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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
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Commission file number 1-14070
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PIEDMONT BANCORP, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1936232
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(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
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (919) 732-2143
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(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
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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 or any amendment to this
Form 10-K. [X]
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
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common stock on August 30, 1996.
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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.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of Piedmont Bancorp, Inc. for the year ended June
30, 1996, are incorporated by reference into Part I, Part II and Part IV.
Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders of
Piedmont Bancorp, Inc. to be held on November 26, 1996, are incorporated by
reference into Part III.
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PART I
ITEM I. BUSINESS
General
Piedmont Bancorp, Inc. (the "Parent") is a one-bank holding company
whose principal business is the ownership and operation of Hillsborough Savings
Bank, Inc., SSB (the "Bank") located in Hillsborough, North Carolina. The
Parent was incorporated on July 7, 1995 for the purpose of acquiring 100% of the
common stock of the Bank in its recent mutual to stock conversion which was
completed on December 7, 1995 (the "Conversion"). The Conversion occurred
through the sale of 2,645,000 shares of Piedmont Bancorp, Inc. common stock (no
par value). 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 and
paid the balance of $11,353,464 to the Bank in exchange for 100% of the common
stock of the Bank issued in the Conversion.
Hillsborough Savings Bank is a state-chartered stock savings bank
originally organized under the laws of North Carolina in 1913. The Bank is
headquartered in Hillsborough, North Carolina centrally located in its primary
market of central and northern Orange County, North Carolina. The Bank is a
community-oriented financial institution which offers a variety of financial
services to meet the needs of the community it serves. The Bank is principally
engaged in the business of attracting deposits from the general public and using
those deposits to make one-to-four family residential real estate loans, loans
secured by nonresidential real estate, home equity line of credit loans, and
other loans and investments. At June 30, 1996, all of the loans in the Bank's
portfolio which were secured by real estate were secured by properties located
in North Carolina. Revenues are derived primarily from interest on loans. The
Bank also receives interest income from investment securities, mortgage-backed
securities, and interest-bearing deposit balances. The major expenses of the
Bank are interest on deposits and borrowings and noninterest expenses such as
salaries, employee benefits, federal deposit insurance premiums, data processing
expenses, and occupancy expenses. The Bank conducts its business through its
two offices in Hillsborough, North Carolina.
Piedmont Bancorp, Inc. and its wholly-owned bank subsidiary,
Hillsborough Savings Bank, Inc., are collectively referred to as "the Company".
For additional information regarding the Company's business, see the 1996 Annual
Report to Security Holders and the accompanying financial statements.
Market Area and Competition
The Company's primary market area consists of central and northern
Orange County, North Carolina. Hillsborough is located approximately 10 miles
northwest of Durham, North Carolina and 10 miles north of Chapel Hill, North
Carolina. North Carolina's Research Triangle Park is located about 20 miles
eastward between the cities of Chapel Hill, Durham and Raleigh. Chapel Hill and
Durham are home to the University of North Carolina at Chapel Hill and Duke
University, respectively. The economy of Orange County is significantly
impacted by these universities and the employment opportunities they generate.
However, the economy in Orange County is varied with employment spread among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities.
The Company faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them. The
Company has also faced additional significant competition for investors' funds
from short-term money market securities and other corporate and government
securities. The ability of the Company to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities. The Company
experiences strong competition for real estate loans from other savings
institutions, commercial banks,
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and mortgage banking companies. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
Management believes that its image as "the hometown bank" gives it
certain advantages over its local competition. The Company, its directors and
employees actively participate in local civic affairs. Long-time employment of
local personnel have enabled the Bank to establish and maintain long-term
relationships with customers. The Bank offers quick local decisions and more
flexible underwriting standards than the competition.
SUPERVISION AND REGULATION
Regulation of the Parent Holding Company
General. The Parent was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Parent is subject to certain regulations of the Federal
Reserve. Under the BHCA, a holding company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Parent from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
Additionally, the BHCA prohibits the Parent from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto. The BHCA generally does not place territorial
restrictions on the activities of such nonbanking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-
disapproval) must be obtained prior to any person acquiring control of the
Parent. Control is conclusively presumed to exist if, among other things, a
person acquires more than 25% of any class of voting stock of the Parent or
controls in any manner the election of a majority of the directors of the
Parent. Control is presumed to exist if a person acquires more than 10% of any
class of voting stock and the stock is registered under Section 12 of the
Exchange Act or the acquirer will be the largest stockholder after the
acquisition.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default or in default. For example,
under the 1991 Banking Law, to avoid receivership of an insured depository
institution subsidiary, a bank holding company is required to guarantee the
compliance of any insured depository institution subsidiary that may become
"undercapitalized" with the terms of any capital restoration plan filed by such
subsidiary with its appropriate federal banking agency up to the lesser of (i)
an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized or (ii) the amount which is necessary (or
would have been necessary) to bring the institution into compliance with all
acceptable capital standards as of the time the institution fails to comply with
such capital restoration plan. Under a policy of the Federal Reserve with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The Federal Reserve
under the BHCA also has the authority to require a bank holding company to
terminate any activity or to relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.
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In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA") require insured depository institutions under
common control to reimburse the FDIC for any loss suffered by either the SAIF or
the BIF as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
No stock repurchases may be made within one year after the conversion
without the approval of the Administrator. Also, the Parent must notify the
Federal Reserve prior to repurchasing common stock for in excess of 10% of its
net worth during any rolling twelve-month period.
As a result of the Parent's ownership of the Bank, the Parent is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Parent is also subject to regulation and supervision by the
Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal
Reserve has adopted capital adequacy guidelines for bank holding companies and
banks that are members of the Federal Reserve system and have consolidated
assets of $150 million or more. For bank holding companies with less than $150
million in consolidated assets, the guidelines are applied on a bank-only basis
unless the parent bank holding company (i) is engaged in nonbank activity
involving significant leverage or (ii) has a significant amount of outstanding
debt that is held by the general public. Total consolidated assets of the
Company were less than $150 million during the fiscal year ended June 30, 1996,
and items (i) and (ii) did not apply during that same period. As of June 30,
1996, the Bank exceeded the capital adequacy requirements for bank holding
companies.
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Parent's application to acquire control of the Bank, the Parent
was required to execute a Capital Maintenance Agreement whereby it has agreed to
maintain the Bank's capital in an amount sufficient to enable Hillsborough
Savings Bank to satisfy all regulatory capital requirements.
Federal Securities Law. The Parent has registered its common stock
with the SEC pursuant to Section 12 of the Exchange Act. Accordingly, the proxy
and tender offer rules, insider trading reporting requirements and
restrictions, annual and periodic reporting and other requirements of the
Exchange Act are applicable to the Parent.
Regulation of the Bank
General. Federal and state legislation and regulation have
significantly affected the operations of federally insured savings institutions
and other federally regulated financial institutions in the past several years
and have increased competition among savings institutions, commercial banks and
other providers of financial services. In addition, federal legislation has
imposed new limitations on investment authority, and higher insurance and
examination assessments on savings institutions and has made other changes that
may adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions
will continue to be subject to changes in applicable statutes and regulations
from time to time.
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The Bank is a member of the FHLB system, and its deposits are insured
by the FDIC through the SAIF. It is subject to examination and regulation by the
FDIC and the Administrator and to regulations governing such matters as capital
standards, mergers, establishment of branch offices, subsidiary investments and
activities, and general investment authority. Generally, North Carolina-
chartered savings banks whose deposits are insured by the SAIF are subject to
restrictions with respect to activities and investments, transactions with
affiliates and loans-to-one borrower similar to those applicable to SAIF-insured
savings associations. Such examination and regulation is intended primarily for
the protection of depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Stockholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As holders of loans secured by real property and as owners
of real property, financial institutions may be subject to potential liability
under various statutes and regulations applicable to property owners generally,
including statutes and regulations relating to the environmental condition of
real property.
The FDIC has extensive enforcement authority over North Carolina-
chartered savings banks. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the Bank. Since
consummation of the conversion, the Bank is an affiliate of the Parent.
Generally, Sections 23A and 23B (i) establish certain collateral requirements
for loans to affiliates; (ii) limit the extent to which the savings institution
or its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of such savings institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (iii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the savings institution or the subsidiary as those
provided to a nonaffiliate. The term "covered transaction" includes the making
of loans or other extensions of credit to an affiliate, the purchase of assets
from an affiliate, the purchase of, or an investment in, the securities of an
affiliate, the acceptance of securities of an affiliate as collateral for a loan
or extension of credit to any person, or issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who own
more than 10% of a savings bank, and certain affiliated entities of any of the
foregoing, may not exceed, together with all other outstanding loans to such
person and affiliated entities, the savings bank's loans-to-one borrower limit
as established by federal law (as discussed below). Section 22(h) also
prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers and stockholders who own more than 10%
of a savings bank, and their respective affiliates, unless such loan is approved
in advance by a majority of the board of directors of the savings bank. Any
"interested" director may not participate in the voting. The Federal Reserve has
prescribed the loan amount (which
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includes all other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of $25,000 or 5% of
unimpaired capital and unimpaired surplus (up to $500,000). Further, pursuant to
Section 22(h) the Federal Reserve requires that loans to directors, executive
officers, and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and not involve more than
the normal risk of repayment or present other unfavorable features.
Insurance of Deposit Accounts. The FDIC administers two separate
deposit insurance funds. The SAIF maintains a fund to insure the deposits of
institutions the deposits of which were insured by the Federal Savings and Loan
Insurance Corporation (the "FSLIC") prior to the enactment of FIRREA, and the
BIF maintains a fund to insure the deposits of institutions the deposits of
which were insured by the FDIC prior to the enactment of FIRREA. The Bank is a
member of the SAIF of the FDIC.
As a SAIF-insured institution, Hillsborough Savings Bank is subject to
insurance assessments imposed by the FDIC. Effective January 1, 1993, the FDIC
replaced its uniform assessment rate with a transitional risk-based assessment
schedule issued by the FDIC pursuant to the 1991 Banking Law, which imposes
assessments ranging from $0.23 to $0.31 per $100 of an institution's average
assessment base. The actual assessment to be paid by each SAIF member is based
on the institution's assessment risk classification, which is based on whether
the institution is considered "well capitalized," "adequately capitalized" or
"undercapitalized" (as such terms have been defined in federal regulations), and
whether such institution is considered by its supervisory agency to be
financially sound or to have supervisory concerns. Under the 1991 Banking Law,
the FDIC also may impose special assessments on SAIF members to repay amounts
borrowed from the U.S. Treasury or for any other reason deemed necessary by the
FDIC. As a result of the 1991 Banking Law, the assessment rate on deposits
could further increase over a 15-year period.
Financial institutions 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 new risk-based premium schedule that
has reduced assessment rates for commercial banks, left assessment rates for
savings institutions such as the Bank at current levels, and will increase the
disparity between SAIF and BIF assessments. Assessments for BIF members range
from $0.04 to $0.31 per $100 of domestic deposits. 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. 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 the federal banking regulators, by members of the United
States Congress and by industry groups.
The Balanced Budget Act of 1995, which was passed by the United States
Congress but vetoed by the President for reasons unrelated to the SAIF
recapitalization, provided for a one-time assessment currently estimated to be
0.85% of insured deposits. It is unknown whether similar legislation that would
fully capitalize the SAIF will be enacted or whether premiums for either BIF or
SAIF members will be adjusted in the future by the FDIC or by legislative
action. If a special assessment as described above were to be required, it
would result in a one-time charge to the Bank estimated at $711,000 pre-tax,
assuming the special assessment is based on deposits held at June 30, 1996.
Management cannot predict whether such legislation will be enacted, or, if
enacted, the amount of any one-time assessment or whether ongoing SAIF premiums
will be reduced to a level equal to that of BIF premiums.
The Bank incurred deposit insurance premium expense of $176,000 in the
year ended June 30, 1996. 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.
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Community Reinvestment Act. The Bank, like other financial
institutions, is subject to the Community Reinvestment Act ("CRA"). A purpose of
the CRA is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. During the Bank's last compliance examination, it received a
"satisfactory" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by The Bank to acquire
branches or to acquire or combine with other financial institutions and take
other actions and, if such rating was less than "satisfactory," could result in
the denial of such applications.
The federal banking regulatory agencies have issued a revision of the
CRA regulations, which became effective on January 1, 1996, to implement a new
evaluation system that rates institutions based on their actual performance in
meeting community credit needs. Under the regulations, a bank will first be
evaluated and rated under three categories: a lending test, an investment test
and a service test. For each of these three tests, the bank will be given a
rating of either "outstanding," "high satisfactory," "low satisfactory," "needs
to improve" or "substantial non-compliance." A set of criteria for each rating
has been developed and is included in the regulation. If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantitative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to its service area should
be considered. The ratings received under the three tests will be used to
determine the overall composite CRA rating. The composite ratings will be the
same as those that are currently given: "outstanding," "satisfactory," "needs to
improve" or "substantial non-compliance."
Capital Requirements Applicable to The Bank. The FDIC requires the
Bank to have a minimum leverage ratio of Tier I capital (principally consisting
of common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible and
goodwill items), to average total assets of at least 3%; provided, however that
all institutions, other than those (i) receiving the highest rating during the
examination process and (ii) not anticipating or experiencing any significant
growth, are required to maintain a ratio of 1% or 2% above the stated minimum,
with an absolute minimum leverage ratio of not less than 4%. The FDIC also
requires the Bank to have a ratio of total capital to risk-weighted assets,
including certain off-balance sheet activities, such as standby letters of
credit, of at least 8%. At least half of the total capital is required to be
Tier I capital. The remainder (Tier II capital) may consist of a limited amount
of subordinated debt, certain hybrid capital instruments, other debt securities,
certain types of preferred stock and a limited amount of general loan loss
allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
institution may be deemed to be operating in an unsafe or unsound condition,
allowing the FDIC to take various enforcement actions, including possible
termination of insurance or placement of the institution in receivership.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At June 30, 1996, The Bank complied with each of the capital
requirements of the FDIC and the Administrator. For a description of The Bank's
required and actual capital levels on June 30, 1996, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -
ANALYSIS OF FINANCIAL CONDITION - Capital Resources" in the 1996 Annual Report
to Security Holders.
