<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K/A
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
-------------
Commission file number 1-14070
-------
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 Identification No.)
incorporation or organization)
260 South Churton Street, P.O. Box 1000
Hillsborough, North Carolina 27278
---------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (919) 732-2143
--------------
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
(Title of class)
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. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$ 41,605,850 common stock, no par value, based on the closing price of such
- ---------------------------------------------------------------------------
common stock on August 30, 1996.
- --------------------------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
2,750,800 shares of common stock, no par value, outstanding at August 30, 1996.
- -------------------------------------------------------------------------------
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PIEDMONT BANCORP, INC.
Date: November 12, 1996 By: /s/ D. Tyson Clayton
----------------------------------
D. Tyson Clayton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ D. Tyson Clayton President, Chief November 12, 1996
- --------------------------- Executive
D. Tyson Clayton Officer and Director
/s/ Peggy S. Walker Executive Vice November 12, 1996
- --------------------------- President, Secretary,
Peggy S. Walker and Director
/s/ Gina B. Riggins Vice President, November 12, 1996
- --------------------------- Treasurer, Principal
Gina B. Riggins Financial Officer
/s/ M. Marion Clark Director November 12, 1996
- ---------------------------
M. Marion Clark
/s/ Robert B. Nichols, Jr. Director November 12, 1996
- ---------------------------
Robert B. Nichols, Jr.
/s/ Alfred L. Carr Director November 12, 1996
- ---------------------------
Alfred L. Carr
/s/ Everett H. Kennedy Director November 12, 1996
- ---------------------------
Everett H. Kennedy
/s/ Donald W. Pope Director November 12, 1996
- ---------------------------
Donald W. Pope
/s/ James P. Ray Director November 12, 1996
- ---------------------------
James P. Ray
/s/ William Larry Rogers Director November 12, 1996
- ---------------------------
William Larry Rogers
<PAGE>
INDEX TO EXHIBITS
Sequential
Exhibit No. Description Page No.
(10)(ii)(a) Piedmont Bancorp, Inc. Stock Option Plan*
(10)(ii)(b) Hillsborough Savings Bank, Inc., SSB Management
Recognition Plan*
(11) Statement Regarding Computation of Per Share Earnings*
(12) Statement Regarding Computation of Ratios*
(13) 1996 Annual Report to Security Holders
(27) Financial Data Schedule*
* Previously filed.
<PAGE>
Exhibit 13
1996 ANNUAL REPORT TO SECURITY HOLDERS
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Interest income $ 9,248 $ 7,811 $ 6,864 $ 6,728 $ 7,397
Interest expense 4,414 3,682 3,262 3,506 4,425
-------- -------- ------- ------- -------
Net interest income 4,834 4,129 3,602 3,222 2,972
Provision for loan losses 96 120 87 60 48
-------- -------- ------- ------- -------
Net interest income after provision for loan losses 4,738 4,009 3,515 3,162 2,924
Other income 255 336 255 683 297
Other expenses 2,449 2,265 2,027 1,832 1,702
-------- -------- ------- ------- -------
Income before income tax expense 2,544 2,080 1,743 2,013 1,519
Income tax expense 849 837 710 803 538
-------- -------- ------- ------- -------
Net income $ 1,695 $ 1,243 $ 1,033 $ 1,210 $ 981
======== ======== ======= ======= =======
Selected Year-end Balances:
Total assets $128,711 $104,013 $97,368 $95,094 $89,232
Loans receivable, net 91,187 84,713 81,733 80,937 75,892
Investments(1) 32,564 15,043 11,338 9,910 9,569
Deposits 73,361 76,745 74,287 72,262 69,511
FHLB Advances 17,250 13,000 10,500 11,000 9,000
Stockholders' equity 37,050 13,646 12,195 11,347 10,138
Average Balance Sheet Data:
Total assets $119,252 $100,359 $97,827 $90,876 $83,263
Total earning assets 116,010 96,745 95,046 87,265 80,875
Loans receivable, net 87,917 83,326 83,534 76,642 72,328
Investments(1) 27,297 12,633 10,733 9,976 7,978
Deposits 77,221 75,110 73,137 71,505 68,032
FHLB Advances 13,248 10,628 11,603 7,074 4,421
Stockholders' equity 27,557 12,810 11,959 10,971 9,754
Selected Financial Ratios:
Return on average assets 1.42% 1.24% 1.06% 1.33% 1.18%
Return on average equity 6.15 9.70 8.64 11.03 10.20
Average equity to average assets 23.11 12.76 12.22 12.07 11.55
Interest rate spread (tax equivalent basis) 3.16 3.72 3.32 3.25 3.11
Net interest margin (tax equivalent basis) 4.33 4.29 3.80 3.69 3.70
Dividend payout ratio 48.89 n/a n/a n/a n/a
Cash dividends declared per common share $ 0.22 n/a n/a n/a n/a
</TABLE>
(1) Includes investment securities, mortgage backed-securities, and interest-
bearing deposits.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of the Company. It should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in this report
and the supplemental financial data appearing throughout this discussion and
analysis.
ANALYSIS OF RESULTS OF OPERATIONS
The Company's results of operations depend primarily on net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. Operations are
also affected by non-interest income, such as income from customer service
charges, loan servicing fee income, gains and losses on the sale of loans and
investments, and other sources of income. The Company's principal operating
expenses, aside from interest expense, consist of compensation and employee
benefits, federal deposit insurance premiums, data processing expenses, office
occupancy costs, and income taxes.
The Company completed its first year as a public company with record
earnings. Net income increased to $1.7 million for the year ended June 30, 1996
compared to $1.2 million in 1995 and $1.0 million in 1994. Growth in net
interest income outpaced a decline in other income and an increase in other
expense to make 1996 the most profitable year in the Company's eighty-three year
history.
Net Interest Income. Net interest income, the Company's primary source
of earnings, continued its trend of growth. Table 1 shows that tax-equivalent
net interest income increased by $902,000 or 21.6% in 1996 to $5.1 million from
$4.2 million in 1995. 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.
The increase in tax-equivalent interest income in 1996 as compared to
1995 was primarily the result of a $19.3 million or 19.9% increase in earning
assets. Average loans increased by $4.6 million or 5.5% to $87.9 million.
Average investments increased by $11.8 million or 107% as stock Conversion
proceeds were invested primarily in both taxable and tax-exempt investment
securities. The weighted average yield on interest-earning assets increased by
five basis points in 1996, largely due to the upward adjustment of the
Company's portfolio of adjustable rate loans in the rising rate environment. In
1995, tax-equivalent interest income rose 14.0% primarily due to increases in
the average yield which increased by 86 basis points.
Interest expense rose by $732,000 or 19.9% during 1996. Average
interest-bearing liabilities increased by $4.4 million or 5.2% in 1996 while the
average rate paid on those liabilities increased by 61 basis points. The
increase in interest expense in 1996 was due primarily to increases in deposit
rates. In 1995, interest expense rose 12.9% due to increases in deposit rates.
Interest rate spread (on a tax equivalent basis) declined to 3.16% in
1996 from 3.72% in 1995 and 3.32% in 1994 as the increase in the cost of
interest-bearing liabilities outpaced the increase in the yield on interest-
earning assets. Despite the decline in interest rate spread, net interest
margin (on a tax equivalent basis) increased to 4.33% in 1996 from 4.29% in
1995, and 3.80% in 1994. 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.
While primary reasons for increases have been discussed above, the total
increase in net interest income is attributable to both an increase in net
interest-earning assets and interest rate spread over the three-year period.
Table 2 shows the effect of variances in volume and rate on taxable-equivalent
interest income, interest expense, and net interest income. The table shows
that increases in net interest income were primarily due to volume in 1996 while
such increases were primarily due to rate in 1995.
<PAGE>
Table 1: NET INTEREST INCOME ANALYSIS - TAX EQUIVALENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable $ 87,917 $ 7,591 8.63% $ 83,326 $6,969 8.36% $83,534 $6,186 7.41%
Taxable investment securities 14,993 1,020 6.80 10,160 688 6.77 9,154 585 6.39
Tax-exempt investment securities(1) 7,754 546 7.04 821 54 6.58 290 15 5.30
Interest-bearing deposits 4,550 226 4.97 1,652 64 3.87 1,289 43 3.34
FHLB common stock 796 58 7.29 786 55 7.00 779 41 5.26
------- ----- ------- ----- ------ -----
Total interest-earning assets 116,010 9,441 8.14 96,745 7,830 8.09 95,046 6,870 7.23
Non-interest-earning assets 3,242 3,614 2,781
------- ------- ------
TOTAL $119,252 $100,359 $97,827
======= ======= ======
Liabilities and retained earnings:
Interest-bearing liabilities:
Deposit accounts $ 75,365 $ 3,614 4.80% $ 73,569 $3,101 4.21% $71,755 2,761 3.85
FHLB advances 13,248 800 6.04 10,628 581 5.47 11,603 501 4.31
------ ----- ------ ----- ------ -----
Total interest-bearing liabilities 88,613 4,414 4.98 84,197 3,682 4.37 83,358 3,262 3.91
Non-interest-bearing liabilities 3,082 3,352 2,510
Stockholder's equity 27,557 12,810 11,959
------- ------ ------
TOTAL $119,252 $100,359 $97,827
======= ======= ======
Net interest income and interest rate
spread $ 5,027 3.16% $4,148 3.72% $3,608 3.32%
===== ===== =====
Net interest-earning assets
and net interest margin $ 27,397 4.33% $ 12,548 4.29% $11,688 3.80%
====== ====== =====
Ratio of interest-earning assets
to interest bearing liabilities 130.92% 114.90% 114.02%
</TABLE>
(1) Interest earned on tax-exempt investment securities has been adjusted to a
tax-equivalent basis using the applicable combined federal and state rates of
34% and 7.75%, respectively, and reduced by the nondeductible portion of
interest expense.
