UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
Commission file number 1-14070
PIEDMONT BANCORP, INC.
(Exact name of registrant as specified in its charter)
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North Carolina 56-1936232
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
260 South Churton Street, P.O. Box 1000
Hillsborough, North Carolina 27278
(Address of principal executive office) (Zip Code)
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Registrant's telephone number, including area code (919) 732-2143
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such common equity, as of a specified date within 60
days prior to the date of filing. $17,519,250 common stock, no par value, based
on the closing price of such common stock on September 1, 1999.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 2,502,700 shares of common
stock, no par value, outstanding at September 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of Piedmont Bancorp, Inc. (the "1999 Annual
Report") for the year ended June 30, 1999, are incorporated by reference into
Part I, Part II and Part IV.
Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders of
Piedmont Bancorp, Inc. to be held on November 19, 1999, are incorporated by
reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Piedmont Bancorp, Inc. (the "Parent") is a one-bank holding company
whose principal business is the ownership and operation of Hillsborough Savings
Bank, Inc., SSB (the "Bank") located in Hillsborough, North Carolina. The Parent
was incorporated in July 1995 for the purpose of acquiring all of the common
stock of the Bank in its mutual to stock conversion that was completed on
December 7, 1995 (the "Conversion").
The Bank is a state-chartered stock savings bank originally organized
under the laws of North Carolina in 1913. The Bank is headquartered in
Hillsborough, North Carolina and is centrally located in its primary market of
central and northern Orange County, North Carolina. The Bank is a
community-oriented financial institution which offers a variety of financial
services to meet the needs of the community it serves. The Bank is principally
engaged in the business of attracting deposits from the general public and using
those deposits to make one-to-four family residential real estate loans, loans
secured by nonresidential real estate, home equity line of credit loans, and
other loans and investments. At June 30, 1999, all of the loans in the Bank's
portfolio which were secured by real estate were secured by properties located
in North Carolina. Revenues are derived primarily from interest on loans. The
Bank also receives interest income from investment securities and
interest-bearing deposit balances. The major expenses of the Bank are interest
on deposits and borrowings and noninterest expenses such as compensation and
fringe benefits, data processing expenses, and occupancy expenses. The Bank
conducts its business through three offices in Hillsborough, Durham and Chapel
Hill, North Carolina.
Piedmont Bancorp, Inc. and its wholly-owned bank subsidiary,
Hillsborough Savings Bank, Inc., SSB are collectively referred to as the
"Company". For additional information regarding the Company's business, see the
1999 Annual Report and the accompanying financial statements, which are
incorporated herein by reference.
Market Area and Competition
The Company's primary market area consists of central and northern
Orange County, North Carolina. Hillsborough is located approximately ten miles
northwest of Durham, North Carolina and ten miles north of Chapel Hill, North
Carolina. North Carolina's Research Triangle Park is located about 20 miles
eastward between the cities of Chapel Hill, Durham and Raleigh. Chapel Hill and
Durham are home to the University of North Carolina at Chapel Hill and Duke
University, respectively. These universities and the employment opportunities
they generate significantly impact the economy of Orange County. However, the
economy in Orange County is varied with employment spread among manufacturing,
agricultural, retail and wholesale trade, government, services and utilities.
As of June 30, 1998, there were 17 depository institutions with 287
offices in Wake, Orange and Durham Counties. Based upon June 30, 1998
comparative data, the Bank had 8.5% market share in Orange County and a 0.0%
market share in Wake and Durham Counties. The Bank had no market share in Durham
county as its Durham office did not open until April of 1999.
<PAGE>
The Company faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
that have greater financial and marketing resources available to them. The
Company has also faced additional significant competition for investors' funds
from short-term money market securities and other corporate and government
securities. The ability of the Company to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities. The Company
experiences strong competition for real estate loans from other savings
institutions, commercial banks, and mortgage banking companies. Competition may
increase as a result of the continued reduction of restrictions on the
interstate operations of financial institutions.
Management believes that its image as "the hometown bank" gives it
certain advantages over its local competition. The Company, its directors and
employees actively participate in local civil affairs. Long-time employment of
local personnel has enabled the Bank to establish and maintain long-term
relationships with customers. In many cases, the Bank offers quicker loan
decisions and more flexible underwriting standards than the competition.
SUPERVISION AND REGULATION
Regulation of the Parent
Bank holding companies and state savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect or will affect the Parent
and the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Parent and the Bank. Supervision, regulation
and examination of the Parent and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Parent.
General. The Parent was organized for the purpose of acquiring and
holding all of the capital stock of the Bank. As a bank holding company subject
to the Bank Holding Company Act of 1956, as amended (the "BHCA"), the Parent is
subject to certain regulations of the Federal Reserve Board. Under the BHCA, the
Parent's activities and those of its subsidiaries are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries or engaging in any other activity which the Federal Reserve
Board determines to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. The BHCA prohibits the Parent from
acquiring direct or indirect control of more than 5% of the outstanding voting
stock or substantially all of the assets of any bank or savings bank or merging
or consolidating with another bank holding company or savings and loan holding
company without prior approval of the Federal Reserve Board.
Additionally, the BHCA prohibits the Parent from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve Board to be so closely related to banking as
to be properly incident thereto. The BHCA generally does not place territorial
restrictions on the activities of such nonbanking related activities.
<PAGE>
Similarly, Federal Reserve Board approval (or, in certain cases,
non-disapproval) must be obtained prior to any person acquiring control of the
Parent. Control is conclusively presumed to exist if, among other things, a
person acquires more than 25% of any class of voting stock of the Parent or
controls in any manner the election of a majority of the directors of the
Parent. Control is presumed to exist if a person acquires more than 10% of any
class of voting stock and the stock is registered under Section 12 of the
Exchange Act or the acquiror will be the largest shareholder after the
acquisition.
As a result of the Parent's ownership of the Bank, the Parent is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Parent is also subject to regulation and supervision by the
North Carolina Administrator, Savings Institutions Division, North Carolina
Department of Commerce (the "Administrator").
Capital Maintenance. There are a number of obligations and restrictions
imposed on bank holding companies and their depository institution subsidiaries
by law and regulatory policy that are designed to minimize potential loss to the
depositors of such depository institutions and the Federal Deposit Insurance
Corporation (the "FDIC") insurance funds in the event the depository institution
becomes in danger of default or in default. For example, under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("1991 Banking Law"), to
avoid receivership of an insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all acceptable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under a policy of the Federal Reserve Board with respect to
bank holding company operations, a bank holding company is required to serve as
a source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. The Federal Reserve Board under the BHCA, also has
the authority to require a bank holding company to terminate any activity or to
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal Reserve Board's determination that such activity or
control constitutes a serious risk to the financial soundness and stability of
any bank subsidiary of the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA") require insured depository institutions under
common control to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund (the "SAIF") or the Bank Insurance Fund (the "BIF")
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
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In connection with the Administrator's approval of the Parent's
application to acquire control of the Bank, the Parent was required to execute a
Capital Maintenance Agreement whereby it has agreed to maintain the Bank's
capital in an amount sufficient to enable the Bank to satisfy all regulatory
capital requirements.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve
Board has adopted capital adequacy guidelines for bank holding companies and
banks that are members of the Federal Reserve Board system and have consolidated
assets of $150 million or more. Bank holding companies subject to the Federal
Reserve Board's capital adequacy guidelines are required to comply with the
Federal Reserve Board's risk-based capital regulations. Under these regulations,
the minimum ratio of total capital to risk-weighted assets (including certain
off-balance sheet activities, such as standby letters of credit) is eight
percent. At least half of the total capital is required to be "Tier I capital,"
principally consisting of common stockholders' equity, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less certain goodwill items. The remainder ("Tier II capital") may consist of a
limited amount of subordinated debt, certain hybrid capital instruments and
other debt securities, perpetual preferred stock, and a limited amount of the
general loan loss allowance. In addition to the risk-based capital guidelines,
the Federal Reserve Board has adopted a minimum Tier I (leverage) capital ratio,
under which a bank holding company must maintain a minimum level of Tier I
capital to average total consolidated assets of at least three percent in the
case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank
holding companies are expected to maintain a Tier I (leverage) capital ratio of
at least one percent to two percent above the stated minimum.
Dividend and Repurchase Limitations. The Parent's sources of income
consist of dividends paid by the Bank to the Parent. Consequently, declarations
of cash dividends by the Parent may depend upon dividend payments by the Bank to
the Parent, which are subject to various restrictions. See " -- Regulation of
the Bank -- Restrictions on Dividends and Other Capital Distributions." The
Parent must obtain Federal Reserve Board approval prior to repurchasing Common
Stock for in excess of ten percent of its net worth during any twelve-month
period unless the Parent (i) both before and after the redemption satisfies
capital requirements for "well capitalized" state member banks; (ii) received a
one or two rating in its last examination; and (iii) is not the subject of any
unresolved supervisory issues.
The Parent is prohibited, under the North Carolina Business Corporation
Act, from paying a dividend if such payment would (i) cause the Parent to be
unable to pay its debts as they become due in the ordinary course of business or
(ii) reduce the Parent's total assets below the sum of the Parent's total
liabilities plus any amounts which would be needed, if the Parent were to be
dissolved at the time of distribution, to satisfy the preferential rights that
are superior to holders of the Common Stock.
Neither the Administrator nor the FDIC has promulgated any regulations
specifically limiting the right of the Parent to pay dividends and repurchase
shares. However, at the Administrator's request, the Company has provided prior
notice to the Administrator of each dividend paid by the Company.
<PAGE>
Federal Securities Law. The Parent has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and will not deregister the Common Stock for a
period of three years following the completion of the Conversion. As a result of
such registration, the proxy and tender offer rules, insider trading reporting
requirements, annual and periodic reporting and other requirements of the
Exchange Act are applicable to the Parent.
The registration under the Securities Act of 1933, as amended (the
"Securities Act") of the Common Stock does not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Parent may be resold without registration. Shares purchased by an affiliate of
the Parent are subject to the resale provisions of Rule 144 under the Securities
Act. So long as the Parent meets the current public information requirements of
Rule 144 under the Securities Act, each affiliate of the Parent who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) will be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) one percent of the
outstanding shares of the Parent or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks. Provision may be made in
the future by the Parent to permit affiliates to have their shares registered
for sale under the Securities Act under certain circumstances. There are
currently no demand registration rights outstanding. However, in the event the
Parent at some future time determines to issue additional shares from its
authorized but unissued shares, the Parent might offer registration rights to
certain of its affiliates who want to sell their shares.
Regulation of the Bank
General. Federal and state legislation and regulation have
significantly affected the operations of federally insured savings institutions
and other federally regulated financial institutions in the past several years
and have increased competition among savings institutions, commercial banks and
other providers of financial services. In addition, federal legislation has
imposed new limitations on investment authority, and higher insurance and
examination assessments on savings institutions and has made other changes that
may adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina-chartered savings bank, is a member of the
Federal Home Loan Bank ("FHLB") system, and its deposits are insured by the FDIC
through the SAIF. It is subject to examination and regulation by the FDIC and
the Administrator and to regulations governing such matters as capital
standards, mergers, establishment of branch offices, subsidiary investments and
activities, and general investment authority. Such examination and regulation is
intended primarily for the protection of depositors and the federal deposit
insurance funds.
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The Bank is subject to various regulations promulgated by the Federal
Reserve Board including, without limitation, Regulation B (Equal Credit
Opportunity), Regulation D (Reserves), Regulation E (Electronic Fund Transfers),
Regulation O (Loans to Executive Officers, Directors and Principal
Shareholders), Regulation Z (Truth in Lending), Regulation CC (Availability of
Funds) and Regulation DD (Truth in Savings). As holders of loans secured by real
property and as owners of real property, financial institutions, including the
Bank, may be subject to potential liability under various statutes and
regulations applicable to property owners generally, including statutes and
regulations relating to the environmental condition of real property.
The FDIC has extensive enforcement authority over the Bank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated in
response to violations of laws and regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between savings institutions and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a savings institution is any
company or entity that controls, is controlled by or is under common control
with the savings institution. In a holding company context, the parent holding
company of a savings institution and any companies which are controlled by such
parent holding company are affiliates of the savings institution. Generally,
Sections 23A and 23 B (i) establish certain collateral requirements for loans to
affiliates; (ii) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such savings institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (iii) require that all
such transactions be on terms substantially the same, or at least as favorable
to the savings institution or the subsidiary, as those provided to a
nonaffiliate. The term "covered transaction" includes the making of loans or
other extensions of credit to an affiliate, the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate,
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person, or issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings institutions the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who own
more than 10% of a savings institution and certain affiliated entities of any of
the foregoing, may not exceed, together with all other outstanding loans to such
<PAGE>
person and affiliated entities, the savings institution's loans-to-one borrower
limit as established by federal law (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers and stockholders who own more than 10% of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the savings institution. Any
"interested" director may not participate in the voting. The Federal Reserve
Board has prescribed the loan amount (which includes all other outstanding loans
to such person), as to which such prior board of director approval is required,
as being the greater of $25,000 or 5% of unimpaired capital and unimpaired
surplus (up to $500,000). Further, pursuant to Section 22(h) the Federal Reserve
Board requires that loans to directors, executive officers, and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and not involve more than the normal risk of
repayment or present other unfavorable features. Section 22(h) also generally
prohibits a depository institution from paying the overdrafts of any of its
executive officers or directors.
Insurance of Deposit Accounts. The FDIC administers two separate
insurance funds. The SAIF maintains a fund to insure the deposits for most
savings institutions and the BIF maintains a fund to insure the deposits of most
commercial banks. The Bank is a member of the SAIF of the FDIC.
The Bank is required to pay assessments to the FDIC based on a
percentage of its insured deposits. Under the FDIC's risk-based deposit
insurance assessment system, the assessment rate for an insured depository
institution depends on the assessment risk classification assigned to the
institution by the FDIC, which is determined by the institution's capital level
and supervisory evaluations. Based on the data reported to regulators for the
date closest to the last day of the seventh month proceeding the semi-annual
assessment period, institutions are assigned to one of three capital groups well
capitalized, adequately capitalized or undercapitalized - using the same
percentage criteria as in the prompt corrective action regulations. See
"--Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the instution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.
The assessment rate for SAIF members had ranged from 0.23% of deposits
for well capitalized institutions in Subgroup A to 0.31% of deposits for
undercapitalized institutions in Subgroup C while assessments for over 90% of
the BIF had been the statutory minimum of $2,000. However, recently enacted
legislation provided for a one-time assessment equal to 65.7 basis points times
insured deposits as of March 31, 1995. This assessment fully capitalized the
<PAGE>
SAIF. Accordingly, although the special assessment resulted in a $487,000
one-time charge to the Bank, the recapitalization of the SAIF had the effect of
reducing the Bank's future deposit insurance premiums to the SAIF. Under the
recently enacted legislation, most BIF members will be assessed approximately
1.3 basis points while the rate for most SAIF members will be approximately 6.4
basis points until January 1, 2000. At that time, BIF and SAIF will begin pro
rata sharing of the payment at an expected rate of 2.43 basis points.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
Community Reinvestment Act. The Bank, like other financial
institutions, is subject to the Community Reinvestment Act, as amended ("CRA").
A purpose of the CRA is to encourage financial institutions to help meet the
credit needs of its entire community, including the needs of low- and
moderate-income neighborhoods. Financial institutions' compliance with the CRA
is regularly evaluated by their regulatory agencies. Under recently adopted
regulations, institutions are first evaluated and rated under three categories:
a lending test, an investment test and a service test. For each of these three
tests, the savings bank is given a rating of either "outstanding," "high
satisfactory," "low satisfactory," "needs to improve" or "substantial
non-compliance." A set of criteria for each rating is included in the
regulation. If an institution disagrees with a particular rating, the
institution has the burden of rebutting the presumption by clearly establishing
that the quantative measures do not accurately present its actual performance,
or that demographics, competitive conditions or economic or legal limitations
peculiar to the service area should be considered. The ratings received under
the three tests are used to determine the overall composite CRA rating of
"outstanding," "satisfactory," "needs to improve" or "substantial
non-compliance."
During the Bank's last compliance examination, which was performed by
the FDIC under the new CRA regulations in August 1998, the Bank received a
"satisfactory" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve Board and FDIC in considering applications submitted by the Bank to
acquire branches or to acquire or combine with other financial institutions and
take other actions and could result in the denial of such applications.
Capital Requirements. The FDIC requires the Bank to have a minimum
leverage ratio of Tier I capital (principally consisting of common stockholders'
equity, noncumulative perpetual preferred stock and minority interests in
consolidated subsidiaries, less certain intangible and goodwill items), to total
assets of at least three percent; provided, however that all institutions, other
than those (i) receiving the highest rating during the examination process and
(ii) not anticipating or experiencing any significant growth, are required to
<PAGE>
maintain a ratio of one percent or two percent above the stated minimum, with an
absolute minimum leverage ratio of not less than four percent. The FDIC also
requires the Bank to have a ratio of total capital to risk-weighted assets,
including certain off-balance sheet activities, such as standby letters of
credit, of at least eight percent. At least half of the total capital is
required to be Tier I capital. The remainder (Tier II capital) may consist of a
limited amount of subordinated debt, certain hybrid capital instruments, other
debt securities, certain types of preferred stock and a limited amount of
general loan loss allowance.
An institution that fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to two percent or
less, the institution may be deemed to be operating in an unsafe or unsound
condition, allowing the FDIC to take various enforcement actions, including
possible termination of insurance or placement of the institution in
receivership.
The Administrator requires that net worth equal at least five percent
of total assets. Intangible assets must be deducted from net worth and assets
when computing compliance with this requirement.
At June 30, 1999, the Bank complied with each of the capital
requirements of the FDIC and the Administrator. For a description of the Bank's
required and actual capital levels on June 30, 1999, see Note captioned
"Stockholders Equity" on pages 40-41 of the 1999 Annual Report.
Each federal banking agency was required by law to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk, and the risk of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multi-family mortgages. On August 2, 1995, the federal
banking agencies issued a joint notice of adoption of final risk-based capital
rules to take account of interest rate risk. The final regulation required an
assessment of the need for additional capital on a case-by-case basis,
considering both the level of measured exposure and qualitative risk factors.
The final rule also stated an intent to, in the future, establish an explicit
minimum capital charge for interest rate risk based on the level of a bank's
measured interest rate risk exposure. The final regulation has not had a
material impact on the Bank's capital requirements.
