UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 1999
---------------------
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.
As of May 10, 1999, 2,555,800 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
March 31, June 30,
1999 1998
--------- ---------
(unaudited) *
(in thousands, except shares)
Assets
<S> <C> <C>
Cash $ 960 $ 823
Interest-bearing deposits in other financial institutions 1,577 1,821
Investment securities:
Available-for-sale 22,875 13,775
Held-to-maturity 3,461 3,250
Loans receivable (net of allowance for loan losses of $1,048 and
$951 at March 31, 1999 and June 30, 1998, respectively) 99,708 106,500
Federal Home Loan Bank stock, at cost 1,366 1,152
Premises and equipment 2,646 1,414
Prepaid expenses and other assets 1,979 1,806
--------- ---------
Total assets $ 134,572 $ 130,541
========= =========
Liabilities and Stockholders' Equity
Liabilities
Deposits :
Demand, non-interest bearing 3,481 2,844
Savings, NOW and MMDA 37,206 32,800
Certificates of Deposit 51,292 54,196
--------- ---------
91,979 89,840
Advances from the Federal Home Loan Bank 21,307 18,000
Accrued expenses and other liabilities 1,040 1,095
--------- ---------
Total liabilities 114,326 108,935
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(continued)
March 31, June 30,
1999 1998
--------- ---------
(unaudited) *
(in thousands, except shares)
Stockholders' Equity
<S> <C> <C>
Preferred stock, no par value, 5,000,000 shares authorized;
none issued -- --
Common stock, no par value, 20,000,000 shares authorized; 2,555,800 and
2,750,800 shares issued and outstanding at March 31, 1999 and June
30, 1998, respectively 7,257 9,121
Unearned ESOP shares (505) (679)
Unamortized deferred compensation (726) (953)
Unallocated restricted stock (87) (61)
Retained earnings, substantially restricted (note 6) 14,267 14,101
Accumulated other comprehensive income 40 77
--------- ---------
Total stockholders' equity 20,246 21,606
--------- ---------
Total liabilities and stockholders' equity $ 134,572 $ 130,541
========= =========
</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 Nine Months Ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 2,207 $ 2,333 $ 6,694 $ 6,765
Interest on deposits in other financial institutions 21 12 64 42
Interest and dividends on investment securities:
Taxable 263 205 720 616
Non-taxable 50 49 146 146
------- ------- ------- -------
Total interest income 2,541 2,599 7,624 7,569
------- ------- ------- -------
Interest expense:
Interest on deposits 973 987 3,044 2,972
Interest on borrowings 282 315 783 882
------- ------- ------- -------
Total interest expense 1,255 1,302 3,827 3,854
------- ------- ------- -------
Net interest income 1,286 1,297 3,797 3,715
Provision for loan losses 3 24 30 72
------- ------- ------- -------
Net interest income after provision for loan losses 1,283 1,273 3,767 3,643
------- ------- ------- -------
Other income:
Customer service and other fees 64 53 168 157
Mortgage loan servicing fees (2) 15 5 54
Gain on sale of investment securities -- -- 5 6
Lower-of-cost or market adjustment on loans held-for-sale (26) (24) (26) 12
Gain on sale of loans 17 23 80 23
Stock and mutual fund commissions 13 -- 57 --
Gain on sale of real estate owned -- 114 -- 114
Other 24 26 80 74
------- ------- ------- -------
Total other income 90 207 369 440
------- ------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(continued)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Other expenses:
Compensation and fringe benefits (note 5) 492 430 1,422 1,255
Data and items processing 104 69 260 185
Deposit insurance premiums 14 13 40 39
Occupancy expense 39 32 94 84
Furniture and equipment expense 50 32 139 83
Professional fees 25 52 92 145
Other 135 158 424 396
------- ------- ------- -------
Total other expenses 859 786 2,471 2,187
------- ------- ------- -------
Income before income tax expense 514 694 1,665 1,896
Income tax expense 178 247 578 672
------- ------- ------- -------
Net income $ 336 $ 447 $ 1,087 $ 1,224
======= ======= ======= =======
Net income per share - basic (note 7) $ 0.13 $ 0.17 $ 0.42 $ 0.46
======= ======= ======= =======
Net income per share - diluted (note 7) $ 0.13 $ 0.16 $ 0.42 $ 0.45
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
Accumulated
Unearned Unamortized Unallocated other
Shares Common ESOP Deferred Restricted Retained
Outstanding Stock Shares Compensation Stock Earnings
---------- -------- ------- --------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 2,750,800 $ 9,143 $ (933) $ (1,269) $ (21) $ 13,580
Net income - - - - - 1,224
Release of ESOP shares - (33) 194 - - -
Amortization of unearned compensation - - - 193 - -
Forfeiture of restricted stock - - - 146 (146) -
Allocation of restricted stock - (11) - (95) 106 -
Tax benefit of dividends on restricted stock - (5) - - - -
Cash dividends declared, net of
forfeited dividends on restricted stock - 36 - - - (797)
Change in unrealized holding gains (losses),
net of income taxes - - - - - -
---------- -------- ------- --------- ------ --------
Balance at March 31, 1998 2,750,800 $ 9,130 $ (739) $ (1,025) $ (61) $ 14,007
========== ======== ======= ========= ====== ========