Table 2: RATE/VOLUME ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income (tax-equivalent) on:
Loans $ 384 $ 225 $13 $ 622 $(15) $794 $ 4 $783
Taxable investment securities 327 3 2 332 64 35 4 103
Tax-exempt investment securities 455 4 33 492 28 4 7 39
Interest-bearing deposits 112 18 32 162 12 7 2 21
FHLB common stock 1 2 -- 3 -- 14 -- 14
----- ---- --- ----- --- ---- ---- ---
Total interest income 1,279 252 80 1,611 89 854 17 960
----- ---- --- ----- --- ---- ---- ---
Deposit accounts 76 434 3 513 16 314 10 340
FHLB advances 143 61 15 219 (42) 135 (13) 80
----- ---- --- ----- --- ---- ---- ---
Total interest expense 219 495 18 732 (26) 449 (3) 420
----- ---- --- ----- --- ---- ---- ---
Increase (decrease) in net interest income $1,060 $(243) $62 $ 879 $115 $405 $ 20 $540
===== ==== === ===== === ==== ==== ===
</TABLE>
2
<PAGE>
Provisions for Loan Losses. The provision for loan losses is charged
to earnings to maintain the total allowance for loan losses at a level
considered adequate to cover loan losses based on existing loan levels and types
of loans outstanding, nonperforming loans, prior loan loss experience, industry
standards and general economic conditions. Provisions for loan losses were
$96,000 in 1996 compared to $120,000 in 1995, and $87,000 in 1994. During 1994
and 1995, the provision and resulting allowance for loan losses were increased
based on management's efforts to reflect industry practices regarding the
allowance for loan losses. During 1996, the provision was lowered, largely as a
result of an improved level of the relationship of the allowance to outstanding
loans.
Other Income. Other income decreased from $337,000 in 1995 to
$255,000 in 1996, the same level as 1994. Other income included losses
realized on the sale of investments and mortgage-backed securities of $47,000,
$100,000, and $81,000 in 1996, 1995, and 1994, respectively. These net losses
were incurred as management, in response to higher prevailing market interest
rates, restructured the Company's investment portfolio to achieve higher yields
in future periods. "Other" income includes lower-of-cost- or-market writedowns
on loans held-for-sale of $40,000 for 1996 resulting from the rising interest
rate environment while lower-of-cost-or-market recoveries of $19,000 were
recorded during 1995.
In 1994, gains of $96,000 were recorded on mortgage loans sold as part
of management's efforts to improve its interest sensitivity and liquidity
positions. Also in 1994, management wrote down excess servicing assets by
$111,000 as a result of a change in estimated prepayment speeds used in valuing
excess servicing which had risen to historical highs in response to mortgage
interest rates reaching historical lows.
Other Expenses. Other expenses increased by 8.1% in 1996 compared to
an increase of 11.7% in 1995. As a percent of average assets, other expense for
1996 was at its lowest level of the last three years: 2.05% as compared to
2.26% in 1995 and 2.07% in 1994.
Compensation and fringe benefits, consistently representing over 50%
of total other expenses, increased by $55,000 or 4.2% in 1996 compared to
$210,000 or 19.3% in 1995. Salaries increased by $57,000 and $72,000 in 1996 and
1995, respectively, while retirement expense increased by $120,000 and $6,000
for the same periods. 1996 retirement expense reflects the implementation of
the Bank's Employee Stock Ownership Plan ("ESOP") which provides a higher level
of retirement benefits to employees than the retirement plan which was in place
in previous years. Directors' compensation declined by $113,000 to a more
normal level from 1995 when extra meetings associated with the Conversion were
held.
On August 29, 1996, 105,800 shares of Parent stock were awarded under
the Bank's Management Recognition Plan ("MRP") which has been approved by
stockholders and the board of directors. Management estimates that pre-tax
expenses associated with the MRP will total approximately $315,000 per year for
a period of five years.
Data and items processing expense increased by $31,000 and $16,000 in
1996 and 1995, respectively. Reasons for the increase include increased
transaction volume and investments in technology. Professional fees increased
by $30,000 and $24,000 for the same periods as the Company obtained assistance
in making the transition from mutual to stock ownership.
Management continues to look for ways to improve cost efficiency.
During the late fall of the coming year, the Company will be closing its branch,
which is located one mile from the home office, as part of the effort to operate
in the most cost efficient manner. No losses will be incurred.
Income Tax Expense. Income tax expense increased 1.4% to $849,000 in
1996 from $837,000 in 1995. The effective tax rate declined from 40.2% in 1995
to 33.4% in 1996, reflecting a higher level of tax-exempt income in 1996.
Income tax expense totaled $710,000 in 1994, and the effective tax rate was
40.7%.
3
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
On December 7, 1995, the Bank completed its conversion from a mutual
to a stock savings bank through the sale of 2,645,000 shares of no par common
stock of the Parent. Total proceeds of $26,450,000 were reduced by Conversion
expenses of $1,052,395. The Parent retained 50% of the net conversion proceeds
after deducting the proceeds of a loan to the Bank's Employee Stock Ownership
Plan ("ESOP") and paid the balance to the Bank in exchange for the common stock
of the Bank issued in the Conversion. The increase in assets from $104.0
million at June 30, 1995 to $128.7 million at June 30, 1996 is directly
attributable to proceeds of the Conversion which were invested in loans and
investment securities.
Loans
The Company's primary source of revenue is interest and fee income
from lending activities, consisting primarily of one-to-four family residential
mortgage loans located in its primary market area. The Company also makes loans
secured by improved nonresidential real estate, construction loans, loans
secured by undeveloped real estate, home equity loans, and consumer loans, both
secured and unsecured.
At June 30, 1996, the loan portfolio totaled $91.2 million and
represented 70.8% of total assets. During 1996, loans increased by $6.5 million
or 7.6%. Loan originations increased from $9.8 million in 1995 to $21.2
million in 1996, largely in response to the Company's efforts to expand its loan
programs into adjacent counties. The relative composition of the Company's loan
portfolio has remained consistent during recent years, with residential one-to-
four family loans comprising approximately 73% of the portfolio. Table 3 sets
forth the composition of the loan portfolio at the dates indicated.
Table 3: TYPES OF LOANS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
June 30,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Real estate loans: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 1-4 family $67,095 73.58% $62,379 73.63% $59,842 73.22% $58,500 72.28% $55,036 72.52%
Nonresidential real estate 8,818 9.67 8,623 10.18 7,574 9.27 7,242 8.95 8,677 11.43
Home equity and other
second mortgage 11,616 12.74 11,916 14.07 12,027 14.71 11,244 13.89 9,915 13.07
Construction 5,026 5.51 1,805 2.13 2,769 3.39 5,762 7.12 3,896 5.13
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans 92,555 101.50 84,723 100.01 82,212 100.59 82,748 102.24 77,524 102.15
Other installment loans 1,719 1.89 1,635 1.93 1,635 2.00 1,460 1.80 1,498 1.97
Less:
Unearned fees and
discounts 281 0.31 185 0.22 268 0.33 305 0.38 279 0.37
Loans in process 2,198 2.41 945 1.11 1,442 1.76 2,649 3.27 2,574 3.39
Allowance for loan losses 608 0.67 515 0.61 404 0.50 317 0.39 277 0.36
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total reductions 3,087 3.39 1,645 1.94 2,114 2.59 3,271 4.04 3,130 4.12
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans, net $91,187 100.00 $84,713 100.00 $81,733 100.00 $80,937 100.00 $75,892 100.00
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
In order to protect the Company's net interest margin, management has,
as part of its interest rate risk management program, placed an emphasis on
maintaining adjustable rate mortgage loans and home equity lines of credit in
its portfolio. This strategy has resulted in more consistent net interest
income and lower interest sensitivity than experienced by most traditional
fixed-rate residential mortgage lenders.
The following table sets forth the time to contractual maturity of the
Company's loan portfolio at June 30, 1996. Loans which have adjustable rates
are shown as being due in the period during which rates are next subject to
change while fixed rate and other loans are shown as due in the period of
contractual maturity. Demand loans, loans having no stated maturity and
overdrafts are reported as due in one year or less. The table does not include
prepayments or scheduled principal repayments. Amounts in the table are net of
loans in process and are net of unamortized loan fees.
4
<PAGE>
<TABLE>
<CAPTION>
Table 4: LOAN MATURITIES
- ---------------------------------------------------------------------------------------------
. June 30, 1996
------------------------------------------------------------
Over 1 Over 3 Over 5
One Year Year to Years to Years to Over 10
Or Less 3 Years 5 Years 10 Years Years Total
--------- ------- -------- -------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Fixed rate 1-4 family $ 166 $211 $471 3,200 $28,685 $32,733
Adjustable rate 1-4 family 37,734 103 142 -- -- 37,979
Adjustable home equity 10,816 -- -- -- -- 10,816
Other fixed rate loans 100 167 -- 304 1,112 1,683
Other adjustable rate loans 6,857 -- -- -- -- 6,857
Other loans 960 458 129 80 100 1,727
Less:
Allowance for loan losses (608) -- -- -- -- (608)
------- ---- ---- ------ ------- -------
TOTAL LOANS $56,025 $939 $742 $3,584 $29,897 $91,187
======= ==== ==== ====== ======= =======
</TABLE>
Asset Quality and Allowance for Loan Losses
The following table sets forth information with respect to nonperforming assets
including nonaccrual loans and real estate owned at the dates indicated.