Effective June 26, 1996, the federal banking agencies issued a joint
policy statement announcing the agencies' election not to adopt a standardized
measure and explicit capital charge for interest rate risk at that time. Rather,
the policy statement (i) identifies the main elements of sound interest rate
risk management, (ii) describes prudent principles and practices for each of
those elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy. The joint policy statement has not had a material impact on the Bank's
management of interest rate risk.
<PAGE>
In December 1994, the FDIC adopted a final rule changing its risk-based
capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives interest and
exchange rate contracts. Under the rule, savings banks are permitted to net
positive and negative mark-to-market values of rate contracts with the same
counterparty, subject to legally enforceable bilateral netting contracts that
meet certain criteria. This represents a change from the prior rules which
recognized only a very limited form of netting. This rule has not had a material
effect upon its financial condition or results of operations.
Loans-to-One-Borrower. The Bank is subject to the Administrator's
loans-to-one-borrower limits. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. Notwithstanding the limits just
described, savings banks may make loans to one borrower, for any purpose, in an
amount up to $500,000. A savings institution also is authorized to make loans to
one borrower to develop domestic residential housing units, not to exceed the
lesser of $30 million, or 30% of the savings institution's net worth, provided
that (i) the purchase price of each single-family dwelling in the development
does not exceed $500,000; (ii) the savings institution is in compliance with its
fully phased-in capital requirements; (iii) the loans comply with applicable
loan-to-value requirements; (iv) the aggregate amount of loans made under this
authority does not exceed 150% of net worth; and (v) the institution's regulator
issues an order permitting the savings institution to use this higher limit.
These limits also authorize a savings bank to make loans to one borrower to
finance the sale of real property acquired in satisfaction of debts in an amount
up to 50% of net worth.
As of June 30, 1999, the largest aggregate amount of loans which the
Bank had to any one borrower was $2,100,000. The Bank had no loans outstanding
which management believes violate the applicable loans to one borrower limits.
Federal Home Loan Bank System. The FHLB system provides a central
credit facility for member institutions. As a member of the FHLB of Atlanta, the
Bank is required to own capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of one percent of the aggregate principal amount of
its unpaid residential mortgage loans, home purchase contracts and similar
obligations at the end of each calendar year, or five percent of its outstanding
advances (borrowings) from the FHLB of Atlanta. On June 30, 1999, the Bank was
in compliance with this requirement with an investment in FHLB of Atlanta stock
of $1,036,000.
Federal Reserve System. Regulation D, promulgated by the Federal
Reserve Board, imposes reserve requirements on all depository institutions,
including savings banks and savings institutions, which maintain transaction
accounts or non-personal time deposits. Checking accounts, NOW accounts and
certain other types of accounts that permit payments or transfers to third
parties fall within the definition of transaction accounts and are subject to
Regulation D reserve requirements, as are any non-personal time deposits
(including certain money market deposit accounts) at a savings institution. For
1998, a depository institution must maintain average daily reserves equal to 3%
of the first $47.8 million of net transaction accounts, plus 10% of that portion
of total transaction accounts in excess of $47.8 million. The first $4.7 million
of otherwise reservable balances are exempt from the reserve requirements. These
percentages and threshold limits are subject to adjustment by the Federal
Reserve Board.
<PAGE>
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a insured institution without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of control,
control of an insured institution is conclusively deemed to have been acquired,
among other things, upon the acquisition of more than twenty five percent of any
class of voting stock. In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than ten percent of any class
of voting stock. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person.
Liquidity. The Bank is subject to the Administrator's requirement that
the ratio of liquid assets to total assets equal at least ten percent. The
computation of liquidity under North Carolina regulation allows the inclusion of
mortgage-backed securities and investments which, in the judgment of the
Administrator, have a readily marketable value, including investments with
maturities in excess of five years. At June 30, 1999, the Bank's liquidity
ratio, calculated in accordance with North Carolina regulations, was
approximately 29%.
Prompt Corrective Regulatory Action. The 1991 Banking Law provided the
federal banking agencies with broad powers to take corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of ten percent or greater, (ii) a Tier I risk-based
capital ratio of six percent or greater, (iii) a leverage ratio of five percent
or greater and (iv) is not subject to any order or written directive to meet and
maintain a specific capital level for any capital measure. An "adequately
capitalized" institution is defined as one that has (i) a total risk-based
capital ratio of eight percent or greater, (ii) a Tier I risk-based capital
ratio of four percent or greater and (iii) a leverage ratio of four percent or
greater (or three percent or greater in the case of an institution with the
highest examination rating and which is not experiencing or anticipating
significant growth). An institution is considered (A) "undercapitalized" if it
has (i) a total risk-based capital ratio of less than eight percent, (ii) a Tier
I risk-based capital ratio of less than four percent or (iii) a leverage ratio
of less than four percent (or three percent in the case of an institution with
the highest examination rating and which is not experiencing or anticipating
significant growth); (B) "significantly undercapitalized" if the institution has
(i) a total risk-based capital ratio of less than six percent, or (ii) a Tier I
risk-based capital ratio of less than three percent or (iii) a leverage ratio of
less than three percent and (C) "critically undercapitalized" if the institution
has a ratio of tangible equity to total assets equal to or less than two
percent. The Bank is considered to be "well capitalized" under the rules set
forth above.
<PAGE>
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state.
Such interstate acquisitions are subject to certain restrictions.
States may require the bank or savings bank being acquired to have been in
existence for a certain length of time but not in excess of five years. In
addition, no bank or savings bank may acquire more than 10% of the insured
deposits in the United States or more than 30% of the insured deposits in any
one state, unless the state has specifically legislated a higher deposit cap.
States are free to legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state could
deny interstate branching if it specifically elected to do so by June 1, 1997.
States could choose to allow interstate branching prior to June 1, 1997 by
opting-in to a group of states that permitteds these transactions. These states
generally allow interstate branching via a merger of an out-of-state bank with
an in-state bank, or on a de novo basis. North Carolina enacted legislation
permitting branching transactions prior to June 1, 1997, and did not adopt
legislation electing to deny interstate branching.
It is anticipated that the Interstate Banking Act will increase
competition within the markets in which the Bank now operates, although the
extent to which such competition will increase in such markets or the timing of
such increase cannot be predicted. To date the Bank has not experienced
significant increased competition at its Hillsborough office as a result of the
passage of the Interstate Banking Act. However, the Durham and Chapel Hill
offices recently opened by the Bank have had much more increased competition as
a result of the Interstate Banking Act.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. See
"--Capital Requirements." In addition, a North Carolina-chartered stock savings
bank, for a period of five years after its conversion from mutual to stock form,
must obtain the written approval from the Administrator before declaring or
paying a cash dividend on its capital stock in an amount in excess of one-half
of the greater of (i) the institution's net income for the most recent fiscal
year end, or (ii) the average of the institution's net income after dividends
for the most recent fiscal year end and not more than two of the immediately
preceding fiscal year ends, if applicable. The Bank has obtained the
Administrator's prior approval for each dividend paid by the Bank to the Parent.
Retained income at June 30, 1999, includes approximately $2,777,000
million for which no provision for federal income tax has been made. This amount
represents an allocation of income to bad debt deductions for tax purposes only.
Payment of dividends by the Bank out of this bad debt allocation would create
taxable income equal to approximately 164% of the dividend for the Bank.
<PAGE>
At the time of the Conversion, the Bank established a liquidation
account in an amount equal to its net worth at June 30, 1995. The liquidation
account is maintained for the benefit of eligible deposit account holders who
continue to maintain their deposit accounts in the Bank after the Conversion.
Only in the event of a complete liquidation would each eligible deposit account
holder be entitled to receive a liquidating distribution in the amount of the
then current adjusted subaccount balance for the deposit accounts before any
liquidation distribution may be made with respect to the Common Stock. Dividends
paid by the Bank to the Parent cannot reduce the net worth of the Bank below the
amount required for this liquidation account.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
Additional Limitations on Activities. FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations for savings banks are permitted to
engage are limited to those of service corporations for national banks.
Savings banks are also required to notify the FDIC at least 30 days
prior to the establishment or acquisition of any subsidiary, or at least 30 days
prior to conducting any such new activity. Any such activities must be conducted
in accordance with the regulations and orders of the FDIC and the Administrator.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds").
Other North Carolina Regulation. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to: the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires that the Bank maintain federal deposit insurance as a condition of
doing business.
<PAGE>
The Administrator conducts regular examinations of North
Carolina-chartered savings banks. The purpose of such examinations is to assure
that institutions are being operated in compliance with applicable North
Carolina law and regulations and in a safe and sound manner. These examinations
are usually conducted on a joint basis with the FDIC. In addition, the
Administrator is required to conduct an examination of any institution when he
has good reason to believe that the standing and responsibility of the
institution is of doubtful character or when he otherwise deems it prudent. The
Administrator is empowered to order the revocation of the license of an
institution if he finds that it has violated or is in violation of any North
Carolina law or regulation and that revocation is necessary in order to preserve
the assets of the institution and protect the interests of its depositors. The
Administrator has the power to issue cease and desist orders if any person or
institution is engaging in, or has engaged in, any unsafe or unsound practice or
unfair and discriminatory practice in the conduct of its business or in
violation of any other law, rule or regulation.
A North Carolina-chartered savings bank must maintain net worth,
computed in accordance with the Administrator's requirements, of five percent of
total assets and liquidity of ten percent of total assets, as discussed above.
Additionally, a North Carolina-chartered savings bank is required to maintain
general valuation allowances and specific loss reserves in the same amounts as
required by the FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North
Carolina-chartered savings bank cannot invest more than 15% of its total assets
in business, commercial, corporate and agricultural loans without the prior
approval of the Administrator. In addition to such lending authority, North
Carolina-chartered savings banks are authorized to invest funds, in excess of
loan demand, in certain statutorily permitted investments, including but not
limited to (i) obligations of the United States, or those guaranteed by it; (ii)
obligations of the State of North Carolina; (iii) bank demand or time deposits;
(iv) stock or obligations of the federal deposit insurance fund or a FHLB; (v)
savings accounts of any savings institution as approved by the board of
directors; and (vi) stock or obligations of any agency of the State of North
Carolina or of the United States or of any corporation doing business in North
Carolina whose principal business is to make education loans.
North Carolina law provides a procedure by which savings institutions
may consolidate or merge, subject to approval of the Administrator. The approval
is conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company may be affected by such statute or
regulation.
<PAGE>
Subsidiaries
The Bank is the only subsidiary of the Parent. The Bank has one
subsidiary, HSB Financial Services, Inc., that was incorporated under North
Carolina Law in January of 1998. HSB Financial Services, Inc. was established
for the primary purpose of selling mutual funds and other retail nondeposit
investments. HSB Financial Services, Inc. currently has one employee. The total
assets of HSB Financial Services, Inc. at June 30, 1999 were $20,582, the net
income for that subsidiary for the year ended June 30, 1999 was $6,132.
Employees
As of June 30, 1999, the Bank had 47 full-time employees and 3
part-time employees. The Bank provides its employees with basic and major
medical insurance, life insurance, sick leave and vacation benefits. In
addition, the Bank maintains a 401(k) retirement plan pursuant to which the Bank
matches one-half of employees' contributions, with its contribution limited to
three percent of each employee's salary.
The Bank also has an Employee Stock Ownership Plan (the "ESOP"), which
provides benefits to employees of the Bank. Also, the directors, officers and
employees of the Bank participate in the Management Recognition Plan and the
Stock Option Plan, under which 105,800 shares of restricted stock have been
awarded and options to purchase 253,334 shares of Common Stock have been
granted, respectively.
Employees are not represented by any union or collective bargaining
group, and the Company considers its employee relations to be good.
Federal Income Taxation
Savings institutions such as the Bank are subject to the taxing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), for
corporations, as modified by certain provisions specifically applicable for
financial or thrift institutions. Income is reported using the accrual method of
accounting. The maximum corporate federal income tax rate is 35%.
For fiscal years beginning prior to December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Code were permitted certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. A reserve could be established for bad debts on qualifying real
property loans (generally loans secured by interests in real property improved
or to be improved) under (i) a method based on a percentage of the institution's
taxable income, as adjusted (the "percentage of taxable income method") or (ii)
a method based on actual loss experience (the "experience method"). The reserve
for nonqualifying loans was computed using the experience method.
The percentage of taxable income method was limited to 8% of taxable
income. This method could not raise the reserve to exceed 6% of qualifying real
property loans at the end of the year. Moreover, the additions for qualifying
real property loans, when added to nonqualifying loans, could not exceed 12% of
the amount by which total deposits or withdrawable accounts exceed the sum of
surplus, undivided profits and reserves at the beginning of the year. The
experience method was the amount necessary to increase the balance of the
<PAGE>
reserve at the close of the year to the greater of (i) the amount which bore the
same ratio to loans outstanding at the close of the year as the total net bad
debts sustained during the current and five preceding years bore to the sum of
the loans outstanding at the close of such six years or (ii) the balance in the
reserve account at the close of the last taxable year beginning before 1988
(assuming that the loans outstanding have not declined since such date).
In order to qualify for the percentage of income method, an institution
had to have at least 60% of its assets as "qualifying assets" which generally
included, cash, obligations of the United States government or an agency or
instrumentality thereof or of a state or political subdivision, residential real
estate-related loans, or loans secured by savings accounts and property used in
the conduct of its business. In addition, it had to meet certain other
supervisory tests and operate principally for the purpose of acquiring savings
and investing in loans.
As a result of changes in law, thrift institutions were required to
change to either the reserve method or the specific charge-off method that
applied to banks. Large thrift institutions, those generally exceeding $500
million in assets, had to convert to the specific charge-off method. In
computing its bad debt reserve for federal income taxes, the Bank used the
reserve method in fiscal years 1997, 1998 and 1999.
Bad debt reserve balances in excess of the balance computed under the
experience method or amounts maintained in a supplemental reserve built up prior
to 1962 ("excess bad debt reserve") require inclusion in taxable income upon
certain distributions to shareholders. Distributions in redemption or
liquidation of stock or distributions with respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated as a distribution from the excess bad debt reserve. When such a
distribution takes place and it is treated as from the excess bad debt reserve,
the thrift is required to reduce its reserve by such amount and simultaneously
recognize the amount as an item of taxable income increased by the amount of
income tax imposed on the inclusion. Dividends not in excess of earnings and
profits accumulated since December 31, 1951 will not require inclusion of part
or all of the bad debt reserve in taxable income. The Bank has accumulated
earnings and profits since December 31, 1951 and has an excess in its bad debt
reserve. Distributions in excess of current and accumulated earnings and profits
will increase taxable income. Net retained earnings at June 30, 1999 includes
approximately $2,777,000 for which no provision for federal income tax has been
made.
Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repeals the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995. The legislation will trigger bad debt reserve recapture for
post-1987 excess reserves over a six-year period. At June 30, 1999, the Bank's
post-1987 excess reserves amounted to approximately $534,000. A special
provision suspends recapture of post-1987 excess reserves for up to two years
if, during those years, the institution satisfies a "residential loan
requirement." This requirement will be met if the principal amount of the
institution's residential loans exceeds a base year amount, which is determined
by reference to the average of the institution's residential loans during the
six taxable years ending before January 1, 1996. However, notwithstanding this
special provision, recapture must begin no later than the first taxable year
beginning after December 31, 1997.
<PAGE>
The Bank may also be subject to the corporate alternative minimum tax
("AMT"). This tax is applicable only to the extent it exceeds the regular
corporate income tax. The AMT is imposed at the rate of 20% of the corporation's
alternative minimum taxable income ("AMTI") subject to applicable statutory
exemptions. AMTI is calculated by adding certain tax preference items and making
certain adjustments to the corporation's regular taxable income. Preference
items and adjustments generally applicable to financial institutions include,
but are not limited to, the following: (i) the excess of the bad debt deduction
over the amount that would have been allowable on the basis of actual
experience; (ii) interest on certain tax-exempt bonds issued after August 7,
1986; and (iii) 75% of the excess, if any, of a corporation's adjusted earnings
and profits over its AMTI (as otherwise determined with certain adjustments).
Net operating loss carryovers, subject to certain adjustments, may be utilized
to offset up to 90% of the AMTI. Credit for AMT paid may be available in future
years to reduce future regular federal income tax liability. The Bank has not
been subject to the AMT in recent years.
The Bank's federal income tax returns have not been audited in the last
ten tax years. The Parent's 1996 federal income tax return was examined in
fiscal 1999 and was accepted by the Internal Revenue Service with no proposed
adjustments. The Bank and Parent filed separate federal returns until fiscal
1997 and began filing consolidated returns in fiscal 1998.
State Taxation
Under North Carolina law, the corporate income tax in 1997 was 7.50% of
federal taxable income as computed under the Code, subject to certain prescribed
adjustments. The North Carolina corporate tax rate dropped to 7.25% in 1998 and
will drop to 7.00% in 1999 and 6.90% thereafter. An annual state franchise tax
is imposed at a rate of 0.15% applied to the greatest of the institution's (i)
capital stock, surplus and undivided profits, (ii) investment in tangible
property in North Carolina or (iii) appraised valuation of property in North
Carolina.
ITEM 2. PROPERTIES
At June 30, 1999, the Company conducted its business from three offices
in Hillsborough, Durham and Chapel Hill, North Carolina. The following table
sets forth certain information regarding the Company's owned and leased
properties as of June 30, 1999. The Hillsborough and Chapel Hill Offices are
owned by the Company, and the Durham Office is leased under an operating lease
that expires in 2013.