Balance at June 30, 1998 2,750,800 $ 9,121 $ (679) $ (953) $ (61) $ 14,101
Net income - - - - - 1,087
Purchase and retirement of common stock (195,000) (1,833) - - - -
Release of ESOP shares - (44) 174 - - -
Amortization of unearned compensation - - - 201 - -
Forfeiture of restricted stock - - - 26 (26) -
Tax benefit of dividends on restricted stock - 1 - - - -
Cash dividends declared, net of
forfeited dividends on restricted stock - 12 - - - (921)
Change in unrealized holding gains (losses),
net of income taxes - - - - - -
--------- -------- ------- --------- ------ --------
Balance at March 31, 1999 2,555,800 $ 7,257 $ (505) $ (726) $ (87) $ 14,267
========= ======== ======= ======= ====== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
comprehensive Stockholders'
income Equity
------ ------
<S> <C> <C>
Balance at June 30, 1997 $ (84) $ 20,416
Net income - 1,224
Release of ESOP shares - 161
Amortization of unearned compensation - 193
Forfeiture of restricted stock - -
Allocation of restricted stock - -
Tax benefit of dividends on restricted stock - (5)
Cash dividends declared, net of
forfeited dividends on restricted stock - (761)
Change in unrealized holding gains (losses),
net of income taxes 156 156
----- --------
Balance at March 31, 1998 $ 72 $ 21,384
===== ========
Balance at June 30, 1998 $ 77 $ 21,606
Net income - 1,087
Purchase and retirement of common stock - (1,833)
Release of ESOP shares - 130
Amortization of unearned compensation - 201
Forfeiture of restricted stock - -
Tax benefit of dividends on restricted stock - 1
Cash dividends declared, net of
forfeited dividends on restricted stock - (909)
Change in unrealized holding gains (losses),
net of income taxes (37) (37)
----- --------
Balance at March 31, 1999 $ 40 $ 20,246
===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 1,087 $ 1,224
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 119 75
Net amortization (accretion) 73 84
Provision for loan losses 30 72
Net gain on sale of investments and mortgage-backed securities (5) (6)
Gain on sale of loans (80) --
Loss on sale of fixed assets -- 4
Gain on sale of real estate owned -- (114)
Release of ESOP shares 130 161
Compensation earned under MRP 201 193
Net increase in mortgage loans held for sale (1,843) (1,563)
Increase in other assets (208) (476)
Increase (decrease) in other liabilities (37) 388
-------- --------
Net cash provided (used in) operating activities (533) 42
-------- --------
Investing activities:
Net (increase) decrease in loans held for investment 8,712 (9,599)
Principal collected on mortgage-backed securities 1,030 375
Purchases of investment securities classified as
Purchases of mortgage-backed securities classified as available-for-sale (6,670) (1,532)
Purchases of collateralized mortgage-backed securities classified as available-for-sale (2,037) --
Purchases of investment securities classified as held-to-maturity (300) (307)
Proceeds of sales of mortgage-backed-securities classified as available-for-sale 501 1,508
Proceeds from investment securities called by issuer 3,825 55
Purchases of Federal Home Loan Bank stock (214) (189)
Purchases of premises and equipment (1,351) (182)
Proceeds from sale of real estate owned -- 636
-------- --------
Net cash used in investing activities (2,248) (10,485)
-------- --------
Financing activities:
Net increase (decrease) in time deposits (2,904) 154
Net increase in other deposits 5,043 3,309
Proceeds from borrowings 8,450 14,200
Repayments of borrowings (5,143) (9,000)
Purchase and retirement of common stock (1,833) --
Cash dividends paid to shareholders (939) (764)
-------- --------
Net cash provided by financing activities 2,674 7,899
-------- --------
Decrease in cash and cash equivalents (107) (2,544)
Cash and cash equivalents at beginning of period 2,644 4,645
-------- --------
Cash and cash equivalents at end of period $ 2,537 $ 2,101
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Nine months ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,814 $ 3,837
======== ========
Income taxes $ 599 $ 251
======== ========
Supplemental disclosure of noncash transactions:
Unrealized gains on available-for-sale securities,
net of deferred taxes of $26 and $100 $ 39 $ 156
======== ========
Dividends declared but unpaid 306 269
======== ========
Transfer from loans receivable to real estate owned -- 522
======== ========
</TABLE>
See accompanying notes to financial statements
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
1) Organization and Operations
Piedmont Bancorp, Inc., ("the Parent") is a bank holding company, formed in
December 1995, which owns all of the outstanding common stock of
Hillsborough Savings Bank, Inc. SSB ("the Bank"). 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 in December 1995. The Bank is primarily engaged in the business of
obtaining 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 March
31, 1999 and for the three and nine month periods ended March 31, 1999 and
March 31, 1998 in conformity with generally accepted accounting principles.
Operating results for the three and nine month periods ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1999.