The 1991 Banking Law required each federal banking agency to revise
its risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk, and the risk of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multi-family mortgages. On August 2, 1995, the federal
banking agencies issued a joint notice of adoption of final risk-based capital
rules to take account of interest rate risk. The final regulation required an
assessment of the need for additional capital on a case-by-case basis,
considering both the level of measured exposure and qualitative risk factors.
The final rule also stated an intent to, in the future, establish an explicit
minimum capital charge for interest rate risk based on the level of a bank's
measured interest rate risk exposure. The final regulation has not had a
material impact on the Bank's capital requirements.
Effective June 26, 1996, the federal banking agencies issued a joint
policy statement announcing the agencies' election not to adopt a standardized
measure and explicit capital charge for interest rate risk at that time.
Rather, the policy statement (i) identifies the main elements of sound interest
rate risk management, (ii) describes prudent principles and practices for each
of those elements, and (iii) describes the critical factors affecting the
agencies' evaluation of a bank's interest rate risk when making a determination
of capital adequacy. The joint policy statement is not expected to have a
material impact on the Bank's management of interest rate risk .
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In December 1994, the FDIC adopted a final rule changing its risk-
based capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives - interest and
exchange rate contracts. Under the rule, savings banks are permitted to net
positive and negative mark-to-market values of rate contracts with the same
counterparty, subject to legally enforceable bilateral netting contracts that
meet certain criteria. This represents a change from the prior rules which
recognized only a very limited form of netting. The Bank does not anticipate
that this rule will have a material effect upon its financial condition or
results of operations.
Loans to One Borrower. The Bank is subject to the Administrator's
loans-to-one borrower limits. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the Bank. Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of net worth. These limits also authorize savings banks to
make loans to one borrower, for any purpose, in an amount not to exceed
$500,000. The Bank also is authorized to make loans to one borrower to develop
domestic residential housing units, not to exceed the lesser of $30 million, or
30% of the institution's net worth, provided that (i) the purchase price of each
single-family dwelling in the development does not exceed $500,000; (ii) the
institution is in compliance with its fully phased-in capital requirements;
(iii) the loans comply with applicable loan-to-value requirements; (iv) the
aggregate amount of loans made under this authority does not exceed 150% of net
worth; and (v) the institution's regulator issues an order permitting the
institution to use this higher limit. These limits also authorize a savings
bank to make loans-to-one borrower to finance the sale of real property acquired
in satisfaction of debts in an amount up to 50% of net worth.
As of June 30, 1996, the largest aggregate amount of loans which the
Bank had to any one borrower was $1,722,000. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one borrower limits.
Limitations on Rates Paid for Deposits. Regulations promulgated by
the FDIC pursuant to the 1991 Banking Law place limitations on the ability of
insured depository institutions to accept, renew or roll over deposits by
offering rates of interest which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in such depository institution's normal market
area. Under these regulations, "well capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The definitions of "well capitalized," "adequately
capitalized" and "undercapitalized" are the same as the definitions adopted by
the FDIC to implement the corrective action provisions of the 1991 Banking Law.
Federal Home Loan Bank System. The FHLB system provides a central
credit facility for member institutions. As a member of the FHLB of Atlanta,
The Bank is required to own capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On June 30, 1996, The Bank was in compliance with this
requirement with an investment in FHLB of Atlanta stock of $863,000.
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Federal Reserve System. Federal Reserve regulations require banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of June 30, 1996, The Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired, among other things, upon the acquisition of more than 25% of any
class of voting stock. In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than 10% of any class of
voting stock. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of The
Company. If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is
not required for (i) any offer with a view toward public resale made exclusively
to the Company or its underwriters or the selling group acting on its behalf or
(ii) any offer to acquire or acquisition of beneficial ownership of more than
10% of the common stock of the Company by a corporation whose ownership is or
will be substantially the same as the ownership of the Company, provided that
the offer or acquisition is made more than one year following the consummation
of the Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Parent and
the Bank or the Boards of Directors of the Parent and the Bank support the
acquisition, (ii) the acquirer is of good character and integrity and possesses
satisfactory managerial skills, and will be a source of financial strength to
the Parent and the Bank; and (iii) the public interests will not be adversely
affected.
Liquidity. the Bank is subject to the Administrator's requirement
that the ratio of liquid assets to total assets equal at least 10%. The
computation of liquidity under North Carolina regulation allows the inclusion of
mortgage-backed securities and investments which, in the judgment of the
Administrator, have a readily marketable value, including investments with
maturities in excess of five years. At June 30, 1996, the Bank's liquidity
ratio, calculated in accordance with North Carolina regulations, was
approximately 23%.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations for state savings banks are
permitted to engage are limited to those of service corporations for national
banks.
10
<PAGE>
State savings banks are also required to notify the FDIC at least 30
days prior to the establishment or acquisition of any subsidiary, or at least 30
days prior to conducting any such new activity. Any such activities must be
conducted in accordance with the regulations and orders of the FDIC and the
Administrator. State savings banks are also generally prohibited from directly
or indirectly acquiring or retaining any corporate debt security that is not of
investment grade (generally referred to as "junk bonds").
Impact of the 1991 Banking Law. The 1991 Banking Law became effective
on December 19, 1991. Among other things, the 1991 Banking Law provided
increased funding for the BIF and provided for expanded regulation of depository
institutions and their affiliates, including bank holding companies.
The 1991 Banking Law provided the federal banking agencies with broad
powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers will depend upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Under the FDIC regulations applicable to the Bank, an
institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" institution is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-
based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater
(or 3% or greater in the case of an institution with the highest examination
rating and which is not experiencing or anticipating significant growth). An
institution is considered (A) "undercapitalized" if it has (i) a total risk-
based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of
less than 4% or (iii) a leverage ratio of less than 4% (or 3% and is not
experiencing or anticipating significant growth); (B) "significantly
undercapitalized" if the institution has (i) a total risk-based capital ratio of
less than 6%, (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a
leverage ratio of less than 3% and (C) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets equal to or less than
2%.
To facilitate the early identification of problems, the 1991 Banking
Law required the federal banking agencies to review and, under certain
circumstances, prescribe more stringent accounting and reporting requirements
than those required by generally accepted accounting principles. The FDIC issued
a final rule, effective July 2, 1993, implementing those provisions.
The 1991 Banking Law further requires the federal banking agencies to
develop regulations requiring disclosure of contingent assets and liabilities
and, to the extent feasible and practicable, supplemental disclosure of the
estimated fair market value of assets and liabilities. The 1991 Banking Law also
requires annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small, well-
capitalized institutions and state chartered institutions examined by state
regulators. Moreover, the 1991 Banking Law, as modified by the Federal Housing
Enterprises Financial Security and Soundness Act, requires the federal banking
agencies to set operational and managerial, asset quality, earnings and stock
valuation standards for insured depository institutions and depository
institution holding companies, as well as compensation standards (but not dollar
levels of compensation) for insured depository institutions that prohibit
excessive compensation, fees or benefits to officers, directors, employees, and
principal stockholders. In July 1992, the federal banking agencies issued a
joint advance notice of proposed rulemaking soliciting comments on all aspects
of the implementation of these standards in accordance with the 1991 Banking
Law, including whether the compensation standards should apply to depository
institution holding companies. An interagency notice of proposed rulemaking was
issued in November 1993. However, sections of the Riegle Community Development
and Regulatory Improvement Act of 1994 will affect the nature and scope of the
proposed regulations, and eliminates the requirement that the regulations apply
to depository institution holding companies.
The foregoing necessarily is a general description of certain
provisions of the 1991 Banking Law and does not purport to be complete.
11
<PAGE>
Interstate Banking. A bank or savings bank holding company and its
subsidiaries are currently prohibited from acquiring any voting shares of, or
interest in, any banks or savings banks located outside of the state in which
the operations of the savings bank holding company's subsidiaries are located,
unless the acquisition is specifically authorized by the statutes of the state
in which the target bank is located. However, in September 1994, Congress
passed the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"). The Interstate Banking Act permits adequately
capitalized bank and savings bank holding companies to acquire control of banks
and savings banks in any state beginning on September 29, 1995, one year after
the effectiveness of the Interstate Banking Act. North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions.
States may require the bank or savings bank being acquired to have been in
existence for a certain length of time but not in excess of five years. In
addition, no bank or saving bank may acquire more than 10% of the insured
deposits in the United States or more than 30% of the insured deposits in any
one state, unless the state has specifically legislated a higher deposit cap.
States are free to legislate stricter deposit caps and, at present, 18 states
have deposit caps lower than 30%.
The Interstate Banking Act also provides for interstate branching.
The McFadden Act of 1927 established state lines as the ultimate barrier to
geographic expansion of a banking network by branching. The Interstate Banking
Act withdraws these barriers, effective June 1, 1997, allowing interstate
branching in all states, provided that a particular state has not specifically
prohibited interstate branching by legislation prior to such time. Unlike
interstate acquisitions, a state may prohibit interstate branching if it
specifically elects to do so by June 1, 1997. States may choose to allow
interstate branching prior to June 1, 1997 by opting-in to a group of states
that permits these transactions. These states generally allow interstate
branching via a merger of an out-of-state bank with an in-state bank, or on a de
novo basis. North Carolina has enacted legislation permitting interstate
branching transactions.
It is anticipated that the Interstate Banking Act will increase
competition within the market in which the Bank now operates, although the
extent to which such competition will increase in such market or the timing of
such increase cannot be predicted. In addition, there can be no assurance as to
whether, or in what form, legislation may be enacted in North Carolina in
reaction to the Interstate Banking Act or what impact such legislation or the
Interstate Banking Act might have upon the Bank.
The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in Section 39 of the 1991 Banking Law which
required the banking regulatory agencies to promulgate regulations governing
such topics as internal controls, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation and fees and other matters
those agencies determine to be appropriate. The legislation exempts bank
holding companies from these provisions and requires the agencies to prepare
guidelines, as opposed to regulations, dealing with these areas. It also gives
more discretion to the banking regulatory agencies in prescribing standards for
banks' asset quality, earnings and stock valuation.
The Interstate Banking Act also expands current exemptions from the
requirement that banks be examined on a 12-month cycle. Exempted banks will be
inspected every 18 months. Other provisions address paperwork reduction and
regulatory improvements, small business and commercial real estate loan
securitization, truth-in-lending amendments regarding high cost mortgages,
strengthening of the independence of certain financial regulatory agencies,
money laundering, flood insurance reform and extension of certain statutes of
limitations.
12
<PAGE>
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution. Under FDIC regulations, stock repurchases may be made
during the first year after the Conversion only after receipt of FDIC approval.
In addition, the Bank is not permitted to declare or pay a cash
dividend or repurchase any of its capital stock if the effect thereof would be
to cause its net worth to be reduced below the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock ownership.
Restrictions on Benefit Plans. FDIC regulations provide that for a
period of one year from the date of the conversion, the Bank may not implement
or adopt a stock option plan or restricted stock plan, other than a tax-
qualified plan or ESOP, unless: (1) the plans are fully disclosed in the
conversion proxy soliciting and stock offering material, (2) all such plans are
approved by a majority of the Parent's stockholders prior to implementation and
no earlier than six months following the conversion, (3) for stock option plans,
the exercise price must be at least equal to the market price of the stock at
the time of grant, (4) for restricted stock plans, no stock issued in connection
with the Conversion may be used to fund the plan and (5) prior to implementing
the plans, all such plans are submitted for review and approval to the Regional
Director of the FDIC.
The FDIC regulations provide that the FDIC will presume that excessive
compensation will result if stock based benefit plans fail to satisfy percentage
limitations on management stock-based benefit plans set forth in the regulations
of the OTS. Those regulations provide that (1) for stock option plans, the
total number of shares for which options may be granted may not exceed 10% of
the shares issued in the Conversion, (2) for restricted stock plans, the shares
issued may not exceed 3% of the shares issued in the Conversion (4% for
institutions with tangible capital of 10% or greater after the Conversion), (3)
the aggregate amount of stock purchased by the ESOP shall not exceed 10% (8%
for well-capitalized institutions utilizing a 4% restricted stock plan), (4) no
individual employee may receive more than 25% of the available awards under any
plan, and (5) directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any plan. The awards
and grants made or to be made under the MRP and the Stock Option Plan conform to
these requirements.
Other North Carolina Regulation. As a North Carolina-chartered
savings bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to: the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires that the Bank maintain federal deposit insurance as a condition of
doing business.
13
<PAGE>
The Administrator conducts regular examinations of North Carolina-
chartered savings banks. The purpose of such examinations is to assure that
institutions are being operated in compliance with applicable North Carolina law
and regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina-chartered savings bank must maintain net worth,
computed in accordance with the Administrator's requirements, of 5% of total
assets and liquidity of 10% of total assets, as discussed above. Additionally, a
North Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions
may consolidate or merge, subject to approval of the Administrator. The approval
is conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Subsidiaries
The Bank is the only subsidiary of the Company. The Bank has no
subsidiaries.
