UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1997
---------------------
Commission File Number 001-14070
PIEDMONT BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1936232
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
260 South Churton Street, Hillsborough, NC 27278
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (919) 732-2143
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
As of November 3, 1997, 2,750,800 shares of the registrant's common stock, no
par value, were outstanding. The registrant has no other classes of securities
outstanding.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1997 1997
(unaudited) *
--------- ---------
(in thousands, except shares)
<S> <C> <C>
Assets
Cash ......................................................... $ 893 $ 879
Interest-bearing deposits in other financial institutions .... 1,828 3,766
Investment securities:
Available-for-sale ........................................ 12,186 10,866
Held-to-maturity .......................................... 3,327 3,341
Loans receivable (net of allowance for loan losses of $854 and
$796 at September 30, 1997 and June 30, 1997, respectively) 104,260 100,173
Federal Home Loan Bank stock, at cost ........................ 978 920
Premises and equipment ....................................... 1,182 1,205
Prepaid expenses and other assets ............................ 1,890 1,611
--------- ---------
Total assets ....................................... $ 126,544 $ 122,761
========= =========
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing .............................. 2,301 2,074
Savings, NOW and MMDA ..................................... 29,084 28,594
Certificates of Deposit ................................... 53,507 54,192
--------- ---------
84,892 84,860
Advances from the Federal Home Loan Bank ..................... 19,550 16,500
Accrued expenses and other liabilities ....................... 1,311 985
--------- ---------
Total liabilities ....................................... 105,753 102,345
--------- ---------
Stockholders' Equity
Preferred stock, no par value, 5,000,000 shares authorized;
none issued ............................................... -- --
Common stock, no par value, 20,000,000 shares authorized;
2,750,800 shares issued and outstanding ................... 9,145 9,143
Unearned ESOP shares ......................................... (859) (933)
Unamortized deferred compensation ............................ (1,167) (1,269)
Unallocated restricted stock ................................. (58) (21)
Retained earnings, substantially restricted (note 6) ......... 13,731 13,580
Unrealized holding losses on available-for-sale securities ... (1) (84)
--------- ---------
Total stockholders' equity ............................. 20,791 20,416
--------- ---------
Total liabilities and stockholders' equity ......... $ 126,544 $ 122,761
========= =========
</TABLE>
* Derived from audited financial statements
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended
September 30,
--------------------
1997 1996
------- -------
(in thousands, except per share data)
<S> <C> <C>
Interest income:
Interest on loans ............................................... $ 2,187 $ 1,970
Interest on deposits in other financial institutions ............ 16 16
Interest and dividends on investment securities:
Taxable ...................................................... 203 323
Non-taxable .................................................. 48 154
------- -------
Total interest income .................................. 2,454 2,463
------- -------
Interest expense:
Interest on deposits ............................................ 993 859
Interest on borrowings .......................................... 266 252
------- -------
Total interest expense ................................. 1,259 1,111
------- -------
Net interest income ................................................ 1,195 1,352
Provision for loan losses .......................................... 24 21
------- -------
Net interest income after provision for loan losses .... 1,171 1,331
------- -------
Other income:
Customer service and other fees ................................. 52 51
Mortgage loan servicing fees .................................... 21 22
Gain (loss) on sale of investment securities .................... 6 (26)
Lower-of-cost or market adjustment on loans held-for-sale ....... 33 37
Other ........................................................... 25 18
------- -------
Total other income ..................................... 137 102
------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended
September 30,
--------------------
1997 1996
------- -------
(in thousands, except per share data)
<S> <C> <C>
Other expenses:
SAIF recapitalization assessment ................................ -- 487
Compensation and fringe benefits (note 5) ....................... 423 416
Data and items processing ....................................... 55 62
Deposit insurance premiums ...................................... 13 45
Occupancy expense ............................................... 25 30
Furniture and equipment expense ................................. 25 30
Professional fees ............................................... 37 31
Other ........................................................... 93 113
------- -------
Total other expenses ................................... 671 1,214
------- -------
Income before income tax expense ....................... 637 219