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) Comprehensive Income
On July 1, 1998, the Company adopted 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
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
4) Comprehensive Income (continued)
income separately from retained earnings and additional paid-in-capital in
the equity section of a statement of financial position. In accordance with
the provisions of SFAS No. 130, comparative financial statements presented
for earlier periods have been reclassified to reflect the provisions of the
statement.
Comprehensive income is the change in equity of an enterprise during the
period from transactions and other events and circumstances from nonowner
sources and, accordingly, includes both net income and amounts referred to
as other comprehensive income. The Company's other comprehensive income for
the nine months ended March 31, 1999 and 1998 consisted of unrealized gains
and losses on certain investments in debt securities. Comprehensive income
for the nine months ended March 31, 1999 and 1998 amounted to $1,050,000 and
$1,380,000, respectively.
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. A $40,000 cash contribution from the Bank in December
1995 and a loan from the Parent in the amount of $2,690,677 funded the ESOP.
The loan is secured by shares of stock purchased by the ESOP and is not
guaranteed by the Bank. The Bank funds principal and interest payments on
this loan primarily from discretionary contributions. Dividends, if any,
paid on shares held by the ESOP may also be used to reduce the loan.
Dividends on unallocated shares that 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 nine-month
periods ended March 31, 1999 and 1998, ESOP-related compensation expense
totaled $130,000 and $161,000, respectively. For the three-month periods
ended March 31, 1999 and 1998, ESOP-related compensation expense totaled
$40,000 and $50,000, respectively. Additionally, in December of 1998 and
1997, 18,448 and 19,918 shares, respectively, were released to individual
participant accounts. At March 31, 1999, a total of 167,285 shares have been
released and allocated to participants under the Plan and 44,315 shares
remain unallocated.
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,
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
5) Employee and Director Benefit Plans (continued)
officers, and employees of the Bank. The shares awarded under the MRP were
issued from authorized but unissued shares of common stock at no cost to
recipients. The shares granted vest at a rate of 20% each year on the
anniversary of the initial award of shares so that the shares will be
completely vested at the end of five years. During the first nine months of
fiscal 1999, one MRP participant forfeited 1,719 restricted, non-vested
shares of the Company's stock and $12,000 of dividends previously paid to
the participants on those restricted shares. The dividends refunded to the
Bank have been reflected as an addition to common stock. The shares
forfeited during the nine months ended March 31, 1999, combined with shares
previously forfeited, leaves 5,778 restricted shares unallocated under the
MRP. Compensation expense of $201,000 and $193,000 was recorded during the
nine-month periods ended March 31, 1999 and 1998, respectively. During the
three months ended March 31, 1999 and 1998, compensation expense was
recorded of $67,000 and $55,000, 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.
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
7) Earnings per Share
Basic net income per share, or basic EPS, is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
ESOP shares that are unallocated and are not committed to be released are
not included in weighted average shares outstanding. Diluted EPS reflects
the potential dilution that could occur if the Company's dilutive stock
options were exercised. The numerator of the basic EPS computation is the
same as the numerator of the diluted EPS computation for all periods
presented. A reconciliation of the denominators of the basic and diluted EPS
computations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic EPS denominator: weighted average
number of common shares outstanding 2,545,568 2,690,574 2,619,589 2,683,500
Dilutive effect of stock options
-- 26,735 950 26,208
--------- --------- --------- ---------
Diluted EPS denominator 2,545,568 2,717,309 2,620,539 2,709,708
========= ========= ========= =========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Nine Months Ended March 31, 1999 and
1997
Summary
For the nine months ended March 31, 1999, the Company recorded net income of
$1,087,000, or $0.42 basic and diluted earnings per share, compared to net
income of $1,224,000, or $0.46 basic and $0.45 diluted earnings per share for
the nine months ended March 31, 1998.
Net Interest Income
As shown in the table below, tax-equivalent net interest income increased
$83,000 to $3,888,000 for the nine months ended March 31, 1999 from $3,805,000
for the same period in 1998. 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.
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Rate(1) Balance Rate(1)
------- -------- ------- ------- -------- --------
Assets: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 1,236 $ 64 6.90 % $ 1,631 $ 42 3.43 %
FHLB common stock 1,167 70 8.00 1,029 56 7.26
Taxable investment securities 13,674 650 6.34 11,460 560 6.52
Tax-exempt investment securities (2) 3,932 237 8.05 3,941 236 7.98
Loans receivable 106,180 6,694 8.41 6,765 106,273 8.49
-------- ------- ---- -------- -------- ----
Total interest-earning assets 126,189 7,715 8.15 124,334 7,659 8.21
------- ---- -------- ----
Non-interest-earning assets 4,138 3,288
-------- --------
Total $130,327 $127,622
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposit accounts 87,522 3,044 4.63 83,864 2,972 4.72
Borrowings 18,016 783 5.79 19,675 882 5.98
-------- ------- ---- -------- -------- ----
Total interest-bearing liabilities 105,538 3,827 4.83 103,539 3,854 4.96
------- ---- -------- ----
Non-interest-bearing liabilities 3,722 3,019
Stockholders' equity 21,067 21,064
-------- --------
Total $130,327 $127,622
Net interest income and interest rate spread margin $ 3,888 3.32 % $ 3,805 3.25 %
======= ========
Net interest-earning assets and net interest $ 20,651 4.11 % $ 20,795 4.08 %
======== ========
Ratio of interest-earning assets to interest-bearing
liabilities 119.57 % 120.08 %
</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
7.25%, respectively, and reduced by the nondeductible portion of interest
expense.