Employees
As of June 30, 1996, the Bank had 29 full-time employees and two part-
time employees. The Bank provides its employees with basic and major medical
insurance, life insurance, sick leave and vacation benefits. In addition, the
Bank maintains a 401(k) retirement plan pursuant to which the Bank matches one-
half of employees' contributions, with its contribution limited to 3% of each
employee's salary.
In connection with the Conversion, the Bank adopted an Employee Stock
Ownership Plan (the "ESOP"), which provides benefits to employees of the Bank.
Also, the Boards of Directors of the Bank and the Parent have approved, and the
stockholders of the Parent have approved, the Bank's Management Recognition Plan
and the Parent's Stock Option Plan. Effective August 29, 1996, 105,800 shares
were awarded to directors, officers and employees under the Management
Recognition Plan. No stock options have been rewarded under the Stock Option
Plan to date.
Employees are not represented by any union or collective bargaining
group, and the Bank considers its employee relations to be good.
14
<PAGE>
Federal Income Taxation
The Parent and the Bank are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in the same general manner as
other corporations. However, savings banks which meet certain definitional
tests and other conditions prescribed by the Code may benefit from certain
favorable provisions regarding their deductions from taxable income for annual
additions to their bad debt reserve. A savings bank qualifying under these
rules is permitted to deduct (i) an addition to a reserve for losses on
"qualifying real property loans," (in general, loans secured by interests in
real property improved or to be improved with the proceeds of the loan) (the
"qualifying real property reserve") and (ii) an addition to a reserve for losses
on nonqualifying loans. A savings bank that satisfies certain requirements may
compute its addition to the qualifying real property reserve under (i) a method
based on the savings bank's actual loss experience (the "experience method") or
(ii) a method based on a percentage of the savings bank's taxable income, as
adjusted (the "percentage of taxable income method"). The addition to the
nonqualifying real property reserve must be computed under the experience
method. Under the percentage of taxable income method, the bad debt deduction
for qualifying real property loans is limited to 8% of taxable income before the
bad debt deduction, subject to certain adjustments.
A savings bank may not use the percentage of taxable income method in
any year in which less than 60% of its total assets are "qualifying assets,"
which include U.S. Government securities, loans secured by an interest in
residential real property, cash, and certain other assets. The addition to the
reserve for losses on qualifying real property loans under the percentage of
taxable income method cannot exceed the amount necessary to increase the balance
of the qualifying real property reserve at the close of the taxable year to 6%
of the balance of the qualifying real property loans outstanding at the end of
the taxable year. In addition, the annual addition to the qualifying real
property reserve under the percentage of taxable income method cannot, when
added to the addition to the reserve for losses on nonqualifying loans, exceed
the amount by which (i) 12% of the total deposits or withdrawable accounts of
depositors of the qualifying institution at the close of the taxable year
exceeds (ii) the sum of the institution's surplus, undivided profits, and
reserves at the beginning of such year. In fiscal years 1996, 1995 and 1994,
the Bank elected to use the percentage of taxable income method in computing its
bad debt reserve for federal income tax purposes.
If a savings bank has a reserve for losses on qualifying real property
loans that exceeds the reserve it would have under the experience method
("excess bad debt reserve"), or maintains a supplemental reserve that represents
certain reserves built up from 1952 through 1962, it may be subject to tax when
it makes distributions with respect to its stock, including distributions in
redemption of stock or in liquidation. Under these circumstances, the
institution's taxable income would be increased by an amount not to exceed the
amount of its excess bad debt reserve and supplemental reserve, equal to the sum
of (i) any nonstock distributions paid in excess of earnings and profits
accumulated in taxable years beginning after December 31, 1951, (ii) any
distributions made in redemption of stock or made in partial or complete
liquidation, and (iii) the amount of federal income tax payable (determined on a
grossed-up basis) on the sum of (i) and (ii). The Bank currently has earnings
and profits accumulated since December 31, 1951, and has an excess bad debt
reserve of approximately $2.8 million. Thus, any distribution with respect to
its stock in excess of current and accumulated earnings and profits would
increase its taxable income as described above.
Institutions which become ineligible to use the percentage of income
method must change to either the reserve method or the specific charge-off
method that applies to commercial banks. Large institutions, those generally
exceeding $500 million in assets, must convert to the specific charge-off
method. Legislation recently adopted by Congress requires ratable inclusion in
income of excess reserves over a six-year period in the event of ineligibility.
The Parent and the Bank may also be subject to the corporate
alternative minimum tax ("AMT"). Generally, a corporation's AMT is the excess of
its "tentative minimum tax" (i.e., 20% of the amount by which the corporation's
alternative minimum taxable income ("AMTI") exceeds an applicable statutory
exemption amount) over its regular income tax. The amount of the corporation's
AMT, if any, is added to the corporation's regular tax for a taxable year and
the total is the corporation's federal income tax for the year. AMTI is
calculated by adding certain tax preference items and making certain adjustments
to the corporation's regular taxable income. Such items and
15
<PAGE>
adjustments include, but are not limited to, the following: (i) 75% of the
excess, if any, of a corporation's adjusted current earnings and profits over
its AMTI (as otherwise determined with certain adjustments); (ii) interest on
certain tax-exempt bonds issued after August 7, 1986; and (iii) the amount by
which a financial institution's allowable deduction for the taxable year for
additions to its reserve for bad debts exceeds the deduction that would have
been allowable if the financial institution had made additions to its bad debt
reserve for all taxable years on the basis of actual experience. Net operating
loss carryovers may be utilized, subject to certain adjustments, to offset up to
90% of the AMTI, as otherwise determined. Thus, despite any available net
operating loss carryovers, a corporation generally will be subject to an
effective minimum tax liability of at least 2% of the excess of its AMTI over
the exemption amount. A portion of the AMT paid by a corporation may be credited
against future regular federal income tax liability, subject to certain
limitations. In recent years, the Bank has not been subject to the AMT.
The Bank's federal income tax returns have not been audited since the
1989 fiscal year.
State Taxation
Under North Carolina law, the corporate income tax is 7.75% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition, for tax years beginning in 1994, 1993, 1992 and 1991,
corporate taxpayers were required to pay a surtax equal to 1%, 2%, 3% and 4%,
respectively, of the state income tax otherwise payable by it. An annual state
franchise tax is imposed at a rate of 0.15% applied to the greatest of the
institution's (i) capital stock, surplus and undivided profits, (ii) investment
in tangible property in North Carolina or (iii) appraised valuation of property
in North Carolina.
The North Carolina corporate tax rate will drop to 7.50% in 1997,
7.25% in 1998, 7.00% in 1999 and 6.90% thereafter.
ITEM 2. PROPERTIES
At June 30, 1996, the Company conducted its business from its two offices
in Hillsborough, North Carolina. The following table sets forth certain
information regarding the Company's properties as of June 30, 1996. All
properties are owned by the Company.
<TABLE>
<CAPTION>
Net Book
Value of
Address Property
- ------- --------
<S> <C>
112 North Churton Street $ 44,000
Hillsborough, North Carolina 27278
260 South Churton Street $1,048,000
Hillsborough, North Carolina 27278
</TABLE>
In addition to the properties described above, the Company owns an
office building adjacent to its North Churton Street branch. This property had
a net book value of $16,000 as of June 30, 1996 and was used for rental office
space. The total net book value of the Company's furniture, fixtures and
equipment on June 30, 1996 was $216,000.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, the Company is not involved in any pending
legal proceedings other than routine, non-material proceedings occurring in the
ordinary course of business.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the stockholders of the Company was held on June 11,
1996 (the "Special Meeting") to approve the Piedmont Bancorp, Inc. Stock Option
Plan (the "Stock Option Plan") and the Hillsborough Savings Bank, Inc., SSB
Management Recognition Plan (the "MRP"). At the Special Meeting, 1,551,909
votes were cast for approval of the Stock Option Plan, 216,911 votes were cast
against or withheld and there were 11,895 abstentions or broker non-votes. With
regard to the MRP, 1,546,661 votes were cast for approval of the Plan, 229,904
votes were cast against or withheld and there were 4,150 abstentions or broker
non-votes.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The high and low stock price for the Company's common stock was $15 1/8 and
$15 1/8, respectively, on August 30, 1996. The information required by this
Item is set forth under the section captioned "Capital Stock" in the Company's
1996 Annual Report which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned
"Five Year Summary" on the inside cover of the Company's 1996 Annual Report
which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The table below sets forth certain performance ratios for the
Company for the periods indicated.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Return on Average Assets (Net income 1.42% 1.24% 1.06%
divided by average total assets)
Return on Average Equity (Net income 6.15% 9.70% 8.64%
divided by average
shareholders' equity
Average Equity to Average Assets Ratio 23.11% 12.76% 12.22%
(Average shareholders'
equity divided by average total assets)
Interest Rate Spread for the Period 3.16% 3.72% 3.32%
(Tax equivalent basis)
Average Interest-Earning Assets to 130.92% 114.90% 114.02%
Average Interest-Bearing Liabilities
Net Interest Margin (Tax equivalent 4.33% 4.29% 3.80%
basis)
Loan Loss Allowance to Nonperforming 80.21% 1716.67% 134.67%
Assets at Period End
</TABLE>
See also the information set forth under Item 1 above and the
information set forth under the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operation" in the Company's 1996
Annual Report which section is incorporated herein by reference.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data
set forth in the Company's 1996 Annual Report are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the fiscal year ended June 30, 1996 and the
interim subsequent period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth under the section
captioned "Proposal 1 - Election of Directors" in the Proxy Statement for the
1996 Annual Meeting of Shareholders of Piedmont Bancorp, Inc. to be held on
November 26, 1996 (the "Proxy Statement") and the section captioned "Compliance
with Section 16(a) of the Exchange Act of 1934" in the Proxy Statement, which
sections are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION AND TRANSACTIONS
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors' Compensation" and " -
Management Compensation" in the Proxy Statement, which sections are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
from the section captioned "Security Ownership of Certain Beneficial Owners" in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-K. See also the section captioned "Proposal 1 - Election of Directors -
Certain Indebtedness and Transactions of Management" in the Proxy Statement,
which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)1. Consolidated Financial Statements (contained in the Company's 1996
Annual Report attached hereto as Exhibit (13) and incorporated herein
by reference)
(a) Independent Auditors' Report
(b) Consolidated Balance Sheets as of June 30, 1996 and 1995
(c) Consolidated Statements of Income for the Years Ended June 30,
1996, 1995 and 1994
(d) Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1996, 1995 and 1994
18
<PAGE>
(e) Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1995 and 1994
(f) Notes to Consolidated Financial Statements
14(a)2. Financial Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
14(a)3. Exhibits
Exhibit (3)(i) Articles of Incorporation, incorporated herein by
reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 (No.33-94512)
filed on July 12, 1995 and amended on
September 27, 1995 and October 6, 1995
Exhibit (3)(ii) Bylaws, incorporated herein by reference to
Exhibit 3.2 of the Company's Registration
Statement on Form S-1 (No.33-94512) filed on
July 12, 1995 and amended on September 27, 1995
and October 6, 1995
Exhibit (4) Specimen Stock Certificate, incorporated herein by
reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1 (No.33-94512)
filed on July 12, 1995 and amended on
September 27, 1995 and October 6, 1995
Exhibit (10)(ii)(a) Piedmont Bancorp, Inc. Stock Option Plan
Exhibit (10)(ii)(b) Hillsborough Savings Bank, Inc., SSB Management
Recognition Plan
Exhibit (10)(ii)(c) Employment Agreement between Hillsborough
Savings Bank, Inc., SSB and D. Tyson
Clayton, incorporated herein by reference to
Exhibit 10.2 of the Company's Registration
Statement on Form S-1 (No. 33-94512) filed
on July 12, 1995 and amended on September
27, 1995 and October 6, 1995
Exhibit (10)(ii)(d) Employment Agreement between Hillsborough
Savings Bank, Inc., SSB and Peggy S. Walker,
incorporated herein by reference to Exhibit
10.2 of the Company's Registration Statement
on Form S-1 (No. 33-94512) filed on July 12,
1995 and amended on September 27, 1995 and
October 6, 1995
Exhibit (10)(ii)(e) Employment Agreement between Hillsborough
Savings Bank, Inc., SSB and Gina B. Riggins,
incorporated herein by reference to Exhibit
10.2 of the Company's Registration Statement
on Form S-1 (No. 33-94512) filed on July 12,
1995 and amended on September 27, 1995 and
October 6, 1995
Exhibit (10)(ii)(f) Employment Agreement between Hillsborough
Savings Bank, Inc., SSB and Robert L.
Pearson, incorporated herein by reference to
Exhibit 10.2 of the Company's Registration
Statement on Form S-1 (No. 33-94512) filed
on July 12, 1995 and amended on September
27, 1995 and October 6, 1995
19
<PAGE>
Exhibit (11) Statement Regarding Computation of Per Share
Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1996 Annual Report to Security Holders
Exhibit (27) Financial Data Schedule
14(b) The Company filed no reports on Form 8-K during the last quarter of
the fiscal year ended June 30, 1996.
20
<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: September 24, 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 September 24, 1996
- --------------------------- Executive
D. Tyson Clayton Officer and Director
/s/ Peggy S. Walker Executive Vice September 24, 1996
- --------------------------- President, Secretary,
Peggy S. Walker and Director
/s/ Gina B. Riggins Vice President, September 24, 1996
- --------------------------- Treasurer, Principal
Gina B. Riggins Financial Officer
/s/ M. Marion Clark Director September 24, 1996
- ---------------------------
M. Marion Clark
/s/ Robert B. Nichols, Jr. Director September 24, 1996
- ---------------------------
Robert B. Nichols, Jr.