<TABLE>
<CAPTION>
Table 5: SUMMARY OF NONPERFORMING AND PROBLEM ASSETS
- -------------------------------------------------------------------------------------------------------------
June 30,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total nonaccrual loans $ 758 $ 30 $ 139 $ 158 $ 76
Total restructured loans -- -- -- -- --
-------- -------- ------- ------- -------
Total nonperforming loans 758 30 139 158 76
-------- -------- ------- ------- -------
Real estate owned -- -- 161 108 118
In-substance foreclosures -- -- -- -- --
-------- -------- ------- ------- -------
Total foreclosed property -- -- 161 108 118
-------- -------- ------- ------- -------
Total nonperforming assets $ 758 $ 30 $ 300 $ 266 $ 194
Accruing loans, delinquent 90 days or more $ 301 $ 571 41 $ 266 $ 359
Nonperforming loans to total loans 0.83% 0.04% 0.17% 0.20% 0.10%
Nonperforming assets to total assets 0.59% 0.03% 0.31% 0.28% 0.22%
Total assets $128,711 $104,013 $97,368 $95,094 $89,232
Total loans, net $ 91,187 $ 84,713 $81,733 $80,937 $75,892
</TABLE>
Nonperforming assets increased to $758,000 at June 30, 1996 compared to $30,000
and $300,000 at June 30, 1995 and 1994, respectively. The increase in nonaccrual
loans is primarily attributable to one large credit totaling $457,000 secured by
commercial real estate and several smaller credits secured by residential real
estate. 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 as discussed below.
While the level of nonperforming assets is higher than in recent years, the
Company's asset quality remains strong as evidenced by security property,
charge-off activity, and comparison with peer asset quality measures.
5
<PAGE>
Effective July 1, 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan", as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan: Income
Recognition" (collectively referred to hereafter as "SFAS No. 114"). At June
30, 1996, the recorded investment in loans that are considered to be impaired
under SFAS No. 114 was $826,000 and was comprised of two loans. One of the
loans totaling $457,000 was in non-accrual status at June 30, 1996. There was
no related allowance for credit losses associated with these loans as determined
in accordance with SFAS No. 114. The average recorded investment in impaired
loans during 1996 was approximately $864,000. No additions to the allowance
for loan losses were necessary due to the adoption of SFAS No. 114.
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio.
The adequacy of the allowance for loan losses and the related provision are
based upon management's evaluation of the risk characteristics of the loan
portfolio under current economic conditions with consideration to such factors
as financial condition of the borrower, collateral values, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, and delinquency trends. Management believes that
the allowance for loan losses is adequate. While management uses all available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
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 calculated and charged to earnings to
maintain the total allowance for loan losses at a level considered adequate to
cover loan losses based on existing loan levels, types of loans outstanding,
nonperforming loans, prior loan loss experience, industry standards and general
economic conditions. Provisions for loan losses were $96,000 in 1996 compared
to $120,000 in 1995, and $87,000 in 1994. During 1994 and 1995, the provision
and resulting allowance for loan losses were increased based on management's
efforts to reflect industry practices regarding the allowance for loan losses.
During 1996, the provision was lowered, largely as a result of an improved level
of the relationship of the allowance to outstanding loans.
The following tables describe the activity related to the allowance
for loan losses and the allocation of the allowance for loan losses to various
categories of loans for the periods indicated.
Table 6: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 515 $ 404 $ 317 $ 277 $ 250
Provision for loan losses 96 120 87 60 49
Charge-offs 4 14 4 21 22
Recoveries 1 5 4 1 --
---- ---- ---- ---- ----
Balance, end of period $ 608 $ 515 $ 404 $ 317 $ 277
==== ==== ==== ==== ====
Allowance as a percentage of loans 0.66% 0.60% 0.49% 0.39% 0.36%
</TABLE>
6
<PAGE>
Table 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
June 30,
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Residential 1-4 family $ 256 $ 216 $ 170 $ 132 $ 116
Nonresidential real estate 170 155 121 95 84
Home equity and other second mortgage 97 82 65 51 44
Construction 36 16 12 10 8
----- ----- ----- ----- -----
Total real estate loans 559 469 368 288 252
Other loans 49 46 36 29 25
----- ----- ----- ----- -----
Total allowance for loan losses $ 608 $ 515 $ 404 $ 317 $ 277
===== ===== ===== ===== =====
</TABLE>
The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations. Refer to Table 3 for percentages of loans in each category to
total loans.
Investment Securities
Interest and dividend income from investment securities generally provides the
second largest source of income to the Company after interest on loans. The
Company's portfolio of investment securities includes U.S. government and agency
securities, mortgage-backed securities, and obligations of states and local
governments. The mortgage-backed securities consist of mortgage-backed
securities issued by the FNMA and collateralized mortgage obligations issued by
the FNMA and FHLMC which are secured by mortgage-backed securities guaranteed by
the FNMA or FHLMC.
Investment securities totaled $30.6 million at June 30, 1996, an increase of
$17.9 million from $12.7 million at June 30, 1995. This growth is attributable
to management placing Conversion proceeds in investment securities until such
time as those funds are needed for other purposes, primarily to fund loans in
the Company's community. Accordingly, most of the securities purchased were
classified as available-for-sale under Statement of Financial Accounting
Standards No. 115 ("SFAS 115"). At June 30, 1996, net unrealized losses of
$951,000 were included in the carrying value of securities classified available-
for-sale compared to net unrealized gains of $37,000 on such securities at June
30, 1995. Net unrealized losses were caused by fluctuations in market interest
rates rather than by concerns about the issuer's ability to meet their
obligations.
Table 8 shows maturities of investment securities held by the Company at June
30, 1996 and the weighted average tax-equivalent yields for each type of
security and maturity. Further information about the Company's investment
securities as of June 30, 1996 and 1995 is presented in Note 2 of the notes to
the consolidated financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
Table 8: INVESTMENT SECURITIES - MATURITY/YIELD SCHEDULE
- -------------------------------------------------------------------------------------------------
More than More than
One year or Less 1 Year to 5 Years 5 years to 10 years
------------------ --------------------- ----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. government and agency $ - - $ 503 8.37% $ 8,859 6.79%
State and local government(1) - - 857 6.82 2,947 7.38
Mortgage-backed securities(2) - - 2,419 5.73 3,715 6.25
-------- -------- ------ ---- ------- ----
Total available-for-sale $ - - $3,779 6.33 $15,521 6.77
-------- -------- ------ ---- ------- ----
Held-to-maturity:
U.S. government and agency $ - - $ - - $ - -
State and local government(3) 76 4.93 1,215 6.51 1,285 8.20
Mortgage-backed securities - - - - - -
-------- -------- ------ ---- ------- ----
Total held-to-maturity $ 76 4.93 $1,215 6.51 $ 1,285 8.20
-------- -------- ------ ---- ------- ----
Total investments,
at carrying value $ 76 $4,994 $16,806
======== ====== =======
<CAPTION>
Over 10 Years Total
------------- -----
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government and agency $ 947 7.42% $10,309 6.93%
State and local government(1) 6,039 8.28 9,843 7.88
Mortgage-backed securities(2) 812 7.13 6,946 6.17
------ ---- ------- ----
Total available-for-sale $7,798 8.06 $27,098 7.08
------ ---- ------- ----
Held-to-maturity:
U.S. government and agency $ - - $ - -
State and local government(3) 943 8.19 3,519 7.54
Mortgage-backed securities - - - -
------ ---- ------- ----
Total held-to-maturity $ 943 8.19 $ 3,519 7.54
------ ---- ------- ----
Total investments,
at carrying value $8,741 $30,617
====== =======
</TABLE>
(1) Yields are stated on a taxable equivalent basis assuming statutory tax
rates of 34% for federal and 7.75% for state purposes. Book yields
without regard to tax-equivalent adjustments are: one to five years,
4.15%; six to ten years, 4.56%; over ten years, 4.87%; total 4.71%.
(2) Mortgage-backed securities are shown at their weighted average expected
life obtained from an outside evaluation of the average remaining life of
each security based on historic prepayment speeds of the underlying
mortgages at June 30, 1996.
(3) Yields are stated on a taxable equivalent basis assuming statutory tax
rates of 34% for federal and 7.75% for state purposes. Book yields without
regard to tax-equivalent adjustments are: one year or less, 3.30%; one to
five years, 5.03%; six to ten years, 4.68%, over ten years, 5.28%;
total, 5.04%.
In addition to the investment securities discussed above, the Company also earns
interest on its correspondent bank account at the Federal Home Loan Bank
("FHLB") of Atlanta and dividends on its FHLB stock. The Bank is required to
maintain, as a condition of membership, an investment in stock of the FHLB of
Atlanta equal to the greater of 1% of outstanding home loans or 5% of its
outstanding advances. No ready market exists for such stock, which is carried
at cost. As of June 30, 1996, the Company's investment in stock of the FHLB of
Atlanta was $863,000.
Funding Sources
Deposits are the primary source of the Company's funds for lending and
other investment purposes. The Company attracts both short-term and long-term
deposits from the general public by offering a variety of accounts and rates
including savings accounts, NOW accounts, money market accounts, and fixed
interest rate certificates with varying maturities. Deposit inflows and
outflows are significantly influenced by general interest rates and other market
conditions, primarily competition. As competition for deposits has increased
both from larger financial institutions in its local market place and from
mutual funds and other investments, borrowings have provided an additional
source of funding. The use of borrowed funds to provide liquidity assists the
Company in matching the interest rates on its assets and liabilities because the
interest rates on most borrowed funds are fixed and therefore more predictable
than the costs of deposits which are subject to change based upon market
conditions and other factors.