Income tax expense ................................................. 223 36
------- -------
Net income ....................................... $ 414 $ 183
======= =======
Net income per share (notes 2 and 7) ............................... $ 0.15 $ 0.07
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
Unearned Unamortized Unallocated
Shares Common ESOP Deferred Restricted
Outstanding Stock Shares Compensation Stock
----------- ----- ------ ------------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 ......................... 2,645,000 $ 25,398 $ (2,552) $ -- $ --
Net income ................................. -- -- -- -- --
Issuance of restricted stock ............... 105,800 1,587 -- (1,587) --
Release of ESOP shares ..................... -- -- 107 -- --
Amortization of unearned compensation ...... -- -- -- 26 --
Cash dividends declared .................... -- -- -- -- --
Change in unrealized holding gains (losses),
net of income taxes...................... -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at September 30, 1996 .................... 2,750,800 $ 26,985 $ (2,445) $ (1,561) $ --
========= ========= ========= ========= =========
Balance at June 30, 1997 ......................... 2,750,800 $ 9,143 $ (933) $ (1,269) $ (21)
Net income ................................. -- -- -- -- --
Release of ESOP shares ..................... -- (12) 74 -- --
Amortization of unearned compensation ...... -- -- -- 65 --
Forfeiture of restricted stock ............. -- -- 37 (37)
Tax benefit of dividends on restricted stock -- (3) -- -- --
Cash dividends declared, net of
forfeited dividends on restricted stock.. -- 17 -- -- --
Change in unrealized holding gains (losses),
net of income taxes...................... -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at September 30, 1997 .................... 2,750,800 $ 9,145 $ (859) $ (1,167) $ (58)
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
(continued)
Unrealized Total
Retained holding gains Stockholders'
Earnings (losses) Equity
-------- -------- ------
<S> <C> <C> <C>
Balance at June 30, 1996 ......................... $ 14,783 $ (579) $ 37,050
Net income ................................. 183 -- 183
Issuance of restricted stock ............... -- -- --
Release of ESOP shares ..................... -- -- 107
Amortization of unearned compensation ...... -- -- 26
Cash dividends declared .................... (305) -- (305)
Change in unrealized holding gains (losses),
net of income taxes...................... -- (175) (175)
--------- --------- ---------
Balance at September 30, 1996 .................... $ 14,661 $ (404) $ 37,236
========= ========= =========
Balance at June 30, 1997 ......................... $ 13,580 $ (84) $ 20,416
Net income ................................. 414 -- 414
Release of ESOP shares ..................... -- -- 62
Amortization of unearned compensation ...... -- -- 65
Forfeiture of restricted stock ............. -- -- --
Tax benefit of dividends on restricted stock -- -- (3)
Cash dividends declared, net of
forfeited dividends on restricted stock . (263) -- (246)
Change in unrealized holding gains (losses),
net of income taxes...................... -- 83 83
--------- --------- ---------
Balance at September 30, 1997 .................... $ 13,731 $ (1) $ 20,791
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended
September 30,
--------------------
1997 1996
------- -------
<S> <C> <C>
Operating activities:
Net income .................................................................. $ 414 $ 183
Adjustments to reconcile net income to net cash provided
(used) by operating activities
Depreciation .......................................................... 25 24
Net amortization (accretion) .......................................... 26 39
Provision for loan losses ............................................. 24 21
Net (gain) loss on sale of investments and mortgage-backed securities . (6) 26
Release of ESOP shares ................................................ 62 107
Compensation earned under MRP ......................................... 65 26
Net decrease (increase) in mortgage loans held for sale ............... (609) 3
Increase in other assets .............................................. (326) (370)
Increase in other liabilities ......................................... 330 637
------- -------
Net cash provided by operating activities ....................... 5 696
------- -------
Investing activities:
Net increase in loans held for investment ................................... (3,519) (3,354)
Principal collected on mortgage-backed securities ........................... 95 164
Purchases of investment securities classified as available-for-sale ......... (2,782) --
Proceeds from sales of investment securities classified as available-for-sale 1,508 1,115
Proceeds from call of investment securities classified as held-to-maturity .. 10 --
Purchases of FHLB Stock ..................................................... (58) --
Purchases of premises and equipment ......................................... (2) (3)
------- -------
Net cash used by investing activities ........................... (4,748) (2,078)
------- -------
Financing activities:
Net increase (decrease) in time deposits .................................... (685) 556
Net increase in other deposits .............................................. 717 1,964
Proceeds from borrowings .................................................... 6,050 5,000
Repayments of borrowings .................................................... (3,000) (5,000)