/s/ Alfred L. Carr Director September 24, 1996
- ---------------------------
Alfred L. Carr
Director September __, 1996
- ---------------------------
Everett H. Kennedy
/s/ Donald W. Pope Director September 24, 1996
- ---------------------------
Donald W. Pope
/s/ James P. Ray Director September 24, 1996
- ---------------------------
James P. Ray
/s/ William Larry Rogers Director September 24, 1996
- ---------------------------
William Larry Rogers
21
<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
22
<PAGE>
EXHIBIT 10(ii)(a)
PIEDMONT BANCORP, INC.
STOCK OPTION PLAN
THIS IS THE PIEDMONT BANCORP, INC. STOCK OPTION PLAN ("Plan") of Piedmont
Bancorp, Inc. (the "Corporation"), a North Carolina corporation, with its
principal office in Hillsborough, Orange County, North Carolina, adopted by the
Board of Directors of the Corporation and effective upon the approval of the
Plan by a majority of the shareholders of the Corporation and the receipt of all
necessary regulatory approvals, or as soon as practicable thereafter, under
which options may be granted from time to time to eligible directors and
employees of the Corporation, Hillsborough Savings Bank, Inc., SSB (the "Bank")
and of any corporation or other entity of which either the Corporation or the
Bank owns, directly or indirectly, not less than fifty percent (50%) of any
class of equity securities (a "Subsidiary"), to purchase shares of common stock
of the Corporation ("Common Stock"), subject to the provisions set forth as
follows:
1. PURPOSE. The purpose of this Plan is to aid the Corporation, the Bank
-------
and any Subsidiary in attracting and retaining capable directors and employees
and to provide a long range incentive for directors and employees to remain in
the management of the Corporation, the Bank or any Subsidiary, to perform at
increasing levels of effectiveness and to acquire a permanent stake in the
Corporation with the interest and outlook of an owner. These objectives will be
promoted through the granting of options to acquire shares of Common Stock
pursuant to the terms of this Plan.
2. ADMINISTRATION. The Plan shall be administered by the committee (the
--------------
"Committee"), who are three members of the Board of Directors of the Corporation
(the "Board") who are "disinterested persons" as described in Rule 16b-
3(c)(2)(i) of the Rules and Regulations under the Securities Act of 1934 (the
"Exchange Act"). Members of the Committee shall serve at the pleasure of the
Board. In the absence at any time of a duly appointed Committee, this Plan
shall be administered by those members of the Board who are "disinterested
persons," and by the Board if there are less than three "disinterested persons."
The Committee may designate any officers or employees of the Corporation, the
Bank or any Subsidiary to assist in the administration of the Plan and to
execute documents on behalf of the Committee and perform such other ministerial
duties as may be delegated to them by the Committee.
Subject to the provisions of the Plan, the determinations or the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive upon all persons affected thereby. By way of
illustration and not of limitation, the Committee shall have the discretion (a)
to construe and interpret the Plan and all options granted hereunder and to
determine the terms and provisions (and amendments thereof) of the options
granted under the Plan (which need not be identical); (b) to define the terms
used in the Plan and in the options granted hereunder; (c) to prescribe, amend
and rescind the rules and regulations relating to the Plan; (d) to determine the
individuals to whom and the time or times at which such options shall be granted
(except for the options described in paragraph 5), the number of shares to be
subject to each option (except for the options described in paragraph 5), the
option price, and the determination of leaves of absence which may be granted to
participants without constituting a termination of their employment for the
<PAGE>
purposes of the Plan; and (e) to make all other determinations necessary or
advisable for the administration of the Plan.
It shall be in the discretion of the Committee to grant options which
qualify as "incentive stock options" (as that term is defined in Section 422 of
the Internal Revenue Code of 1986, as amended) or which do not qualify as
incentive stock options and which will be given tax treatment as "nonqualified
stock options" (herein referred to collectively as "options;" however, whenever
reference is specifically made only to "incentive stock options" or
"nonqualified stock options," such reference shall be deemed to be made to the
exclusion of the other). Any options granted which fail to satisfy the
requirements for incentive stock options shall become nonqualified stock
options.
3. STOCK AVAILABLE FOR OPTIONS. The stock to be subject to options under
---------------------------
the Plan shall be authorized but unissued shares of Common Stock or, in the
discretion of the Committee, issued shares of Common Stock which have been
reacquired by the Corporation. The total number of shares of Common Stock for
which options may be granted under the Plan is the number of shares equal to ten
percent (10%) of the total number of shares of Common Stock issued by the
Corporation in connection with the conversion of the Bank from a North Carolina
mutual savings bank to a North Carolina stock savings bank on December 7, 1995
(the "Conversion"). Such number of shares is subject to any capital adjustments
as provided in Section 14. In the event that an option granted under the Plan
is forfeited, expires or is terminated unexercised as to any shares covered
thereby, such shares thereafter shall be available for the granting of options
under the Plan; however, if the forfeiture, expiration or termination date of an
option is beyond the term of existence of the Plan as described in Section 19,
then any shares covered by forfeited, unexercised or terminated options shall
not reactivate the existence of the Plan and therefore may not be available for
additional grants under the Plan. The Corporation, during the terms of the
Plan, will reserve and keep available a number of shares of Common Stock
sufficient to satisfy the requirements of the Plan. In the discretion of the
Committee and the Board, the shares of Common Stock necessary to be delivered to
satisfy exercised options may be from authorized and unissued shares of Common
Stock or may be purchased in the open market.
4. ELIGIBILITY. Options shall be granted only to individuals who meet all
-----------
of the following eligibility requirements:
(a) Such individual must be an employee or a member of the Board of
Directors of the Corporation, the Bank or a Subsidiary. For this purpose,
an individual shall be considered to be an "employee" only if there exists
between the Corporation, the Bank or a Subsidiary and the individual the
legal and bona fide relationship of employer and employee. In determining
whether such relationship exists, the regulations of the United States
Treasury Department relating to the determination of such relationship for
the purpose of collection of income tax at the source on wages shall be
applied.
(b) Such individual must have such knowledge and experience in
financial and business matters that he or she is capable of evaluating the
merits and risks of the investment involved in the exercise of the
options.
2
<PAGE>
(c) Such individual, being otherwise eligible under this Section
4, shall have been selected by the Committee as a person to whom an option
shall be granted under the Plan or shall have been designated in paragraph
5 hereof.
In determining the directors and employees to whom options shall be granted
and the number of shares to be covered by each option, the Committee shall take
into account the nature of the services rendered by respective directors and
employees, their present and potential contributions to the success of the
Corporation, the Bank and any Subsidiary and such other factors as the Committee
shall deem relevant. A director or employee who has been granted an option
under the Plan may be granted an additional option or options under the Plan if
the Committee shall so determine.
If, pursuant to the terms of the Plan, it is necessary that the percentage
of stock ownership of any individual be determined, stock ownership in the
Corporation or of a related corporation which is owned (directly or indirectly)
by or for such individual's brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants or by or for any corporation,
partnership, estate or trust of which such employee is a shareholder, partner or
beneficiary shall be considered as owned by such director or employee.
5. INITIAL GRANTS. Subject to the provisions of this Plan, options shall
--------------
be awarded to the directors and employees as set forth on Exhibit A. Such
options shall be granted after the date the Plan is approved by a majority of
the Corporation's shareholders and by all necessary regulatory authorities and
execution by the optionee of a Stock Option Grant and Agreement (the "Option
Agreement") in the form attached hereto as Exhibit B as modified by the
Committee to the extent it deems such modification to be necessary or desirable.
Such options shall be granted with the intention that they will be nonqualified
or incentive stock options as denominated in the Option Agreement. Any option
granted with the intention that it will be an incentive stock option but which
fails to satisfy a requirement for incentive stock options shall continue to be
valid and shall be treated as a nonqualified stock option.
6. OPTION PRICE.
------------
(a) The option price of each option granted under the Plan shall
be not less than one hundred percent (100%) of the market value of the
stock on the date of grant of the option. In the case of incentive stock
options granted to a shareholder who owns stock possessing more than 10
percent (10%) of the total combined voting power of all classes of stock
of the Corporation, the Bank or a Subsidiary (a "ten percent
shareholder"), the option price of each option granted under the Plan
shall not be less than one hundred and ten percent (110%) of the market
value of the stock on the date of grant of the option. If the Common Stock
is listed on a national securities exchange (including the NASDAQ National
Market System) on the date in question, then the market value per share
shall be not less than the average of the highest and lowest selling price
on such exchange on such date, or if there were no sales on such date,
then the market price per share shall be equal to the average between the
bid and asked price on such date. If the Common Stock is traded otherwise
than on a national securities exchange on the date in question, then the
market price per share shall be equal to the average between the bid and
asked price on such date, or, if there is no bid and asked
3
<PAGE>
price on such date, then on the next prior business day on which there was a bid
and asked price. If no such bid and asked price is available, then the market
value per share shall be its fair market value as determined by the Committee,
in its sole and absolute discretion. The Committee shall maintain a written
record of its method of determining such value.
(b) The option price shall be payable to the Corporation either
(i) in cash or by check, bank draft or money order payable to the order of
the Corporation, or (ii) at the discretion of the Committee, through the
delivery of shares of the common stock of the Corporation owned by the
optionee with a market value (determined in a manner consistent with (i)
above) equal to the option price, or (iii) at the discretion of the
Committee by a combination of (i) and (ii) above. No shares shall be
delivered until full payment has been made. The Committee may not approve
a reduction of such purchase price in any such option, or the cancellation
of any such options and the regranting thereof to the same optionee at a
lower purchase price, at a time when the market value of the shares is
lower than it was when such option was granted.
7. EXPIRATION OF OPTIONS. The Committee shall determine the expiration
---------------------
date or dates of each option, but such expiration date shall be not later than
ten (10) years after the date such option is granted. In the event an incentive
stock option is granted to a ten percent shareholder, the expiration date or
dates of each option shall be not later than five (5) years after the date such
option is granted. The Committee, in its discretion, may extend the expiration
date or dates of an option after such date was originally set; however, such
expiration date may not exceed the maximum expiration date described in this
Section 7.
8. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
(a) All options must be granted within ten (10) years of the
Effective Date of this Plan as defined in Section 18.
(b) The Committee may grant options which are intended to be
incentive stock options and nonqualified stock options, either separately
or jointly, to an eligible employee.
(c) The grant of options shall be evidenced by a written instrument
(an Option Agreement) containing terms and conditions established by the
Committee consistent with the provisions of this Plan.
(d) Not less than 100 shares may be purchased at any one time
unless the number purchased is the total number at that time purchasable
under the Plan.
(e) The recipient of an option shall have no rights as a shareholder
with respect to any shares covered by his option until payment in full by
him for the shares being purchased. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is
prior to the date such stock is fully paid for, except as provided in
Section 14.
4
<PAGE>
(f) The aggregate fair market value of the stock (determined as of
the time the option is granted) with respect to which incentive stock
options are exercisable for the first time by any participant during any
calendar year (under all benefit plans of the Corporation, the Bank or any
Subsidiary, if applicable) shall not exceed $100,000; provided, however,
that such $100,000 limit of this subsection (f) shall not apply to the
grant of nonqualified stock options. The Committee may grant options which
are exercisable in excess of the foregoing limitations, in which case
options granted which are exercisable in excess of such limitation shall
be nonqualified stock options.
(g) All stock obtained pursuant to an option which qualifies as an
incentive stock option shall be held in escrow for a period which ends on
the later of (i) two (2) years from the date of the granting of the option
or (ii) one (1) year after the transfer of the stock pursuant to the
exercise of the option. The stock shall be held by the Corporation or its
designee. The employee who has exercised the option shall during such
holding period have all rights of a shareholder, including but not limited
to the rights to vote, receive dividends and sell the stock. The sole
purpose of the escrow is to inform the Corporation of a disqualifying
disposition of the stock within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and it shall be administered solely for
that purpose.
9. EXERCISE OF OPTIONS.
-------------------
(a) An optionee receiving options by virtue of his position as a
director must remain continuously a member of the Board of Directors of
the Corporation, the Board of Directors of the Bank or the Board of
Directors of one or more of the Subsidiaries from the date of the grant
until the exercise of the option except as provided in Sections 10, 11 and
12 of this Plan. An optionee receiving options by virtue of his position
as an employee must at all times be employed by the Corporation, the Bank
or a Subsidiary from the date of grant until the exercise of the options
granted except as provided in Sections 10, 11 and 12. All options granted
under the Plan shall be exercisable in annual installments in accordance
with the following schedule:
twenty percent (20%) of the shares beginning 1 year after the date
of the grant of the options;
twenty percent (20%) of the shares beginning 2 years after the date
of the grant of the options;
twenty percent (20%) of the shares beginning 3 years after the date
of the grant of the options;
twenty percent (20%) of the shares beginning 4 years after the date
of the grant of the options; and
twenty percent (20%) of the shares beginning 5 years after the date
of the grant of the options.
5
<PAGE>
Notwithstanding the foregoing, options shall become exercisable with
respect to all of the shares subject thereto upon the optionee's death or
upon the optionee's disability within the meaning of Section 22(e)(3) of
the Internal Revenue Code of 1986, as amended.
The right to exercise options in annual installments shall be cumulative
and any vested installments may be exercised, in whole or in part, at the
election of the optionee. The exercise of any option must be evidenced by
written notice to the Corporation that the optionee intends to exercise
his option.
In no event shall an option be deemed granted by the Corporation or
exercisable by a recipient prior to the mutual execution by the
Corporation and the recipient of an Option Agreement which comports with
the requirements of Section 5 and Section 8(c).