<PAGE>
The increase in net interest income is primarily due to a higher level of
interest-earning assets during the nine months ended March 31, 1999 as compared
to the same period in 1998. Average taxable investment securities increased $2.2
million over the same nine-month period last year. The average yield on taxable
investment securities declined 18 basis points while the average yield on loans
receivable declined 7 basis points from the nine month period ended March 31,
1998 to the same period in 1999. Interest rate spread (on a tax-equivalent
basis) increased to 3.32% for the nine months ended March 31, 1999 from 3.25%
for the same nine month period in 1998 primarily due to a decline in the average
yield on total interest bearing liabilities. Net interest margin increased to
4.11% for the nine months ended March 31, 1999 from 4.08% for the nine months
ended March 31, 1998.
Provision for Loan Losses
The provision for loan losses for the nine months ended March 31, 1999 totaled
$30,000 compared to $72,000 for the same period in 1998. The decline between the
two nine month periods was based on the Company's favorable charge off
experience over the past nine quarters and the decline in net loans receivable
from fiscal 1998 to 1999. 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 $369,000 for the nine months ended March 31, 1999 compared
to $440,000 for the same period in 1998. Mortgage loan servicing fees declined
$49,000 from the first nine months of fiscal 1998 to the same period in 1999 due
to faster prepayments on the underlying mortgages in 1999 as compared to 1998.
During the first nine months of fiscal 1998 there was a positive lower-of-cost
or market adjustment of $12,000 compared to a negative lower-of-cost or market
adjustment of $26,000 during the nine months ended March 31, 1999. The Company
recorded a $80,000 gain on sale of loans during the first nine months of fiscal
1999. There was only one gain on sale of loans totaling $23,000 during the first
nine months of fiscal 1998. The Company collected stock and mutual fund
commissions of $57,000 during the first nine months of fiscal 1999. There were
no commissions in the first nine months of fiscal 1998 since the full service
and discount brokerage subsidiary of the Bank did not begin operations until the
quarter ended June 30, 1998. Lastly, the Company sold real estate owned
consisting of one tract of land and recorded a gain of $114,000 during the nine
months ended March 31, 1998. There were no such sales of real estate owned
during the nine months ended March 31, 1999.
Other Expenses
Other expenses totaled $2,471,000 for the nine months ended March 31, 1999
compared to $2,187,000 for the same period in 1998. Compensation expense
increased $167,000 from the quarter ended March 31, 1998 to the same period in
1999. Some of the increase in compensation expense is due to normal cost of
living and merit increases for employees with the remainder of the increase due
to additional staffing for the Company's new Durham and Chapel Hill bank
branches. Data and items processing expense increased $75,000 for the nine
months ended March 31, 1999 compared to the same period in 1998 due to the
Bank's conversion to a new data processor in the third quarter of fiscal 1998.
The Bank's new processor provides a higher level of service and technology
compared to the Bank's previous processor. Furniture and equipment expense
increased $56,000 from the nine months ended March 31, 1998 to the same period
in 1999 due to higher depreciation expense associated with the purchase of
computer equipment in the third quarter of fiscal 1998. Professional fees
<PAGE>
declined $53,000 from the nine months ended March 31, 1998 to the same period in
1999 due to assistance from professional advisors in fiscal 1998 for the
Company's strategic plan and prospective bank branches. Other "other" expense
increased $28,000 from the nine months ended March 31, 1998 to the same period
in 1999 due primarily to increased expenses associated with the Company's new
Durham and Chapel Hill branches.
Income Tax Expense
Income tax expense was $578,000 for the nine months ended March 31, 1999
resulting in an effective rate of 34.7% compared to $672,000 or 35.4% for the
same period in 1998.
Comparison of Results of Operations for the Three Months Ended March 31, 1999
and 1997
Summary
For the quarter ended March 31, 1999, the Company recorded net income of
$336,000, or $0.13 basic and diluted earnings per share, compared to $447,000,
or $0.17 basic and $0.16 diluted earnings per share for the same quarter last
year.