Owned Net Book
Or Value of
Address Leased Property
------- ------ --------
260 South Churton Street Owned $1,334,000
Hillsborough, North Carolina 27278
1406 E. Franklin Street Owned $940,000
Chapel Hill, North Carolina 27514
3400 Westgate Drive Leased $254,000
Durham, North Carolina 27707
<PAGE>
In addition to the properties described above, the Company owns two
additional office buildings located in Hillsborough, North Carolina, one at 112
North Churton Street (former branch location) and another directly adjacent to
the North Churton Street building. These properties have net book values of
$39,000 and $15,000, respectively, as of June 30, 1999 and were both used for
rental office space. The total net book value of the Company's premises and
equipment on June 30, 1999 was $3,213,000. The properties are considered by the
Company's management to be in good condition.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, the Company is not involved in any
pending legal proceedings other than routine, non-material proceedings occurring
in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the quarter ended June 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is set forth under the section
captioned "Capital Stock" in the Company's 1999 Annual Report which is
incorporated herein by reference. See also "Item 1. BUSINESS SUPERVISION AND
REGULATION--Regulation of the Parent--Dividend and Repurchase Limitations" and "
- --Regulation of the Bank--Restrictions on Dividends and Other Capital
Distributions" above for a detailed discussion of regulatory restrictions which
limit the ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table
captioned "Selected Financial Data" on page 2 of the Company's 1999 Annual
Report which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
See the information set forth under Item 1 above and the information
set forth under the section captioned "Management's Discussion and Analysis " on
pages 7-22 of the Company's 1999 Annual Report which section is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth under the sections
captioned "Liquidity and Interest Rate Risk Management" and "Market Risk" on
pages 17 and 18 of the Company's Annual Report which is incorporated herein by
reference.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary
data set forth on pages 24-47 in the Company's 1999 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the fiscal year ended June 30, 1999
and the interim subsequent period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth under the section
captioned "Proposal 1 - Election of Directors" in the Proxy Statement for the
1999 Annual Meeting of Shareholders of Piedmont Bancorp, Inc. to be held on
November 18, 1999 (the "Proxy Statement") and the section captioned "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement, which
sections are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Director Compensation" and "
Management Compensation" in the Proxy Statement, which sections are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference from the section captioned "Security Ownership of Certain Beneficial
Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no reportable transactions since the beginning of the
Company's last fiscal year nor are any reportable transactions proposed as of
the date of this Form 10-K. See also the section captioned "Proposal 1 Election
of Directors - Certain Indebtedness and Transactions of Management" in the Proxy
Statement, which section is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
14(a) Consolidated Financial Statements (contained in the Company's
1999 Annual Report attached hereto as Exhibit (13) and
incorporated herein by reference) including the following:
(1) Independent Auditors' Report
(2) Consolidated Balance Sheets as of June 30, 1999 and
1998
(3) Consolidated Statements of Income for the Years Ended
June 30, 1999, 1998 and 1997
(4) Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended June 30,
1999, 1998 and 1997
(5) Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997
(6) Notes to Consolidated Financial Statements
14(a)2. Financial Statement Schedules
All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
14(a)3. Exhibits
Exhibit (3)(i) Articles of Incorporation, incorporated
herein by reference to Exhibit 3.1 of the
Company's Registration Statement on Form
S-1 (No. 33-94512) filed on July 12, 1995
and amended on September 27, 1995 and
October 6, 1995
Exhibit (3)(ii) Bylaws, as amended August 19, 1999
Exhibit (4) Specimen Stock Certificate, incorporated
herein by reference to Exhibit 4.1 of the
Company's Registration Statement on Form
S-1 (No. 33-94512) filed on July 12, 1995
and amended on September 27, 1995 and
October 6, 1995
<PAGE>
Exhibit (10)(a) Piedmont Bancorp, Inc. Stock Option Plan,
incorporated herein by reference to
Exhibit (10)(ii)(a) of the Registrant's
Form 10-K for the year ended June 30, 1996
Exhibit (10)(b) Hillsborough Savings Bank, Inc.,
SSB Management Recognition Plan,
incorporated herein by reference to
Exhibit (10)(ii)(b) of the Registrant's
Form 10-K for the year ended June 30, 1996
Exhibit (10)(c) Employment Agreement between Hillsborough
Savings Bank, Inc., SSB and D. Tyson
Clayton, incorporated herein by reference
to Exhibit 10.2 of the Company's
Registration Statement on Form S-1 (No.
33-94512) filed on July 12, 1995 and
amended on September 27, 1995 and October
6, 1995
Exhibit (10)(d) Employment Agreement between Hillsborough
Savings Bank, Inc., SSB and Peggy S.
Walker, incorporated herein by reference
to Exhibit 10.2 of the Company's
Registration Statement on Form S-1 (No.
33-94512) filed on July 12, 1995 and
amended on September 27, 1995 and October
6, 1995
Exhibit (10)(e) Employment Agreement between Hillsborough
Savings Bank, Inc., SSB and Ted R. Laws,
incorporated herein by reference to
Exhibit (10)(ii)(e) of the Registrant's
Form 10-K for the year ended June 30, 1997
Exhibit (10)(f) Employment Agreement between Hillsborough
Savings Bank, Inc., SSB and Thomas W.
Wayne, incorporated herein by reference to
Exhibit (10)(ii)(f) of the Registrant's
Form 10-K for the year ended June 30, 1998
Exhibit (10)(g) Employment Agreement between Hillsborough
Savings Bank, Inc., SSB and Danny C. Lloyd
Exhibit (10)(h) Ground Lease dated September 2, 1987
between ZT-Durham Associates #1 and
Guaranty State Bank, as subsequently
assigned to Hillsborough Savings Bank,
Inc. SSB for space in the Westgate Plaza
Shopping Center located on property in
Durham, North Carolina.
<PAGE>
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1999 Annual Report to Security Holders
Exhibit (21) See Item 1. "Business--Subsidiaries" for a
discussion of subsidiaries.
Exhibit (23) Consent of Independent Auditors
Exhibit (27) Financial Data Schedule
14(b) The Company filed one report on Form 8-K during the last quarter of the
fiscal year ended June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PIEDMONT BANCORP, INC.
Date: September 16, 1999 By: /s/D. Tyson Clayton
-----------------
D. Tyson Clayton
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/D. Tyson Clayton President, Chief Executive September 16, 1999
- ------------------- Officer and Director
D. Tyson Clayton
/s/Peggy S. Walker Executive Vice President, September 16, 1999
- --------------- Secretary and Director
Peggy S. Walker
/s/Thomas W. Wayne Vice President, Treasurer and September 16, 1999
- ------------------ Principal Financial Officer
Thomas W. Wayne
M. Marion Clark Director September 16, 1999
- ---------------
M. Marion Clark
/s/Robert B. Nichols, Jr. Director September 16, 1999
- -------------------------
Robert B. Nichols, Jr.
/s/Alfred L. Carr Director September 16, 1999
- -----------------
Alfred L. Carr
/s/Everett H. Kennedy Director September 16, 1999
- ---------------------
Everett H. Kennedy
/s/Donald W. Pope Director September 16, 1999
- -----------------
Donald W. Pope
<PAGE>
/s/James P. Ray Director September 16, 1999
- ---------------
James P. Ray
/s/William Larry Rogers
- ----------------------- Director September 16, 1999
William Larry Rogers
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
(3)(ii) Bylaws, as amended August 19, 1999
(10)(g) Employment Agreement between Hillsborough Savings
Bank, Inc., SSB and Danny C. Lloyd
(10)(h) Ground Lease dated September 2, 1987 between ZT-Durham
Associates #1 and Guaranty State Bank, as subsequently assigned
to Hillsborough Savings Bank, Inc. SSB for space in the Westgate
Plaza Shopping Center located on property in Durham, North
Carolina.
(12) Statement Regarding Computation of Ratios
(13) 1999 Annual Report to Security Holders
(23) Consent of Independent Auditors
(27) Financial Data Schedule
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO THOMAS W. WAYNE, VICE
PRESIDENT, TREASURER, AND PRINCIPAL FINANCIAL OFFICER OF PIEDMONT BANCORP, INC.
Ex-3(ii)
AMENDED AND RESTATED
BYLAWS
OF
PIEDMONT BANCORP, INC.
ARTICLE I
OFFICES
-------
Section 1. Principal Office. The principal office of the corporation
shall be located at such place as the Board of Directors may fix from time to
time.
Section 2. Registered Office. The registered office of the corporation
required by law to be maintained in the State of North Carolina may be, but need
not be, identical with the principal office.
Section 3. Other Offices. The corporation may have offices at such
other places, either within or without the State of North Carolina, as the Board
of Directors may designate or as the affairs of the corporation may require from
time to time.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
Section 1. Place of Meetings. All meetings of shareholders shall be
held at the principal office of the corporation, or at such other place, either
within or without the State of North Carolina, as shall in each case be (i)
fixed by the Chief Executive Officer, the President, the Chairman of the Board,
or the Board of Directors and designated in the notice of the meeting or (ii)
agreed upon by a majority of the shareholders entitled to vote at the meeting.
Section 2. Annual Meetings. The annual meeting of shareholders shall be
held during the first five (5) calendar months following the end of the
corporation's fiscal year, on any day (except Saturday, Sunday, or a legal
holiday) during that period as shall be determined by the Board of Directors,
for the purpose of electing directors of the corporation and for the transaction
of such other business as may be properly brought before the meeting.
Section 3. Substitute Annual Meeting. If the annual meeting shall not
be held within the time designated by these Bylaws, a substitute annual meeting
may be called in accordance with the provisions of Section 4 of this Article II.
A meeting so called shall be designated and treated for all purposes as the
annual meeting.
Section 4. Special Meetings. Special meetings of the shareholders may
be called at any time by the Chief Executive Officer, the President, the
Chairman of the Board of Directors or the Board of Directors.
<PAGE>
Section 5. Notice of Meetings. Written notice stating the date, time,
and place of the meeting shall be given not less than ten (10) nor more than
sixty (60) days before the date of any shareholders' meeting, either by personal
delivery, or by mail by or at the direction of the Chief Executive Officer, the
President, the Chairman of the Board of Directors or the Board of Directors, to
each shareholder entitled to vote at such meeting, provided that such notice
must be given to all shareholders with respect to any meeting at which a merger
or share exchange is to be considered and in such other instances as required by
law. If mailed, such notice shall be deemed to be effective when deposited in
the United States mail, correctly addressed to the shareholder at the
shareholder's address as it appears on the current record of shareholders of the
corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall include a
description of the purpose or purposes for which the meeting is called; but, in
the case of an annual or substitute annual meeting, the notice of meeting need
not include a description of the purpose or purposes for which the meeting is
called unless such a description is required by the provisions of Chapter 55 of
the North Carolina General Statutes.
When a meeting is adjourned to a different date, time or place, notice
need not be given of the new date, time or place if the new date, time or place
is announced at the meeting before adjournment and if a new record date is not
fixed for the adjourned meeting. If a new record date is fixed for the adjourned
meeting (which must be done if the new date is more than 120 days after the date
of the original meeting), notice of the adjourned meeting must be given as
provided in this Section 5 to persons who are shareholders as of the new record
date.
Section 6. Waiver of Notice. Any shareholder may waive notice of any
meeting before or after the meeting. The waiver must be in writing, signed by
the shareholder, and delivered to the corporation for inclusion in the minutes
or filing with the corporate records. A shareholder's attendance, in person or
by proxy, at a meeting (i) waives objection to lack of notice or defective
notice of the meeting, unless the shareholder or his proxy at the beginning of
the meeting objects to holding the meeting or transacting business at the
meeting, and (ii) waives objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder or his proxy objects to considering the matter
before it is voted upon.
Section 7. Shareholders' List. Before each meeting of shareholders, the
Secretary of the corporation shall prepare an alphabetical list of the
shareholders entitled to notice of such meeting. The list shall be arranged by
voting group (and within each voting group by class or series of shares) and
show the address of and number of shares held by each shareholder. The list
shall be kept on file at the principal office of the corporation, or at a place
identified in the meeting notice in the city where the meeting will be held, for
the period beginning two (2) business days after notice of the meeting is given
and continuing through the meeting, and shall be available for inspection by any
shareholder, his agent or attorney, at any time during regular business hours.
The list shall also be available at the meeting and shall be subject to
inspection by any shareholder, his agent or attorney, at any time during the
meeting or any adjournment thereof.
2
<PAGE>
Section 8. Fixing Record Date. The Board of Directors may fix a date
selected by them as the record date for one (1) or more voting groups in order
to determine the shareholders entitled to notice of a shareholders' meeting, to
vote, or to take any other action. Such record date may not be more than seventy
(70) days before the meeting or action requiring a determination of
shareholders. A determination of shareholders entitled to notice of or to vote
at a shareholders' meeting is effective for any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
which it must do if the meeting is adjourned to a date more than 120 days after
the date fixed for the original meeting.
If no record date is fixed by the Board of Directors for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, the close of business on the day before the first notice of the
meeting is delivered to shareholders shall be the record date for such
determination of shareholders.
Section 9. Voting Groups. All shares of one (1) or more classes or
series that, under the Articles of Incorporation or the North Carolina Business
Corporation Act, are entitled to vote and be counted together collectively on a
matter at a meeting of shareholders constitute a voting group. All shares
entitled by the Articles of Incorporation or the North Carolina Business
Corporation Act to vote generally on a matter are for that purpose a single
voting group. Classes or series of shares shall not be entitled to vote
separately by voting group unless expressly authorized by the Articles of
Incorporation or specifically required by law.
Section 10. Quorum. Shares entitled to vote as a separate voting group
may take action on a matter at the meeting only if a quorum of those shares
exists. A majority of the votes entitled to be cast on the matter by the voting
group constitutes a quorum of that voting group for action on that matter.
Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to time by the vote of a
majority of the votes cast on the motion to adjourn; and, subject to the
provisions of Section 5 of this Article II, at any adjourned meeting any
business may be transacted that might have been transacted at the original
meeting if a quorum exists with respect to the matter proposed.
Section 11. Proxies. Shares may be voted either in person or by one (1)
or more proxies authorized by a written appointment of proxy signed by the
shareholder or by his duly authorized attorney in fact. An appointment of proxy
is valid for eleven months from the date of its execution, unless a different
period is expressly provided in the appointment form.
Section 12. Voting of Shares. Subject to the provisions of the Articles
of Incorporation, each outstanding share shall be entitled to one (1) vote on
each matter voted on at a meeting of shareholders.
Except in the election of directors as governed by the provisions of
Section 4 of Article III, if a quorum exists, action on a matter by a voting
group is approved if the votes cast within the voting group favoring the action
exceed the votes cast opposing the action, unless a greater vote is required by
law or the Articles of Incorporation or these Bylaws.
<PAGE>
Absent special circumstances, shares of the corporation are not
entitled to vote if they are owned, directly or indirectly, by a second
corporation in which the corporation owns, directly or indirectly, a majority of
the shares entitled to vote for directors of the second corporation; provided
that this provision does not limit the power of the corporation or such second
corporation to vote shares held by it in a fiduciary capacity.
3
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
------------------
Section 1. General Powers. All corporate powers shall be exercised by
or under the authority of, and the business and affairs of the corporation shall
be managed under the direction of, the Board of Directors.
Section 2. Number and Qualification. The number of directors of the
Corporation shall not be less than five (5) nor more than fifteen (15), with the
exact number to be fixed from time to time by the Board of Directors.
Section 3. Nominations. At any meeting of shareholders at which
directors are to be elected, nominations for election to the Board of Directors
may be made by the Board of Directors or, subject to the conditions described
below, by any holder of shares entitled to be voted at that meeting in the
election of directors. To be eligible for consideration at the meeting of
shareholders, all nominations, other than those made by the Board of Directors,
shall be in writing and must be delivered to Secretary of the corporation not
less than fifty (50) days nor more than ninety (90) days prior to the meeting at
which such nominations will be made; provided, however, that if less than sixty
(60) days' notice of the meeting is given to shareholders, such nominations must
be delivered to the Secretary of the corporation not later than the close of
business on the tenth (10th) day following the day on which the notice of
meeting was mailed.
Section 4. Election. Except as provided in Section 7 of this Article
III, the directors shall be elected at the annual meeting of shareholders. Those
persons who receive the highest number of votes at a meeting at which a quorum
is present shall be deemed to have been elected.
Section 5. Terms of Directors. Each initial director shall hold office
until the earliest of the first shareholders' meeting at which directors are
elected, or until such director's death, resignation, or removal.
At all times that the number of directors is less than nine (9), each
director shall be elected to a term ending as of the next succeeding annual
meeting of shareholders or until his or her earlier death, resignation,
retirement, removal or disqualification or until his or her successor shall be
elected and shall qualify.
In the first election of directors that the total number of directors
is nine (9) or more, the directors shall be divided into three (3) classes, as
nearly equal as possible in number as may be, to serve in the first instance for
terms of one (1), two (2) and three (3) years, respectively, from the date such
class of directors takes office or until their earlier death, resignation,
retirement, removal or disqualification or until their successors shall be
elected and shall qualify, and thereafter the successors in each class of
directors shall be elected for terms of three (3) years or until their earlier
death, resignation, retirement, removal, or disqualification or until their
successors shall be elected and shall qualify. In the event of any increase or
decrease in the number of directors at a time that the directors are so
classified, the additional or eliminated directorships shall be classified or
chosen so that all classes of directors shall remain or become as nearly equal
as possible in number.
<PAGE>
Notwithstanding the provisions of this Section 5, a decrease in the
number of directors does not shorten an incumbent director's term. Despite the
expiration of a director's term, such director shall continue to serve until a
successor shall be elected and qualified or until there is a decrease in the
number of directors.
4
<PAGE>
Section 6. Removal. Any director may be removed from office at any
time, with or without cause, by a vote of the shareholders if the number of
votes cast to remove such director exceeds the number of votes cast not to
remove him. If a director is elected by a voting group of shareholders, only the
shareholders of that voting group may participate in the vote to remove him. A
director may not be removed by the shareholders at a meeting unless the notice
of that meeting states that the purpose, or one (1) of the purposes, of the
meeting is removal of the director. If any directors are so removed, new
directors may be elected at the same meeting.
Section 7. Vacancies. Any vacancy occurring in the Board of Directors,
including without limitation a vacancy resulting from an increase in the number
of directors or from the failure by the shareholders to elect the full
authorized number of directors, may be filled by the Board of Directors. If the
directors remaining in office do not constitute a quorum, the directors may fill
the vacancy by the affirmative vote of a majority of the remaining directors or
by the sole remaining director. If the vacant office was held by a director
elected by voting group, only the remaining director or directors elected by
that voting group or the holders of shares of that voting group are entitled to
fill the vacancy. A director elected to fill a vacancy shall be elected to serve
the remaining term of the director replaced, or if a director is not elected to
replace a previously elected director, the new director shall be elected to
serve until the next shareholders' meeting at which directors are elected.
Section 8. Chairman of the Board of Directors. There may be a Chairman
of the Board of Directors and a Vice Chairman of the Board of Directors elected
by the directors from their number at any meeting of the Board of Directors. The
Chairman and Vice Chairman shall serve in such positions at the pleasure of the
Board of Directors. The Chairman shall preside at all meetings of the Board of
Directors and shareholders, serve as a member of any executive committee of the
Board of Directors, and perform such other duties as may be directed by the
Board of Directors.
In the absence of the Chairman, the Vice Chairman shall preside at
meetings of directors or shareholders.
Section 9. Compensation. The Board of Directors may provide for the
compensation of directors for their services as such and for the payment or
reimbursement of any or all expenses incurred by them in connection with such
services.
5
<PAGE>
ARTICLE IV
MEETINGS AND COMMITTEES OF DIRECTORS
------------------------------------
Section 1. Regular Meetings. A regular meeting of the Board of
Directors shall be held immediately after, and at the same place as, the annual
meeting of shareholders. In addition, the Board of Directors may provide, by
resolution, the time and place, either within or without the State of North
Carolina, for the holding of additional regular meetings.