(b) The inability of the Corporation or Bank to obtain approval from
any regulatory body or authority deemed by counsel to be necessary to the
lawful issuance and sale of any shares of Common Stock hereunder shall
relieve the Corporation and the Bank of any liability in respect of the
non-issuance or sale of such shares. As a condition to the exercise of an
option, the Corporation may require the person exercising the Option to
make such representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements of federal
or state securities laws.
(c) The Committee shall have the discretionary authority to impose
in the Option Agreements such restrictions on shares of Common Stock as it
may deem appropriate or desirable, including but not limited to the
authority to impose a right of first refusal or to establish repurchase
rights or both of these restrictions.
10. TERMINATION OF DIRECTORSHIP OR EMPLOYMENT - EXCEPT BY DISABILITY OR
-------------------------------------------------------------------
DEATH. If any optionee receiving the grant of an option by virtue of his
- -----
position as a director ceases to be a director of at least one of the
Corporation, the Bank or any Subsidiary or if any optionee receiving the grant
of an option by virtue of his position as an employee ceases to be an employee
of at least one of the Corporation, the Bank and any Subsidiary for any reason
other than death or disability (as defined in paragraph 11), he may, (i) at any
time within three (3) months after his date of termination, but not later than
the date of expiration of the option, exercise any option designated in the
Option Agreement as an incentive stock option and (ii) at any time prior to the
date of expiration of the option, exercise any option designated in the Option
Agreement as a nonqualified stock option. However, in either such event the
optionee may exercise any option only to the extent it was vested and he or she
was entitled to exercise the option on the date of termination. Any options or
portions of options of terminated directors or employees not so exercised shall
terminate and be forfeited.
11. TERMINATION OF DIRECTORSHIP OR EMPLOYMENT - DISABILITY. If any
------------------------------------------------------
optionee receiving the grant of an option by virtue of his position as a
director ceases to be a director of at least one of the Corporation, the Bank or
any Subsidiary or if any employee receiving the grant of an option by virtue of
his position as an employee ceases to be employed by at least one of the
Corporation, the Bank and any Subsidiary due to his becoming disabled within the
meaning
6
<PAGE>
of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended, he may,
(i) at any time within 12 months after his date of termination, but not later
than the date of expiration of the option, exercise any option designated in the
Option Agreement as an incentive stock option with respect to all shares subject
thereto and (ii) at any time prior to the date of expiration of the option,
exercise any option designated in the Option Agreement as a nonqualified stock
option with respect to all shares subject thereto. Any portions of options of
terminated directors or employees not so exercised shall terminate.
12. TERMINATION OF DIRECTORSHIP OR EMPLOYMENT - DEATH. If an optionee
-------------------------------------------------
receiving the grant of an option by virtue of his position as a director dies
while a director of the Corporation, the Bank or any Subsidiary or if any
employee receiving the grant of an option by virtue of his position as an
employee dies while in the employment of the Corporation, the Bank or a
Subsidiary, the person or persons to whom the option is transferred by will or
by the laws of descent and distribution may exercise the option at any time
until the term of the option has expired, with respect to all shares subject
thereto, to the same extent and upon the same terms and conditions the optionee
would have been entitled to do so had he lived. Any options or portions of
options of deceased directors or employees not so exercised shall terminate.
13. RESTRICTIONS ON TRANSFER. An option granted under this Plan may not
------------------------
be transferred except by will or the laws of descent and distribution and,
during the lifetime of the optionee to whom it was granted, may be exercised
only by such optionee.
14. CAPITAL ADJUSTMENTS AND OTHER CHANGES AFFECTING COMMON
------------------------------------------------------
STOCK.
-----
(a) If the outstanding shares of Common Stock of the Corporation are
increased, decreased, changed into or exchanged for a different number or
kind of shares or other securities of the Corporation or another entity as
a result of a recapitalization, reclassification, stock dividend, stock
split, amendment to the Corporation's Certificate of Incorporation,
reverse stock split, merger or consolidation, an appropriate adjustment
shall be made in the number and/or kind of securities allocated to the
options previously and subsequently granted under the Plan, without change
in the aggregate purchase price applicable to the unexercised portion of
the outstanding options but with a corresponding adjustment in the price
for each share or other unit of any security covered by the options.
(b) To the extent that the foregoing adjustments relate to
particular stock or securities of the Corporation subject to option under
this Plan, such adjustments shall be made by the Committee, whose
determination in that respect shall be final and conclusive.
(c) The grant of an option pursuant to this Plan shall not affect in
any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell,
or transfer all or any part of its business or assets.
7
<PAGE>
(d) No fractional shares of stock shall be issued under the Plan for
any such adjustment.
(e) Any adjustment made pursuant to this Section 14(a), shall be
made in such manner as not to constitute a modification of any outstanding
incentive stock options within the meaning of Section 424(h) of the
Internal Revenue Code of 1986, as amended.
(f) In the event the Corporation declares a special cash dividend or
a return of capital in an amount per share which exceeds 10% of the market
value of a share of Common Stock as of the date of declaration (with
market value per share determined by the Committee pursuant to the method
set forth in paragraph 6(a) hereof), the per share exercise price of all
previously granted options which remain unexercised as of the date of such
declaration shall be proportionately adjusted to give effect to such
special cash dividend or return of capital as of the date of payment of
such special cash dividend or return of capital; provided, however, that
if such adjustment with respect to incentive stock options would be
treated as a modification of outstanding incentive stock options with the
effect that, for purposes of Sections 422 and 425(h) of the Internal
Revenue Code of 1986, as amended, and the rules and regulations
thereunder, new incentive stock options would be deemed to be granted,
then, at the election of the Committee, no adjustment to the per share
exercise price of outstanding incentive stock options shall be made. In
addition, no such adjustment of the per share exercise price shall be made
if applicable regulatory requirements prohibit such an adjustment.
15. INVESTMENT PURPOSE. At the discretion of the Committee, any Option
------------------
Agreement may provide that the optionee shall, by accepting the option,
represent and agree, for himself and his transferees by will or the laws of
descent and distribution, that all shares of stock purchased upon the exercise
of the option will be acquired for investment and not for resale or
distribution, and that upon each exercise of any portion of an option, the
person entitled to exercise the same shall furnish evidence of such facts which
is satisfactory to the Corporation. Certificates for shares of stock acquired
under the Plan may be issued bearing such restrictive legends as the Corporation
and its counsel may deem necessary to ensure that the optionee is not an
"underwriter" within the meaning of the regulations of the Securities Exchange
Commission.
16. APPLICATION OF FUNDS. The proceeds received by the Corporation from
--------------------
the sale of Common Stock pursuant to options will be used for general corporate
purposes.
17. NO OBLIGATION TO EXERCISE OPTION. The granting of an option shall
--------------------------------
impose no obligation upon the optionee to exercise such option.
18. EFFECTIVE DATE OF PLAN. The Plan will become effective upon the
----------------------
approval of the Plan by a majority of the shareholders of the Corporation as
required by regulations of the FDIC and the receipt of all necessary regulatory
approvals.
19. TERM OF PLAN. Options may be granted pursuant to this Plan from time
------------
to time within ten (10) years from the effective date of the Plan.
8
<PAGE>
20. TIME OF GRANTING OF OPTIONS. Nothing contained in the Plan or in any
---------------------------
resolution adopted or to be adopted by the Committee or the shareholders of the
Corporation and no action taken by the Committee shall constitute the granting
of any option hereunder. The granting of an option pursuant to the Plan shall
take place only when an Option Agreement shall have been duly executed and
delivered by and on behalf of the Corporation at the direction of the Committee.
21. WITHHOLDING TAXES. Whenever the Corporation proposes or is required
-----------------
to issue or transfer shares of stock under the Plan, the Corporation shall have
the right to require the optionee to remit to the Corporation an amount
sufficient to satisfy any Federal, state and/or local withholding tax
requirements prior to the issuance of any certificate or certificates for such
shares. Alternatively, the Corporation may issue or transfer such shares of
stock net of the number of shares sufficient to satisfy the withholding tax
requirements. For withholding tax purposes, the shares of stock shall be valued
on the date the withholding obligation is incurred.
22. TERMINATION AND AMENDMENT. The Board may at any time alter, suspend,
-------------------------
terminate or discontinue the Plan, but may not, without the consent of the
holder of an option previously granted, make any alteration which would deprive
the optionee of his rights with respect thereto; provided, however, that
-------- -------
shareholder approval of certain amendments may be necessary if it is desirable
for the Plan to continue to satisfy the requirements of Rule 16b-3 of the
Securities Exchange Commission; and provided further, that in no event shall
-------- -------
this Plan be terminated at the time of or following any merger or consolidation
of the Corporation or the Bank, unless and until the surviving entity shall have
made provision for an equivalent benefit for all the then current option
holders. Notwithstanding anything herein to the contrary, the Board may not
amend Section 5 hereof or any other provisions of this Plan described in Rule
16b-3(c)(2)(ii)(A) of the regulations promulgated pursuant to the Exchange Act
more than once every six months, other than to comport with changes in the
Internal Revenue Code, the Employee Retirement Income Security Act, or the rules
thereunder.
23. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph
----------------------------------------
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction of, this Plan. As used herein, the masculine
gender shall include the feminine and neuter, and the singular number shall
include the plural, and vice versa, whenever such meanings are appropriate.
24. EXCULPATION AND INDEMNIFICATION. In connection with this Plan, no
-------------------------------
member of the Board, no member of the Board of Directors of the Bank, and no
member of the Board of Directors of any Subsidiary, and no member of the
Committee shall be personally liable for any act or omission to act, nor for any
mistake in judgment made in good faith, unless arising out of, or resulting
from, such person's own bad faith, willful misconduct or criminal acts. To the
extent permitted by applicable law and regulation, the Corporation shall
indemnify, defend and hold harmless the members of the Board, the members of the
Board of Directors of the Bank and the members of the Board of Directors of any
Subsidiary, and members of the Committee, and each other officer or employee of
the Bank, the Corporation or of any Subsidiary to whom any power or duty
relating to the administration or interpretation of this Plan may be assigned or
delegated, from and against any and all liabilities (including any amount paid
in settlement of a claim with the approval
9
<PAGE>
of the Board), and any costs or expenses (including counsel fees) incurred by
such persons arising out of or as a result of, any act or omission to act, in
connection with the performance of such person's duties, responsibilities and
obligations under this Plan, other than such liabilities, costs, and expenses as
may arise out of, or result from the bad faith, willful misconduct or criminal
acts of such persons.
25. GOVERNING LAW. Without regard to the principles of conflicts of laws,
-------------
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.
26. INSPECTION OF PLAN. A copy of this Plan, and any amendments thereto,
------------------
shall be maintained by the Secretary of the Corporation and shall be shown to
any proper person making inquiry about it.
27. OTHER PROVISIONS. The Option Agreements authorized under this Plan
----------------
shall contain such other provisions not inconsistent with the foregoing,
including, without limitation, increased restrictions upon the exercise of
options, as the Committee may deem advisable.
10
<PAGE>
EXHIBIT A
---------
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
SHARES SUBJECT TO OPTION
OPTIONEE UNDER PLAN
- -------- -------------------------------
<S> <C>
M. Marion Clark 4.285%
Robert B. Nichols, Jr. 4.285%
Alfred L. Carr 4.285%
Everett H. Kennedy 4.285%
Donald W. Pope 4.285%
James P. Ray 4.285%
William Larry Rogers 4.285%
D. Tyson Clayton 16.80%
Peggy S. Walker 14.92%
Robert L. Pearson 9.52%
Gina B. Riggins 8.76%
Dathene Hawkins 1.55%
Judy Reneau 1.33%
Coleen Shambley 1.16%
Amy Latta 1.21%
Glenda Riggs 0.96%
Teresa Cecil 1.07%
Lola Miller 0.95%
Robert Ward 1.28%
Diane Cecil 0.74%
Linda Frazier 0.78%
Elvira Simmons 0.64%
Kendell Sturdivant 0.97%
Brenda Sykes 0.74%
Cynthia Dunn 0.78%
Christy Clayton 0.57%
Corrina Ashley 0.43%
Toni Champion 0.58%
Nancy Freeman 0.56%
Bette Walker 0.52%
Jessica Robinson 0.47%
Jill Stephens 0.51%
Sue Kinsey 0.39%
Susan Dean 0.26%
Jennifer Overman 0.44%
Carolyn Compton 0.30%
Linward Toran 0.44%
Julie Thompson 0.37%
</TABLE>
<PAGE>
EXHIBIT B
---------
PIEDMONT BANCORP, INC.
STOCK OPTION PLAN
STOCK OPTION GRANT AND AGREEMENT
THIS STOCK OPTION GRANT AND AGREEMENT ("Agreement"), being made according
to and subject to the terms and conditions of the PIEDMONT BANCORP, INC. STOCK
OPTION PLAN ("Plan"), a copy of which is attached hereto as Annex A and is
hereby incorporated by reference and made a part of this Agreement, is herein
executed and effective the _______ day of _______________, _____, between
Piedmont Bancorp, Inc. (the "Corporation") and ____________________
("Optionee"):
1. GRANT. As of the above date, the Corporation hereby grants: (i) an
-----
incentive stock option (as that term is defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code")) to purchase ________ shares of
Common Stock of the Corporation to the Optionee at the price stated in this
Agreement; and/or (ii) a nonqualified stock option to purchase __________ shares
of Common Stock of the Corporation to the Optionee at the price stated in this
Agreement.