Net Interest Income
As shown in the table below, there was a $11,000 decline in tax-equivalent net
interest income from the quarter ended March 31, 1998 to the same period in
1999. 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.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Rate(1) Balance Rate(1)
------- -------- ------- ------- -------- -------
Assets: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 894 $ 21 9.40 % $ 1,626 $ 12 2.95 %
FHLB common stock 1,201 27 8.99 1,106 20 7.23
Taxable investment securities 15,238 236 6.20 11,414 185 6.48
Tax-exempt investment securities (2) 4,073 81 7.95 3,995 80 8.01
Loans receivable 105,822 2,207 8.34 109,161 2,333 8.55
----------- -------- ---- ----------- ------- ----
Total interest-earning assets 127,228 2,572 8.09 127,302 2,630 8.26
-------- ---- ------- ----
Non-interest-earning assets 4,883 3,494
----------- ----------
Total $ 132,111 $ 130,796
=========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposit accounts 88,695 973 4.45 85,330 987 4.69
Borrowings 19,571 282 5.76 21,126 315 5.96
----------- -------- ---- ----------- ------- ----
Total interest-bearing liabilities 108,266 1,255 4.69 106,456 1,302 4.89
-------- ---- ------- ----
Non-interest-bearing liabilities 3,289 2,970
Stockholders' equity 20,556 21,370
----------- ---------
Total $ 132,111 $ 130,796
=========== =========
Net interest income and interest rate spread $ 1,317 3.40 % $ 1,328 3.37 %
======== =======
Net interest-earning assets and net interest margin $ 18,962 4.10 % $ 20,846 4.13 %
=========== =========
Ratio of interest-earning assets to interest-bearing
liabilities 117.51 % 119.58 %
</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
7.25%, respectively, and reduced by the nondeductible portion of interest
expense.
<PAGE>
The average yield on total interest earning assets declined 17 basis points from
the three months ended March 31, 1998 to the same period in 1999. Most of the
decline was caused by a shift in average interest earning assets from loans
receivable to taxable investment securities. Average loans receivable decreased
$3.3 million and average taxable investment securities increased $3.8 million
from the three months ended March 31, 1998 to the same period in 1999. Some of
the decline in the average yield on total interest earning assets was caused by
21 and 28 basis point declines in the average yield on loans receivable and
taxable investment securities, respectively, from the three months ended March
31, 1998 to the same three month period in 1999. The average rate on total
interest bearing liabilities declined 20 basis points from the three months
ended March 31, 1998 to the same three-month period in 1999. A shift from
borrowings to deposits from the three months ended March 31, 1998 to the same
three-month period in 1999, as well as a decline in the average yield/rate on
deposits and borrowings caused the decline during the same period of time.
Interest rate spread (on a tax-equivalent basis) increased to 3.40% for the
quarter March 31, 1999 from 3.37% for the same quarter in 1998, while the net
interest margin decreased to 4.10% from 4.13% during the same period of time.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 1999 totaled
$3,000 compared to $24,000 for the same period in 1998. The decline between the
two three month periods was based on the Company's favorable charge off
experience over the past nine quarters and the decline in net loans receivable
from fiscal 1998 to 1999. 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 $90,000 for the quarter ended March 31, 1999 compared to
$207,000 for the same period in 1998. Increases and decreases in various income
accounts caused the overall decrease in other income. Customer service and other
fees increased $11,000 from the three months ended March 31, 1998 to the same
period in 1999 due to increases in ATM fees and safety deposit box fees.
Mortgage loan servicing fees declined $17,000 from the three months ended March
31, 1998 to the same period in 1999 due to faster prepayments on the underlying
mortgages in 1999 as compared to 1998. The Company collected stock and mutual
fund commissions of $13,000 during the three months ended March 31, 1999. There
were no commissions in the three months ended March 31, 1998 since the full
service and discount brokerage subsidiary of the Bank did not begin operations
until the quarter ended June 30, 1998. Lastly, the Company sold real estate
owned consisting of one tract of land and recorded a gain of $114,000 during the
three months ended March 31, 1998. There were no such sales of real estate owned
during the three months ended March 31, 1999.
Other Expenses
Other expenses totaled $859,000 for the three months ended March 31, 1999
compared to $786,000 for the same period in 1998. Compensation expense increased
$62,000 from the quarter ended March 31, 1998 to the same period in 1999. Some
of the increase in compensation expense is due to normal cost of living and
merit increases for employees with the remainder of the increase due to
additional staffing for the Company's new Durham and Chapel Hill bank branches
during the third quarter of fiscal 1999. Data and items processing expense
increased $35,000 from the quarter ended March 31, 1998 to the same period in
1999 due to the Bank's conversion to a new data processor in the third quarter
of fiscal 1998. The Bank's new processor provides a higher level of service and
technology compared to the Bank's previous processor. Furniture and equipment
<PAGE>
expense increased $18,000 from the quarter ended March 31, 1998 to the same
period in 1999 due to higher depreciation expense associated with the purchase
and depreciation of computer equipment at the end of the third quarter of fiscal
1998. Professional fees declined $27,000 from the three months ended March 31,
1998 to the same period in 1998 due to a branch feasibility study that was
conducted on behalf of the bank in the third quarter of fiscal 1998. Other
"other" expense decreased $23,000 from the quarter ended March 31, 1998 to the
same period in 1999 due primarily to decreases in training expense and checking
and savings forms in the three months ended March 31, 1999.
Income Tax Expense
Income tax expense was $178,000 for the quarter ended March 31, 1999 resulting
in an effective rate of 34.6% compared to $247,000 or 35.6% for the same period
in 1998.