Cash dividends paid to shareholders ......................................... (263) (292)
------- -------
Net cash provided by financing activities ....................... 2,819 2,228
------- -------
Increase (decrease) in cash and cash equivalents ................ (1,924) 846
Cash and cash equivalents at beginning of period ............................... 4,645 2,670
------- -------
Cash and cash equivalents at end of period ..................................... $ 2,721 $ 3,516
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(continued)
Three Months Ended
September 30,
--------------------
1997 1996
------- -------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................. $ 1,235 $ 1,113
======= =======
Income taxes ............................................................. $ 45 $ 79
======= =======
Supplemental disclosure of noncash transactions:
Unrealized gains on available-for-sale securities, net of deferred taxes
of $53 and $113 .......................................................... $ 83 $ 175
======= =======
Dividends declared but unpaid ............................................... $ 263 $ 305
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
1) Organization and Operations
In December, 1995, pursuant to a Plan of Conversion approved by its members
and regulators, Hillsborough Savings Bank, Inc., SSB (the "Bank") amended
and restated its charter to effect its conversion from a North Carolina
chartered mutual savings bank to a North Carolina chartered stock savings
bank (the "Conversion") and became a wholly-owned subsidiary of Piedmont
Bancorp, Inc., (the "Parent"), a holding company formed in connection with
the Conversion. The Bank is primarily engaged in the business of obtaining
savings deposits and providing loans to the general public. The principal
activity of the Parent is ownership of the Bank.
2) Basis of Presentation
The consolidated financial statements include the accounts of 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. In
management's opinion, the financial information, which is unaudited,
reflects all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the financial information as of
September 30, 1997 and for the three month period ended September 30, 1997
and September 30, 1996 in conformity with generally accepted accounting
principles. Operating results for the three month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 1998.
3) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash and
interest-bearing deposits in other financial institutions with original
maturities of three months or less to be cash equivalents.
4) Adoption of Statements of Financial Accounting Standards ("SFAS")
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share". SFAS 128 establishes standards of computing and presenting earnings
per share (EPS) and applies to entities with publicly held common stock or
potential common stock. This statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15,
"Earnings per Share", and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted
EPS computation. SFAS 128 is effective for financial statements issued for
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
4) Adoption of Statements of Financial Accounting Standards ("SFAS"), continued
periods ending after December 15, 1997 and requires restatement of all prior
period EPS data presented. The Company plans to adopt SFAS 128 in fiscal
year 1998 without any significant impact on its consolidated financial
statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 ("SFAS 129"), "Disclosure of Information about Capital
Structure". SFAS 129 establishes standards for disclosing information about
an entity's capital structure and is applicable to all entities. It contains
no change in disclosure requirements for entities that were previously
subject to the requirements of APB Opinion No. 10, "Omnibus Opinion - 1966",
APB Opinion No. 15, "Earnings Per Share", and Statement of Financial
Accounting Standards No. 47, "Disclosure of Long-Term Obligations". SFAS 129
is effective for financial statements for periods ending after December 15,
1997. The Company plans to adopt SFAS 129 in fiscal year 1998 with no impact
on its consolidated financial statements.
5) Employee and Director Benefit Plans
The Company has an employee stock ownership plan ("ESOP") whereby an
aggregate number of shares amounting to 211,600 were purchased for future
allocation to employees. Contributions to the ESOP are made by the Bank on a
discretionary basis, and are allocated among ESOP participants on the basis
of relative compensation in the year of allocation. Benefits will vest in
full upon five years of service with credit given for years of service prior
to the conversion. The ESOP was 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. Dividends on unallocated shares which are used to repay
debt are not reported as dividends in the consolidated financial statements
but rather are recorded as an element of compensation expense. Dividends on
allocated shares are credited to the accounts of the participants and
reported as dividends in the consolidated financial statements. For the
three month periods ended September 30, 1997 and 1996, ESOP-related
compensation expense totaled $61,900 and $107,000, respectively. At
September 30, 1997, a total of 128,919 shares have been released and
allocated to participants under the Plan and 82,681 shares remain
unallocated, of which 19,918 are committed to be released on December 31,
1997.