The option(s) granted under this section and as described in this Agreement
is (are) in all respects subject to and conditioned by the terms, definitions,
and provisions of this Agreement and of the Plan. Capitalized terms in this
Agreement which are not otherwise defined but which are defined in the Plan
shall have the same meaning given to those terms in the Plan.
2. PRICE. The option price is $_____________ for each share.
-----
3. EXERCISE OF OPTION. The option(s) granted under this Agreement shall
------------------
be exercisable pursuant to the terms and conditions of the Plan and as set forth
below:
(a) Right to Exercise: There are no other terms and conditions imposed on
-----------------
the Optionee's right to exercise his options other than those imposed in the
Plan, except as stated below:
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(b) Annual Installments: Subject to the terms and conditions of the Plan,
-------------------
the incentive stock options can be exercised in annual installments as follows:
__________________ shares beginning on ______________, 19__
__________________ shares beginning on ______________, 19__
__________________ shares beginning on ______________, 19__
__________________ shares beginning on ______________, 19__
__________________ shares beginning on ______________, 19__
<PAGE>
The nonqualified options can be exercised in annual installments as follows:
__________________ shares beginning on _______________, 19__
__________________ shares beginning on _______________, 19__
__________________ shares beginning on _______________, 19__
__________________ shares beginning on _______________, 19__
__________________ shares beginning on _______________, 19__
The right to exercise the option(s) in annual installments shall be cumulative.
In addition, the option(s) shall be exercisable upon disability and death as set
forth in the Plan.
(c) Method of Exercise: The options under this Agreement shall be
------------------
exercisable by a written notice to the Secretary of the Corporation which shall
include the following:
(1) State the election to exercise the option, the number of shares
in respect of which it is being exercised, the person in whose name the
stock certificate or certificates for such shares of Common Stock is to be
registered, his or her address, and social security number;
(2) Contain any such representation and agreements as to Optionee's
investment intent with respect to such shares of Common Stock as may be
required by the Corporation;
(3) Be signed by the person entitled to exercise the option and, if
the option is being exercised by any person or persons other than the
Optionee, be accompanied by proof, satisfactory to the Corporation, of the
right of such person or persons to exercise the option in accordance with
the Plan; and
(4) Be accompanied by payment of the purchase price of any shares with
respect to which the option is being exercised which payment shall be in
form acceptable to the Committee pursuant to Section 6(b) of the Plan.
(d) Representations and Warranties: In order to exercise an option, the
------------------------------
person exercising the option must make the representations and warranties to the
Corporation as may be required by any applicable law or regulation, or as may
otherwise be required pursuant to the Plan.
(e) Approvals. In order for an option to be exercised, all filings and
---------
approvals required by applicable law and regulations or pursuant to the Plan
must have been made and obtained.
4. NON-TRANSFERABILITY OF OPTION. This option may not be transferred in
-----------------------------
any manner otherwise than by will or the laws of descent and distribution and
may be exercised during the life of the Optionee only by him or her.
2
<PAGE>
5. INVESTMENT PURPOSE. This option may not be exercised if the issuance
------------------
of shares upon such exercise would constitute a violation of any applicable
federal or state securities law or other law or valid regulation.
6. EXPIRATION OF OPTION. This option shall expire on _____________,
--------------------
_________.
7. ESCROW. All stock purchased pursuant to an incentive stock option
------
shall be held in escrow for a period which ends on the later of (i) two (2)
years from the date of the granting of the option or (ii) one (1) year after the
transfer of the stock pursuant to the exercise of the option. The stock shall
be held by the Corporation or its designee. The optionee who has exercised the
option shall have all rights of a stockholder, including, but not limited to,
the rights to vote, receive dividends and sell the stock. The sole purpose of
the escrow is to inform the Corporation of a disqualifying disposition of the
stock within the meaning of Section 422 of the Code, and it shall be
administered solely for this purpose.
8. RESOLUTION OF DISPUTES. Any dispute or disagreement which should arise
----------------------
under, or as a result of, or in any way relate to, the interpretation,
construction, or application of this Agreement will be determined by the
Committee designated in Section 2 of the Plan. Any determination made by such
Committee shall be final, binding, and conclusive for all purposes.
9. CONSTRUCTION CONTROLLED BY PLAN. The options evidenced hereby shall
-------------------------------
be subject to all of the requirements, conditions and provisions of the Plan.
This Agreement shall be construed so as to be consistent with the Plan; and the
provisions of the Plan shall be deemed to be controlling in the event that any
provision should appear to be inconsistent therewith.
10. SEVERABILITY. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such a manner as to be valid and enforceable under
applicable law, but if any provision of this Agreement is determined to be
unenforceable, invalid or illegal, the validity of any other provision or part
thereof shall not be affected thereby and this Agreement shall continue to be
binding on the parties hereto as if such unenforceable, invalid or illegal
provision or part thereof had not been included herein.
11. MODIFICATION OF AGREEMENT; WAIVER. This Agreement may be modified,
---------------------------------
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto and only subject to the limitations set forth in the Plan. No waiver
hereunder shall constitute a waiver with respect to any subsequent occurrence or
other transaction hereunder or of any other provision.
12. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph
----------------------------------------
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction, of this Agreement. As used herein, the
masculine gender shall include the feminine and neuter, and the singular number
shall include the plural, and vice versa, whenever such meanings are
appropriate.
3
<PAGE>
13. GOVERNING LAW; VENUE AND JURISDICTION. Without regard to the
-------------------------------------
principles of conflicts of laws, the laws of the State of North Carolina shall
govern and control the validity, interpretation, performance, and enforcement of
this Agreement.
14. BINDING EFFECT. This Agreement shall be binding upon and shall inure
--------------
to the benefit of the Corporation, and its successors and assigns, and shall be
binding upon and inure to the benefit of the Optionee, and his or her heirs,
legatees, personal representative, executor, administrator and permitted
assigns.
15. ENTIRE AGREEMENT. This Agreement and the Plan constitute and embody
----------------
the entire understanding and agreement of the parties hereto and, except as
otherwise provided hereunder, there are no other agreements or understandings,
written or oral, in effect between the parties hereto relating to the matters
addressed herein.
16. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have set their hands and seals the day and
year first above written.
ATTEST: PIEDMONT BANCORP, INC.
- ----------------------------- By:____________________________
(Corporate Seal)
-----------------President
OPTIONEE:
______________________________
(SEAL)
4
<PAGE>
EXHIBIT 10(ii)(b)
HILLSBOROUGH SAVINGS BANK, INC., SSB
MANAGEMENT RECOGNITION PLAN
Hillsborough Savings Bank, Inc., SSB, a North Carolina chartered savings
bank (the "Bank"), does herein set forth the terms of the Management Recognition
Plan (the "Plan").
1. Purpose of this Plan. The purpose of this Plan is to provide to the
--------------------
directors, officers and employees (the "Participants") of the Bank and of any
corporation or other entity of which the Bank owns, directly or indirectly, not
less than fifty percent (50%) of any class of the equity securities thereof (a
"Subsidiary"), an ownership interest in the Bank's parent holding company,
Piedmont Bancorp, Inc. (the "Corporation") by making awards (hereinafter
referred to as "Awards" or singularly, "Award") of shares of common stock of the
Corporation (the "Common Stock"). The Board of Directors of the Bank (the
"Board") and the Board of Directors of the Corporation believe that
participation in the ownership of the Corporation will induce Participants to
continue to serve the Bank or any Subsidiary as directors, officers and/or
employees and encourage them to contribute to the future growth and profits of
the Bank and the Corporation. In addition, the existence of this Plan will make
it possible for the Bank and its Subsidiaries to attract capable individuals to
serve as directors or officers of the Bank and its Subsidiaries. The Board
believes that the existence of this Plan will provide incentives to the
directors, officers and employees of the Bank and any Subsidiaries which will
contribute materially to the success of such companies.
2. Administration of this Plan.
---------------------------
(a) This Plan shall be administered by a committee of the Board (the
"Committee") which shall consist of not less than three non-employee members of
the Board who are "disinterested persons" as described in Rule 16b-3(c)(2)(i) of
the Rules and Regulations under the Securities Exchange Act of 1934 (the
"Exchange Act"). In the absence of a duly appointed Committee, the Plan shall
be administered by those members of the Board who are "disinterested persons,"
and by the Board if there are less than three "disinterested persons." The
Committee shall have full power and authority to construe, interpret and
administer this Plan. All actions, decisions, determinations, or
interpretations of the Committee shall be final, conclusive, and binding upon
all parties. Members of the Committee shall serve at the pleasure of the Board.
(b) The Committee shall decide (i) to whom Awards shall be made under this
Plan, except as provided in subparagraph 3(b) and paragraph 5 hereof, (ii) the
number of shares of Common Stock subject to each award except as provided in
subparagraph 3(b) and paragraph 5 hereof, (iii) the number of additional shares,
if any, to be purchased or allocated for the purposes of this Plan, (iv) the
determination of leaves of absence which may be granted to Participants without
constituting a termination of their employment for purposes of the Plan and (v)
such additional terms and conditions for Awards as the Committee shall deem
appropriate, including, without limitation, any determinations as to the
restrictions or conditions on transfer of shares of Common Stock that are
necessary or appropriate to satisfy all applicable securities laws, rules,
regulations, and listing requirements.
<PAGE>
(c) The Committee may designate any officers or employees of the Bank or of
any Subsidiary to assist in the administration of this Plan. The Committee may
authorize such individuals to execute documents on its behalf and may delegate
to them such other ministerial and limited discretionary duties as the Committee
may see fit.
(d) Any unallocated, undistributed or forfeited shares of Common Stock held
under this Plan shall be held by Robert B. Nichols, Jr., Everett H. Kennedy and
William Larry Rogers (the "Trustees") and any successor or successors who from
time to time may be appointed by the Board.
3. Shares of Common Stock Available Under the Plan.
-----------------------------------------------
(a) The Plan shall acquire a number of shares of Common Stock of the
Corporation equal to four percent (4%) of the shares of Common Stock issued in
connection with the conversion of the Bank from a North Carolina chartered
mutual savings bank to a North Carolina chartered stock savings bank on December
7, 1995 (the "Conversion"). Such shares of Common Stock may be purchased by the
Plan in the open market, or, subject to approval of the Board of Directors of
the Corporation, may be acquired through the issuance by the Corporation to the
Plan of authorized but unissued shares of Common Stock on such terms as may be
approved by the Committee and the Board of Directors of the Corporation. Such
shares (the "Plan Shares") shall be held or delivered by the Trustees or shall
be allocated and distributed pursuant to the terms of this Plan.
(b) Upon the purchase of the Plan Shares as provided in subparagraph (a)
above, such Plan Shares shall be allocated as provided in paragraph 5 hereof.
4. Eligibility. The Participants in this Plan to whom Awards may be made
-----------
shall be the following: members of the Board, members of the Board of Directors
of any Subsidiary, and such officers and employees of the Bank and/or of any
Subsidiary as may be designated by the Board. Notwithstanding the foregoing, no
member of the Committee is eligible to receive any grants or any awards of
shares under this Plan during the one-year period prior to serving on the
Committee or during such service, except for Awards of Plan Shares which are
distributed pursuant to the provisions of paragraph 5 hereof.
5. Award of Plan Shares. Subject to the provisions of paragraph 7 hereof,
--------------------
effective on the date this Plan is approved by a majority of the shareholders of
the Corporation, or as soon as practicable thereafter, the Plan Shares shall be
awarded to Participants listed in, and in the amounts set forth in, Exhibit A.
6. Vesting of Shares.
-----------------
(a) Shares granted under this Plan shall vest and the right of a
Participant to the Plan Shares shall be nonforfeitable in accordance with the
following schedule:
2
<PAGE>
Date When Plan Shares Percentage of Plan
Become Vested Shares Vested
------------------- -------------------
First Anniversary of Award of Plan Shares 20%
Second Anniversary of Award of Plan Shares 20%
Third Anniversary of Award of Plan Shares 20%
Fourth Anniversary of Award of Plan Shares 20%
Fifth Anniversary of Award of Plan Shares 20%
(b) In determining the number of shares vested under the above vesting
schedule, a Participant shall not receive fractional shares. If the product
resulting from multiplying the vested percentage times the allocated shares
results in a fractional share, then a Participant's vested right shall be
rounded down to the nearest whole number of shares.
(c) In the event any Participant shall no longer be either a director or an
employee of the Bank or any Subsidiary for any reason, other than as provided in
subparagraph 6(d)below, and such Participant does not have a 100% vested
interest in his or her shares under the Plan, then any shares which are not
vested, based upon the applicable schedule in subparagraph 6(a) above, shall be
forfeited and shall be available again for Awards to Participants as may be
determined by the Committee.
(d) In the event that a Participant shall no longer be an employee or a
director of the Bank or any Subsidiary because of such Participant's disability
or death, prior to the date when all shares allocated to him or her would be
100% vested in accordance with the schedule in subparagraph 6(a) above, then,
notwithstanding the foregoing schedule in subparagraph 6(a) above, all shares
allocated to such Participant shall immediately become fully vested and
nonforfeitable. For purposes of this Plan, the term "disability" shall be
defined in the same manner as such term is defined in Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended (the "Code").
7. Action Required of Participants.
-------------------------------
(a) If required by the Committee, each Participant receiving an Award of
shares under this Plan shall represent to and agree with the Corporation, the
Bank, the Committee and the Trustees (i) that he is acquiring such shares on his
own behalf as an investment and not with a present intention of distribution or
re-sale and (ii) that there shall be placed upon the certificates representing
such shares a legend setting forth these representations and agreements or a
reference thereto. Such shares shall be transferable thereafter only if the
proposed transfer shall be permissible under this Plan and if, in the opinion of
counsel for the Corporation, such transfer shall at such time be in compliance
with all applicable federal and state securities laws and regulations.