Financial Condition
CHANGES IN FINANCIAL CONDITION
Total assets increased $4.0 million or 3.1% to $134.6 million at March 31, 1999
from $130.5 million at June 30, 1998. A decrease in net loans of $6.8 million,
offset in part by increases in investment securities of $9.3 million and
premises and equipment of $1.2 million, contributed to the majority of the
increase in assets from June 30, 1998 to March 31, 1999. Total liabilities
increased $5.4 million to $114.3 million at March 31, 1999 from $108.9 million
at June 30, 1998. Increases of $2.1 million and $3.3 million in deposits and
Advances from the Federal Home Loan Bank made up the majority of the change in
liabilities during the first nine months of fiscal 1999.
Total stockholders' equity decreased $1.4 million to $20.2 million at March 31,
1999 from $21.6 million at June 30, 1998. Under a previously announced stock
repurchase plan, the Company repurchased and retired 195,000 shares of its
common stock during the nine months ended March 31, 1999. The average cost of
the shares repurchased was $9.31 per share for a total cost of $1,833,000. The
implementation of the share repurchase plan and cash dividends declared were the
primary factors contributing to the decline in stockholders' equity during the
nine months ended March 31, 1999. Mitigating these decreases was net income of
$1,087,000, and release of ESOP shares, amortization of unearned compensation,
and a change in unrealized holding losses on investment securities of $130,000,
$201,000 and $37,000, respectively.
ASSET QUALITY
Nonperforming Assets and Risk Assets
Nonperforming assets include nonaccrual loans, restructured loans and real
estate owned. The table on the following page presents information on
nonperforming assets and loans contractually past due but still accruing at
March 31, 1999 and June 30, 1998.
<PAGE>
<TABLE>
<CAPTION>
March 31, June 30
1999 1998
-------- -----------
(in thousands)
<S> <C> <C>
Total nonaccrual loans $ 894 $ 928
Total restructured loans -- --
-------- --------
Total nonperforming loans 894 928
Real estate owned -- --
-------- --------
Total nonperforming assets 894 928
Accruing loans, delinquent 90 days or more -- --
-------- --------
Total risk assets $ 894 $ 928
======== ========
Nonperforming loans to total loans 0.90% 0.87%
Nonperforming assets to total assets 0.66% 0.71%
Risk assets to total assets 0.66% 0.71%
Allowance for loan losses to:
Total nonperforming assets 1.17x 1.02x
Total risk assets 1.17x 1.02x
Total assets $134,572 $ 130,541
Total loans, net 99,708 106,500
Allowance for loan losses
1,048 951
</TABLE>
There were no significant changes in nonperforming assets outstanding from June
30, 1998 to March 31, 1999. Management has reviewed the collateral for
nonperforming assets and believes that collateral values related to the loans
exceeds such balances. The recorded investment in loans that are considered to
be impaired under SFAS No. 114 (Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan") were $118,000 at both
March 31, 1999 and June 30, 1998. There was no related allowance for credit
losses associated with these loans as determined in accordance with SFAS No.
114. 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 and nine months ended March 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------- ---------------------
1999 1998 1999 1998
------- ------ --------- ------
<S> <C> <C> <C> <C>
Balance at the beginning of period $ 1,029 $ 879 $ 951 $ 796
Provision for loan losses 3 24 30 72
Recoveries 16 11 75 50
Loans charged off - - (8) (4)
------- ------ --------- ------
Balance at end of period $ 1,048 $ 914 $ 1,048 $ 914
======= ====== ======= ======
</TABLE>
At March 31, 1999, the allowance for loan losses was 1.04% of total loans,
compared to 0.89% of total loans at June 30, 1998 and 0.82% of total loans at
March 31, 1998.
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 (1) material and
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 $3,000 provision for loan losses for the three
months ended March 31, 1999 compared to a $24,000 provision for the same period
in 1998. The decline between the two three month periods was based on the
Company's favorable charge off experience over the past nine quarters and the
decline in net loans receivable from fiscal 1998 to 1999.
YEAR 2000 ISSUE
The Company recognizes and is addressing the potentially severe implications of
the "Year 2000 Issue." The "Year 2000 Issue" is a general term used to describe
the various problems that may result from the improper processing of dates and
date-sensitive calculations as the Year 2000 approaches. This issue is caused by
the fact that many of the world's existing computer programs use only two digits
to identify the year in the date field of a program. These programs were
designed and developed without considering the impact of the upcoming change in
<PAGE>
the century and could experience serious malfunctions when the last two digits
of the year change to "00" as a result of identifying a year designated "00" as
the year 1900 rather than the Year 2000. This misidentification could prevent
the Company from being able to engage in normal business operations, including,
among other things, miscalculating interest accruals and the inability to
process customer transactions. Because of the potentially serious ramifications
of the Year 2000 Issue, the Company is taking the Year 2000 Issue very
seriously. The Company formed a Year 2000 Committee, which is comprised of the
Company's management team, in November of 1997. Other employees are actively
involved in the Company's Year 2000 efforts on an as needed basis. The Committee
is leading the Company's Year 2000 efforts to ensure that the Company is
properly prepared for the Year 2000. The Company's Board of Directors has
approved a plan submitted by the Year 2000 Committee that was developed in
accordance with guidelines set forth by the Federal Financial Institutions
Examination Council. This plan, which is described in further detail below, has
five primary phases related to internal Year 2000 compliance:
1. Awareness - this phase is ongoing and is designed to inform the Company's
Board of Directors (the "Board") and Executive management ("Management"),
employees, customers and vendors of the impact of the Year 2000 Issue. The
awareness phase is an ongoing one that is designed to provide ongoing
information about the Year 2000 issue to the Board of Directors,
Management, employees and customers. Since December of 1997 the Board has
been apprised of the Company's efforts at their regular meetings. Employees
are informed of the Company's Year 2000 efforts through monthly scheduled
employee meetings. In addition, all customers were updated with respect to
the Company's Year 2000 efforts through mailings sent in June of 1998 and
April of 1999. The Company has also placed Year 2000 information on the
Bank's World Wide Web site.