The Bank has a management recognition plan ("MRP") which serves as a means
of providing existing directors and employees of the Bank with an ownership
interest in the Company. On August 29, 1996, restricted stock awards of
105,800 shares were made to 38 directors, officers, and employees of the
Bank. The shares awarded under the MRP were issued from authorized but
unissued shares of common stock at no cost to recipients. The shares granted
vest at a rate of 20% each year on the anniversary of the initial award of
shares so that the shares will be completely vested at the end of five
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
5) Employee and Director Benefit Plans, continued
years. During the first quarter of fiscal 1998, two MRP participants
forfeited a total of 2,424 restricted, non-vested shares of the Company's
stock and $18,000 of dividends previously paid to the participants on those
restricted shares. The forfeited shares remain unallocated as of September
30, 1997. The dividends refunded to the Bank have been reflected as an
addition to equity in the same ratio the dividends were originally paid to
the former participants. Compensation expense of $65,000 and $26,000 was
recorded during the three month periods ended September 30, 1997 and 1996,
respectively.
6) Regulatory Restrictions
At the time of conversion, the Bank established a liquidation account in an
amount equal to its net worth at June 30, 1995. The liquidation account will
be maintained for the benefit of eligible deposit account holders who
continue to maintain their deposit accounts in the Bank after conversion.
Only in the event of a complete liquidation will each eligible deposit
account holder be entitled to receive a liquidation distribution from the
liquidation account in the amount of the current adjusted subaccount balance
for deposit accounts then held before any liquidation distribution may be
made with respect to common stock. Dividends paid subsequent to the
conversion cannot be paid from this liquidation account.
The Bank may not declare or pay a cash dividend on or repurchase any of its
common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations. In
addition, for a period of five years after the conversion, the Bank will be
required, under existing North Carolina regulations, to obtain prior written
approval of the Administrator before it can declare and pay a cash dividend
on its capital stock in an amount in excess of one-half of the greater of
(i) its net income for the most recent fiscal year, or (ii) the average of
its net income after dividends for the most recent fiscal year and not more
than two of the immediately preceding fiscal years, if applicable. As a
result of this limitation, the Bank cannot pay a dividend without the
approval of the Administrator.
Management is not aware of any other trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on the Company's liquidity,
capital resources, or other operations.
7) Earnings per Share
Earnings per common share of $0.15 and $0.07 for the quarters ended
September 30, 1997 and 1996, respectively, were calculated by dividing net
income of $414,000 and $183,000 for the respective quarters by the
weighted-average number of common and common equivalent shares outstanding
of 2,713,220 and 2,557,739, respectively. For purposes of the
weighted-average number of common and common-equivalent shares outstanding,
common stock equivalents consist of stock options. The number of shares
purchased by the employee stock ownership plan which have not been allocated
or committed to be released to participant accounts are not assumed to be
outstanding.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three Months Ended
September 30, 1997 and 1996
Summary
For the quarter ended September 30, 1997, the Company recorded net income of
$414,000, or $0.15 per share, compared to $183,000, or $0.07 per share for the
same quarter last year. Earnings for the quarter ended September 30, 1996 were
adversely impacted by a special $487,000 assessment paid to the Federal Deposit
Insurance Corporation ("FDIC") to recapitalize the Savings Association Insurance
Fund ("SAIF"). Without the effect of the SAIF-assessment, net income for the
quarter ended September 30, 1996 would have been $496,000, or $0.19 per share.