Section 2. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board or the President
if such officer is also a director, or by any three (3) or more directors. Such
a meeting may be held either within or without the State of North Carolina, as
fixed by the person or persons calling the meeting.
Section 3. Notice of Meetings. Regular meetings of the Board of
Directors may be held without notice. The person or persons calling a special
meeting of the Board of Directors shall, at least two (2) days before the
meeting, give or cause to be given notice thereof by any usual means of
communication. Such notice need not specify the purpose for which the meeting is
called. Any duly convened regular or special meeting may be adjourned by the
directors to a later time without further notice.
Section 4. Waiver of Notice. Any director may waive notice of any
meeting before or after the meeting. The waiver must be in writing, signed by
the director entitled to the notice, and be delivered to the corporation for
inclusion in the minutes or for filing with the corporate records. A director's
attendance at or participation in a meeting waives any required notice of such
meeting unless the director at the beginning of the meeting, or promptly upon
arrival, objects to holding the meeting or to transacting business at the
meeting and does not thereafter vote for or assent to action taken at the
meeting.
Section 5. Quorum. Unless the Articles of Incorporation or these Bylaws
provide otherwise, a majority of the number of directors fixed by or pursuant to
these Bylaws shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, or if no number is so fixed, a majority of
the number of directors in office immediately before the meeting begins shall
constitute a quorum.
Section 6. Manner of Acting. Except as otherwise provided in the
Articles of Incorporation or these Bylaws, including Section 9 of this Article
IV, the affirmative vote of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
Section 7. Presumption of Assent. A director who is present at a
meeting of the Board of Directors or a committee of the Board of Directors when
corporate action is taken is deemed to have assented to the action taken unless
(i) he objects at the beginning of the meeting, or promptly upon his arrival, to
holding it or to transacting business at the meeting, or (ii) his dissent or
abstention from the action taken is entered in the minutes of the meeting, or
(iii) he files written notice of his dissent or abstention with the presiding
officer of the meeting before its adjournment or with the corporation
immediately after the adjournment of the meeting. Such right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
6
<PAGE>
Section 8. Action Without Meeting. Action required or permitted to be
taken at a meeting of the Board of Directors may be taken without a meeting if
the action is taken by all members of the Board of Directors. The action must be
evidenced by one (1) or more written consents signed by each director before or
after such action, describing the action taken, and included in the minutes or
filed with the corporate records.
Section 9. Committees of the Board of Directors. The Board of Directors
may create such committees of the Board of Directors as it shall consider
appropriate, including without limitation those committees specifically provided
for in these Bylaws. The creation of a committee of the Board of Directors and
appointment of members to it must by approved by the greater of (i) a majority
of the number of directors in office when the action is taken or (ii) the number
of directors required to take action pursuant to Section 6 of this Article IV.
Each committee of the Board of Directors must have two (2) or more members and,
to the extent authorized by law, shall have such duties and authority as may be
described in these Bylaws or otherwise specified by the Board of Directors. Each
committee member shall serve at the pleasure of the Board of Directors. The
provisions in these Bylaws governing meetings, actions without meeting and other
requirements of the Board of Directors shall also apply to any committees of the
Board of Directors established pursuant to these Bylaws.
Section 10. Executive Committee. There may be a standing committee of
the Board of Directors to be known as the Executive Committee and consisting of
not fewer than three (3) directors, one (1) of whom shall be the Chairman of the
Board of Directors and one (1) of whom shall be the President of the
corporation, if such officer is also a director. Except as limited by Section 9
of this Article IV or otherwise limited by law, the Executive Committee is
empowered to act for and on behalf of the Board of Directors in any and all
matters in the interim between meetings of the Board of Directors. Within the
powers conferred upon it, action by the Executive Committee shall be as binding
upon the corporation as if performed by the full Board of Directors. Such
actions shall be reported to the Board of Directors for review at its next
meeting following such action. The committee shall meet as often as it considers
necessary or advisable.
Section 11. Audit Committee. There may be a standing committee of the
Board of Directors to be known as the Audit Committee and consisting of not
fewer than three (3) directors. The Audit Committee shall supervise examination
of the assets and the liabilities and the internal audit program of the
corporation and its subsidiaries, cause outside audits to be performed on the
financial statements of the corporation, and shall make periodic reports to the
Board of Directors.
ARTICLE V
OFFICERS
--------
Section 1. Officers of the Corporation. The officers of the corporation
shall consist of a President, a Secretary, a Treasurer, and such Vice Presidents
or other officers (including assistant officers) as may from time to time be
appointed by or under the authority of the Board of Directors. Any two (2) or
more offices may be held by the same person, but no officer may act in more than
one (1) capacity where action of two (2) or more officers is required.
7
<PAGE>
Section 2. Appointment and Term. The officers of the corporation shall
be appointed by the Board of Directors or by a duly appointed officer authorized
by the Board of Directors to appoint one (1) or more officers. Each officer
shall hold office until his death, resignation, retirement, removal,
disqualification, or his successor shall have been appointed.
Section 3. Compensation of Officers. The compensation of all officers
of the corporation shall be fixed by or under the authority of the Board of
Directors, and no officer shall serve the corporation in any other capacity and
receive compensation therefor unless such additional compensation shall be duly
authorized. The appointment of an officer does not itself create contract
rights.
Section 4. Removal. Any officer may be removed by the Board of
Directors at any time with or without cause; but such removal shall not itself
affect the officer's contract rights, if any, with the corporation except to the
extent, if any, specified in any such contract.
Section 5. Resignation. An officer may resign at any time by
communicating his resignation to the corporation, orally or in writing. A
resignation is effective when communicated unless it specifies in writing a
later effective date. If a resignation is made effective at a later date that is
accepted by the corporation, the Board of Directors may fill the pending vacancy
before the effective date if the Board of Directors provides that the successor
does not take office until the effective date. An officer's resignation does not
affect the corporation's contract rights, if any, with the officer except to the
extent, if any, specified in any such contract.
Section 6. Bonds. The Board of Directors may by resolution require any
officer, agent, or employee of the corporation to give bond to the corporation,
with sufficient sureties, conditioned on the faithful performance of the duties
of his respective office or position, and to comply with such other conditions
as may from time to time be required by the Board of Directors.
Section 7. President. The President shall be the principal executive
officer of the corporation and, subject to the control of the Board of
Directors, shall in general supervise and control all of the business and
affairs of the corporation. He shall sign, with the Secretary, an Assistant
Secretary, or any other proper officer of the corporation thereunto authorized
by the Board of Directors, certificates for shares of the corporation, any
deeds, mortgages, bonds, contracts, or other instruments which the Board of
Directors has authorized to be executed, except in cases where the signing and
execution thereof shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the corporation, or shall be
required by law to be otherwise signed or executed, and in general he shall
perform all duties incident to the office of the President and such other duties
as may be prescribed by the Board of Directors from time to time. The President
shall be entitled to attend all regular and special meetings and meetings of
committees of the Board of Directors. If the President of the corporation is
also a director of the corporation, he shall serve as a member of the Executive
Committee.
Section 8. Vice Presidents. In the absence of the President or in the
event of his death, inability or refusal to act, the Vice Presidents, unless
otherwise determined by the Board of Directors, shall perform the duties of the
President, and when so acting shall have all the powers of and be subject to all
the restrictions upon the President. Any Vice President (or Assistant Vice
President) may sign, with the Secretary, an Assistant Secretary, or any other
proper officer of the corporation thereunto authorized by the Board of
Directors, certificates for shares of the corporation and any other instruments
which may be signed by the President, and shall perform such other duties as
from time to time may be prescribed by the President or Board of Directors.
8
<PAGE>
Section 9. Secretary. The Secretary shall: (i) keep the minutes of the
meetings of shareholders, of the Board of Directors, and of all committees of
the Board of Directors, in one or more books provided for that purpose; (ii) see
that all notices are duly given in accordance with the provisions of these
Bylaws or as required by law; (iii) maintain and authenticate the records of the
corporation and be custodian of the seal of the corporation and see that the
seal of the corporation is affixed to all documents the execution of which on
behalf of the corporation under its seal is duly authorized; (iv) sign with the
President or a Vice President, certificates for shares of the corporation, the
issuance of which shall have been authorized by resolution of the Board of
Directors; (v) maintain or cause to be maintained, and have general charge of,
the stock transfer books of the corporation; (vi) prepare or cause to be
prepared shareholder lists prior to each meeting of shareholders as required by
law; (vii) attest the signature or certify the incumbency or signature of any
officer of the corporation; and (viii) in general perform all duties incident to
the office of secretary and such other duties as from time to time may be
prescribed by the President or by the Board of Directors.
Section 10. Treasurer. The Treasurer shall be, and may be designated as
such as, the corporation's Chief Financial Officer, and shall: (i) have charge
and custody of and be responsible for all funds and securities of the
corporation; receive and give receipts for moneys due and payable to the
corporation from any source whatsoever, and deposit all such moneys in the name
of the corporation in such depositories as shall be selected in accordance with
the provisions of Section 4 of Article VI of these Bylaws; (ii) maintain, or
cause to be maintained, appropriate accounting records as required by law; (iii)
prepare, or cause to be prepared, annual financial statements of the corporation
that include a balance sheet as of the end of the fiscal year and income and
cash flow statement for that year, which statements, or a written notice of
their availability, shall be mailed to each shareholder within 120 days after
the end of such fiscal year; and (iv) in general perform all of the duties
incident to the office of treasurer and such other duties as from time to time
may be prescribed by the President or by the Board of Directors.
Section 11. Assistant Officers. In the absence of a duly appointed
officer of the corporation, or in the event of his death, inability or refusal
to act, any person appointed by the Board of Directors and designated by title
as an assistant to that officer, unless otherwise determined by the Board of
Directors, may perform the duties of, and when so acting shall have all the
powers of and be subject to all the restrictions upon, that officer. Such
assistant officers shall perform such other duties as from time to time may be
prescribed by the President or by the Board of Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
--------------------------------------
Section 1. Contracts. The Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation, and such
authorization may be general or confined to specific instances. Also, the Board
of Directors may limit, condition, restrict or deny such authority to any
officer or officers, or any agent or agents.
Section 2. Loans. No loans shall be contracted on behalf of the
corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
9
<PAGE>
Section 3. Checks and Drafts. All checks, drafts, or other orders for
the payment of money, issued in the name of the corporation, shall be signed by
such officer or officers, agent or agents of the corporation and in such manner
as shall from time to time be determined by the Board of Directors.
Section 4. Deposits. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the corporation
in such depositories as may be selected by or under the authority of the Board
of Directors.
ARTICLE VII
SHARES AND THEIR TRANSFER
-------------------------
Section 1. Certificate For Shares. The Board of Directors may authorize
the issuance of some or all of the shares of the corporation's classes or series
without issuing certificates to represent such shares. If shares are represented
by certificates, the certificates shall be in such form as required by law and
as determined by the Board of Directors. Certificates shall be signed, either
manually or in facsimile, by the President or a Vice President, and by the
Secretary or Treasurer or an Assistant Secretary or an Assistant Treasurer. All
certificates for shares shall be consecutively numbered or otherwise identified
and entered into the stock transfer books of the corporation. When shares are
represented by certificates, the corporation shall issue and deliver, to each
shareholder to whom such shares have been issued or transferred, certificates
representing the shares owned by him. When shares are not represented by
certificates, then within a reasonable time after the issuance or transfer of
such shares, the corporation shall send the shareholder to whom such shares have
been issued or transferred a written statement of the information required by
law to be on certificates.
Section 2. Stock Transfer Books. The corporation shall keep or cause to
be kept a book or set of books, to be known as the stock transfer books of the
corporation, containing the name of each shareholder of record, together with
such shareholder's address and the number and class or series of shares held by
him. Transfers of shares of the corporation shall be made only on the stock
transfer books of the corporation (i) by the holder of record thereof or by his
legal representative, who shall provide proper evidence of authority to
transfer; (ii) by his attorney authorized to effect such transfer by power of
attorney duly executed and filed with the Secretary; and (iii) on surrender for
cancellation of the certificate for such shares (if the shares are represented
by certificates).
Section 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
corporation claimed to have been lost or destroyed, upon receipt of an affidavit
of such fact from the person claiming the certificate to have been lost or
destroyed. When authorizing such issue of a new certificate, the Board of
Directors shall require that the owner of such lost or destroyed certificate, or
his legal representative, give the corporation a bond in such sum and with such
surety or other security as the Board of Directors may direct as indemnity
against any claims that may be made against the corporation with respect to the
certificate claimed to have been lost or destroyed, except where the Board of
Directors by resolution finds that in the judgment of the Board of Directors the
circumstances justify omission of a bond.
10
<PAGE>
Section 4. Distribution or Share Dividend Record Date. The Board of
Directors may fix a date as the record date for determining shareholders
entitled to a distribution or share dividend. If no record date is fixed by the
Board of Directors for such determination, it is the date the Board of Directors
authorizes the distribution or share dividend.
Section 5. Holder of Record. Except as otherwise required by law, the
corporation may treat the person in whose name the shares stand of record on its
books as the absolute owner of the shares and the person exclusively entitled to
receive notification and distributions, to vote, and to otherwise exercise the
rights, powers, and privileges of ownership of such shares.
Section 6. Shares Held by Nominees. The corporation shall recognize the
beneficial owner of shares registered in the name of the nominee as the owner
and shareholder of such shares for certain purposes if the nominee in whose name
such shares are registered files with the Secretary a written certificate in a
form prescribed by the corporation, signed by the nominee, indicating the
following: (i) the name, address, and taxpayer identification number of the
nominee; (ii) the name, address, and taxpayer identification number of the
beneficial owner; (iii) the number and class or series of shares registered in
the name of the nominee as to which the beneficial owner shall be recognized as
the shareholder; and (iv) the purposes for which the beneficial owner shall be
recognized as the shareholder.
The purposes for which the corporation shall recognize the beneficial
owner as the shareholder may include the following: (i) receiving notice of,
voting at, and otherwise participating in shareholders' meetings; (ii) executing
consents with respect to the shares; (iii) exercising dissenters' rights under
the North Carolina Business Corporation Act; (iv) receiving distributions and
share dividends with respect to the shares; (v) exercising inspection rights;
(vi) receiving reports, financial statements, proxy statements, and other
communications from the corporation; (vii) making any demand upon the
corporation required or permitted by law; and (viii) exercising any other rights
or receiving any other benefits of a shareholder with respect to the shares.
The certificate shall be effective ten (10) business days after its
receipt by the corporation and until it is changed by the nominee, unless the
certificate specifies a later effective time or an earlier termination date.
If the certificate affects less than all of the shares registered in
the name of the nominee, the corporation may require the shares affected by the
certificate to be registered separately on the books of the corporation and be
represented by a share certificate that bears a conspicuous legend stating that
there is a nominee certificate in effect with respect to the shares represented
by that share certificate.
ARTICLE VIII
GENERAL PROVISIONS
------------------
Section 1. Distributions. The Board of Directors may from time to time
authorize, and the corporation may grant, distributions and share dividends to
its shareholders pursuant to law and subject to any provisions with respect
thereto in its Articles of Incorporation.
Section 2. Seal. The corporate seal of the corporation shall consist of
two concentric circles between which is the name of the corporation and in the
center of which is inscribed SEAL; and such seal, as impressed or affixed on the
margin hereof, is hereby adopted as the corporate seal of the corporation.
11
<PAGE>
Section 3. Fiscal Year. The fiscal year of the corporation shall be
fixed by the Board of Directors.
Section 4. Amendments. Except as otherwise provided in the Articles of
Incorporation or by law, these Bylaws may be amended or repealed and new Bylaws
may be adopted by the Board of Directors.
No Bylaw adopted, amended, or repealed by the shareholders shall be
readopted, amended, or repealed by the Board of Directors, unless the Articles
of Incorporation or a Bylaw adopted by the shareholders authorizes the Board of
Directors to adopt, amend, or repeal that particular Bylaw or the Bylaws
generally.
Section 5. Definitions. Unless the context otherwise requires, terms
used in these Bylaws shall have the meanings assigned to them in the North
Carolina Business Corporation Act to the extent defined therein.
12
<PAGE>
ARTICLE IX
INDEMNIFICATION
---------------
In addition to any indemnification required or permitted by law, and
except as otherwise provided in these Bylaws, any person who at any time serves
or has served as a director, officer, employee or agent of the corporation and
any such person who serves or has served at the request of the corporation as a
director, officer, employee, partner, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or as a trustee or
administrator under an employee benefit plan, shall have a right to be
indemnified by the corporation to the full extent allowed by applicable law
against liability and litigation expense arising out of such status or
activities in such capacity. "Liability and litigation expense" shall include
costs and expenses of litigation (including reasonable attorneys' fees),
judgments, fines and amounts paid in settlement which are actually and
reasonably incurred in connection with or as a consequence of any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, including appeals.
Promptly after the final disposition or termination of any matter which
involves liability or litigation expense as described above or at such earlier
time as it sees fit, the corporation shall determine whether any person
described in this Article IX is entitled to indemnification thereunder. Such
determination shall be limited to the following issues: (i) whether the persons
to be indemnified are persons described in this Article IX, (ii) whether the
liability or litigation expense incurred arose out of the status or activities
of such persons as described in this Article IX, (iii) whether liability was
actually incurred and/or litigation expense was actually and reasonably
incurred, and (iv) whether the indemnification requested is permitted by
applicable law. Such determination shall be made by a majority vote of directors
who were not parties to the action, suit or proceeding (or, in connection with
"threatened" actions, suits or proceedings, who were not "threatened parties").
If at least two such disinterested directors are not obtainable, or, even if
obtainable, if at least half of the number of disinterested directors so direct,
such determination shall be made by independent legal counsel in written
opinion.
Litigation expense incurred by a person described in this Article IX in
connection with a matter described in this Article IX may be paid by the
corporation in advance of the final disposition or termination of such matter,
if the corporation receives an undertaking, dated, in writing and signed by the
person to be indemnified, to repay all such sums unless such person is
ultimately determined to be entitled to be indemnified by the corporation as
provided in this Article IX. Requests for payments in advance of final
disposition or termination shall be submitted in writing unless this requirement
is waived by the corporation.
Notwithstanding the foregoing, no advance payment shall be made as to
any payment or portion of a payment for which the determination is made that the
person requesting payment will not be entitled to indemnification. Such
determination may be made only by a majority vote of disinterested directors or
by independent legal counsel as next provided. If there are not at least two
disinterested directors, the notice of all requests for advance payment shall be
delivered for review to independent legal counsel for the corporation. Such
counsel shall have the authority to disapprove any advance payment or portion of
a payment for which it appears that the person requesting payment will not be
entitled to indemnification.