Deposits. Deposits totaled $73.4 million at June 30, 1996 compared
to $76.7 million at June 30, 1995. The decrease reflects approximately $5
million of deposits which customers used to purchase the Parent's stock in the
Conversion. The following table sets forth certain information regarding the
Company's average savings deposits for the last three years.
8
<PAGE>
Table 9: AVERAGE DEPOSITS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing checking accounts $ 6,412 1.84% $ 5,305 2.32% 4,698 2.16%
Savings and money market deposits 18,980 3.22 17,592 2.72 18,537 2.71
Certificates of deposit 49,973 5.78 50,672 4.91 48,520 4.45
------- ---- ------- ---- ------- ----
Total interest-bearing deposits 75,365 4.80 73,569 4.20 71,755 3.85
Non-interest-bearing deposits 1,856 -- 1,541 -- 1,382 --
------- ---- ------- ---- ------- ----
TOTAL DEPOSITS $77,221 4.68 $75,110 4.11 $73,137 3.78
======= ==== ======= ==== ======= ====
</TABLE>
As of June 30, 1996, the Company held $6,072,000 in time certificates
of deposit of $100,000 or more. Maturities of certificates of deposits of
$100,000 or more at June 30, 1996 were as follows: three months or less,
$2,361,000; over three months through six months, $1,488,000; over six months
through twelve months, $719,000; over twelve months through twenty-four months,
$1,249,000; and over twenty-four months, $255,000.
Borrowings. The Company's principal source of long-term borrowings
are advances from the FHLB of Atlanta. As a requirement for membership, the
Bank is required to own capital stock in the FHLB of Atlanta and is authorized
to apply for advances on the security of that stock and a floating lien on its
1-4 family residential mortgage loans. Each credit program has its own interest
rate and range of maturities. At June 30, 1996, FHLB advances totaled $17.25
million compared to $13 million at June 30, 1995. Additional information on
borrowings is provided in Note 6 of the notes to the consolidated financial
statements.
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 June 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. Table 10 shows the amount of
interest-earning assets and interest-bearing liabilities outstanding at June 30,
1996 which are projected to reprice or mature in each of the future time periods
shown. At June 30, 1996, the Company had a cumulative one year asset-sensitive
gap position of $3.7 million or 2.95% of interest-earning assets. 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 this table reflects the interest-sensitivity
of the balance sheet as of a specific date and is 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
June 30, 1996, management believes that its interest rate risk is at an
acceptable level.
9
<PAGE>
<TABLE>
<CAPTION>
Table 10: INTEREST SENSITIVITY
- --------------------------------------------------------------------------------------------------------------
June 30, 1996
--------------------------------------------------------------------
More than More than
3 Months 4 to 12 1 Year to 3 Years to Over
Or Less Months 3 Years 5 Years 5 Years Total
-------- -------- ---------- ---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Mortgage loans:
Fixed rate residential 1-4 family $ 1,405 $ 3,458 $ 7,277 $ 4,069 $16,524 $ 32,733
Adjustable rate residential 1-4 family 10,137 27,635 117 90 -- 37,979
Adjustable home equity 10,816 -- -- -- -- 10,816
Other fixed rate loans 15 49 145 172 1,302 1,683
Other adjustable rate loans 1,028 5,829 -- -- -- 6,857
------- ------- ------- ------- ------- --------
Total mortgage loans 23,401 36,971 7,539 4,331 17,826 90,068
Other loans 818 444 465 -- -- 1,727
------- ------- ------- ------- ------- --------
Total loans 24,219 37,415 8,004 4,331 17,826 91,795
Interest-bearing deposits 1,947 -- -- -- -- 1,947
Investment securities(1) -- 76 2,236 2,758 25,547 30,617
FHLB common stock -- -- -- -- 863 863
------- ------- ------- ------- ------- --------
Total interest-earning assets $26,166 $37,491 $10,240 $ 7,089 $44,236 $125,222
======= ======= ======= ======= ======= ========
Interest-bearing liabilities
Deposits:
Fixed maturity deposits $18,195 $16,935 $11,556 $ 1,730 -- $ 48,416
NOW accounts 594 1,420 1,899 493 1,092 5,498
Savings and money market accounts 1,947 3,618 3,990 2,522 5,727 17,804
------- ------- ------- ------- ------- --------
Total deposits 20,736 21,973 17,445 4,745 6,819 71,718
FHLB advances 8,250 9,000 -- -- -- 17,250
------- ------- ------- ------- ------- --------
Total interest-bearing liabilities $28,986 $30,973 $17,445 $ 4,745 $ 6,819 $ 88,968
======= ======= ======= ======= ======= ========
Interest sensitivity gap per period $(2,820) $ 6,518 $(7,205) $ 2,344 $37,417 $ 36,254
Cumulative interest sensitivity gap (2,820) 3,698 (3,507) (1,163) 36,254 36,254
Cumulative gap as a percentage of
total interest-earning assets (2.25)% 2.95% (2.80)% (0.93)% 28.95% 28.95%
Cumulative interest-earning assets as a
percentage of interest-bearing 90.27% 106.17% 95.47% 98.58% 140.75% 140.75%
liabilities
</TABLE>
(1) Includes investment and mortgage-backed securities
This table was prepared using the assumptions regarding loan prepayment rates,
loan repricing and deposit decay rates which are used by the FHLB of Atlanta in
making its gap computations. These assumptions should not be regarded as
indicative of the actual prepayments and withdrawals that may be experienced by
the Company. However, management believes that these assumptions approximate
actual experience and considers them appropriate and reasonable.
Capital Resources
Stockholders' equity increased from $13,646,000 at June 30, 1995 to
$37,050,000 at June 30, 1996, largely as a result of the Conversion.
As a state savings bank holding company, the Parent is regulated by the
Board of Governors of the Federal Reserve Board ("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 Savings Institutions Division, North Carolina
Department of Commerce ("the Administrator").
10
<PAGE>
The Bank must comply with the capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier I
capital to total risk-weighted assets and total capital to risk-weighted assets
of 4% and 8%, respectively. Tier I capital consists of total stockholders'
equity calculated in accordance with generally accepted accounting principles
less intangible assets, and total capital is comprised of Tier I capital plus
certain adjustments, the only one of which applicable to the Bank is the
allowance for loan losses. Risk-weighted assets reflect the Bank's on- and off-
balance sheet exposures after such exposures have been adjusted for their
relative risk levels using formulas set forth in FDIC regulations. The Bank is
also subject to a leverage capital requirement, which calls for a minimum ratio
of Tier I 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
assets.
At June 30, 1996 and 1995, the Bank was in compliance with all of the
aforementioned capital requirements as summarized in Table 11. Refer to
"Supervision and Regulation" under "Business" and note 7 to the consolidated
financial statements for a discussion of other matters that may affect the
Company's capital resources.
Table 11: REGULATORY CAPITAL
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
At June 30,
-----------
1996 1995
---- ----
Risk-Based and Leverage Capital (dollars in thousands)
<S> <C> <C>
Tier I Capital:
Common stockholders' equity $ 23,429 $ 13,646
Unrealized holding loss (gain) on securities available-for-sale 441 (22)
------------ ------------
Total Tier I leverage capital 23,870 13,624
Tier II Capital:
Qualifying allowance for loan losses 608 515
Tier II capital additions 608 515
------------ ------------
Total risk-based capital $ 24,478 $ 14,139
Risk-weighted assets 66,500 58,972
Fourth quarter average assets 122,491 102,858
Risk-based capital ratios:
Tier I capital as a percent of risk-weighted assets 35.89% 23.10%
Minimum Required Tier I capital 4.00% 4.00%
Total risk-based capital as a percent of risk-weighed assets 36.81% 23.98%
Minimum required total risk-based capital 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital as a percent of fourth quarter average assets 19.49% 13.25%
Minimum required Tier I leverage capital 3.00 - 5.00% 3.00 - 5.00%
North Carolina regulatory capital:
Total risk-based capital as a percent of fourth quarter average assets 19.98% 13.75%
Minimum required North Carolina capital 5.00% 5.00%
</TABLE>
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of the
Company are primarily monetary in nature, and changes in interest rates have a
greater impact on the Company's performance than do the effects of inflation.
11
<PAGE>
Regulatory Issues
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 basis points to be levied
on SAIF-insured deposits. As a SAIF-insured institution, the Bank 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 June 30, 1996, the
approximate proposed one-time fee would be $671,000.
Financial institutions such as the Bank 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 approved a risk-based premium
schedule that will maintain assessment rates for SAIF-insured financial
institutions at current levels which will increase the disparity between SAIF
and BIF assessments. In announcing this rule, the FDIC noted that the premium
differential 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 the Bank, 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.
The Bank incurred deposit insurance premium expense of $176,000, $172,000 and
$166,000 in fiscal 1996, 1995 and 1994, respectively. 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 the Bank.
Accounting Issues
The Company prepares its consolidated financial statements and related
disclosures in conformity with standards established by, among others, the
Financial Accounting Standards Board (the "FASB"). Because the information
needed by users of financial reports is dynamic, the FASB frequently has new
rules and proposed new rules for companies to apply in reporting their
activities. The following discussion addresses such changes as of June 30, 1996
that will affect the Company's future reporting.
The FASB has issued Statement of Financial Accounting Standards ("SFAS") No.
121 , "Accounting for the Impairment of Long-Lived Assets and for 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 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 the Company's
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 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
12
<PAGE>
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.
Management does not expect that adoption of SFAS 122 will have a material impact
on the Company's consolidated financial statements.
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.
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 transfer 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.