(b) Each Participant receiving an Award of Plan Shares under this Plan
shall deliver to the Bank a Stock Grant Agreement, substantially in the form
attached hereto as Exhibit B, as modified as the Committee deems necessary or
desirable (a "Stock Grant Agreement"), which shall be signed by such
Participant.
3
<PAGE>
8. Restrictions.
------------
(a) Plan Shares subject to an award made under this Plan shall forthwith,
after the Participant makes any representations required by paragraph 7 hereof,
be issued in a certificate or certificates for such shares which shall be
prepared in the name of such Participant or any transferee permitted by
paragraph 12(a) (a "Permitted Transferee"). Such Participant or transferee
shall thereupon be a shareholder with respect to all of the shares represented
by such certificate or certificates and shall have all of the rights of a
shareholder with respect to all of such shares, including the right to vote such
shares and to receive all dividends and other distributions with respect thereto
subject to possible forfeiture as set forth in paragraph 6 and subject to the
provisions of paragraph 10 hereof.
(b) Certificates of stock representing shares subject to an Award made
under this Plan shall be imprinted with a legend to the effect that the shares
represented are subject to restrictions on transfer and potential forfeiture in
accordance with the terms of the Stock Grant Agreement and this Plan, and the
transfer agent for Common Stock shall be instructed to that effect with respect
to such shares. In aid of such restrictions, the Participant or Permitted
Transferee shall, immediately upon receipt of the certificate or certificates,
deposit such certificate or certificates together with a stock power or other
instrument of transfer, appropriately endorsed in blank, with the Trustees or
with such other escrow agent as may be designated by the Trustees, with the
expenses of any such escrow arrangement to be borne by the Bank.
(c) In addition, all Plan Shares which are awarded with respect to
Participants who are directors or executive officers of the Bank, without the
written consent of the Administrator of the Savings Institutions Division of the
North Carolina Department of Commerce, may not be sold during a period of one
year following the effective date of the Conversion, except upon death of the
director or executive officer. Certificates of stock representing Plan Shares
awarded with respect to Participants who are directors and executive officers of
the Bank (including those transferred to Permitted Transferees) shall be
imprinted with a legend to that effect, and the transfer agent for such Plan
Shares shall be instructed to that effect with respect to such shares.
(d) In the event that, as the result of a stock split or stock dividend or
combination of shares or any other change or exchange for other securities by
reclassification, reorganization, merger, consolidation, recapitalization, or
otherwise, a Participant or Permitted Transferee shall, as the owner of the
shares subject to an Award made under this Plan and subject to the restrictions
hereunder, be entitled to new or additional or different shares of Common Stock
or other securities, the certificate or certificates for, or other evidence of,
such new or additional or different shares or other securities, together with a
stock power or other instrument of transfer appropriately endorsed, shall also
be imprinted with one or more legends as provided in subparagraph 8(b) and 8(c)
above and deposited by such Participant or Permitted Transferee with the
Trustees, and all provisions of this Plan relating to vesting, restrictions and
lapse of restrictions herein set forth shall thereupon be applicable to such new
or additional or different shares or other securities to the extent applicable
to the shares with respect to which they were distributed; provided, however,
that if a Participant or Permitted Transferee should receive rights, warrants or
fractional interests in respect of any of such shares then being held under the
terms of this Plan, such rights or warrants may be held, exercised, sold or
otherwise disposed of, and
4
<PAGE>
such fractional interests may be settled, by such Participant or Permitted
Transferee free and clear of the restrictions herein set forth.
(e) The restriction to which shares subject to an Award made under this
Plan shall be subject is that if the directorship or employment of the
Participant with respect to whom an Award is made (whichever position resulted
in the Award) should be terminated for any reason during the "restricted period"
(as defined in subparagraph 12(b) hereof), except as otherwise specifically
provided in paragraph 6 hereof, the Participant's or Permitted Transferee's
interest in the shares issued under this Plan shall be forfeited as provided in
the applicable schedule in subparagraph 6(a) hereof.
9. Effect of Award on Status of Participant. The fact that an Award is
----------------------------------------
made to a Participant under this Plan shall not confer on such Participant any
right to continued service on the Board or on the Board of Directors of any
Subsidiary, nor any right to continued employment with the Bank or any
Subsidiary; nor shall it limit the right of the Bank, the Corporation, or any
Subsidiary to remove such Participant from any such boards, or to terminate his
or her employment at any time.
10. Voting Rights; Dividends; Other Distributions. After an Award of Plan
---------------------------------------------
Shares to a Participant or Permitted Transferee, the Participant or Permitted
Transferee shall have the full power to vote all of the Plan Shares held by the
Trustees in his name from time to time and shall be entitled to receive all cash
dividends declared upon any such Plan Shares held by the Trustees in his name
from time to time. All shares of Common Stock or other securities, including
but not limited to stock dividends, issued in respect of such Plan Shares or in
substitution thereof, whether by the Corporation or by another issuer, shall be
held by the Trustees and shall be subject to all terms and conditions of this
Plan and shall be redelivered to a Participant or Permitted Transferee or
delivered as instructed by the Committee under the same circumstances as the
shares with respect to, or in substitution for, which they were issued;
provided, however, that if a Participant or Permitted Transferee should receive
rights, warrants or fractional interests in respect of any of the shares held by
the Trustees in his name, such rights or warrants may be held, exercised, sold
or otherwise disposed of, and such fractional interests may be settled, by such
Participants or Permitted Transferees free and clear of the restrictions herein
set forth.
Notwithstanding the foregoing, if a Participant or Permitted Transferee
hereunder forfeits any Plan Shares pursuant to the terms of this Plan, the
Participant or Permitted Transferee, as applicable, shall, within 30 days after
the effective date of such forfeiture, pay the Corporation an amount equal to
the dividends received by such Participant or Permitted Transferee with respect
to such forfeited Plan Shares.
11. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation.
---------------------------------------------------------------------
In the event of a change in the number or type of shares of Common Stock
outstanding, or in the event shares of Common Stock are decreased, changed into
or exchanged for securities of a different entity, by reason of a
reclassification, recapitalization, reorganization, or other similar capital
adjustment; merger or consolidation of the Corporation; or the sale by the
Corporation of all or a substantial portion of its assets, or the occurrence of
any other event which could affect the implementation of this Plan and the
realization of its objectives, the number or kind of shares subject to Awards
which have occurred, or could occur, under this Plan shall be proportionately
and equitably adjusted by the Committee.
5
<PAGE>
12. Non-Transferability.
-------------------
(a) Any shares subject to an Award made under this Plan shall not be sold,
exchanged, transferred, pledged, hypothecated or otherwise disposed of during
the "restricted period." Nothing herein shall preclude a Participant from making
a gift of any such shares to a spouse, child, stepchild, grandchild, parent or
sibling, or legal dependent of such Participant, to a trust of which the
beneficiary or beneficiaries of the trust shall be either a person designated
herein or such Participant, or to a civic or charitable organization designated
by the Participant; provided, however, that any such shares so given by a
Participant shall remain subject to the restrictions, obligations and conditions
set forth in this Plan, including, but not limited to, the escrow provisions set
forth in paragraph 8(b). In addition, such shares may be tendered in response
to a tender offer for or a request or invitation to tenders of greater than
fifty percent (50%) of the outstanding Common Stock and may be surrendered in a
merger, consolidation or share exchange involving the Corporation; provided,
however, in each case, that except as otherwise provided herein, the securities
or other consideration received in exchange therefor shall thereafter be subject
to the restrictions and conditions set forth in this Plan, including, but not
limited to, the escrow provisions set forth in paragraph 8(b).
(b) The term "restricted period" with respect to shares subject to an Award
made under this Plan shall be the period commencing on the date of making such
Award of such shares to a Participant and ending on the date on which such
shares are no longer subject to forfeiture as provided in paragraph 6 hereof.
The date of making an Award shall be the date of execution by a Participant of a
Stock Grant Agreement in the form referred to in subparagraph 7(b) hereof.
13. Impact of Award on Other Benefits of Participant. The value of any
------------------------------------------------
Award, either on the date of the Award or at the time such shares become vested,
shall not be includable as compensation or earnings for purposes of any other
benefit plan offered by the Bank, the Corporation or any Subsidiary.
14. Corporate Action. The making of an Award under this Plan shall not
----------------
affect in any way the right or power of the Corporation or its shareholders or
the Bank or its shareholders or any Subsidiary or its shareholders to make or
authorize any adjustment, recapitalization, reorganization, or other change in
the Corporation's, the Bank's or any Subsidiary's capital structure or its
business, or any merger or consolidation of the Corporation, the Bank or any
Subsidiary, or the issuance of any bonds, debentures, preferred or other capital
stock or rights with respect thereto, or the dissolution or liquidation of the
Corporation, the Bank or any Subsidiary, or any sale or transfer of all or any
part of the Corporation's, the Bank's or any Subsidiary's assets or business.
15. Tax Withholding. The Bank, the Corporation or any Subsidiary shall
---------------
have the right to deduct or otherwise effect a withholding of any amount
required by federal or state laws to be withheld with respect to the making of
an Award or the sale of shares acquired under this Plan in order for the Bank,
the Corporation or any Subsidiary to obtain a tax deduction otherwise available
as a consequence of such Award or sale, as the case may be.
6
<PAGE>
16. Exculpation and Indemnification. In connection with this Plan, no
-------------------------------
member of the Board, no member of the Board of Directors of the Corporation, no
member of the Committee and no Trustee shall be personally liable for any act or
omission to act in his capacity as a member of the Board, the Board of Directors
of the Corporation or the Committee or as a Trustee, nor for any mistake in
judgment made in good faith, unless arising out of, or resulting from, such
person's own bad faith, willful misconduct, or criminal acts. To the extent
permitted by applicable law and regulation, the Bank shall indemnify, defend and
hold harmless the members of the Board, the members of the Board of Directors of
the Corporation and the Committee and each Trustee and each other officer or
employee of the Bank, the Corporation or of any Subsidiary to whom any duty or
power relating to the administration or interpretation of this Plan may be
assigned or delegated, from and against any and all liabilities (including any
amount paid in settlement of a claim with the approval of the Board) and any
costs or expenses (including counsel fees) incurred by such persons arising out
of, or as a result of, any act or omission to act in connection with the
performance of such person's duties, responsibilities, and obligations under
this Plan, other than such liabilities, costs, and expenses as may arise out of,
or result from, the bad faith, willful misconduct, or criminal acts of such
persons.
17. Amendment and Modification of this Plan. The Board may at any time,
---------------------------------------
and from time to time, amend or modify this Plan (including the form of Stock
Grant Agreement) in any respect; provided, however, any amendment or
modification of this Plan shall not in any manner affect any Award of shares
theretofore made to a Participant under this Plan without the consent of such
Participant or any permitted transferee of such Participant and further provided
that no amendment shall be made to paragraph 5 of the Plan more than once every
six months other than to comport with changes in the Code, Employee Retirement
Income Security Act or the rules thereunder.
18. Termination and Expiration of this Plan. This Plan may be abandoned,
---------------------------------------
suspended, or terminated, in whole or in part, at any time by the Board;
provided, however, that abandonment, suspension, or termination of this Plan
shall not affect any Award theretofore made under this Plan; and provided
further, that in no event shall this Plan be terminated at the time of or
following any merger or consolidation of the Corporation or the Bank, unless and
until the surviving entity shall have made provision for an equivalent benefit
for all the then current participants in the Plan. Unless sooner terminated,
this Plan shall terminate at the close of business on the day that is the tenth
(10th) anniversary of the date of approval of the Plan by a majority of the
shareholders of the Corporation; and no Award of shares may be made under this
Plan thereafter. Such termination shall not effect any Award of shares
theretofore made. In the event that the Board terminates this Plan in whole,
any shares held by the Trustees pursuant to paragraph 2(d) which have not been
allocated to eligible Participants, together with any other trust assets, shall
revert to the Bank.
19. Effective Date. This Plan has been adopted by the Board to be
--------------
effective as of the date of approval of the Plan by a majority of the
shareholders of the Corporation as required by the regulations of the Federal
Deposit Insurance Corporation.
20. Captions and Headings; Gender and Number. Captions and paragraph
----------------------------------------
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or construction of this Plan. As used
7
<PAGE>
herein, the masculine gender shall include the feminine and neuter, and the
singular number shall include the plural, and vice versa, whenever such meanings
are appropriate.
21. Expenses of Administration of Plan. All costs and expenses incurred
----------------------------------
in the operation and administration of this Plan shall be borne by the Bank or
by a Subsidiary.
22. Governing Law. Without regard to the principles of conflicts of laws,
-------------
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.
23. Inspection of Plan. A copy of this Plan, and any amendments thereto,
------------------
shall be maintained by the Secretary of the Bank and shall be shown to any
proper person making inquiry about it.