13
<PAGE>
The corporation shall not be obligated to indemnify persons described
in this Article IX for any amounts paid in settlement unless the corporation
consents in writing to the settlement. The corporation shall not unreasonably
withhold its consent to proposed settlements. The corporation's consent to a
proposed settlement shall not constitute an agreement by the corporation that
any person is entitled to indemnification thereunder. The corporation may waive
the requirement of this section for its written consent as fairness and equity
may require.
A person described in this Article IX may apply to the corporation in
writing for indemnification or advance expenses. Such applications shall be
addressed to the Secretary or, in the absence of the Secretary, to any officer
of the corporation. The corporation shall respond in writing to such
applications as follows: to a request for indemnity under this Article IX,
within ninety days after receipt of the application; to a request for advance
expenses under this Article IX, within fifteen days after receipt of the
application.
If any action is necessary or appropriate to authorize the corporation
to pay the indemnification required by these Bylaws, the Board of Directors
shall take such action, including (i) making a good faith evaluation of the
indemnification request, (ii) giving notice to, and obtaining approval by, the
shareholders of the corporation, and (iii) taking any other action.
The right to indemnification or advance expenses provided herein shall
be enforceable in any court of competent jurisdiction. A legal action may be
commenced if a claim for indemnity or advance expenses is denied in whole or in
part, or upon the expiration of the time periods provided above. In any such
action, if the claimant establishes the right to indemnification, he or she
shall also have the right to be indemnified against the litigation expense
(including, without limitation, reasonable attorneys' fees) of such action.
As provided by N.C. Gen. Stat. ss.55-8-57, the corporation shall have
the power to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation, or who is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or as a trustee or administrator under an employee benefit plan,
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not the corporation
has the power to indemnify him against such liability.
The right to indemnification provided herein shall not be deemed
exclusive of any other rights to which any persons seeking indemnity may be
entitled apart from the provisions of this bylaw, except there shall be no right
to indemnification as to any liability or litigation expense for which such
person is entitled to receive payment under any insurance policy other than a
directors' and officers' liability insurance policy maintained by the
corporation. Such right inures to the benefit of the heirs and legal
representatives of any persons entitled to such right. Any person who at any
time after the adoption of this bylaw serves or has served in any status or
capacity described in this Article IX shall be deemed to be doing or to have
done so in reliance upon, and as consideration for, the right of indemnification
provided herein. Any repeal or modification hereof shall not affect any rights
or obligations then existing. The right provided herein shall not apply as to
persons serving institutions which are hereafter merged into or combined with
the corporation, except after the effective date of such merger or combination
and only as to status and activities after such date.
14
<PAGE>
If this Article or any portion hereof shall be invalidated on any
ground by any court or agency of competent jurisdiction, then the corporation
shall nevertheless indemnify each person described in this Article IX to the
full extent permitted by the portion of this Article that is not invalidated and
also to the full extent (not exceeding the benefits described herein) permitted
or required by other applicable law.
Adopted this the 19th day of August, 1999.
__________________
Secretary
15
EXHIBIT (10)(g)
HILLSBOROUGH SAVINGS BANK, INC., SSB
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of February 18, 1999, by and between HILLSBOROUGH
SAVINGS BANK, INC., SSB (hereinafter referred to as the "SavingsBank") and Danny
C. Lloyd (hereinafter referred to as the "Officer") and is joined in by PIEDMONT
BANCORP, INC., the parent holding company of theSavings Bank (hereinafter
referred to as the "Holding Company").
WHEREAS, the Savings Bank is a state-chartered stock savings bank and
the wholly-owned subsidiary of the Holding Company, and
WHEREAS, the Savings Bank desires to retain the services of the Officer
as Vice President of the Savings Bank upon the terms and conditions set forth
herein; and
WHEREAS, the services of the Officer, his experience and knowledge of
the affairs of the Savings Bank, and his reputation and contacts in the industry
and the local community are extremely valuable to the Savings Bank, and
WHEREAS, the Savings Bank wishes to attract and retain such
well-qualified executives and it is in the best interest of the Savings Bank and
of the Officer to secure the continued services of the Officer notwithstanding
any change in control of the Savings Bank or the Holding Company; and
WHEREAS, the Savings Bank considers the establishment and maintenance
of a sound and vital management to be part of its overall corporate strategy and
to be essential to protecting and enhancing the best interests of the Holding
Company, the Savings Bank and their stockholders; and
WHEREAS, the parties desire to enter into this Agreement in order to
set forth the terms and conditions of the Officer's employment relationship with
the Savings Bank.
NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:
1. Employment. The Savings Bank hereby agrees to employ the Officer and
the Officer hereby agrees to accept employment, upon the terms and conditions
stated herein, as Vice President of the Savings Bank. The Officer shall render
such administrative and management services to the Savings Bank as are
customarily performed by persons situated in a similar executive capacity. The
Officer shall promote the business of the Savings Bank and perform such other
duties as shall, from time to time, be reasonably prescribed by the Board of
Directors of the Savings Bank (the "Board").
2. Compensation. The Savings Bank shall pay the Officer during the term
of this agreement, as compensation for all service rendered by him to the
Savings Bank, a base salary at the rate of $59,000.00 per annum, payable in cash
not less frequently than monthly; provided that the rate of salary shall be
reviewed by the Board not less often than annually. Such rate of salary, or
<PAGE>
increased rate of salary, as the case may be, may be further increased from time
to time in such amounts as the Board, in its discretion, may decide. In
determining salary increases, the Board shall compensate the Officer for
increases in the cost of living and may also provide for performance or merit
increases. Participation in incentive compensation, deferred compensation,
discretionary bonus, profit-sharing, retirement, stock option and other employee
benefit plans that the Savings Bank or the Holding Company have adopted or may
from time to time adopt, and participation in any fringe benefits, shall not
reduce that salary payable to the Officer under this Section. The Officer will
be entitled to such customary fringe benefits, vacation, sick leave as are
consistent with the normal practices and established policies of the Savings
Bank. In the event of a Change of Control (as defined in Section 10), the
Officer's rate of salary shall be increased not less than six percent (6%)
annually during the term of this Agreement.
3. Discretionary Bonuses. During the term of this Agreement, the
Officer shall be entitled in an equitable manner with all other key management
personnel of the Savings Bank, to such discretionary bonuses as may be
authorized, declared and paid by the Directors to the Savings Bank's key
management employees. No other compensation provided for in this Agreement shall
be deemed a substitute for the Officer's right to such discretionary bonuses
when and as declared by the Directors.
4. Participation in Retirement and Employee Benefit Plans: Fringe
Benefits. The Officer shall be entitled to participate in any plan relating to
deferred compensation, stock awards, stock options, stock purchases, pension,
thrift, profit sharing, group life insurance, medical and dental coverage,
disability coverage, education, or other retirement or employee benefits that
the Savings Bank or the Holding Company have adopted, or may, from time to time
adopt, for benefit of their executive employees and for employees generally,
subject to the eligibility rules of such plans. The Officer shall also be
entitled to participate in any other fringe benefits which are now or may be or
become applicable to the Officer or the Savings Bank's other executive
employees, including the payment of reasonable expenses for attending annual and
periodic meetings of trade associations, and any other benefits which are
commensurate with the duties and responsibilities to be performed by the Officer
under this Agreement. Additionally, the Officer shall be entitled to such
vacation and sick leave as shall be established under uniform employee policies
promulgated by the Directors. The Savings Bank shall reimburse the Officer for
all out-of-pocket reasonable and necessary business expenses which the Officer
may incur in connection with his services on behalf of the Savings Bank.
5. Term. The initial term of employment under this Agreement shall be
for the period commencing upon the effective date of this Agreement and ending
three (3) calendar years from the effective date of this Agreement. On each
anniversary of the effective date of this Agreement of the Savings Bank, the
term of this Agreement shall automatically be extended for an additional one
year period beyond the then effective expiration date unless written notice from
the Savings Bank or the Officer is received 90 days prior to an anniversary date
advising the other party that this Agreement shall not be further extended;
provided that the Directors shall review the Officer's performance annually and
make a specific determination pursuant to such review to renew this Agreement
prior to the 90 day notice period.
<PAGE>
6. Loyalty. The Officer shall devote his full efforts and entire
business time to the performance of his duties and responsibilities under this
Agreement. The Officer agrees that he will hold in confidence all knowledge or
information of a confidential nature with respect to the respective businesses
of the Holding Company, the Savings Bank or of their subsidiaries, if any,
received by him during the term of this Agreement and will not disclose or make
use of such information, except in the ordinary course of his duties under this
Agreement, without the prior written consent of the Holding Company or the
Savings Bank.
7. Standards. The Officer shall perform his duties and responsibilities
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and as may be
established from time to time by the Board. The Savings Bank will provide the
Officer with the working facilities and staff customary for similar executives
and necessary for him to perform his duties.
8. Termination and Termination Pay. (a) The Officer's employment under
this Agreement shall be terminated upon the death of the Officer during the term
of this Agreement, in which event, the Officer's estate shall be entitled to
receive the compensation due the Officer through the last day of the calendar
month in which his death shall have occurred and for a period of one month
thereafter. (b) The Officer's employment under this Agreement may be terminated
at any time by the Officer upon sixty (60) days' written notice to the Board of
Directors. Upon such termination, the Officer shall be entitled to receive
compensation through the effective date of such termination. (c) The Board may
terminate the Officer's employment at any time, but any termination by the
Board, other than termination for cause, shall not prejudice the Officer's right
to compensation or other benefits under this Agreement for the remaining period
which would have been covered by this Agreement if such termination had not
occurred. The Officer shall have no right to receive compensation or other
benefits for any period after termination for "cause." Termination for "cause"
shall include termination because of the Officer's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provisions of this
Agreement.
9. Additional Regulatory Requirements. (a) If the Officer is suspended
and/or temporarily prohibited from participating in the conduct of the Savings
Bank's affairs by a notice served under Section 8(e)(3) or Section 8(g)(1) of
the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(l)), the Savings
Bank's obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Savings Bank shall (i) pay the Officer all of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations which were suspended. (b)
If the Officer is removed and/or permanently prohibited from participating in
the conduct of the Savings Bank's affairs by an order issued under Section
8(e)(4) of Section 8(g)(l) of the Federal Deposit lnsurance Act
(12U.S.C.1818(e)(4) and (g)(1)), all obligations of the Savings Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected (c) If the Savings Bank
is in default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act
(12U.S.C. ss. 1818(x)(1)), all obligations under this Agreement shall terminate
as of the date of default, but this paragraph shall not affect any vested rights
of the contracting parties. (d) All obligations under this Agreement shall be
<PAGE>
terminated, except to the extent determined that continuation of the Agreement
is necessary for the continued operation of the Savings Bank, (i) by the Federal
Deposit Insurance Corporation (the "Corporation"), at the time the Corporation
enters into an agreement to provide assistance to or on behalf of the Savings
Bank under the authority contained in Section 13(c) of the Federal Deposit
Insurance Act (12 U.S.C. ss. 1818(c)); or (ii) by the Administrator of the
Savings Institution Division of the North Carolina Department of Commerce (the
"Administrator"), at the time the Administrator approves a supervisory merger to
resolve problems related to operation of the Savings Bank or when the Savings
Bank is determined by the Administrator to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
10. Change in Control.
(a) In the event of a "Change in Control" (as defined in Subsection (b)
below), the acquiror shall be prohibited, during the remainder of the term of
this Agreement, from:
(i) Assigning Officer any duties and/or responsibilities that are
inconsistent with his position, duties, responsibilities or
status at the time of the Change in Control or with his
reporting responsibilities or equivalent titles with the
Savings Bank in effect at such time; or
(ii) Adjusting Officer's annual base salary rate other than in
accordance with the provisions of Section 2 of this Agreement;
or
(iii) Reducing in level, scope or coverage or eliminating Officer's
life insurance, medical or hospitalization insurance,
disability insurance, profit sharing plans, stock option
plans, stock purchase plans, deferred compensation plans,
management retention plans, retirement plans or similar plans
or benefits being provided by the Savings Bank or the Holding
Company to the Officer as of the effective date of the Change
in Control; or
(iv) Transferring Officer to a location outside of Orange County,
North Carolina, without the Officer's express written consent.
(b) For the purposes of this Agreement, the term "Change in
Control" shall mean any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form
8K, as in effect on the date hereof, pursuant to Section 13 or
1 5(d) of the Exchange Act; or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the
Holding Company or Savings Bank representing 25 percent or
more of the combined voting power of the outstanding Common
Stock of the Holding Company or Common Stock of the Savings
Bank, as applicable; or
<PAGE>
(iii) individuals who constitute the Board or board of directors of
the Holding Company on the date hereof (the "Incumbent Board"
and "Incumbent Holding Company Board," respectively) cease for
any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three
quarters of the directors comprising the Incumbent Board or
Incumbent Holding Company Board, as applicable, or whose
nomination for election by the Savings Bank's or Holding
Company's shareholders was approved by the Savings Bank's or
Holding Company's Board of Directors or Nominating Committee,
as applicable, shall be considered as though he or she were a
member of the Incumbent Board or Incumbent Holding Company
Board, as applicable; or
(iv) either the Holding Company or the Savings Bank consolidates or
merges with or into another corporation, association or entity
or is otherwise reorganized, where neither the Holding Company
nor the Savings Bank, respectively, is the surviving
corporation in such transaction; or
(v) all or substantially all of the assets of either the Holding
Company or the Savings Bank are sold or otherwise transferred
to or are acquired by any other entity or group.
Notwithstanding the other provisions of this Section 10, a transaction
or event shall not be considered a Change in Control if, prior to the
consummation or occurrence of such transaction or event, Officer and Savings
Bank agree in writing that the same shall not be treated as a Change in Control
for purposes of this Agreement.
(c) If, after the occurrence of a Change in Control, (i) the
employment of the Officer shall be terminated by the Savings
Bank or its successor for any reason other than for "cause" as
defined in Section 8(c) or (ii) the employment of the Officer
shall be terminated by the Officer as a result of a breach of
this Agreement by the Savings Bank or its successor, and as a
result of such termination, the Officer shall not become fully
vested in benefits provided to the Officer under any
retirement plan, restricted stock plan, stock option plan,
stock ownership plan, or other employee benefit plan, then in
addition to any liability arising under this Agreement, the
Savings Bank or its successor shall pay to the Officer an
amount equal to the value of the benefits in which the Officer
shall not become fully vested as a result of such termination.
(d) In the event any dispute shall arise between the Officer and
the Savings Bank as to the terms or interpretation of this
Agreement, including this Section 10, whether instituted by
formal legal proceedings or otherwise, including any action
taken by the Officer to enforce the terms of this Section 10
or in defending against any action taken by the Savings Bank,
the Savings Bank shall reimburse the Officer for all costs and
expenses incurred in such proceedings or actions, including
attorney's fees, in the event the Officer prevails in any such
action.
<PAGE>
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Savings Bank which shall
acquire, directly or indirectly, by conversion, merger,
consolidation, purchase or otherwise, all or substantially all of
the assets of the Holding Company or the Savings Bank.
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Officer, the Officer shall be precluded from
assigning or delegating his rights or duties hereunder without
first obtaining the written consent of the Savings Bank.
12. Modification: Waiver: Amendments. No provision of this Agreement
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing, signed by the Officer and on behalf of the
Savings Bank by such officer as may be specifically designated by the Directors.
No waiver by either party hereto, at any time, of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No amendments or additions to this Agreement shall be binding unless in
writing and signed by both parties, except as herein otherwise provided.
13. Applicable Law. This Agreement shall be governed in all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
14. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
IN WlTNESS WHEREOF, the parties have executed this Agreement as of the
day and year first herein above written.
HILLSBOROUGH SAVINGS BANK, INC., SSB
By: /s/M. Marion Clark
------------------
M. Marion Clark
Chairman of the Board
By: /s/Danny C. Lloyd (SEAL)
-----------------
Danny C. Lloyd
The foregoing Agreement is consented and agreed to by Piedmont
Bancorp,Inc., the parent holding company of Hillsborough Savings Bank, Inc.,
SSB.
PIEDMONT BANCORP, INC.
By: /s/M. Marion Clark
------------------
M. Marion Clark
Chairman of the Board
<PAGE>
Exhibit 10(h)
L E A S E
THIS LEASE is made and entered into this day of 1 1987, by and between ZT-DURHAM
ASSOCIATES, #1, a joint venture existing under the general partnership laws of
North Carolina ("Landlord") and GUARANTY STATE BANK, a North Carolina
corporation ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord holds a leasehold interest in that certain shopping center
(the "Shopping Center") described on Exhibit "A-1" attached hereto and made a
part hereof, and
WHEREAS, Tenant desires to sublease a portion of the Shopping Center# which
portion is more particularly described on Exhibit "A-2" attached hereto and made
a part hereof (the "Leased Land"), on the terms and conditions set forth herein.
NOW, THEREFORE, for payment of rent and the keeping and agreements hereinafter
set the parties hereto do hereby follows:
1. LEASED PREMISES
- ------------------
Landlord and in consideration of the and performing of the covenants
Eorth to be kept and performed, mutually covenant and agree as
Landlord, for and in consideration of the rents, covenants and
agreements hereinafter reserved and contained on the part of Tenant to be paid,
kept, performed and observed by Tenant, hereby demises and leases unto Tenant,
and Tenant hereby leases from Landlord, the Leased Land, together with all and
singular rights, privileges and easements appurtenant thereto or which are
hereinafter provided in this Lease (all of which shall constitute and comprise
the "Leased Premises"). The Leased Premises are part of and are contained in the
Shopping Center. The Shopping Center is shown outlined with a heavy black line,
and the Leased Land is shown as the area cross-hatched in green on the Shopping
Cen'ter Site Plan attached hereto as Exhibit "A-3" and made a part hereof.
2. LEASE TERM.
- --------------
2.1 Interim and Initial Term
----------------------------
TO HAVE AND TO HOLD the Leased Premises unto Tenant, its successors and
permitted assigns, for an interim term (the "Interim Term") commencing on the
date first above written and expiring ninety (90) days after completion of
Landlord's Work (as defined in Section 4.3 herein below), and continuing
thereafter following the expiration of the Interim Term 'for an initial term
(the "Initial 'Term") commencing on the date of expiration of the Interim Term
and expiring on the date twenty (20) years following the first day of the first
full calendar month following the expiration of the Interim Term, unless this
Lease shall sooner terminate as provided herein.