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Piedmont Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Piedmont Bancorp
Inc. and subsidiary as of June 30, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended June 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Piedmont Bancorp,
Inc. and subsidiary as of June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in notes 2 and 8, respectively, to the consolidated financial
statements, on July 1, 1993, the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina
July 19, 1996
-1-
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
ASSETS
<S> <C> <C>
Cash $ 723 $ 778
Interest-bearing deposits in other financial institutions 1,947 2,358
Investment securities (note 2):
Available-for-sale (cost: $28,049 in 1996 and
$10,850 in 1995) 27,098 10,887
Held-to-maturity (market value: $3,477 in 1996
and $1,813 in 1995) 3,519 1,798
Loans receivable (net of allowance for loan losses of
$608 in 1996 and $515 in 1995) (note 3) 91,187 84,713
Federal Home Loan Bank stock, at cost 863 786
Premises and equipment (note 4) 1,324 1,339
Prepaid expenses and other assets (note 8) 2,050 1,354
--------- --------
Total assets $ 128,711 $104,013
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 5):
Demand, non-interest bearing 1,643 1,672
Savings, NOW and MMDA 23,302 21,954
Certificates of deposit 48,416 53,119
--------- --------
73,361 76,745
Advances from the Federal Home Loan Bank (note 6) 17,250 13,000
Accrued expenses and other liabilities 1,050 622
--------- --------
Total liabilities 91,661 90,367
--------- --------
Stockholders' Equity:
Common stock, no par value, 20,000,000 shares authorized;
2,654,000 shares issued and outstanding (note 1) 25,398 --
Unearned ESOP shares (2,552) --
Retained earnings, substantially restricted (notes 7 and 8) 14,783 13,624
Unrealized holding gains (losses) on available-for-sale securities, net (579) 22
--------- --------
Total stockholders' equity 37,050 13,646
--------- --------
Commitments and contingencies (notes 3 and 9)
Total liabilities and stockholders' equity
$ 128,711 $104,013
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C>
Interest income:
Interest on loans $ 7,591 $ 6,969 $ 6,186
Interest on deposits in other financial
institutions 226 64 42
Interest and dividends on investment securities:
Taxable 1,078 743 626
Non-taxable 353 35 10
------ ------ ------
Total interest income 9,248 7,811 6,864
------ ------ ------
Interest expense:
Interest on deposits (note 5) 3,614 3,101 2,761
Interest on borrowings 800 581 501
------ ------ ------
Total interest expense 4,414 3,682 3,262
------ ------ ------
Net interest income 4,834 4,129 3,602
Provision for loan losses (note 3) 96 120 87
------ ------ ------
Net interest income after provision for
loan losses 4,738 4,009 3,515
------ ------ ------
Other income:
Customer service and other fees 175 178 196
Mortgage loan servicing fees 96 115 91
Loss on sale of investment and mortgage-
backed securities (47) (100) (81)
Gain on sale of loans - - 96
Excess servicing writedown - - (111)
Other 31 144 64
------ ------ ------
Total other income 255 337 255
------ ------ ------
Other expenses:
Compensation and fringe benefits 1,353 1,298 1,088
Data and items processing 239 208 192
Deposit insurance premiums 176 172 166
Occupancy expense 123 113 111
Furniture and equipment expense 100 108 90
Professional fees 120 90 66
Other 338 276 314
------ ------ ------
Total other expenses 2,449 2,265 2,027
------ ------ ------
Income before income tax expense 2,544 2,081 1,743
Income tax expense (note 8) 849 837 710
------ ------ ------
Net income $1,695 $1,244 $1,033
====== ====== ======
Net income per share (note 1) $ 0.45 N/A N/A
======
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unearned Unrealized Total
Shares Common ESOP Retained holding Stockholders'
Outstanding Stock Shares Earnings Gains/(Losses) Equity
----------- ----- ------ -------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except shares outstanding)
Balance at June 30, 1993 - $ - $ - $ 11,347 $ - $ 11,347
Net income - - - 1,033 - 1,033
Adjustment to beginning balance for change in
accounting method, net of income taxes of $128 - - - - 184 184
Change in unrealized holding gains (losses),
net of income taxes of $256 - - - - (369) (369)
----------- ------- ------- -------- ----- --------
Balance at June 30, 1994 - - - 12,380 (185) 12,195
Net income - - - 1,244 - 1,244
Change in unrealized holding gains (losses),
net of income taxes of $144 - - - - 207 207
----------- ------- ------- -------- ----- --------
Balance at June 30, 1995 - - - 13,624 22 13,646
Net income - - - 1,695 - 1,695
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 - - 179 - - 179
Cash dividends declared ($0.22 per share) - - - (536) - (536)
Change in unrealized holding gains (losses),
net of income taxes of $387 - - - - (601) (601)
----------- ------- ------- -------- ----- --------
Balance at June 30, 1996 2,645,000 $25,398 $(2,552) $ 14,783 $(579) $ 37,050
=========== ======= ======= ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended June 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
Operating activities: (in thousands)
<S> <C> <C> <C>
Net income $ 1,695 $ 1,244 $ 1,033
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 90 88 78
Net amortization (accretion) 154 (48) 161
Provision for loan losses 96 120 87
Deferred income taxes (56) (60) (45)
Gain on sale of loans -- -- (96)
Net loss on sale of investment and mortgage-backed securities 47 100 80
Release of ESOP shares 179 -- --
Net decrease (increase) in morgage loans held for sale (1,667) (232) 249
Federal Home Loan Bank stock dividends -- -- (31)
Increase in other assets (291) (109) (83)
Increase (decrease) in other liabilities 136 236 (36)
-------- -------- -------
Net cash provided by operating activities 383 1,339 1,397
-------- -------- -------
Investing activities:
Net increase in loans held for investment (4,995) (2,776) (1,095)
Principal collected on mortgage-backed securities 753 149 754
Purchases of investment securities classified as available-for-sale (23,968) (485) (9,529)
Purchases of investment securities classified as held-to-maturity (1,815) (1,416) (465)
Purchases of mortgage-backed securities classified as available-for-sale (1,482) (1,990) --
Proceeds of sales of investment securities classified as available-for-sale 2,946 466 7,965
Proceeds from maturities of investment securities 75 75 --
Proceeds from investment securities called by issuer 4,500 -- --
Proceeds of sales of mortgage-backed securities classified as available-for-sale -- 942 --
Purchases of FHLB Stock (77) -- --
Purchases of premises and equipment (75) (70) (50)
-------- -------- -------
Net cash used by investing activities (24,138) (5,105) (2,420)
-------- -------- -------
Financing activities:
Net increase (decrease) in time deposits (4,703) 3,971 1,054
Net increase (decrease) in other deposits 1,319 (1,513) 971
Proceeds from borrowings 12,750 13,000 6,000
Repayments of borrowings (8,500) (10,500) (6,500)
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 23,289 4,958 1,525
-------- -------- -------
Increase (decrease) in cash and cash equivalents (466) 1,192 502
Cash and cash equivalents at beginning of period 3,136 1,944 1,442
-------- -------- -------
Cash and cash equivalents at end of period $ 2,670 $ 3,136 $ 1,944
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,448 $ 3,615 $ 3,271
======== ======== =======
Income taxes $ 828 $ 775 $ 817
======== ======== =======
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on available-for-sale securities, net of deferred
taxes (benefit) of $387 for 1996, $144 for 1995 and $(128) for 1994 $ (601) $ 207 $ (185)
======== ======== =======
Dividends declared but unpaid $ (292) $ -- $ --
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the years ended June 30, 1996, 1995 and 1994
(1) Significant Accounting Policies
-------------------------------
(a) 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.
(b) Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the 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 periods presented.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes in the
near-term relate to the determination of the allowance for loan losses.
(c) Investment and Mortgage-Backed Securities
-----------------------------------------
Management determines the appropriate classification of investment and
mortgage-backed securities at the time of purchase and reevaluates such
designation at each reporting date. Securities are classified as held-to-
maturity when the Company has both the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at
amortized cost. Securities not classified as held-to-maturity are classified
as available-for-sale. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity. The Company has no trading
securities.
The amortized cost of securities classified as held-to-maturity or available-
for-sale is adjusted for amortization of premiums and accretion of discounts
to maturity, or in the case of mortgage-backed securities, over the estimated
life of the security. Such amortization is included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost
of securities sold is based on the specific identification method.
6
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
1) Significant Accounting Policies, Continued
------------------------------------------
(d) Loan Sales
----------
At the time of origination, when specific loans or groups of loans are
identified for sale, the Company classifies such loans as held for sale and
values these at the lower of aggregate cost or market value as determined by
the current investor yield requirements calculated on an aggregate loan
basis. The Company recognizes gains and losses at the time of sale if loans
selected for sale have an average interest rate, adjusted for servicing
costs, which differs substantially from the actual yield to the purchaser.
Any resulting discount or premium is amortized using a level-yield method
over the actual life of such loans. Normal servicing fees are recognized as
income in the period earned. Prepayment assumptions are reviewed in view of
actual rates of prepayment of loans sold and amortization of the excess
servicing on loans sold is adjusted accordingly. Due to changes in
prepayment assumptions, the Company wrote down its excess servicing asset by
$111,000 during the year ended June 30, 1994.
(e) Loans Receivable
----------------
Loans held for investment are carried at their principal amount outstanding,
net of deferred loan origination fees.
Interest on loans is recorded as borrowers' monthly payments become due.
Accrual of interest income on loans is suspended when, in management's
judgment, doubts exist as to the collectibility of principal and interest.
Loans are returned to accrual status when management determines, based on an
evaluation of the underlying collateral together with the borrower's payment
record and financial condition, that the borrower has the capability and
intent to meet the contractual obligations of the loan agreement.