2. Assessment - during this phase an inventory was conducted of all known
Company processes that could reasonably be expected to be impacted by the
Year 2000 Issue and their related vendors, if applicable. This inventory of
processes and vendors included not only typical computer processes such as
the Company's transaction applications systems, but all known processes
that could be impacted by micro-chip malfunctions. These include but are
not limited to the Company's alarm system, phone system, check ordering
process, and ATM network. The Company inventoried all the systems listed
above in December of 1997 and performed an initial assessment of potential
risks from either under or nonperformance arising from incorrect processing
and usage of dates after December 31, 1999. At this time the Company had
already made the decision to convert in February of 1998 to a new computer
service provider for processing all loan, deposit and general ledger
transactions. In conjunction with the conversion, the Company purchased and
installed new computers, printers and related software in January of 1998.
New hardware and software for a local area network was also purchased and
installed in January of 1998. The total cost of the hardware and software
purchased by the Company in fiscal 1998 totaled $296,000 and was
capitalized. Most of the hardware and software purchased by the Company
either is Year 2000 compliant or will be with minor modifications or
upgrades. The assessment phase is complete, although it is updated
periodically as necessary.
<PAGE>
3. Renovation and/or replacement - this phase includes programming code
enhancements, hardware and software upgrades, system replacements, vendor
certification and any other changes necessary to make any hardware,
software and other equipment Year 2000 compliant. The Company does not
perform in-house programming, and thus is dependent on external vendors to
ensure and modify, if needed, the hardware, software or other services it
provides to the Company for Year 2000 compliance. As a result of the
assessment performed above, the Company contacted all third party vendors,
requested documentation regarding their Year 2000 compliance efforts, and
analyzed their responses. The responses from third party vendors generally
include an overview of renovation efforts to their systems that the Company
utilizes. In addition, some third party software vendors have notified the
Company that upgrades of their software will be necessary to ensure
reliable and accurate Year 2000 processing. One third party computer vendor
(the "primary service provider") processes, either directly, or indirectly
through other computer vendors, all loan, deposit and general ledger
transactions. The primary service provider has notified the Company that
the renovation and replacement of their systems is complete and has been
tested for Year 2000 compliance.
4. Testing - The next phase for the Company under the plan is to complete a
comprehensive testing of all known processes. As noted in the renovation
and/or replacement phase above, the Company's primary service provider has
already tested their system for Year 2000 compliance. The next step, which
is currently in process, is to test the Company's network and core service
provider software applications and hardware. A first test of the company's
core service provider software applications and hardware was performed on
September 20, 1998 using a future date of January 3, 2000. The Company has
reviewed the results of this test, and this review indicated that the
system performed reliably and accurately when using the future date of
January 3, 2000. The Company performed follow up tests with its core
service provider during the third quarter of fiscal 1999 using future dates
of February 29, 2000 and March 1, 2000. The Company has reviewed the
results of this test, and this review indicated that the system performed
reliably and accurately when using the future dates of February 29, 2000
and March 1, 2000. The testing of the remainder of the Company's processes
was substantially complete as of March 31, 1999 with follow up testing to
be performed as needed in calendar year 1999.
5. Implementation - this phase will occur when the Company's vendors certify
their present systems as Year 2000 compliant. This has occurred on the
majority of the Company's systems, including the Company's core service
provider. On some applications the Company is already entering dates
greater than December 31, 1999 into their systems. In these situations no
adverse events have been noted. The Company has developed a Business
Resumption Contingency plan for processes that do not process information
reliably and accurately after December 31, 1999. This plan is expected to
be approved by the Bank's Board of Directors in late May of 1999. The
contingency plans for all systems should be substantially complete by the
end of the fourth quarter of fiscal 1999 in accordance with regulatory
guidelines.
<PAGE>
The Company has also assessed the year 2000 readiness of significant borrowers
and depositors. In the second quarter of 1999 the Company prepared a list of
significant borrowers and depositors. After verbal and/or written inquiries of
these customers, any that the Company had Year 2000 concerns about were
counseled on the Year 2000 issue and urged to take corrective action. Since most
of the Company's loans are to individuals and secured by one to four family
residences this step did not require a significant amount of time or resources.