<PAGE>
2.2 Option to Extend
--------------------
Provided Tenant shall not be in default hereunder either at the time of
the exercise of the option or on the commencement date of the term of the
option, Tenant shall have two (2) successive options of five (5) years each to
extend the term of this Lease beyond the Initial Term upon the same terms and
conditions as those herein specified, as applicable to the Initial Term of
Lease, with the exception of the minimum monthly rental which shall be as
provided in Section 5 .2 herein below. In the event Tenant exercises one or both
of the foregoing options, if Landlord's leasehold interest in the Shopping
Center expires prior to the expiration date of such option or options, this
Lease shall terminate as of the expiration date of Landlord's leasehold interest
in the Shopping Center, unless this Lease is extended between agreement between
Tenant and the owner of the Shopping Center. Tenant acknowledges and agrees that
landlord shall have no obligation to exercise any option which extends the term
of this lease beyond the date on which Landlord's leasehold interest would
otherwise terminate. If Tenant elects to exercise the first of said options,
Tenant shall do so by giving Landlord written notice of such election at least
six (6) months but not more than twelve-- (12)months prior to the expiration of
the Initial Term, and, it 'the Tenant elects to exercise the additional option,
Tenant shall do so by giving Landlord written notice of such election at least
six (6) months but not more than twelve (12) months before the beginning of the
additional period for which the term hereof is to be extended by the exercise of
said option. Notwithstanding the foregoing, if Tenant fails to exercise the
second option granted hereunder within the above-prescribed time period and
Landlord, on or before the termination of this Lease, elects to extend the term
of its leasehold interest in the Shopping Center (which term would have
otherwise expired during the option term which Tenant elected not to exercise)
Tenant shall have ten (10) days after receipt of written notice of Landlord's
extension election in which to elect to exercise the otherwise expired option by
giving Landlord written notice of such election within said ten (10) day period.
If Tenant exercises either option hereunder, the term of this Lease shall be
automatically extended for the additional period of years covered by the option
so exercised, or such portion thereof as Tenant's leasehold interest in the
Shopping Center is in effect, without execution of an extension or renewal
lease. As used in this Lease, the phrases "term of this Lease", "the term
hereof", "Lease Term" or words of like import shall refer to the Interim Term of
this Lease and to the Initial Term of this Lease, as the case may be, together
with, in any such case, any extended term with respect to which an option shall
be exercised.
2.3 Supplemental Memorandum of Lease.
--------------------------------------
When the commencement date and termination date of the initial Term
have been determined as provided in Section 2.1 above, Landlord and Tenant shall
execute, acknowledge and record a Supplemental Memorandum of Lease specifying
therein the commencement date and termination of the Initial Term of this Lease.
<PAGE>
2.4 Cancellation of Lease.
-------------------------
Notwithstanding anything to the contrary herein contained, in the event
the Initial Term of this Lease is not commenced on or before ninety (90) days
from the date hereof, then Landlord shall have the right to cancel and terminate
this Lease; provided, however, that such cancellation and termination shall not
relieve either party of liability arising as a result of a breach by such party
of any covenant or obligation to be performed by such party under the terms of
this Lease.
3. USE OF PREMISES-COMPLIANCE WITH LAWS AND ORDINANCES.
- -------------------------------------------------------
3.1 Use of Premises
--------------------
Tenant may use the Leased Premises for the purpose of a retail
commercial banking operation and for no other purpose whatsoever. Tenant agrees
to use the Leased Premises in a careful, safe and proper manner, and not to use
or permit the Leased Premises to be used for any purposes prohibited by
applicable federal, state, county, municipal or other govern- mental laws,
codes, rules and regulations. Tenant shall not commit waste, or suffer or permit
waste permit waste to be committed, or permit any nuisances on or in the
Premises.
3.2. Discontinuance of Business.
--------------------------------
If Tenant shall cease operating all or substantially all of Tenant's
business in the Leased Premises for a continuous period of one hundred fifty
(150) days or for a period of one hundred fifty (150) days out of one hundred
eighty (180) days, for any reason other than to permit repair of damage or
destruction thereto or to alter or refurbish the Leased Premises, or due to a
taking by condemnation or other taking of the Leased Premises or the access
thereto, then Landlord, upon sixty (60) days' prior written notice to Tenant,
may terminate this Lease; provided, however, that if Tenant shall commence and
continue the bona fide operation of Tenant's business on the Leased Premises
within sixty (60) days, said notice of termination shall be nullified and of no
force of effect; and further provided, however, that any such the operation of
Tenant's business shall not be deemed an event of default hereunder.
3.3 Compliance with Laws.
--------------------------
Tenant covenants that during the Lease term, Tenant will comply, at
Tenant's sole cost and expense, with all laws, ordinances, orders, rules,
regulations and requirements of all federal, state and municipal governments and
appropriate departments, commissions, boards and officers hereof, which may be
applicable to the Leased Premises, Tenant's Building and building equipment, any
improvements thereon or therein or the use or manner of use of the Leased
Premises.
<PAGE>
Right to Contest Laws
Tenant shall have the right, after notice to Landlord, to contest by
appropriate legal proceedings, without cost or expense to Landlord, the validity
of any law, ordinance, order, rule, regulation or requirement of the nature
herein referred to and to postpone compliance with the same, provided such
contest shall be promptly and diligently prosecuted by and at the expense of
Tenant and so long as Landlord shall not thereby suffer any civil, or be
subjected to any criminal, penalties or sanctions, and Tenant shall properly
protect and save harmless Landlord against any liability and claims for any such
noncompliance or postponement of compliance. Landlord shall have the right, but
shall be under no obligations to contest by appropriate legal proceedings, at
Landlord's expense, any such law, ordinance, rule, regulation or requirement.
4. TENANT'S BUILDING.
- ---------------------
4.1 Plans and Specifications.
-----------------------------
Tenant shall select an architect to prepare the plans and
specifications for the improvements and to supervise the construction of the
improvements. When prepared, they shall be submitted to Landlord for Landlord's
written approval.
The following requirements shall apply with respect to the plans and
specifications for the improvements and construction thereof:
a. All construction on the Leased Land shall be in accordance with the
site plan attached to the Shopping Center lease agreement with Toys 'R Us
(the "Toys Lease") as Exhibit "a" (the "Toys Site Plan"), which site plan
is attached hereto as Exhibit "E" and by this reference made a part hereof;
b. The height of any building, structure or improvement constructed on
the Leased Land shall not exceed twenty (20) feet above -:he finished
grade;
c., The entrance to any building constructed on the Leased Land shall
not be located on the side of such building that faces the main driveway
between such building and the area shown as the "Primary Parking Area" on
the Toys Site Plan; and
d. No construction, remodeling, expansion, maintenance or repairs that
materially decrease the free flow of traffic and pedestrian passage through
the Common Area to premises leased to other tenants of the Shopping Center
shall be permitted during the period from November I through December 31 of
each year of the term of this Lease.
When Tenant's plans and specifications have been approved, they shall
be attached hereto as Exhibit "B" or, in the alternative, shall be described in
Exhibit "B" attached hereto.
<PAGE>
4.2 Governmental Permits, Licenses and Authorizations.
-------------------------------------------------------
Tenant shall promptly apply to all applicable governmental and
regulatory agencies and authorities in order to secure proper permits, licenses,
and authorizations necessary for the work and shall diligently pursue same until
receipt thereof. Landlord agrees to cooperate with Tenant in applying for all
such applicable governmental permits, licenses And authorizations and
application shall be made in Landlord's name if required. Tenant shall pay all
fees and costs relating thereto. Notwithstanding the foregoing Landlord shall
secure, at its expense, all approvals, permits, licenses and authorizations
necessary for completion of Landlord's work.
4.3 Landlord's Work
-------------------
Landlord shall grade and compact the Leased Land to the extent
necessary for Tenant's Building, as reasonably determined by Tenant's architect
or engineer, and bring all required utility and sewer facilities and systems to
the perimeter of the Leased Land, all in strict accordance with the plans and
specifications approved by the parties as herinabove provided. The foregoing
work is herein referred to as "landlord's work".
4.4 Tenant's Work.
------------------
After the plans and specifications have been prepared and all necessary
permits and licenses have been obtained as provided for hereinabove, Tenant
shall enter into a construction contract for the completion of the work (herein
referred to as "Tenant's Work") with a general contractor selected by Tenant
with the prior written approval of Landlord. Said construction contract shall
provide for -- one (1) year warranty covering materials and workmanship, a f1oor
and material bond and a completion bond issued by a qualified surety company
licensed to do business in the state in which the Leased Premises are situated.
Tenant shall have the right to enter into addenda and change orders with
appropriate adjustments therefor in the Construction Contract Price, provided
Tenant shall have first obtained the written approval of Landlord.
4.5 Architect's Certificate of Completion
-----------------------------------------
Upon completion of Tenant's Work, the architect supervising
construction shall certify in writing to Landlord and Tenant that Tenant's Work
is complete and Tenant's Building is ready for use and occupancy.
Simultaneously, Landlord and Tenant shall cooperate in securing a proper final
certificate of occupancy or other permit which may be required prior to Tenant's
beginning to transact business on the Leased Premises.
4.6 Construction Costs
----------------------
Except as otherwise specifically provided herein, Tenant shall
contribute all sums necessary for completion of Tenant's Work in accordance with
the plans and specifications, excluding fees of an architect, if any, employed
by Landlord for the purpose of examining and passing upon such plans and
specifications and seeing that Tenant's Work conforms therewith.
<PAGE>
All building and improvements shall be deemed a part of the real
property and shall be and remain the property of the Landlord.
4.7 Trade Fixtures
-------------------
Landlord agrees not to unreasonably interfere with Tenant's right to
install fixtures, furnishings, equipment and signs (hereinafter collectively
referred to as "Trade Fixtures") in, on, or about the Leased Land during the
Interim Term of this Lease. All Trade Fixtures installed at any time by Tenant,
Tenant's suppliers, or any permitted subtenant(s) of Tenant in, on, or about the
Leased Land shall be and remain the property of the person, firm or corporation
installing same and shall be removable at any time during the term of this Lease
provided Tenant or any permitted subtenant(s) of Tenant shall not be in default
hereunder at the time of such removal. The removal of any such Trade Fixtures
shall be at the expense of Tenant or any permitted subtenant(s) of Tenant, who
shall repair any damage or injury to the Leased Land or Tenant's Building or
other improvements occasioned by any such removal. Notwithstanding the
foregoing, Tenant shall remain liable for any breach of this Section 4.7 or of
any other term or condition of this Lease by Tenant's subtenant(s).
4.8 Signage
-----------
Tenant shall not erect or install any signs on the Leased Premises
without the prior written consent of Landlord. All permitted signs shall comply
appropriate governmental authorities, and all necessary permits or licenses
shall be obtained by Tenant. Tenant shall maintain all permitted signs in good
condition and repair at all times and shall save Landlord harmless from any
injury to persons or property arising - from the erection and maintenance of
said signs. Upon vacating the Leased Premises, Tenant shall remove all signs and
repair all damage caused by such removal.
4.9 Encumbrance of the Leasehold.
---------------------------------
Tenant shall have the right to convey or encumber its leasehold
interest in the Leased Premises by security deed, mortgage or other instrument
in connection with obtaining financing from a bank or institutional lender
provided Tenant shall not be in default at such time, and provided all such
conveyances and encumbrances shall at all times be ineerior and subject to the
prior right, title and interest of the Landlord therein and thereto.
5. RENTAL
- ---------
5.1 Interim Term.
-----------------
No rental or other charges shall accrue or be payable by Tenant to
Landlord during the interim Term; however, during the entire Interim Term,
Tenant shall perform, observe and discharge all other covenants and obligations
of Tenant under this Lease.
<PAGE>
5.2 Initial Term and Option Periods.
------------------------------------
Tenant shall pay to Landlord as rental for the use and occupancy of the
Leased Premises during the Initial Term and any extension thereof, fixed annual
rental, commencing on the first day of the first full calendar month following
the date of expiration of the Interim Term, a fixed annual rental (the "Annual
Rental") of Thirty Thousand and No Dollars ($30,000.00) per year for the first
five (5) years of the Initial Term; Thirty-Four Thousand Five Hundred and No
Dollars ($34,500.00) for the next five (5) years of the Initial Term;
Thirty-Nine Thousand Six Hundred Eighty and 00/100 Dollars ($39,680.00) for the
next five (5) years of the Initial Term; Forty-Five Thousand Six Hundred Thirty
and 00/100 Dollars ($45,630.00) for the final five (5) years of the Initial
Term; FiEty-Two Thousand Four Hundred Seventy and 00/100 Dollars ($52,470.00)
for the first five (5) year option period; and Sixty Thousand Three Hundred
Forty and 00/100 Dollars ($60,340.00) for the second five (5) year option
period. The Annual Rental shall be payable in advance in equal installments of
one-twelfth (1/12th) of the Annual Rental applicable to the month in question,
except that installments for partial months shall be prorated.
5.3 Place of Payment.
--------------------
All payments of rental shall be made by Tenant to Landlord in lawful
money of the United States at the address set forth in Section 22.1 herein or at
such other place within the United States of America as Landlord may from time
to time direct in writing.
6. ASSIGNMENT AND SUBLETTING
- ----------------------------
Except as provided in Section 4. 9 above, or in the event of a merger
or consolidation of Tenant with another bank Authorized to conduct business in
North Carolina, neither this Lease nor any or all interest herein shall be sold,
mortgaged, pledged, encumbered, assigned, transferred, or otherwise disposed of
in any manner by Tenant, voluntarily or involun- tarily, by operation of law, or
otherwise, nor shall the Leased Premises or any part thereof be sublet, used, or
occupied for the conduct of any business any third person, firm, or corporation
or for any purpose other than herein authorized, except with the written consent
of Landlord. A sale or sales of fifty percent (50%) or more of the capital stock
of Tenant (if Tenant is a corporation) or of the majority interest in capital,
profits, or losses of Tenant (if Tenant is a partnership) shall be deemed to be
a prohibited assignment of this Lease within the meaning of this Article 6. In
the event Tenant desires to sublet the Leased Premises, or any portion thereof,
or assign this lease, Tenant shall give written notice thereof to Landlord at
least ninety (90.) days but not more than one hundred eighty (180) days prior to
the proposed commence- ment date of such subletting or assignment, which notice
shall set forth the name of the proposed subtenant or assignee, the relevant
terms of any sublease or assignment and copies of financial reports and other
relevant financial information or the proposed subtenant or assignee. Landlord
shall notify Tenant of its decision to grant or withhold its consent, which it
may do in its sole discretion, within thirty (30) days of its receipt of
Tenant's written notice. Notwithstanding any permitted assignment or subletting,
<PAGE>
Tenant shall at all times remain directly and primarily liable for the payment
of the rent herein specified and for compliance with all of its other
obligations under this Lease. Upon the occurrence of a default under Section 20
of this Lease that is not cured within the applicable grace period, if the
Leased Premises or any part thereof are then sublet, Landlord, in addition to
any other remedies provided herein or by law, may collect directly from such
subtenant all rents due and becoming due to Tenant under such sublease and apply
such rent against any sums due to Landlord from Tenant hereunder. No such
collection directly from an assignee or subtenant shall be construed to
constitute a novation or a release of Tenant from the further performance of
Tenant's obligations hereunder. Any guaranty of Tenant executed as consideration
for this Lease shall remain in full force and effect before and after any such
assignment or subletting. Landlord may require Tenant, and Tenant hereby agrees,
to execute a guaranty of this Lease before Landlord consents to any such
assignment or sublease.
In addition to Landlord's right to consent to any subtenant or
assignee, Landlord shall have the option, in its sole discretion, in the event
of any proposed subletting or assignment, to terminate this Lease, or in the
case of a proposed subletting of less than the entire Premises, to recapture the
portion of the Premises to be sublet, as of the date the subletting or
assignment is to be effective. The option shall be exercised by Landlord's
giving Tenant written notice thereof within sixty (60) days following Landlord's
receipt of Tenant's written notice as required above. If this Lease shall be
terminated with respect to the entire Leased Premises, the Term shall end on the
date stated in Tenant's notice as the effective date of the sublease or
assignment as if that date had been originally fixed in this Lease for the
expiration of the Term. If Landlord recaptures only a portion of the Leased
Premises, the Annual Rental shall abate, proportionately, based on the Annual
Rental due as of the date immediately prior to such recapture. Tenant shall, at
Tenant's sole cost and expense, discharge in full any outstanding commission
obligation with respect to this Lease and any commissions which may be owing as
a result of any proposed assignment or subletting, whether or not the Premises
are rented by Landlord to the proposed tenant or any other tenant.
Consent by Landlord to any assignment or subletting shall not include
consent on a subsequent assignment or subletting of the Leased Premises by
Tenant or its assignee or sublessee or the consent to the assignment or
transferring of any Lease renewal option rights, space option rights or other
special privileges granted to Tenant hereunder (and such - options, rights or
privileges shall terminate upon such assignment), unless Landlord specifically
grants in writing such options, rights or privileges to assignee or or
subtenant. Any sale assignment, mortgage, transfer of this lease or subletting
which does not comply with the provisions of this Section shall be void.
Notwithstanding Landlord's consent, in the event that Tenant sells,
sublets, assigns, or transfers this Lease and at any time receives periodic rent
and/or other consideration which exceeds that which Tenant would at that time be
obligated to pay to Landlord, Tenant shall pay to Landlord 100% of the gross
increase in such rent as such rent is received by Tenant and 100% of any other
consideration received by Tenant from such subtenant or such assignee.
Should Landlord consent to an assignment or sublease of this Lease,
Tenant, its proposed assignee or subtenant and Landlord shall execute an
agreement prepared by or acceptable to Landlord wherein the proposed assignee or
subtenant agrees to be bound by the terms and conditions of this Lease, and
Tenant will pay to Landlord on demand a sum equal to all of Landlord's costs,
including without limitation reasonable attorneys' fees, incurred in connection
with such assignment, sublease or transfer.