Loan fees are accounted for in accordance with Statement of Financial
Accounting Standards No. 91. Loan origination fees and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment
of the related loans' yield over the life of the related loans using a level-
yield method. Unamortized net loan fees or costs on loans sold are recorded
as gain or loss on sale in the year of disposition.
(f) Allowance for Loan Losses
-------------------------
The Company provides for loan losses on the allowance method. Accordingly,
all loan losses are charged to the allowance and all recoveries are credited
to it. Additions to the allowance for loan losses are provided by charges to
operating expense. The provision is based upon management's evaluation of the
risk characteristics of the loan portfolio under current economic conditions
and considers such factors as financial condition of the borrower, collateral
values, growth and composition of the loan portfolio, the relationship of the
allowance for loan losses to outstanding loans, and delinquency trends.
At June 30, 1996, substantially all of the Company's loans were
collateralized by real estate in Orange and adjacent counties. The collateral
is predominately owner-occupied residential real estate in which the borrower
does not rely on underlying cash flows from the property to satisfy debt
service. The ultimate collectibility of a substantial portion of the loan
portfolio is susceptible to changes in market conditions in the Company's
market area. While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary based on changes
in economic conditions. Various regulatory agencies, as an integral part of
their examination processes, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examinations.
7
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
1) Significant Accounting Policies, Continued
------------------------------------------
Effective July 1, 1995, as required, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impariment of a Loan," as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan: Income
Recognition" (collectively referred to hereafter as "SFAS No. 114"). The
adoption of SFAS No. 114 did not have a material effect on the Company's
financial condition or results of operations. Under the provisions of SFAS
No. 114, the 1996 provision for loan losses releated to loans that are
identified for impairment in accordance with SFAS No. 114 is based on
discounted cash flows using the loans' initial interest rate or the fair
value of the collateral if the loan is collateral dependent. Large groups of
smaller balance homogenous loans that are collectively evaluated for
impairment (such as residential mortgage and consumer installment loans) are
excluded from this impairment evaluation in accordance with SFAS No. 114, and
their allowance for loan losses is calculated in accordance with the
allowance for loan losses policy described above.
(g) Investment in Federal Home Loan Bank Stock
------------------------------------------
As a requirement for membership, the Bank invests in stock of the Federal
Home Loan Bank of Atlanta (FHLB) in the amount of 1% of its outstanding
residential loans or 5% of its outstanding advances from the FHLB, whichever
is greater. At June 30, 1996, the Bank owned 8,625 shares of the FHLB's $100
par value capital stock.
(h) Premises and Equipment
----------------------
Premises and equipment are stated at cost. Provisions for depreciation are
computed principally using the straight-line method and charged to operations
over the estimated useful lives of the assets which range from 5 to 40 years
for office buildings and 3 to 10 years for furniture, fixtures, and equipment
and other improvements.
(i) Income Taxes
------------
In February of 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes". Statement 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability
method of accounting for income taxes. Under the asset and liability method
of Statement 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. Effective July 1, 1993, the Company adopted Statement 109
with no cumulative effect of that change in the method of accounting for
income taxes on the June 30, 1994 statement of income.
8
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
1) Significant Accounting Policies, Continued
------------------------------------------
(j) Retirement Plan
---------------
The Bank has an employee stock ownership plan which covers substantially all
of its employees. Contributions to the plan are determined annually by the
Board of Directors based on employee compensation. Prior to establishment of
the employee stock ownership plan, the Company had a self-administered,
defined contribution retirement plan that covered all eligible employees.
This plan was terminated as of July 31, 1995 in conjunction with the
Conversion. The Bank also has a 401(k) plan that covers all eligible
employees. The Bank matches voluntary contributions by participating
employees.
(k) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, the Company considers cash and
interest-bearing deposits in other institutions with original maturities of
three months or less to be cash equivalents.
(l) Earnings Per Share
------------------
Earnings per share has been computed based on net income and the weighted
average number of shares outstanding solely for the post Conversion period,
or 2,446,832 shares for the year ended June 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.
(m) New Accounting Pronouncements
-----------------------------
The FASB has issued SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for 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
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 the Company's 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
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. Management does not
expect that adoption of SFAS 122 will have a material impact on the Company's
consolidated financial statements.
9
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Significant Accounting Policies, Continued
------------------------------------------
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 entitites 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.
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.
(n) Reclassifications
-----------------
Certain reclassifications have been made for 1995 and 1994 to conform with
the 1996 presentation. The reclassifications had no effect on previously
reported net income or stockholders' equity.
10
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Investment Securities
---------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments
in Debt and Equity Securities". This statement addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. These investments
are to be classified in three categories and accounted for as follows: (1)
debt securities that the entity has the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at amortized
cost; (2) debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with net unrealized gains and losses
included in earnings; and (3) debt and equity securities not classified as
either held-to-maturity or trading securities are classified as securities
available-for-sale and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of equity.
The Company adopted SFAS 115 on July 1, 1993. The adoption affected only the
held-to-maturity and available-for-sale classifications, with the net
unrealized securities gains on the securities available-for-sale of $184,000
net of related deferred taxes of $128,000, reported as a separate component
of equity. The Company has no trading securities.
The following is a summary of the securities portfolios by major
classification:
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------------------
(in thousands)
Estimated
Amortized Unrealized Unrealized market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale:
US government and agency securities $10,695 $ 14 $ 400 $10,309
Mortgage-backed securities (1) 7,086 37 177 6,946
State and local governments 10,268 - 425 9,843
------- ---- ------ -------
Total securities available-for-sale 28,049 51 1,002 27,098
======= ==== ====== =======
Securities held-to-maturity:
State and local governments $ 3,519 17 59 $ 3,477
======= ==== ====== =======
<CAPTION>
June 30, 1995
-----------------------------------------------------------------------
(in thousands)
Estimated
Amortized Unrealized Unrealized market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale:
US government and agency securities $ 4,493 62 1 4,555
Mortgage-backed securities (1) 6,357 38 62 6,333
-------- ---- ------ -------
Total securities available-for-sale $ 10,850 100 63 10,887
======== ==== ====== =======
Securities held-to-maturity:
State and local governments $ 1,798 25 10 1,813
======== ==== ====== =======
</TABLE>
(1) At June 30, 1996 and 1995, the Company owned mortgage-backed securities
issued by the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC) with an aggregate
amortized cost of $4,595,000 and $3,869,000 respectively, and a market
value of $4,527,000 and $3,902,000. In addition, the Bank owned
collateralized mortgage obligations issued by FNMA and FHLMC secured by
mortgage-backed securities guaranteed by FNMA and FHLMC, respectively.
The securities had an amortized cost of $2,491,000 and $2,488,000 at
June 30, 1996 and 1995, respectively, and a market value of $2,419,000
and $2,431,000.
11
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Investment Securities, Continued
--------------------------------
The aggregate amortized cost and approximate market value of the available-
for-sale and held-to-maturity securities portfolios at June 30, 1996, by
remaining contractual maturity are as follows:
<TABLE>
<CAPTION>
Securities Securities
available-for-sale held-to-maturity
------------------------- ------------------------
(in thousands)
Estimated Estimated
Amortized market Amortized market
cost value cost value
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
US government and agency securities:
Due in 1 year or less $ - $ - $ - $ -
Due after 1 year through 5 years 489 503 - -
Due after 5 through 10 years 9,209 8,859 - -
Due after 10 years 997 947 - -
Obligations of states local governments:
Due in 1 year or less - - 76 75
Due after 1 year through 5 years 860 857 1,215 1,197
Due after 5 through 10 years 3,088 2,947 1,285 1,282
Due after 10 years 6,320 6,039 943 923
Mortgage-backed securities 7,086 6,946 - -
------- ------- ------ ------
Total securities $28,049 $27,098 $3,519 $3,477
======= ======= ====== ======
</TABLE>
At June 30, 1996 and 1995, investment securities with book values of
$1,925,000 and $1,999,000, respectively, were pledged as collateral for
public deposits.
Summarized below is the sales activity in investment securities:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1996 1995 1994
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
Proceeds from sales of available-for-sale securities $2,946 $1,408 $7,965
Realized gains (7) - (73)
Realized losses 54 100 154
------ ------ ------
Cost of available-for-sale securities sold $2,993 $1,508 $8,046
====== ====== ======
</TABLE>
12
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
(3) Loans Receivable
----------------
June 30,
-----------------------
Loans receivable consist of the
following: 1996 1995
---- ----
(in thousands)
<S> <C> <C>
Loans secured by first mortgages on real estate:
Mortgage loans held for sale $ 3,505 $ 1,838
Mortgage loans held for investment, primarily
one-to-four family 63,590 60,541
Construction loans 5,026 1,805
Commercial and agricultural loans 8,600 8,534
Participation loans purchased 218 89
------- -------
80,939 72,807
Home equity lines of credit 10,816 11,082
Other second mortgage loans 800 834
Other installment loans 1,719 1,635
------- -------
94,274 86,358
Undisbursed proceeds on loans in process (2,198) (945)
Deferred loan fees (281) (185)
Allowance for loan losses (608) (515)
------- -------
$ 91,187 $ 84,713
======= =======
<CAPTION>
An analysis of the allowance for loan losses follows:
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 515 $ 404 $ 317
Provision for loan losses 96 120 87
Loans charged off (4) (14) (4)
Recoveries 1 5 4
------- ------- ------
Balance at end of period $ 608 $ 515 $ 404
======= ======= ======
</TABLE>
At June 30, 1996 and 1995, the Company had loans totaling approximately
$758,000 and $30,000, respectively, which were in nonaccrual status and
$301,000 and $571,000, respectively, which were contractually delinquent for
90 days or more and still accruing.