8
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
MRP
PERCENTAGE OF TOTAL
NAME PLAN SHARES/1/
- ---- -------------------
<S> <C>
M. Marion Clark 4.285%
Robert B. Nichols, Jr. 4.285%
Alfred L. Carr 4.285%
Everett H. Kennedy 4.285%
Donald W. Pope 4.285%
James P. Ray 4.285%
William Larry Rogers 4.285%
D. Tyson Clayton 11.76%
Peggy S. Walker 10.44%
Robert L. Pearson 6.66%
Gina B. Riggins 6.13%
Dathene Hawkins 2.70%
Judy Reneau 2.33%
Coleen Shambley 2.03%
Amy Latta 2.13%
Glenda Riggs 1.68%
Teresa Cecil 1.88%
Lola Miller 1.66%
Robert Ward 2.22%
Diane Cecil 1.30%
Linda Frazier 1.37%
Elvira Simmons 1.12%
Kendell Sturdivant 1.71%
Brenda Sykes 1.31%
Cynthia Dunn 1.37%
Christy Clayton 1.01%
Corrina Ashley 0.75%
Toni Champion 1.00%
Nancy Freeman 0.96%
Bette Walker 0.91%
Jessica Robinson 0.82%
Jill Stephens 0.89%
Sue Kinsey 0.68%
Susan Dean 0.45%
Jennifer Overman 0.76%
Carolyn Compton 0.53%
Linward Toran 0.76%
Julie Thompson 0.67%
___________________
</TABLE>
/1/Total Plan Shares shall be equal to four percent (4%) of the number of
shares of Common Stock issued by the Corporation in connection with the
Conversion.
<PAGE>
EXHIBIT B
STATE OF NORTH CAROLINA
COUNTY OF ORANGE
STOCK GRANT AGREEMENT
THIS STOCK GRANT AGREEMENT (the "Agreement") is made and entered into
as of the ____ of ___________________, _______ (the "Effective Date"), by and
among Hillsborough Savings Bank, Inc., SSB (the "Bank"), a North Carolina
corporation, _______________________ (the "Participant") and Robert B. Nichols,
Jr., Everett H. Kennedy and William Larry Rogers (the "Trustees").
WHEREAS, a Management Recognition Plan (the "Plan") was adopted by the
Board of Directors of the Bank (the "Bank") and approved by the Board of
Directors and by a majority of the shareholders of Piedmont Bancorp, Inc., the
holding company of the Bank (the "Corporation").
WHEREAS, it has been determined that it is desirable and in the best
interest of the Bank to make an award (the "Award") of certain shares of the
Common Stock of the Corporation, under the Plan, to the Participant, subject to
certain restrictions as specified below; and
WHEREAS, capitalized terms not otherwise defined herein shall have the
same meaning given to such terms in the Plan.
NOW, THEREFORE, the Parties agree as follows:
1. Date of Award. The date of making the Award under this Agreement
-------------
is the _____ day of _________________, ______. This Award has been made in
recognition of the Participant's status and service as a ____________________ of
_____________________________________________. The Participant is ____ or _____
is not a director or executive officer of the Bank.
2. Receipt by Participant. The Participant acknowledges receipt of
----------------------
________________________________ (__________) shares of Common Stock (the
"Restricted Stock"), and agrees to the execution of stock powers or such other
transfer authorizations as the Committee shall request, in blank, covering the
Restricted Stock to be held by the Trustees until the Restricted Stock becomes
vested and nonforfeitable pursuant to the Plan and this Agreement.
3. Investment Representation and Transfer Restrictions.
---------------------------------------------------
(a) Investment Representation. Participant makes and agrees to the
-------------------------
investment representation, if any, attached hereto as Annex A, and the Committee
may cause a legend to be placed on any certificate representing any of the
shares of Restricted Stock to make appropriate reference to such representation.
(b) Securities Law and Regulations. The Participant agrees that the
-------------------------------
Restricted Stock shall be subject to such stop-transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Securities and Exchange Commission, any stock
exchange or interdealer quotation system upon which the Common Stock is then
listed and any
<PAGE>
other applicable federal or state securities laws, rules or regulations, and the
Committee may cause a legend or legends to be placed on any certificate
representing any of the shares of Restricted Stock to make appropriate reference
to such restrictions.
(c) Other Transfer Restrictions. If paragraph 1 above states that
---------------------------
Participant is a director or an executive officer of the Bank and if less than
one year has passed since the consummation of the Conversion (defined below),
the Participant agrees with the Bank that each certificate representing any of
the Restricted Stock may bear a legend, substantially in the form attached as
Annex B hereto, to the effect that, during the one year period following the
effective date of the conversion of the Bank from a North Carolina chartered
mutual savings bank to a North Carolina chartered stock savings bank (the
"Conversion"), the Restricted Stock represented thereby may not be sold without
the written consent of the Administrator of the Savings Institutions Division,
North Carolina Department of Commerce, except upon the death of the Participant.
4. Receipt by the Trustees. The Trustees acknowledge receipt from
-----------------------
the Participant of the Restricted Stock, registered in the name of the
Participant, and acknowledge receipt of stock powers executed in blank by the
Participant covering all of the Restricted Stock. The Restricted Stock shall be
held by the Trustees and distributed or transferred in accordance with the Plan
and as set forth herein.
5. Vesting and Delivery of Restricted Stock by the Trustees.
--------------------------------------------------------
(a) Periodic Vesting. Restricted Stock shall vest and become
----------------
nonforfeitable in accordance with the Plan.
(b) Delivery of Restricted Stock to the Participant. After (i)
-----------------------------------------------
the date on which shares of Restricted Stock have become vested as provided in
the Plan, the Committee shall instruct the Trustees to deliver to the
Participant, the Participant's designee, such other person as shall have been
designated as Participant's beneficiary in accordance with this Agreement, or
any other permitted recipient pursuant to the Plan, as applicable, certificates
representing the shares of Restricted Stock which have become vested and
nonforfeitable, as the Committee shall determine, free from any restrictions
imposed by this Agreement other than such restrictions and conditions as may be
deemed necessary by the Committee pursuant to paragraph 3 above.
(c) Delivery of Forfeited Restricted Stock. If the Restricted
--------------------------------------
Shares, or any of them, are forfeited pursuant to the Plan, the Board shall
instruct the Trustees concerning the disposition of such forfeited shares.
Thereafter such forfeited shares shall cease to be subject to this Agreement.
6. Repayment of Dividends. If the Participant hereunder forfeits any
----------------------
shares of Restricted Stock pursuant to the Plan, the Participant shall, within
30 days after the effective date of such forfeiture, pay the Corporation an
amount equal to the dividends received by the Participant with respect to
forfeited shares of Restricted Stock as set forth in the Plan.
2
<PAGE>
7. Designation of Beneficiary. The Participant hereby designates the
--------------------------
person(s) described on Annex C as the beneficiary or beneficiaries who shall be
entitled to receive the Restricted Stock, if any, distributable to the
Participant upon his death. The Participant may, from time to time, revoke or
change his beneficiary designation without the consent of any prior beneficiary,
if any, by filing a new designation with the Committee. The last such
designation received by the Committee shall be controlling; provided, however,
that no designation, or change or revocation thereof, shall be effective unless
received by the Committee prior to the Participant's death, and in no event
shall it be effective as of a date prior to such receipt.
If no such beneficiary designation is in effect at the time of the
Participant's death, or if no designated beneficiary survives the Participant,
or if such designation conflicts with law, the Participant's estate shall be
deemed to have been designated his beneficiary and shall receive the Restricted
Stock, if any, distributable to the Participant upon his death. If the
Committee is in doubt as to the right of any person to receive such
distribution, the Committee may direct the Trustees to retain the Restricted
Stock, without liability for any interest in respect thereof, until the rights
thereto are determined, or the Committee may direct the transfer of such
Restricted Stock into any court of appropriate jurisdiction and such transfer
shall be deemed a complete discharge of the obligations of the Bank, the
Corporation, the Committee and Trustees hereunder.
8. Effect of Award on Status of Participant. The fact that an Award
----------------------------------------
has been made to the Participant under this Plan shall not confer on the
Participant any right to continued service on the Board or on the board of
directors of any Subsidiary, nor to continued employment with the Bank or any
Subsidiary; nor shall it limit the right of the Bank, the Corporation or of any
Subsidiary to remove the Participant from any such boards, or to terminate his
employment at any time without prior notice.
9. Impact of Award on Other Benefits of Participant. The value of
------------------------------------------------
the Restricted Stock on the date of the Award or at the time the Restricted
Stock becomes vested, shall not be includable as compensation or earnings for
purposes of any other benefit plan offered by the Bank, the Corporation or any
Subsidiary.
10. Tax Withholding. All Restricted Stock distributed pursuant to
---------------
this Agreement shall be subject to applicable federal, state and local
withholding for taxes. The Participant expressly acknowledges and agrees to
such withholding without regard to whether the Restricted Stock may then be sold
or otherwise transferred by the Participant.
11. Notices. Any notices or other communications required or
-------
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been sufficiently given if delivered personally or three business
days after deposit in the United States mail as Certified Mail, return receipt
requested, properly addressed and postage prepaid, if to the Bank, the Committee
or the Trustees at the Bank's principal office address at 260 South Churton
Street, Hillsborough, North Carolina 27278; and, if to the Participant, at his
last address appearing on the books of the Bank. The Bank and the Participant
may change their address or addresses by giving written notice of such change as
provided herein. Any notice or other communication hereunder shall be deemed to
have been given on the date actually delivered or as of the third (3rd) business
day following the date mailed as set forth above, as the case may be.
3
<PAGE>
12. Construction Controlled by Plan. The Plan, a copy of which is
-------------------------------
attached hereto as Annex D, is incorporated herein by reference. The Award of
Restricted Shares shall be subject to the terms and conditions of the Plan, and
the Participant hereby assumes and agrees to comply with all of the obligations
imposed upon the Participant in the Plan. This Agreement shall be construed so
as to be consistent with the Plan; and the provisions of the Plan shall be
deemed to be controlling in the event that any provision hereof should appear to
be inconsistent therewith.
13. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such a manner as to be valid and enforceable
under applicable law, but if any provision of this Agreement is determined to be
unenforceable, invalid or illegal, the validity of any other provision or part
thereof shall not be affected thereby and this Agreement shall continue to be
binding on the parties hereto as if such unenforceable, invalid or illegal
provision or part thereof had not been included herein.
14. Governing Law. Without regard to the principles of conflicts of
-------------
laws, the laws of the State of North Carolina shall govern and control the
validity, interpretation, performance, and enforcement of this Agreement.
15. Modification of Agreement; Waiver. This Agreement may be
---------------------------------
modified, amended, suspended or terminated, and any terms, representations or
conditions may be waived, but only by a written instrument signed by each of the
parties hereto or their successors in interest. No waiver hereunder shall
constitute a waiver with respect to any subsequent occurrence or other
transaction hereunder or of any other provision hereof.
16. Binding Effect. This Agreement shall be binding upon and shall
--------------
inure to the benefit of the parties hereto, and their respective heirs,
legatees, personal representatives, executors, and administrators, successors
and assigns.
17. Entire Agreement. This Agreement and the Plan constitute and
----------------
embody the entire understanding and agreement of the parties hereto and, except
as otherwise provided hereunder, there are no other agreements or
understandings, written or oral, in effect between the parties hereto relating
to the matters addressed herein.
18. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
19. Substitution of Trustee. In the event any new trustee is
-----------------------
substituted for any Trustee pursuant to the Plan, such substitute trustee shall
also be substituted as a Trustee hereunder.
4
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this instrument to be executed
in its corporate name by its President, or one of its Vice Presidents, and
attested by its Secretary or one of its Assistant Secretaries, and its corporate
seal to be hereto affixed, all by, authority of its Board of Directors first
duly given; and each individual party hereto has hereunto set his hand and
adopted as his seal the typewritten word "SEAL" appearing beside his name, all
done this the day and year first above written.
HILLSBOROUGH SAVINGS BANK, INC., SSB
By:____________________________________________
__________________ President
ATTEST:
_____________________________
________________ Secretary
[Corporate Seal]
PARTICIPANT
_________________________________________(SEAL)
_________________________________________(SEAL)
TRUSTEE
_________________________________________(SEAL)
TRUSTEE
_________________________________________(SEAL)
TRUSTEE
5
<PAGE>
ANNEX A
INVESTMENT REPRESENTATION
-------------------------
<PAGE>
ANNEX B
FORM OF LEGEND
--------------
The shares represented by this certificate are subject to restrictions
on transfer and, for a period ending December 7, 1996, may not be sold without
the written permission of the Administrator of the Savings Institutions
Division, North Carolina Department of Commerce, except in the event of the
death of the holder thereof.
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Earnings per common share of $0.45 for the year ended June 30, 1996 was
calculated by dividing post-conversion net income of $1,102,000 for the year
ended June 30, 1996 by the average common and common equivalent shares
outstanding of 2,446,832.
<PAGE>
Exhibit 12
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item
7 represent average daily balances.
<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
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 723
<INT-BEARING-DEPOSITS> 1,947
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,098
<INVESTMENTS-CARRYING> 3,519
<INVESTMENTS-MARKET> 3,477
<LOANS> 91,187
<ALLOWANCE> 608
<TOTAL-ASSETS> 128,711
<DEPOSITS> 73,361
<SHORT-TERM> 17,250
<LIABILITIES-OTHER> 1,050
<LONG-TERM> 0
0
0
<COMMON> 22,846
<OTHER-SE> 14,204
<TOTAL-LIABILITIES-AND-EQUITY> 128,711
<INTEREST-LOAN> 7,591
<INTEREST-INVEST> 1,431
<INTEREST-OTHER> 226
<INTEREST-TOTAL> 9,248
<INTEREST-DEPOSIT> 3,614
<INTEREST-EXPENSE> 4,414
<INTEREST-INCOME-NET> 4,834
<LOAN-LOSSES> 96
<SECURITIES-GAINS> (47)
<EXPENSE-OTHER> 2,449
<INCOME-PRETAX> 2,544
<INCOME-PRE-EXTRAORDINARY> 1,695
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,695
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.33
<LOANS-NON> 758
<LOANS-PAST> 301
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,749
<ALLOWANCE-OPEN> 515
<CHARGE-OFFS> 4
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 608
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 605
</TABLE>