<PAGE>
7. REPAIRS AND MAINTENANCE.
- ----------------------------
At the sole cost and expense of Tenant and throughout the terms hereof,
Tenant shall keep and maintain the Leased Premises in good order, condition and
repair, in a clean, sanitary and safe condition in accordance with the laws of
the State in which the Leased Premises are located, and in accordance with all
directions,, rules and regulations of the health officer, fire marshall,
building inspector, or any other proper officer of the governmental agencies
having jurisdiction over the Leased Premises. Without limiting the foregoing,
Tenant shall be responsible for maintenance, repair and replacement as needed of
all electrical, plumbing, ventilating and utility systems located on the Leased
Premises (including the HVAC Facilities), all windows, window fittings and
sashes, and interior and exterior doors, all fixtures within the Leased
Premises, all interior walls, floors and ceilings, water heaters, termite and
pest extermination, all of Tenant's improvements and trade fixtures. Tenant
shall keep and maintain the Leased Premises in accordance with all requirements
of law concerning the manner, usage and condition of the Leased Premises and
appurtenances thereto, as the same shall be in effect from time to time. Tenant
shall permit no waste, damage or injury to the Leased Premises. If at any time
and from time to time during the term hereof Tenant shall fail to make any
maintenance, repairs or replacements in and to the Leased Premises as required
in this Lease, Landlord shall have the right, but not the obligation, to 'enter
the Leased Premises and to make the same for and on behalf of Tenant, and all
sums so expended by Landlord shall be deemed to be additional rent hereunder and
payable to Landlord upon demand.
8. ALTERATIONS BY TENANT
- ------------------------
Tenant shall not make any structural changes to the interior of
Tenant's Building or any change to the exterior building without the prior
written consent of Landlord. No building at any time on the Leased Land shall be
demolished without the prior written consent of the Landlord and any mortgagee
of Landlord. All permitted changes and alterations (herein collectively referred
to as "Alterations") shall be made in all cases subject to the following
conditions which Tenant covenants and agrees to observe and perform:
(a) No Alteration shall be undertaken until Tenant shall have procured
and paid for, so far as the same may be required from time to time, all
municipal and other governmental permits and any authorizations of the
various municipal departments and governmental subdivisions having
jurisdiction, and Landlord agrees to join, at the expense of the Tenant, in
the application for any such permit or whenever such action is necessary.
(b) Each Alteration, when completed, shall be of such a character as
to not adversely affect the value of the improvements and equipment on the
Leased Land immediately before such alteration.
(c) All work done in connection with any Alteration shall be done
promptly and in a good and workmanlike manner and in compliance with the
applicable municipal building and zoning laws and with all other laws,
ordinances, orders, rules, regulations and requirements of federal, state
and municipal governments and appropriate departments, commissions, boards
and officers thereof; the cost of any such alteration shall be paid in cash
or its equivalent, so that no liens shall be enforced against the Leased
Premises or the Shopping Center for labor and materials supplied or claimed
to have been supplied to the Leased Premises.
<PAGE>
(d) No Alteration Building shall result in Tenant's Building having a
height of twenty (20) feet above grade, nor shall it violate any other
provision of Section 4.1 above.
(e) If Tenant ceases the operation of its business on the Leased
Premises during such Alterations, Tenant shall construct barriers to
obscure the view of such construction from the Shopping Center and the
adjacent roadways.
9. LIENS AND CLAIMS
Tenant shall not cause, directly or indirectly, the Leased Premises,
Tenant's Building, or the Shopping Center to be encumbered by any liens of
mechanic's, laborers, or materialmen or any other liens. Tenant shall, whenever
and as often as any such liens are filed against the Leased Premises, Tenant's
Building or the Shopping Center and are purported to be for labor or material
furnished or to be furnished to Tenant, discharge the same of record within
sixty (60) days after the date of filing by payment, bonding or otherwise, as
provided by law. Tenant shall, upon reasonable notice and request in writing
from Landlord, also defend against Landlord, at Tenant's sole cost and expense,
any action, suit, or proceeding which may be brought on or for the enforcement
of any -such lien and shall pay any damages and satisfy and Discharge any
judgements entered in such action, suit, or proceeding and shall save harmless
Landlord from any liability, calim, or damages resulting therefrom. Indefault of
Tenant procuring the discharge of any such lien, Landlord may, without further
notice, procure the discharge therof by bonding or payment or otherwise, and all
costs and expenses which Landlord may incur in obtaining such discharge shall be
paid by Tenant as additional rent within ten (10) days of any demand therefor.
10. UTILITIES.
- --------------
10.1 Tenant Pays Charges
------------------------
During the term of this Lease, Tenant shall pay or cause to be paid all
charges for gas, electricity, water, and other utilities furnished to the Leased
Premises and all sewer use charges or similar charges or assessments for
utilities levied against the Leased premises and shall make all reasonable
efforts to insure that all such services are separately metered or assessed.
11. TAXES AND ASSESSMENTS
- -------------------------
11.1 Real Estate.
------------------
As used herein, the term "Real Estate Taxes" shall mean all real estate
taxes, assessments for improvements to the Leased Land and improvements,
municipal or county water and sewer rates and charges which shall be levied,
assessed, or imposed against the Leased Land or Tenant's E3uildincj_ and any
other improvements erected or caused to be erected thereon and which become a
lien or are due and payable thereon during the term of this Lease, excluding any
franchise, corporate, income, personal property, capital levy, capital stock,
excess profits, transfer, revenue, estate, gift, inheritance or succession tax
payable by Landlord or any other tax, assessment, levy or charge upon, or
measured in whole or in part by, the income or profits of Landlord;
<PAGE>
provided, however, if at any time during the term of this, Lease, the method of
taxation prevailing on the commencement date of the Interim Term shall be
altered so as to cause any tax measured by or imposed upon the rental or other
sums payable hereunder to be substituted for Real Estate Taxes or assessments,
then such taxes shall be 'deemed included in the obligations of Tenant under
this Section, but only to the extent the same would be payable if the Leased
Land were the only property of Landlord subject to such taxes.
11.2 Payment by Tenant.
------------------------
Tenant shall pay or cause to be paid, before any fine, penalty,
interest or cost may be added thereto for the nonpayment thereof, all Real
Estate Taxes levied against the Leased Land during the Initial Term or any
extended term of this Lease, including the improvements on the Leased Land, and
all permitted alterations and additions thereto. Tenant shall not be obligated
for the payment of such taxes during the Interim Term. If the Leased Land shall
not be separately assessed but shall be assessed as a part of a larger parcel of
real property or as a part of the Shopping Center and improvements owned by
Landlord, until such time as the Leased Land shall be separately assessed,
Tenant shall pay, within ten (10) days of written demand for payment from
Landlord, a portion of any Real Estate Taxes levied against the entire parcel of
real property or the Shopping Center owned by Landlord on the following basis:
Tenant's share shall be an amount equal to the product obtained by multiplying
such Real Estate Taxes by a fraction the numberator of which shall be the gross
leaseable floor area of Tenant's Building, and the denominator of which shall be
the toal gross leasable floor area of all buildings in the Shopping Center as
shown on Exhibit "A-3". Gross leaseable floor area of the Shopping Center means
all ground floor area contained in the Shopping Center designated for tenants'
exclusive occupancy.
11.3 Installment Payments
-------------------------
If any real estate, special tax or assessments are at any time during
the Initial Term or any extended term of this Lease levied or assessed against
the Leased Land, which, upon exercise of any option permitted by the assessing
authority, may be paid in installments or converted to an installment payment
basis (irrespective of whether interest shall accrue on unpaid installments),
Tenant may elect to pay such taxes in installments with accrued interest
thereon, provided such taxes are separately assessed. In the event of such
election, Tenant shall be liable only for those installments of such tax or
assessment which accrue and become payable during the Initial Term'or any
extended term of this Lease plus accrued interest thereon.
11.4 Proration
--------------
Any Real Estate Taxes which are payable by Tenant hereunder shall be
prorated between Landlord and Tenant as of the date of commencement and as of
the date of- expiration or earlier termination of the Initial Term or any
extension thereof if such Real Estate Taxes relate to a fiscal period of the
levying authorities which commences before the commencement of the Initial Term
or extends beyond the expiration or earlier termination of the term hereof so
that Tenant shall only pay that portion of such Real Estate Taxes equal to that
proportion which the number of days of such fiscal the Initial Term or
extensions thereof number of days of such fiscal period falling within the
Initial Term or estensions thereof bears to the total number of days of such
fiscal period.
<PAGE>
11.5 Cooperation of Landlord.
------------------------------
Landlord agrees to execute such documents and take such other action as
may be reasonably required so that the Leased Land will be assessed and taxed as
a separate parcel from the entire parcel of real property owned by Landlord.
11.6 Personal Property.
-----------------------
Tenant covenants 'and agrees to pay before delinquency all personal
property taxes, assessments and liens levied during the Initial Term or any
extended term of this Lease upon all personalty belonging to Tenant and situated
on or about the Leased Land.
12. INDEMNIFICATION AND NONLIABILITY OF LANDLORD AND TENANT
- -----------------------------------------------------------
Tenant agrees to protect, defend, indemnify and save harmless Landlord
against any and all loss, damages and liability on account of any, all and every
demand or claim or assertion of liability or any claim or any action founded
thereon arising or alleged to have arisen out of any act or omission of Tenant,
its agents, servants, employees, patrons, customers, independent contractors,
licensees or invitees, arising out of the occupation, use, possession, conduct
or management of the Leased Premises whether such claim or action be for
damages, injury to person or property, including the property of Tenant, or
death of any person, made by any person, group or organization, whether employed
by either of the parties hereto or otherwise, except if Landlord shall have been
grossly negligent under the circumstances involved.
Landlord agrees to protect, defend and indemnify and save harmless
Tenant against any and all loss, damages, and liability on account of any, all
and every demand or claim or assertion of liability for any claim or any action
founded thereon, arising, or alleged to have arisen out of any act or omission
of Landlord, its agents, servants, employees, patrons, customers, independent
contractors, licensee's or invitee's arising out of its use, possession, conduct
or management of the Shopping Center whether such claim or action be or damages,
injury to personal property, including the property of Land- lord, or death of
any person, made by any person, group or organization, whether employed by
either of the parties hereto or otherwise, except if Tenant shall have been
grossly negligent under the circumstances involved.
13. INSURANCE.
- --------------
13.1 Hazard Insurance.
----------------------
During the term hereof, Tenant shall at Tenant's sole cost and expense, for the
mutual benefit and protection of Landlord, Landlord's mortgagees and Tenant,
procure and maintain or cause to be procured and maintained an all-ri policy or
policies of insurance with a vandalism and malicious mischief endorsement
covering Tenant's Building and all other improvements located on the Leased
Land, in a company or companies licensed to do business in the state in which
the Leased Land is situated and acceptable to Landlord, in a total amount of one
hundred percent (100%) of the full replacement value of Tenant's Building and
<PAGE>
appurtenances, but in no event shall such policies contain a co-insurance
provision. The term "full replacement value" shall mean the then actual
replacement cost, excluding excavation and foundation costs. Tenant agrees to
reevaluate insurance coverage at Land'lord's request, but not more often than at
one (1) year intervals and to increase said coverage if it shall then be less
than one hundred percent (100%) of the then full replacement value.
All policies of insurance, and all renewals thereof, shall name both
Landlord and Tenant as insureds and provide for the payment of all losses to ,
its successors or assigns (hereinafter referred to as the "Insurance Trustee"),
for the use and benefit of the Landlord and the Tenant, and of the mortgagee
under any mortgage on the leasehold estate (the "Mortgagee") as -------- their
respective interests may appear.
In the event of any loss, the Insurance Trustee shall proceed to hold
and disburse the proceeds of any such policies of insurance as provided in
Article 15 hereinbelow. During the term of this Lease, Tenant shall, at'
Tenant's sole cost and expense, for the mutual benefit and protection of
Landlord and Tenant, maintain comprehensive general liability insurance against
claims for personal injury or death and property damage occurring upon, in, or
about the Leased Premises, or on, in or about the adjoining sidewalks and
passageway under the control of Tenant, such insurance to afford protection to a
limit of not less than a combined single limit of Three Million Dollars
($3,000,000) per occurrence in respect of personal injury or death and property
damage.
13.2 Course of Construction Policy.
------------------------------------
Tenant shall during the Interim Term obtain at Tenant's sole cost and
expense a "course of construction" policy of insurance, including, but not
limited to, provisions for fire and extended coverage covering the building and
appurtenances to be constructed by Tenant on the Leased Land. Landlord, Tenant's
contractor and Tenant shall be named as insureds under such policy. Tenant
agrees that any "course of construction" policy obtained shall provide that any
insurance carried by Landlord shall be in excess of said "course of
construction" policy and shall not contribute to payment of any loss thereunder.
13.3 Workman's Compensation.
----------------------------
During the term of this lease, Tenant shall maintain or cause to be
maintained, workmen's compensation insurance as required by law.
13.4 Blanket Policies
---------------------
All policies of insurance required hereunder of the Tenant during the
term of this Lease may be in the form of "blanket" policies, provided that the
coverage thereunder must be at least equal to that which would be provided under
the separate policies which Tenant must maintain pursuant to this Lease.
<PAGE>
13.5 Policies and Certificates of Insurance.
--------------------------------------------
Tenant agrees during the term of this Lease, to deliver to Landlord
certified copies o'f policies evidencing the insurance procured by Tenant under
the terms hereof, or to deliver in lieu thereof certificates of coverage from
the insurance company or companies writing said policy or policies of insurance,
which certificates shall designate the company writing the same, the number,
amount and provisions thereof, and shall indicate on the face thereof that
Landlord is a named insured under said policies and that Landlord's mortgagees
on the Leased Land shall be named insureds for the policies provided in this
Lease.
13.6 Cancellation or Termination
--------------------------------
All insurance policies to be provided by Tenant shall contain a
provision that said policies shall not be cancelled, terminated or expire
without thirty (30) days prior notice from the insurance company to Landlord.
Tenant agrees that on or before twenty (2) days prior to expiration of any
insurance policy, Tenant shall deliver to Landlord written notification in the
form of a receipt or other similar documents from the applicable insurance
company that said policy or policies have been renewed, or deliver certificates
of coverage or certified copies from another insurance company licensed to do
business in the state in which the Leased Land is located and acceptable to
Landlord for such coverage.
13.7 Failure to Procure.
------------------------
In the event Tenant should fail to procure or keep in force the
insurance which, as provided in this Lease, must be procured and kept by Tenant,
Landlord may, but shall not be obligated to, procure insurance for Tenant's
benefit and recover the cost thereof from Tenant within ten (10) days from
written demand therefor from Landlord.
13.8 Landlord's Insurance.
--------------------------
During the term of this Lease, Landlord shall, at Landlord's sole cost
and expense, for the mutual benefit and protection of Landlord and Tenant,
maintain comprehensive general liability insurance against claims for personal
injury or death and property damage occurring upon, on, or about the Shopping
Center, such insurance to afford protection to a limit of not less than a
combined single limit of One Million Dollars ($1,000,000.00) per occurrence in
respect of personal injury or death and property damage, as well as a so-called
"umbrella" or excess liability policy to afford protection to a limit of not
less than a combined single limit of Five Million Dollars ($5,000,000.00) per
occurrence in respect of personal injury or death and property damage.
Landlord agrees during the term of this Lease, to deliver to Tenant
certified copies of 'policies evidencing the insurance procured by Landlord
under the terms hereof, or to deliver in lieu thereof certificates of coverage
from the insurance company or companies writing said policy or policies of
insurance, which certificates shall designate the company writing the same, the
number, amount and provisions thereof. All insurance policies to be provided by
Landlord shall contain a provision that said policies shall not be cancelled,
<PAGE>
terminated or expire without thirty (30) days' prior notice from the insurance
company to Tenant. Landlord agrees that on or before twenty (20) days prior to
expiration of any insurance policy, Landlord shall deliver to Tenant written
notification in the form of a receipt or other similar documents from the
applicable insurance company that said policy or policies have been renewed, or
deliver certificates of coverage or certified copies from another insurance
company licensed to do business in the state in which the Leased Land is located
and acceptable to Tenant for such coverage.
In the event Landlord should fail to procure or keep in force the
insurance which, as provided in this Lease, must be procured and kept by
Landlord, Tenant may, but shall not be obligated to, procure insurance for
Landlord '- Landlord benefit and recover the cost thereof from Landlord within
ten (10) days from written demand therefor from Tenant.
14. DAMAGE AND DESTRUCTION.
- ---------------------------
14.1 Damage Covered by Insurance
--------------------------------
If, during the term of this Lease, the Leased Land shall be damaged or
destroyed by a cause or casualty covered by the insurance Tenant is required to
carry pursuant to Article 13 above, Tenant shall repair or replace the building
and/or improvements damaged or destroyed by the insurable cause of damage or
destruction on the same plan and design as existed immediately prior to such
damage or destruction, subject to such delays as may be reasonably attributable
to governmental restrictions or other causes beyond the control of Tenant.
Materials used in repair shall be as nearly like original materials as may then
be reasonably procured in regular channels of supply. All proceeds of insurance
carried on Tenant's Building and any other improvements located on the Leased
Land hereinabove, payable as a result of such damage or destruction, shall be
used and applied in accordance with Article 13 hereinabove and this Article 14
to the extent necessary for such repair or rebuilding. Landlord shall not be
required to contribute any of its own funds to the cost of repair or rebuilding.
14.2 Damage Not Covered by Insurance.
-------------------------------------
If, during the term of this Lease, Tenant's Building or any other
improvements located on the Leased Land shall be damaged or destoyed by a clause
or casualty not covered by the insurance Tenant is required to maintain pursuant
to Article 14 hereinabove to the extent of twenty-five percent (25%) or more of
the monetary value thereof, then by written notice to Tenant within thrity (30)
days after the date of such damage or destruction, Landlord may elect to
terminate this Lease. However, if Landlord gives notice of termination to
Tenant, this Lease shall not be so terminated if the Tenant shall, within thirty
(30) days after receipt of such notice, give written notice to Landlord of
Tenant's Building and improvements. In such event, Tenant shall, at its sole
expense, provide the funds necessary therefor and shall thereafter promptly and
diligently repair and restore the Leased Premises to the same extent required in
section 14.1 hereinabove. In the event any such damage or destruction, from a
cause not covered by the insurance required to be maintained in Article 13 is
not sufficient to permit termination of the Lease pursuant to this Section 14.2,
Tenant shall, at Tenant's sole cost and expense, promptly repair and restore the
Leased Premises to the same extent required in Section 14.1 hereinabove. 14.3
<PAGE>
14.3 Approval of Plans.
-----------------------
Prior to commencement of such restoration, reconstruction or
replacement, the Tenant, or the Mortgagee, in the event any mortgagee shall
elect to undertake such restoration, reconstruction or replacement, shall
furnish Landlord with a copy of all plans, specifications, contracts and
guaranty bonds, or documents and shall obtain the prior written consent of
Landlord for all repairs involving structural portions of the Leased Premises.
All such restoration, reconstruction or replacement shall be subject to the
provisions of Sections 4.1 and 8 above.