Net Interest Income
As shown in the table below, tax-equivalent net interest income decreased
$210,000 to $1,225,000 for the quarter ended September 30, 1997 from $1,435,000
for the same period in 1996. Net interest income is analyzed on a tax-equivalent
basis to adjust for the nontaxable status of income earned on certain
investments such as municipal bonds.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------------------------
1997 1996
------------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits ........................ $ 1,589 $ 16 3.99% $ 1,642 $ 16 3.87%
FHLB common stock ................................ 939 17 7.18 897 16 7.08
Taxable investment securities .................... 11,408 186 6.52 17,715 298 6.73
Tax-exempt investment securities (2) ............. 3,900 78 8.01 13,182 246 7.46
Loans receivable ................................. 103,065 2,187 8.48 93,110 1,970 8.45
-------- -------- ---- -------- -------- ----
Total interest-earning assets ...................... 120,901 2,484 8.21 126,546 2,546 8.04
Non-interest-earning assets ........................ 3,046 3,277
-------- --------
Total ......................................... $123,947 $129,823
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------------------------
1997 1996
------------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposit accounts ................................. $ 82,229 993 4.81 $ 72,321 859 4.72
Borrowings ....................................... 17,574 266 6.05 16,889 252 5.97
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities ................. 99,803 1,259 5.03 89,120 1,111 4.96
Non-interest-bearing liabilities ................... 3,367 3,241
Stockholders' equity ............................... 20,777 37,462
-------- --------
Total ......................................... $123,947 $129,823
-------- --------
Net interest income and interest rate spread ....... $ 1,225 3.18% $ 1,435 3.08%
======== ========
Net interest-earning assets and net interest margin $ 21,098 4.05% $ 37,426 4.53%
======== ========
Ratio of interest-earning assets to interest-bearing
liabilities ...................................... 121.14% 142.00%
- -------------
</TABLE>
(1) All information presented in this column is annualized with the exception of
the ratio of interest-earning assets to interest bearing liabilities.
(2) Interest earned on tax-exempt investment securities has been adjusted to a
tax-equivalent basis using the applicable federal and state rates of 34% and
7.50%, respectively, and reduced by the nondeductible portion of interest
expense.
The decrease in net interest income is primarily due to a lower level of average
net interest-earning assets during the quarter ended September 30, 1997 compared
to the same quarter last year. The decline in interest-earning assets is due to
the sale of investment securities in order to pay the special dividend in
December 1996. Average investment securities decreased by $15.6 million while
average loans increased by $10.0 million over the same quarter last year.
Interest rate spread (on a tax-equivalent basis) increased to 3.18% for the
quarter ended September 30, 1997 from 3.08% for the same quarter in 1996 due to
an increase in the weighted average yield on interest-earning assets due to a
shift in the mix toward higher earning assets, principally loans. Despite the
increase in interest rate spread, net interest margin (on a tax-equivalent
basis) decreased to 4.05% for the quarter ended September 30, 1997 from 4.53%
for the quarter ended September 30, 1996. Net interest margin for the quarter
ended September 30, 1996 reflects return on conversion proceeds which were
invested in loans and investment securities. Net interest margin for the quarter
ending September 30, 1997 reflects the liquidation of those interest-earning
assets to fund the special dividend paid on December 6, 1996 requiring increased
liability funding of asset growth.
<PAGE>
Provision for Loan Losses
The provision for loan losses for the three months ended September 30, 1997
totaled $24,000 compared to $21,000 for the same period in 1996. The provision
for loan losses is based on management's evaluation of the loan portfolio as
discussed under "Financial Condition".
Other Income
Other income totaled $137,000 for the quarter ended September 30, 1997 compared
to $102,000 for the same period in 1996. A large portion of the increase in
other income is due to a $6,000 net gain on the sale of investment securities
during the quarter ended September 30, 1997 compared to a $26,000 net loss on
the sale of investment securities for the same period in 1996. Also contributing
to the increase in other income in the current year is approximately $12,000 of
rental income received from rental of the former branch facility that was closed
in December, 1996.
Other Expenses
Other expenses totaled $671,000 for the three months ended September 30, 1997
compared to $1,214,000 for the same period in 1996. Expenses for the quarter
ended September 30, 1996 included the $487,000 SAIF-assessment. Without this
assessment, expenses would have totaled $727,000 for the 1996 quarter. The
decrease in other expenses is attributable to a $32,000 decrease in FDIC
insurance premiums from $45,000 for the quarter ended September 30, 1996 to
$13,000 for the quarter ended September 30, 1997, resulting from
recapitalization of the SAIF in the prior year. In addition, due to a decreased
equity level after payment of the $7.00 special dividend in December 1996,
franchise tax expense decreased $11,000 from $24,000 for the three months ended
September 30, 1996 to $13,000 for the current quarter.