Additional interest income that would have been recorded on nonaccrual loans
for the years ended June 30, 1996, 1995 and 1994 had they performed in
accordance with their original terms throughout each of the periods amounted
to approximately $57,000, $2,000 and $8,000, respectively.
At June 30, 1996, the Company had mortgage loan commitments outstanding of
$2,220,000. Preapproved but unused lines of credit totaled $7,831,000, and
standby letters of credit totaled $221,000 at June 30, 1996. The Company's
exposure to credit loss for commitments to extend credit and standby letters
of credit is the contractual amount of those financial instruments. The
Company uses the same credit policies for making commitments and issuing
standby letters of credit as it does for on-balance sheet financial
instruments. Each customer's creditworthiness is evaluated on an individual
basis. The amount and type of collateral, if deemed necessary by management,
is based upon this evaluation of creditworthiness. Collateral obtained
varies but may include marketable securities, deposits, real estate,
investment assets, and property and equipment. In management's opinion,
these commitments, and undisbursed proceeds on loans in process reflected
above, represent no more than normal lending risk to the Company and will be
funded from normal sources of liquidity.
13
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable, Continued
---------------------------
At June 30, 1996, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $826,000, comprised of two loans. One of
the loans totaling $457,000 was in non-accrual status at June 30, 1996.
There was no related allowance for credit losses associated with these
loans as determined in accordance with SFAS No. 114. The average recorded
investment in impaired loans during the year ended June 30, 1996 was
approximately $864,000. The Company recognized interest income on the
impaired loans of approximately $65,000 during the year ended June 30,
1996, all of which was collected by June 30, 1996.
The Company serviced loans for others of approximately $12,719,000,
$15,413,000, and $16,733,000 at June 30, 1996, 1995 and 1994, respectively.
The June 30, 1996 balance of loans sold with recourse was approximately
$226,000.
Certain of the Company's mortgage loans are pledged as collateral for
advances from the Federal Home Loan Bank (see note 6).
The Bank makes loans to executive officers and directors of the Company and
to their associates. It is management's opinion that such loans are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility.
Following is a reconciliation of loans outstanding to executive officers,
directors, and their associates for the year ending June 30, 1996:
Balance at June 30, 1995 $ 776,000
New loans 17,000
Repayments (123,000)
---------
Balance at June 30, 1996 $ 670,000
=========
(4) Premises and Equipment
----------------------
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------------------------------------- -------------------------------------------
Accumulated Net book Accumulated Net book
Cost depreciation value Cost depreciation value
---- ------------- ----- ---- ------------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Land and land improvements 443 53 390 443 47 396
Office buildings and improvements 1,013 295 718 1,013 268 745
Furniture, fixtures, and equipment 735 519 216 699 501 198
------ ---- ------ ------ ---- ------
$ 2,191 $ 867 $ 1,324 $ 2,155 $ 816 $ 1,339
======= ==== ====== ====== ==== ======
</TABLE>
(5) Deposits
--------
Time deposits of $100,000 or more totaled $6,072,000 and $7,048,000 at June
30, 1996 and 1995, respectively.
Interest expense on deposits includes $312,000, $326,000, and $306,000 for
the years ended June 30, 1996, 1995, and 1994, respectively, on time
deposits of $100,000 or more.
14
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) Advances from the Federal Home Loan Bank
----------------------------------------
Advances from the Federal Home Loan Bank of Atlanta, with weighted average
interest rates, are as follows:
June 30,
-----------------------
1996 1995
---- ----
(in thousands)
6.03% due on or before June 30, 1996 $ - $ 8,000
5.78% due on or before June 30, 1997 15,250 -
6.02% due on or before June 30, 1997 - 3,000
6.16% due on or before June 30, 1998 2,000 2,000
------- -------
$17,250 $13,000
======= =======
At June 30, 1996, the Bank had additional credit availability from the
Federal Home Loan Bank of $7,750,000.
All advances are secured by all stock in the Federal Home Loan Bank and a
blanket floating lien on the Bank's one-to-four family residential mortgage
loans.
(7) Regulatory Restrictions
-----------------------
CAPITAL REQUIREMENTS: 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 June 30, 1996, the Bank was in compliance with all of the aforementioned
capital requirements.
LIQUIDATION ACCOUNT: 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 the Parent's common
stock. Dividends cannot be paid from this liquidation account.
15
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) Regulatory Restrictions, continued
----------------------------------
DIVIDENDS: Subject to applicable law, the Boards of Directors of the Bank
and the Parent may each provide for the payment of dividends. Future
declarations of cash dividends, if any, by the Parent may depend upon
dividend payments by the Bank to the Parent. Subject to regulations of the
Administrator, the Bank may not declare or pay a cash dividend on or
repurchase any of its common stock if its stockholders' equity would thereby
be reduced below either the aggregate amount then required for the
liquidation account or the minimum regulary 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.
(8) Income Taxes
------------
As discussed in note 1, effective July 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". There was no cumulative effect of the change in accounting for
income taxes. Prior year's financial statements have not been restated to
apply the provisions of FAS 109.
The components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
(in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal $ 782 $ 760 $ 626
State 123 137 129
----- ----- -----
905 897 755
----- ----- -----
Deferred:
Federal (45) (48) (36)
State (11) (12) (9)
----- -----
(56) (60) (45)
----- ----- -----
$ 849 $ 837 $ 710
===== ===== =====
</TABLE>
16
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) Income Taxes, Continued
-----------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are shown
below:
<TABLE>
<CAPTION>
June 30
---------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Allowance for loan losses (net) $ 108 $ 70
Unrealized holding losses on securities available-for-sale 372 -
Deferred compensation accruals 152 140
Deferred loan origination fees, net of deferred costs - 17
Excess servicing 23 30
----- -----
Gross deferred tax assets 655 257
Valuation allowance - -
----- -----
Net deferred tax assets 655 257
----- -----
Accelerated depreciation (46) (34)
FHLB stock dividends (106) (106)
Loan liquidation spread - (37)
Deferred loan origination fees, net of deferred costs (6) -
Unrealized holding gains on securities available-for-sale - (16)
Other temporary differences creating deferred tax liabilities (23) (34)
----- -----
Gross deferred tax liabilities (181) (227)
----- -----
Net deferred tax asset $ 474 $ 30
===== =====
</TABLE>
The Company has no valuation allowance at June 30, 1996 or 1995 because
it has sufficient taxable income in the carryback period to support the
realizability of the net deferred tax asset.
The reconciliation of income taxes at statutory tax rates to income tax
expense reported in the statements of income follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income taxes at the statutory federal tax rate $ 865 $ 707 $ 593
State income taxes less federal benefit 74 83 79
Tax exempt interest (107) 9 3
Other 17 38 35
----- ----- -----
Total tax expense $ 849 $ 837 $ 710
===== ===== =====
</TABLE>
Retained earnings at June 30, 1996 includes approximately $2,777,000 for
which no provision for federal income tax has been made. This amount
represents allocations of income to bad debt deductions for tax purposes
only. Reduction of such amount for purposes other than tax bad debt losses
will create income for tax purposes only, which will be subject to the then
current corporate income tax rate.
17
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Employee and Director Benefit Plans
-----------------------------------
DEFINED CONTRIBUTION RETIREMENT PLAN: The Bank has had a self-administered,
defined contribution retirement plan that covered all eligible employees.
The Bank's policy has been to fund retirement costs accrued. Under the plan,
the Bank contributed an amount equivalent to 10% of the eligible employees'
annual salaries. In conjunction with the Conversion, the 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. Retirement expense of this plan
totaled approximately $9,000 in 1996, $79,000 in 1995, and $77,000 in 1994.
401(k) PLAN: During 1993, the Bank implemented a 401(k) plan that covers all
eligible employees. The Bank matches 50% of employee contributions, with the
Bank's contribution limited to 3% of each employee's salary. 401(k) matching
contributions are funded when accrued. Matching expense totalled
approximately $16,000 in 1996, $17,000 in 1995, and $14,000 in 1994.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP"): The Bank has an 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.
The $40,000 cash contribution was used to release 3,100 shares to ESOP
participants in December 1995. During the six months ended June 30, 1996,
21,566 shares were considered committed to be released to ESOP partipants,
and compensation expense of $139,000 associated with those shares was
recorded. Total compensation expense associated with the ESOP for the year
ended June 30, 1996 was $179,000. At June 30, 1996, there remain 186,934
unearned ESOP shares with a total fair value of approximately $2,454,000.
Dividends on unallocated shares are used by the ESOP to repay the 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.
MANAGEMENT RECOGNITION PLAN: The Bank's Management Recognition Plan ("MRP")
has been approved by stockholders of the Parent and by the Parent's and the
Bank's Boards of Directors. The MRP serves as a means of providing existing
directors and employees of the Bank with an ownership interest in the
Company. On August 29, 1996, 105,800 shares were awarded under the plan. No
amounts were charged to expense in 1996, 1995 or 1994 in connection with this
plan.
STOCK OPTION PLAN: The Company plans to adopt a Stock Option Plan which has
also been approved by the stockholders of the Parent and by the Parent's and
the Bank's Boards of Directors. The Stock Option Plan is to provide for the
granting of options to purchase 264,500 shares, or 10% of the shares issued
in the conversion to employees and directors. No amounts have been charged
to expense in 1996, 1995, or 1994 in connection with this plan.
18
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Employee and Director Benefit Plans, continued
----------------------------------------------
DIRECTORS' DEFERRED COMPENSATION PLAN: The Bank has a deferred compensation
plan for its directors under which the directors would be paid specified
amounts during the ten year period following the latter of the date that the
director becomes 65 years of age, or five years from adoption of the plan.