Excluding the hardware and software purchases noted above, the Company expensed
$6,000 on Year 2000 costs for the quarter ended March 31, 1999, and $18,000 for
the nine months ended March 31, 1999. There were no Year 2000 costs for the
quarter and nine months ended March 31, 1998. Based on an analysis of projected
expenses performed in the second quarter of fiscal 1999, the total cost of the
Year 2000 project is currently estimated at $50,000. Funding of the Year 2000
project costs will come from normal operating cash flow, however the expenses
associated with the Year 2000 Issue will directly reduce otherwise reported net
income for the Company.
Management of the Company believes that the potential effects on the Company's
internal operations of the Year 2000 Issue can and will be addressed prior to
the Year 2000. However, if required modifications or conversions are not made or
are not completed on a timely basis prior to the Year 2000, the Year 2000 Issue
could disrupt normal business operations. The most reasonably likely worst case
Year 2000 scenarios foreseeable at this time would include the Company
temporarily not being able to process, in some combination, various types of
customer transactions. This could affect the ability of the Company to, among
other things, originate new loans, post loan payments, accept deposits or allow
immediate withdrawals, and, depending on the amount of time such a scenario
lasted, could have a material adverse effect on the Company. Because of the
serious implications of these scenarios, the primary emphasis of the Company's
Year 2000 efforts is to correct, with complete replacement if necessary, any
systems or processes whose Year 2000 test results are not satisfactory prior to
the Year 2000. Nevertheless, should one of the most reasonably likely worst case
scenarios occur in the Year 2000, the Company, as noted above, is in the process
of formalizing a contingency plan that would allow for limited transactions,
including the ability to make certain deposit withdrawals, until the Year 2000
problems are fixed. The costs of the Year 2000 project and the date on which the
Company plans to complete Year 2000 compliance are based on management's best
estimates, which were derived using numerous assumptions of future events such
as the availability of certain resources (including internal and external
resources), third party vendor plans and other factors. However, there can be no
guarantee that these estimates will be achieved at the cost disclosed or within
the timeframe indicated, and actual results could differ materially from these
plans. Factors that might affect the timely and efficient completion of the
Company's Year 2000 project include, but are not limited to, vendors' abilities
to adequately correct or convert software and the effect on the Company's
ability to test its systems, the availability and cost of personnel trained in
the Year 2000 area, the ability to identify and correct all relevant computer
programs and similar uncertainties.
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
<PAGE>
investment securities, maturities of investment securities held-to-maturity,
increases in deposits, and advances from the FHLB of Atlanta. At March 31, 1999,
the Bank had $14.3 million of credit available from the FHLB that 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 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 March 31, 1999, the Company had a
cumulative one-year liability-sensitive gap position of $15.4 million or 11.94%
of interest-earning assets. A liability-sensitive gap position generally
indicates that net interest income would increase in a declining rate
environment and decrease in a rising rate environment. The Company had a
cumulative one year liability-sensitive gap position of $11.8 million or 7.09%
of interest-earning assets at June 30, 1998. 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
March 31, 1999, 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 March 31, 1999, the Bank was in compliance with all of
the aforementioned capital requirements.
<PAGE>
As of March 31, 1999, the Bank was considered "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 that management believes
have changed the Bank's category.
CURRENT 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 March 31, 1999
that may affect the Company's future reporting.
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 fiscal years 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 because the Company
operates as one segment.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 ("SFAS 132"), "Employers Disclosures about Pensions and Other
Postretirement Benefits". This statement standardizes the disclosure
requirements of pensions and other postretirement benefits. This statement does
not change any measurement or recognition provisions, and thus will not
materially impact the Company. This statement is effective for fiscal years
beginning after December 15, 1997. The Company plans to adopt SFAS 132 in fiscal
year 1999 without any significant impact on its consolidated financial
statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The Company
plans to adopt SFAS 133 in fiscal year 2000 without any impact on its
consolidated financial statements as the Company does not have any derivative
financial instruments and is not involved in any hedging activities.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in
market price and interest rates. This risk of loss can be reflected in
diminished current market values and/or reduced potential net interest income in
future periods.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. The structure of the Company's loan
and deposit portfolios is such that a significant decline in interest rates may
adversely impact net market values and net interest income. The Company does not
maintain a trading account nor is the Company subject to currency exchange risk
or commodity price risk. Interest rate risk is monitored as part of the
Company's asset/liability management function, which is discussed above in Item
2 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Liquidity and Interest Rate Risk Management".
Management does not believe there has been any significant change in the overall
analysis of financial instruments considered market risk sensitive, as measured
by the factors of contractual maturities, average interest rates and estimated
fair values, since the analysis prepared and presented in conjunction with the
Form 10-K Annual report for the fiscal year ended June 30, 1998.
<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: May ___, 1999 By: /s/ D. Tyson Clayton
--------------------
D. Tyson Clayton
President and Chief Executive Officer
Date: May ___, 1999 By: /s/ Thomas W. Wayne
-------------------
Vice President and principal
financial officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-END> MAR-31-1999 MAR-31-1999
<CASH> 960 0
<INT-BEARING-DEPOSITS> 1,577 0
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0 0
0 0
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<ALLOWANCE-CLOSE> 1,048 1,048
<ALLOWANCE-DOMESTIC> 1,048 1,048
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</TABLE>
