan losses discussed
below.
Provision and Allowance for Loan Losses
- - ---------------------------------------
The following table summarizes the activity in the allowance for loan losses for
the nine months ended March 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Nine months ended
March 31,
---------
1996 1995
---- ----
<S> <C> <C>
Balance at the beginning of period $ 515 $ 404
Provision for loan losses 75 90
Recoveries 1 3
Loans charged off - (4)
----- -----
Balance at the end of period $ 591 $ 493
----- -----
</TABLE>
At March 31, 1996, the allowance for loan losses was 0.67% of total loans,
compared to 0.61% of total loans at June 30, 1995 and 0.59% of total loans at
March 31, 1995.
14
<PAGE>
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
non-performing 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
1996 provision for loan losses was less than the provision made during the
corresponding period of 1995, largely due to slower growth in the loan
portfolio and an improved level of the relationship of the allowance to
outstanding loans.
LIQUIDITY
- - ---------
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of internally generated funds are principal and
interest payments on loans receivable, cash flows generated from operations, and
repayments of mortgage-backed securities. External sources of funds include
increases in deposits, advances from the FHLB of Atlanta, and sales of loans.
As a North Carolina-chartered savings bank, Hillsborough Savings must maintain
liquid assets equal to at least 10% of assets. The computation of liquidity
under North Carolina regulation allows the inclusion of mortgage-backed
securities and investments that are readily marketable, including investments
with maturities in excess of five years. Hillsborough Savings' liquidity ratio
at March 31, 1996, as computed under North Carolina regulations, was
approximately 23%. Management believes that it will have sufficient funds
available to meet its anticipated future loan commitments as well as other
liquidity needs.
CAPITAL RESOURCES
- - -----------------
As a North Carolina-chartered savings bank, Hillsborough Savings is subject to
the capital requirements of the Federal Deposit Insurance Corporation ("FDIC")
and the North Carolina Administrator of Savings Institutions ("NC
Administrator"). The FDIC requires state-chartered savings banks to have a
minimum leverage ratio of Tier I capital (principally consisting of common
shareholders' equity, noncumulative perpetual preferred stock, and a limited
amount of cumulative perpetual preferred stock, less certain intangible assets)
to total assets of at least 3%; provided however, that all institutions, other
than those (i) receiving the highest rating during the examination process and
(ii) not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum. The FDIC also requires
Hillsborough Savings to have a ratio of total capital to risk-weighted assets of
at least 8%, of which at least 4% must be comprised of Tier I capital. The NC
Administrator requires a net worth equal to at least 5% of total assets. At
March 31, 1996, Hillsborough Savings exceeded the capital requirements of both
the FDIC and the NC Administrator.
15
<PAGE>
Current Accounting Issues
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value
of Financial Instruments". SFAS 107 requires disclosure in financial statements
of the fair value of all financial instruments, including assets and liabilities
both on- and off-balance sheet, for which it is practicable to estimate such
fair value. Descriptive information pertinent to estimating the value of
financial instruments for which it is not practicable to estimate fair value
would also be required. Since Hillsborough Savings' total assets were less than
$150 million at June 30, 1993, adoption of SFAS 107 will not be required until
the year ending June 30, 1996.
The FASB has issued SFAS No. 116, "Accounting for Contributions Received and
Contributions Made". Among other requirements, this statement requires that
contributions made, including unconditional promises to give, should be
recognized as expenses in the period made at fair value. As required,
Hillsborough Savings adopted the provisions of this statement in the quarter
ending September 30, 1995, but the impact of such adoption was immaterial.
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. Management does not expect that adoption of SFAS 121 will have a material
impact on its consolidated financial statements.
The FASB has also issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65", which provides guidance for
recognition of mortgage servicing rights. The statement amends FASB Statement
No. 65 to require that the rights to service mortgage loans for others, however
those servicing rights are acquired, be recognized as separate assets,
eliminating the previously existing accounting distinction between servicing
rights acquired through purchase transactions and those acquired through loan
originations. SFAS No. 122 also requires entities to measure the impairment of
servicing rights based on the difference between the carrying amount of the
servicing rights and their current fair value. SFAS No. 122 is required to be
adopted and applied prospectively for fiscal years beginning after December 15,
1995, to transactions involving the sale or securitization of mortgage loans
with servicing rights retained. In addition, the provisions of the statement
should be applied to the measurement of impairment for all capitalized servicing
rights, including servicing rights capitalized prior to the initial adoption of
the statement. Based on recent and anticipated levels of loan sales, management
does not expect that the adoption of this statement will have a material impact
on its consolidated financial statements.
16
<PAGE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 defines a fair value based method of accounting for
an employee stock option or similar equity instrument. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees".
Entities electing to remain with the accounting in APB Opinion 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 accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995,
though they may be adopted on issuance.
The disclosure requirements of SFAS No. 123 are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an earlier
fiscal year for which SFAS No. 123 is initially adopted for recognizing
compensation cost. Pro forma disclosures required for entities that elect to
continue to measure compensation cost using APB Opinion No. 25 must include the
effects of all awards granted in fiscal years that begin after December 15,
1994. Pro forma disclosures for awards granted in the first fiscal year
beginning after December 15, 1994 need not be included in financial statements
for that fiscal year but should be presented subsequently whenever financial
statements for that fiscal year are presented for comparative purposes with
financial statements for a later fiscal year. Management anticipates that the
adoption of the statement should have no material impact on its consolidated
financial statements.
17
<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
18
<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: May 6, 1996 By: /s/ D. Tyson Clayton
-----------------
President
Date: May 6, 1996 By: /s/ Gina B. Riggins
---------------
Vice President and principal
financial officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 804
<INT-BEARING-DEPOSITS> 1,232
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,990
<INVESTMENTS-CARRYING> 3,206
<INVESTMENTS-MARKET> 3,194
<LOANS> 88,598
<ALLOWANCE> 591
<TOTAL-ASSETS> 124,847
<DEPOSITS> 73,292
<SHORT-TERM> 11,750
<LIABILITIES-OTHER> 641
<LONG-TERM> 2,000
0
0
<COMMON> 22,772
<OTHER-SE> 14,392
<TOTAL-LIABILITIES-AND-EQUITY> 124,847
<INTEREST-LOAN> 5,708
<INTEREST-INVEST> 961
<INTEREST-OTHER> 209
<INTEREST-TOTAL> 6,878
<INTEREST-DEPOSIT> 2,771
<INTEREST-EXPENSE> 3,348
<INTEREST-INCOME-NET> 3,530
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,837
<INCOME-PRETAX> 1,863
<INCOME-PRE-EXTRAORDINARY> 1,214
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,214
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.15
<LOANS-NON> 546
<LOANS-PAST> 359
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,471
<ALLOWANCE-OPEN> 515
<CHARGE-OFFS> 0
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 591
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