Income Tax Expense
The Company recorded income tax expense of $223,000 for the quarter ended
September 30, 1997. The Company recorded income tax expense for the quarter
ended September 30, 1996 of $36,000 which reflects the decline in income before
income tax expense.
Financial Condition
CHANGES IN FINANCIAL CONDITION
Total assets increased to $126.5 million at September 30, 1997 from $122.8
million at June 30, 1997. During the quarter ended September 30, 1997, loans
grew by $4.1 million to $104.3 million at September 30, 1997. Loan growth was
funded largely with advances from the Federal Home Loan Bank which increased by
$3.1 million to $19.6 million at September 30, 1997 from $16.5 million at June
30, 1997.
Stockholders' equity increased from $20.4 million at June 30, 1997 to $20.8
million at September 30, 1997. As discussed in note 5 of this report, during the
quarter ended September 30, 1997, two MRP participants forfeited 2,424
restricted, non-vested shares of the Company's stock and $18,000 of dividends
previously paid to the participants on those restricted shares. The forfeited
shares remain unallocated as of September 30, 1997. The dividends refunded to
the Bank have been reflected as an addition to equity in the same ratio the
dividends were originally paid to the former participants.
<PAGE>
ASSET QUALITY
Nonperforming Assets and Risk Assets
Nonperforming assets include nonaccrual loans, restructured loans and real
estate owned. The following table presents information on nonperforming assets
and loans contractually past due but still accruing at September 30, 1997 and
June 30, 1997
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
-------- --------
(in thousands)
<S> <C> <C>
Total nonaccrual loans ................... $ 803 $ 803
Total restructured loans ................. -- --
-------- --------
Total nonperforming loans ........... 803 803
Real estate owned ........................ -- --
-------- --------
Total nonperforming assets .......... $ 803 $ 803
Accruing loans, delinquent 90 days or more 321 244
-------- --------
Total risk assets ................... $ 1,124 $ 1,047
======== ========
Nonperforming loans to total loans ....... 0.77% 0.80%
Nonperforming assets to total assets ..... 0.63 0.65
Risk assets to total assets .............. 0.89 0.85
Allowance for loan losses to:
Total nonperforming assets ........... 1.06x 0.99x
Total risk assets .................... 0.76x 0.76x
Total assets ............................. $126,544 $122,761
Total loans, net ......................... 104,260 100,173
Allowance for loan losses ................ 854 796
</TABLE>
There were no significant changes in nonperforming assets outstanding from June
30, 1997 to September 30, 1997. Management has reviewed the collateral for
nonperforming loans and believes that collateral values related to such loans
exceed the loan balances. Management has included this review among the factors
considered in the evaluation of the allowance for possible loan losses.
<PAGE>
Provision and Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for
the three months ended September 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Balance at the beginning of period $ 796 $ 608
Provision for loan losses 24 21
Recoveries 34 -
Loans charged off - -
----- -----
Balance at the end of period $ 854 $ 629
----- -----
</TABLE>
At September 30, 1997, the allowance for loan losses was 0.81% of total loans,
compared to 0.79% of total loans at June 30, 1997 and 0.66% of total loans at
September 30, 1996.
The levels of the provision and allowance for loan losses are based on
management's ongoing evaluation of the risk characteristics of the loan
portfolio considering current economic conditions, financial condition of
borrowers, growth and composition of the loan portfolio, collateral values, the
relationship of the allowance for loan losses to outstanding loans, the level of
nonperforming loans that have been identified as potential problems, past and
expected loss experience, results of the most recent regulatory examinations,
and other factors deemed relevant by management. Management actively maintains a
current loan watch list and knows of no other loans which are material and (1)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (2) represent material credits about which management has serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. Based on management's evaluation of the loan portfolio, as described
above, the Company recorded a $24,000 provision for loan losses for the three
months ended September 30, 1997 compared to a $21,000 provision for the same
period in 1996.
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Liquidity is the ability to raise funds or convert assets to cash in order to
meet customer and operating needs. The Company's primary sources of liquidity
are its portfolio of investment securities available-for-sale, principal and
interest payments on loans and mortgage-backed securities, interest income from
investment securities, maturities of investment securities held-to-maturity,
increases in deposits, and advances from the FHLB of Atlanta. At September 30,
1997, the Bank had $5.5 million 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.