During 1995, the Bank established another deferred compensation plan for
certain of its directors under which the directors would be paid specified
amounts during the ten year period following the latter of the date that the
director meets a specified age requirement, or five years from adoption of
the plan. The Bank has purchased life insurance policies with the Bank named
as beneficiary to fund the benefits. Total expense related to these plans
was approximately $89,000 for 1996, $162,000 for 1995, and $51,000 for 1994.
EMPLOYMENT AGREEMENTS: In connection with the Conversion, the Bank entered
into employment agreements with executive officers in order to ensure a
stable and competent management base. The agreements provide for a three-
year term, but upon each anniversary, the agreements automatically extend so
that the remaining term shall always be three years. The agreements provide
that the nature of the covered employee's compensation, duties or benefits
cannot be diminished following a change in control of the Company.
SEVERANCE PLAN: In connection with the Conversion, the Bank adopted a
Severance Plan for the benefit of its employees. The Plan provides for
severance pay benefits in the event of a change in control which results in
the termination of such employees or diminished compensation, duties, or
benefits within two years of a change in control. The employees covered
would be entitled to a severance benefit of the greater of (a) the amount
equal to two weeks' salary at the existing salary rate multiplied by the
employee's number of complete years of service or (b) the amount of one
month's salary at the employee's salary rate at the time of termination,
subject to a maximum payment equal to two times the employee's annual
salary.
19
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(10) Quarterly Financial Data (Unaudited)
------------------------------------
Summarized unaudited quarterly financial data for the year ended June 30,
1996 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ---------- ----------- ------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Operating Summary:
Interest income $ 2,137 $ 2,378 $ 2,363 $ 2,370
Interest expense 1,124 1,191 1,033 1,066
-------- -------- -------- --------
Net interest income 1,013 1,187 1,330 1,304
Provision for loan losses 30 24 21 21
-------- -------- -------- --------
Net interest income
after provision for
loan losses 983 1,163 1,309 1,283
Other income 84 82 79 10
Other expenses 573 622 642 612
-------- -------- -------- --------
Income before income tax
expense 494 623 746 681
Income taxes 187 219 243 200
-------- -------- -------- --------
Net income $ 307 $ 404 $ 503 $ 481
======== ======== ======== ========
Per Share Data:
Earnings n/a 0.05 0.20 0.20
Cash dividends declared n/a - 0.10 0.12
Dividend payout n/a - 50% 60%
Book value per share n/a 14.05 14.05 14.01
Selected Average
Balances:
Assets $104,824 $121,715 $123,372 $127,095
Investment securities 13,100 18,307 28,390 31,191
Loans 86,107 87,648 87,818 90,096
Interest-bearing deposits 74,833 84,623 70,387 71,617
Advances 12,893 13,082 11,912 15,105
Stockholders' equity 13,860 21,846 37,351 37,173
---------------------------------------------------------------
Summarized unaudited quarterly financial data for the year ended June 30,
1995 is as follows:
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ---------- ----------- ------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Operating Summary:
Interest income $ 1,822 $ 1,898 $ 1,982 $ 2,109
Interest expense 826 872 934 1,050
-------- -------- -------- --------
Net interest income 996 1,026 1,048 1,059
Provision for loan losses 30 30 30 30
-------- -------- -------- --------
Net interest income
after provision for
loan losses 966 996 1,018 1,029
Other income 97 77 116 47
Other expenses 522 584 576 583
-------- -------- -------- --------
Income before income tax
expense 541 489 558 493
Income taxes 218 203 234 182
-------- -------- -------- --------
Net income $ 323 $ 286 $ 324 $ 311
======== ======== ======== ========
Per Share Data:
Earnings n/a n/a n/a n/a
Cash dividends declared n/a n/a n/a n/a
Dividend payout n/a n/a n/a n/a
Book value per share n/a n/a n/a n/a
Selected Average
Balances:
Assets $ 98,587 $ 98,581 $100,299 $103,969
Investment securities 10,951 10,687 11,332 10,954
Loans 82,580 83,240 83,175 84,309
Interest-bearing deposits 73,008 73,578 73,223 74,467
Advances 10,032 9,698 11,063 11,719
Stockholders' equity 12,398 12,651 12,961 13,230
</TABLE>
20
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Parent Company Financial Data
-----------------------------
Condensed financial information for Piedmont Bancorp, Inc. (Parent Company)
is as follows:
<TABLE>
<CAPTION>
June 30, 1996
-------------
(in thousands)
<S> <C>
Condensed Balance Sheet
Assets:
Cash on deposit with bank subsidiary $ 5,615
Investment securities available for sale at market value:
Obligations of states and local governments, cost $5,624,000 5,398
Investment in bank subsidiary 26,120
Other assets 322
-------
Total assets $ 37,455
=======
Liabilities and stockholders' equity:
Accrued taxes, expenses and other liabilities $ 405
Stockholders' equity 37,050
-------
Total liabilities and stockholders' equity $ 37,455
=======
<CAPTION>
Year Ended
June 30, 1996
-------------
(in thousands)
<S> <C>
Condensed Statement of Income
Interest income from bank subsidiary $ 200
Interest on loan from bank subsidiary ESOP 148
Interest on investment securities 115
-----
Total income 463
Operating expenses 50
-----
Income before income taxes 413
Income tax expense 117
-----
Income before equity in undistributed net income of subsidiary 296
Equity in undistributed net income of bank subsidiary 1,399
-----
Net income $1,695
=====
</TABLE>
21
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
(11) Parent Company Financial Data, Continued
----------------------------------------
Year Ended
June 30, 1996
--------------
(in thousands)
<S> <C>
Condensed Statement of Cash Flows
Cash flows from operating activities:
Net income $ 1,695
Adjustments to reconcile net income to
net cash provided by operating activites:
Undistributed earnings of bank susidiary (1,399)
Increase in other assets (238)
Increase in other liabilities 113
--------
Net cash provided by operating activities 171
--------
Cash flows from investing activities:
Purchases of available for sale securities (5,626)
--------
Net cash used by investing activities (5,626)
--------
Cash flows from financing activities:
Proceeds of issuance of no par common stock 25,398
Purchase of common stock for ESOP (2,731)
Capital contribution to Hillsborough Savings Bank (11,353)
Cash dividends paid to stockholders (244)
--------
Net cash provided by financing activities 11,070
--------
Net increase in cash and cash equivalents 5,615
Cash and cash equivalents at beginning of year -
--------
Cash and cash equivalents at end of year $ 5,615
========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 29
========
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on securities available for sale
net of deferred tax benefit of $88 $ 138
========
Unrealized gains (losses) on subsidiary's securities available
for sale net of deferred tax benefit of $299 $ 463
========
Dividends declared but unpaid $ (292)
========
</TABLE>
22
<PAGE>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Fair Value of Financial Instruments
-----------------------------------
Fair value estimates are made by management at a specific point in time,
based on relevant information about the financial instrument and the
market. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of
a particular financial instrument nor are protential taxes and other
expenses that would be incurred in an actual sale considered. Fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions and/or the
methodology used could significantly affect the estimates disclosed.
Similarly, the fair values disclosed could vary significantly from amounts
realized in actual transactions.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments.
The following table presents the carrying values and estimated fair values
of the Company's financial instruments at June 30, 1996:
<TABLE>
<CAPTION>
Carrying Estimated
value fair value
-------- ----------
<S> <C> <C>
Financial assets:
Cash and interest-bearing deposits $ 2,670 $ 2,670
Investment securities:
Available-for-sale 27,098 27,098
Held-to-maturity 3,519 3,477
Net loans 91,187 90,775
Federal Home Loan Bank stock 863 863
Financial liabilities:
Deposits 73,361 73,475
Federal Home Loan Bank advances 17,250 17,242
</TABLE>
The estimated fair values of net loans and deposits are based on cash flows
discounted at market interest rates. The carrying values of other financial
instruments, including various receivables and payables, approximate fair
value.
At June 30, 1996, the Company had outstanding standby letters of credit and
commitments to extend credit. These off-balance sheet financial instruments
are generally exercisable at the market rate prevailing at the date the
underlying transaction will be complete, and, therefore, they are deemed to
have no current fair market value. Refer to note 3.
23
<PAGE>
16
CAPITAL STOCK
The Parent's common stock is traded on the American Stock Exchange under
the symbol "PDB". As of June 30, 1996, there were 2,645,000 shares outstanding
and 641 shareholders of record, not including the number of persons or entities
whose stock is held in nominee or street name through various brokerage firms or
banks. Payment of dividends by the Bank subsidiary to the Parent is subject to
various restrictions. Under applicable banking regulations, the Bank may no
declare a cash dividend if the effect thereof would be to reduce its net worth
to an amount less than the minimum required by federal and state banking
regulations. In addition, for a period of five years after the consummation of
the Bank's stock conversion, which occurred on December 7, 1995, the Bank will
be required to obtain prior written approval from the Administrator of the
Savings Institutions Division, North Carolina Department of Commerce, before it
can declare a cash dividend in an amount in excess of one-half 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, as applicable.
Quarterly Common Stock Performance and Dividends Declared
For the Year Ended June 30, 1996
<TABLE>
<CAPTION>
Stock Price Dividends Declared, Per Share
---------------- -----------------------------
High Low
---- ---
<S> <C> <C> <C>
Second quarter ended December 31* $13 $12 3/8 $ -
Third quarter ended March 31 13 3/8 12 0.10
Fourth quarter ended June 30 13 5/8 12 3/8 0.12
</TABLE>
- ---------------------------------------------------------
* The Parent's common stock did not begin trading until December 8, 1995