<PAGE>
Interest rate risk is the sensitivity of interest income and interest expense to
changes in interest rates. Management structures the Company's assets and
liabilities in an attempt to protect net interest income from large fluctuations
associated with changes in interest rates. At September 30, 1997, the Company
had a cumulative one year liability-sensitive gap position of $1.0 million or
0.82% of interest-earning assets. A liability-sensitive gap position generally
indicates that net interest income would increase in a declining rate
environment and would experience downward pressure in a rising rate environment.
The Company had a cumulative one year liability-sensitive gap position of $5.6
million or 2.24% of interest-earning assets at June 30, 1997. The
liability-sensitive gap position is primarily attributable to the growth of
customer deposits with maturities of less than one year. The Company will
continue to actively manage its balance sheet in order protect net interest
income from changes in interest rates.
It should be noted that these measures reflect the interest-sensitivity of the
balance sheet as of a specific date and are not necessarily indicative of future
results. Because of this and other limitations, management also monitors
interest rate sensitivity through the use of a model which estimates the change
in net portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest sensitivity measures as of
September 30, 1997, management believes that its interest rate risk is at an
acceptable level.
CAPITAL RESOURCES
The Parent is regulated by the Board of Governors of the Federal Reserve System
("FRB") and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the Administrator,
Savings Institutions Division, North Carolina Department of Commerce, (the
"Administrator"). The Bank is subject to the capital requirements of the FDIC
and the Administrator. The FDIC requires the Bank to maintain minimum ratios of
Tier 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 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 I capital
(as defined above) to quarterly average total assets of 3% and a ratio of 5% to
be "well-capitalized". The Administrator requires a net worth equal to at least
5% of total assets.
At September 30, 1997, the Bank was in compliance with all of the aforementioned
capital requirements.
As of September 30, 1997, the FDIC categorized the Bank as "well-capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well-capitalized", the Bank must meet minimum ratios for total risk-based,
and Tier I leverage (the ratio of Tier I capital to average assets) of 10% and
5%, respectively. There have been no events or conditions since notification
that management believes have changed the Bank's category.
<PAGE>
Current Accounting Issues
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in the financial statement
and (b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company plans
to adopt SFAS 130 in fiscal year 1999 and will make the required disclosures
upon adoption.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for the way that public businesses
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement is effective for financial
statements for periods beginning after December 15, 1997 and in the initial year
of application, comparative information for earlier years is to be restated. The
Company plans to adopt SFAS 131 in fiscal year 1999 without any significant
impact on its consolidated financial statements.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized
Date: November 3, 1997 By: /s/ D. Tyson Clayton
--------------------
D. Tyson Clayton
President
Date: November 3, 1997 By: /s/ Eric J. Schuppenhauer
-------------------------
Eric J. Schuppenhauer
Vice President and principal
financial officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 893
<INT-BEARING-DEPOSITS> 1,828
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,186
<INVESTMENTS-CARRYING> 3,327
<INVESTMENTS-MARKET> 3,397
<LOANS> 104,260
<ALLOWANCE> 854
<TOTAL-ASSETS> 126,544
<DEPOSITS> 84,892
<SHORT-TERM> 19,550
<LIABILITIES-OTHER> 1,311
<LONG-TERM> 0
0
0
<COMMON> 9,145
<OTHER-SE> 11,646
<TOTAL-LIABILITIES-AND-EQUITY> 126,544
<INTEREST-LOAN> 2,187
<INTEREST-INVEST> 251
<INTEREST-OTHER> 16
<INTEREST-TOTAL> 2,454
<INTEREST-DEPOSIT> 993
<INTEREST-EXPENSE> 1,259
<INTEREST-INCOME-NET> 1,195
<LOAN-LOSSES> 24
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 671
<INCOME-PRETAX> 637
<INCOME-PRE-EXTRAORDINARY> 637
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 414
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
<YIELD-ACTUAL> 4.05
<LOANS-NON> 803
<LOANS-PAST> 321
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 796
<CHARGE-OFFS> 0
<RECOVERIES> 34
<ALLOWANCE-CLOSE> 854
<ALLOWANCE-DOMESTIC> 854
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