14.4 Disbursement of Proceeds.
--------------------------------
After such resoration, repair, reconstruction or replacement shall have
commenced, the supervising architect, or if there be no supervising architect,
then the general contractor in charge of such work, shall certify monthly to the
Insurance Trustee statements showing the actual cost of the work done in the
preceding month, and shall furnish satisfactory receipts for labor and materials
showing that Tenant has paid such costs in full. Theerupon, said Insurance
Trustee shall reimburse Tenant for ninety (90) percent of the amount of such
monthly cost paid by the Tenant. Upon the completion of such restoration,
repair, reconstruction, or replacement free from liens for labor and materials,
the Tenant shall exhibit to said Trustee receipts in full showing that it has
paid for all of said work and thereupon said Trustee shall pay to said Tenant
the balance remaining in said insurance fund, it being understood and agreed
that the cost of administering said trust including the compensation of said
Insurance Trustee shall not be paid out of or withheld from said insurance
proceeds, but shall be paid by Tenant.
14.5 Replacement of Tenant's Equipment.
---------------------------------------
Leased Premises not giving rise to a termination of this Lease, Tenant
shall, at its own expense, replace and repair so much of Tenant's equipment in
the Leased Premises which may be damaged or destroyed, as may, in the option of
Tenant, be necessary for the resumption by Tenant of its business in the Leased
Premises. Such replacement or repair shall commence as soon after the damage or
destruction as may be reasonably possible, subject to delays beyond the control
of Tenant.
14.6 Right to Terminate.
-------------------------
In the event of the damage or destruction of the Leased Premises by a
cause or casualty covered by the insurance Tenant is required to carry pursuant
to Article 13 hereinabove, either party hereto shall have the right to terminate
this Lease if, during the last three (3) years of the Initial Term or any
extensions of this Lease, Tenant's Building is damaged in an amount exceeding
sixty-six and two-thirds percent (66-2/3%) of the then reconstruction cost
thereof, provided that, in such event, such termination of this Lease shall be
effected by written notice within ninety (90) days of the happening of the
casualty causing such damage, and all insurance proceeds shall promptly be paid
over to Landlord by the Insurance Trustee.
<PAGE>
15. CONDEMNATION
- ----------------
15.1 Total or Substantial Takinq.
---------------------------------
(a) Total Taking. In the event the Leased Premises shall be
appropriated or taken under the power of eminent domain by any public or
quasi-public authority, this Lease shall terminate and expire as of the
date of such appropriation or taking, and Landlord and Tenant shall
thereupon be released from any liability hereunder for occurrences or
omissions hereunder arising subsequent .to such date of appropriation or
taking.
(b) Partial Taking. In the event as much as twenty percent (20%) of
the Leased Premises or twenty-five percent (25%) of the Shopping Center
shall be appropriated or taken under the power of eminent domain by any
public or quasi-public authority, Tenant shall have the right to cancel and
terminate this Lease as of the date of such taking upon giving Landlord
written notice of such election within thirty (30) days after the receipt
by Tenant from Landlord of notice that the Leased Premises or the Shopping
Center have been so appropriated or taken. In the event of such
cancellation, Landlord and Tenant shall thereupon be released from any
liability under this 'Lease for occurrences or omissions hereunder arising
subsequent to such date of appropriation or taking.
15.2 Effect on Rent
---------------------
If this Lease is terminated as provided in Section 15.1. herein, the
rent for the last month of Tenant's occupancy shall be prorated, and the
Landlord agrees to refund to the Tenant any rent paid in advance.
15.3 Condemnation Award.
------------------------
All compensation awarded or paid upon such a total or partial taking of
the Leased Premises shall belong to and be the property of Landlord without any
participation by Tenant. Nothing contained herein shall affect the Tenant's
right to prosecute any claim directly against the condemning authority in such
condemnation proceedings for loss of business, and/or depreciation to, damage
to, and/or cost of removal of Tenant's Building, and/or for the value of stock
and/or trade fixtures, furniture and other personal property of Tenant;
provided, however, that no such claim shall diminish or otherwise adversely
affect Landlord's award or the award(s) of any and all ground and underlying
lessor(s) and mortgagee(s).
15.4 Restoration of Remainder
-----------------------------
If this Lease shall not be terminated as in this Article 15 provided
but shall continue as to that portion of the Leased Premises which shall not
have been appropriated or taken, then in that event Tenant, at its cost and
expense, shall immediately restore to the extent reasonably possible Tenant's
Building and improvements on the Leased Land remaining to a complete unit of
like quality and character as existed prior to such appropriation or taking, and
the rent shall be reduced in the ratio that the ground floor area of the
restored Leased Premises bears or shall bear to the ground floor area of the
<PAGE>
Leased Premises before such taking. Landlord shall make available to Tenant the
proceeds of any condemnation award received by Landlord to the extent such
proceeds shall be attributable to the loss of Tenant's Building or other
improvements on the Leased Land.
16. SUBORDINATION AND NONDISTURBANCE
- ------------------------------------
This Lease shall be subordinate to the lien of any underlying ground
lease and to any mortgage or deed of trust now or hereafter constituting a lien
on the Leased Premises and to all renewals, modifications and extensions of
either, and Tenant will promptly execute and deliver any instrument reasonably
required by Landlord in confirmation of such subordination; provided, however,
that with respect to any such lien, such subordination shall be conditional upon
the obligation of Landlord to secure from such ground lessor or mortgagee a
written agreement in form for recordation that nothing to the contrary in any
such ground lease, mortgage or deed oE trust withstanding, if by foreclosure or
otherwise, such lessor or lender or any successor in interest shall come into
possession or become the owner of the Leased Premises or the Shopping Center of
which the Leased Premises form a part, it will not disturb the possession, use
or enjoyment by of the Leased Premises nor disaffirm this Lease or Tenant's
rights hereunder, so long as all obligations of are fully performed in
accordance with the provisions of this Lease.
17. RIGHT OF INSPECTION BY LANDLORD
- -----------------------------------
Landlord and Landlord's representatives, including, but not limited to
any ground lessor or mortgagee(s) of Landlord, may enter the Leased Land during
normal banking hours or at such other times as are approved by tenant in
writing, for the purpose of inspecting the Leased Premises; performing any work
which Landlord elects to undertake by reason of Tenant's default hereunder, at
Tenant's expense, or posting notices of non-responsibility under any mechanic's
lien or similar law; and, during the final twelve (12) months of the term
hereof, presenting the Leased Premises to prospective tenants.
18. SALE OF SHOPPING CENTER BY LANDLORD.
- ----------------------------------------
In the event of any sale of the Shopping Center by Landlord, Landlord
shall be and is hereby entirely freed and relieved of all liability under any
and all covenants and unaccrued obligations contained in or derived from this
Lease arising out of any act, occurrence or omission occurring after the
consummation of such sale, and Tenant shall and hereby does attorn to the
purchaser at any such sale or any subsequent sale of the Shopping Center,
provided that any such purchaser shall in writing covenant to and with Tenant to
carry out any and all of the covenants and obligations of Landlord under this
Lease.
<PAGE>
19. LIABILITY OF LANDLORD
- -------------------------
If Landlord shall fail to perform any covenant, term, or condition of
this Lease and Tenant shall recover a money judgment against, Landlord, such
judgment to be satisfied only out of the proceeds of sale received upon
execution of such judgment and levy thereon against the right, title, and
interest of Landlord in the Shopping Center as the same may then be encumbered
and neither Landlord nor any of its partners, officers, or shareholders shall be
liable for any deficiency. It is understood that in no event shall Tenant have
any right to levy execution against any property of Landlord, its partners,
officers, or shareholders, other than their respective interests in the Shopping
Center. Such right of execution shall be subordinate and subject to any mortgage
or other encumbrance upon the Shopping Center.
20. CONDITIONAL LIMITATIONS-DEFAULT PROVISIONS
- ----------------------------------------------
20.1 Events of default.
-----------------------
If at any time during the term of this Lease, any one or more of the
Eollowing events (herein called an "Event of Default") shall occur, that is to
say:
(a) If Tenant shall make benefit of its creditors; or
(b) If any petition shall be filed against Tenant in any court,
whether or not pursuant to any statute of the United States of America or
of any state, in any bankruptcy, reorganization, composition, extension,
arrangement or insolvency proceedings, and Tenant shall thereafter be
adjudicated bankrupt, or if such proceedings shall not be dismissed within
sixty (60) days after the institution of the same, or if any such petition
shall be so filed by Tenant or a liquidator; or
(c) If, in any proceeding, a receiver, receiver and manager, trustee
or liquidator be appointed for all or any portion of Tenant's property, and
such receiver, receiver and manager, trustee or liquidator shall not be
discharged within sixty (60) days after the appointment of such receiver,
receiver and manager, trustee or liquidator; or
(d) If Tenant shall fail to pay any installment of rent provided for
herein, or any part thereof, when the same shall become due and payable,
and such failure shall continue for five (5) days after notice thereof from
Landlord, except that Landlord shall not Pe obligated to provide such
notice more than twice in any twenty-four (24) month period; or
(e) If Tenant shall fail to pay any item of real estate taxes or any
other charge or sum required to be paid by te-n'ant hereunder, and such
failure shall continue for twenty (20) days after notice thereof; or -
(f) If Tenant shall discontinue its business as provided in Section
3.2 hereinabove; or
(g) If Tenant shall fail to perform or any other requirement of this
Lease on the Tenant to be performed or observed, and such shall continue
for twenty (20) days after thereof from Landlord to Tenant.
<PAGE>
Then, upon the happening of any one or more of the aforementioned
Events of Default, Landlord shall have the right, then or at any time therafter
and while such default or defaults shall continue, to give Tenant written notice
of Landlord's intention to terminate this Lease on a date specified in such
notice, which date shall not be less than ten (10) days after the date of giving
such notice, and on the date specified in such notive, which date shall not be
less than ten (10) days after the date of giving of such notice, and on the date
specified in such notice, Tenant's right to possession of the Leased Premises
shall cease and tenant shall peaceably and quietly yield to and surrender to
Landlord the Leased premises and this Lease shall thereupon be terminated and
all of the right, title and interest of Tenant hereunder an in the Leased
Premises shall wholly cease and expire in the same manner and with the same
force and effect as if the date of expiration of such ten (10) day period were
the date originally specified herein for the expiration of this Lease and the
Lease term, and Tenant shall then quit and surrender the Leased premises to
Landlord, but Tenant shall remain liable as hereinafter provided.
20.2 Reentry by Landlord.
-------------------------
In the event of any termination of this Lease as so stated hereinabove
or as otherwise permitted by law, or if a default shall continue
beyond the expiration of any grace period above provided for and Landlord shall
have elected not to terminate the Lease, Landlord may enter upon the Leased
Premises and have, repossess and enjoy the same by summary proceedings,
ejectment or otherwise, and in any such event neither Tenant nor any person
claiming through or under Tenant by virtue of any statute or of an order of any
court shall be entitled to possession or to remain in possession of the Leased
Premises but shall forthwith quit and surrender the Leased Premises. Landlord
shall incur no liability to any person for or by reason of any such entry,
repossession or removal of Tenant or any person claiming through or under
Tenant.
20.3 Payment of Rental and Expenses Upon Default.
- -------------------------------------------------
In case of any such termination, reentry or dispossession by summary
proceedings, ejectment or otherwise, the rent and all other charges required to
be paid by Tenant hereunder shall thereupon become due and payable. up to the
time of such termination, reentry or dispossession, and Tenant shall also pay to
Landlord all expenses which Landlord may then or thereafter incur for legal
expenses, reasonable attorneys' fees, brokerage fees and all other costs paid or
incurred by Landlord for restoring the Leased Premises to good order and
condition, for maintaining the Leased Premises and improve- ments, for reletting
the Leased Premises, and for certain expenses of altering and otherwise
preparing the Leased Premises for such reletting, which latter expenses shall be
limited to those incurred in connection with the removal of all fixtures,
equipment and architectural features unique to Tenant's operation as a banking
institution (such as, for example, vaults, automated teller machines, drive-in
window facilities and overhang) and any repairs necessitated by such removal, as
well as those expenses incurred in connection with adapting the Leased Premises
to use for retail space (such as, for example, installation of additional plate
glass windows).
Landlord may, by written notice, at its option elect to do and perform
any one or more of the following in addition to, and not in limitation of, any
other remedy or right permitted it by law or by this Lease:
<PAGE>
(a) Relet the Leased Premises as the agent of Tenant without
advertisement and by private negotia- tions and for any term and upon such
conditions as Landlord deems proper in its reasonable discretion, and
receive the rent therefor, and Tenant shall pay Landlord any deficiency
that may arise by reason of such reletting on demand, but Tenant shall not
be entitled to any surplus so arising and Tenant shall not have any right
of prior approval with respect to the terms or conditions upon which
Landlord relets the Leased Premises. Tenant shall reimburse Landlord for
all costs, expenses and reasonable attorneys' fees of Landlord incurred in
connection with the default of Tenant, termination of this Lease, eviction
of Tenant and reletting the Leased Premises and, to the extent reimbursable
by Tenant as set Eorth above in this Section 20.3, all costs and expenses
of Landlord incurred in connection with the preparation of the Leased
Premises for reletting.
(b) As agent of Tenant, do whatever Tenant iq obligated to ' do by the
provisions of this Lease. Tenant agrees to reimburse Landlord immediately
upon demand for any costs and expenses, including, but not limited to,
reasonable attorneys' fees, which Landlord may incur in thus effecting
compliance with this Lease on behalf of Tenant, and Tenant further agrees
that Landlord shall not be liable for any damages resulting to Tenant or
the property of Tenant from such action, unless caused by the negligence of
Landlord.
No act or thing done by Landlord or Landlord's agents during the term
of this Lease shall be deemed an acceptance of a surrender of the Leased
Premises, and no agreement to accept a surrender of the Leased Premises shall be
valid unless the same be made in writing and executed by Landlord. Any waiver of
or redress for any violation of any covenant or condition contained in this
Lease or any of the Rules and Regulations now or hereafter adopted by Landlord,
shall not prevent a subsequent act, which would have originally constituted a
violation, from having all the force and effect of an original violation. In
case it should be necessary or proper for Landlord to bring any action under
this Lease, or to consult, or place this Lease or any amount payable by Tenant
hereunder, with an attorney concerning or for the enforcement of any of
Landlord's rights hereunder, then Tenant in each and any such case shall pay
Landlord its reasonable attorneys' fees. In the event of any default by Tenant
under the terms and provisions of this Lease, Landlord, in addition to but not
in lieu of or in limitation of, any other right or remedy provided to Landlord
under the terms of this Lease or otherwise, shall have the right to be
immediately repaid by Tenant the amount of all sums expended by Landlord and not
repaid by Tenant in connection with preparing or improving the Leased Premises
to Tenant's specifications and any and all costs and expenses incurred in
renovating or altering space to make it suitable for reletting.
20.4 Waiver of Rights.
----------------------
The right of Landlord to recover from Tenant the amounts hereinabove
provided for shall survive the issuance of any order for possession or other
cancellation or termination of this Lease. Tenant, for itself and any and all
persons claiming through or under Tenant, including its creditors, upon the
termination of this Lease in accordance with the terms hereof, or in the event
of entry of judgment for the recovery of the possession of the Leased Premises
in any action or proceeding, or if Landlord shall enter the Leased
<PAGE>
Premises by process of law or otherwise, hereby waives any right of
redemption provided or permitted by any statute, law or decision now or
hereafter in force, and does hereby waive, surrender and give up all rights or
privileges which Tenant may or might have under and by reason of any present or
future law or decision, to redeem the Leased Premises or for a continuation of
this Lease for the term hereby demised after having been dispossessed or ejected
therefrom by process of law or otherwise.
20.5 Extended Period to Cure Default.
-------------------------------------
Anything in this Article 20 to the contrary notwithstanding, it is
expressly understood that, with respect to any Event of Default within the
purview of supparagraph (g) of Anything it is Section 20.1 hereof, if such event
of default is of such a nature that it cannot, in fact, with due diligence, be
cured within a period of twenty (20) days, Landlord shall not be entitled to
reenter the Leased Premises or serve a notice of termination upon Tenant, as
provided in said Section, nor shall the same be regarded as an Event of Default
for any of the purposes of this Lease, if Tenant shall have commenced the curing
of such default within the period of twenty (20) days referred to in said
subparagraph (f), and so long as Tenant shall thereafter proceed continuously
and with all due diligence and in good faith to complete the curing of such
default not susceptible of being cured with due diligence within twenty (20)
days, and the time of Tenant within which to cure the same shall be extended for
such period as may be necessary to complete the same with all due diligence.
20.6 Bank Closure or Takeover by state banking Authority.
----------------------------------------------------
Notwithstanding any other provision contained in this Lease, in the
event Tenant is closed or taken over by the Banking Authority of the State of
North Carolina or any other bank supervisory authority, the Landlord may
terminate this Lease only with the concurrence of such Banking Authority or
other bank supervisory authority, and any such authority shall in any event have
the election either to continue or to terminate this Lease; provided that in the
event this Lease is terminated, the maximum claim of Landlord for damages or
indemnity for injury resulting from the ejection or unexpired term of this Lease
shall in no event be more than the delivery to Landlord of the Leased Premises
and all improvements thereon, free and clear of all liens and encumbrances, and
an amount equal to the rent reserved by this Lease, without acceleration, for
(i) the year next succeeding the date of the surrender of the Leased Premises to
the Landlord or (ii) the period through the date of re-entry by the Landlord,
whichever period is shorter, whether before or after the closing of the Bank,
plus an amount equal to the accrued but unpaid rent, without acceleration, up to
the date of the surrender of the Leased Premises to the Landlord.
21. COMMON AREA.
- ---------------
21.1 Grant of Easement and Right to Use.
----------------------------------------
At all times during the Initial Term of this Lease and during any
extension thereof, Landlord shall continuously and without interruption make
available, and hereby grants and to Tenant and Tenant's successors and permitted
assigns, a nonexclusive easement and the right for Tenant and its permitted
subtenants in common with Landlord and all persons, firms and corporations and
others conducting business within or entitled to use the Shopping Center and
<PAGE>
their respective customers, guests, licensees, invitees, subtenants, employees
and agents, to use those portions of the _shopping Center outlined on Exhibit
"C", attached hereto and made a p3-rt hereof, outside the Leased Land'-and shown
thereon as automobile parking area, pedestrian and vehicular accessways,
sidewalks and passageways and ingress and egress areas (herein collectively
referred to as "Common Area") for ingress, egress, parking and all purposes,
including drive-in windows, for which such areas would customarily be utilized.
Landlord hereby reserves the right to change, alter and modify the size,
location, nature or use of the Common Areas or components thereof from that
shown on Exhibit "C" , and/or to develop portions thereof as out parcels, at any
time and from time to time during the term hereof; provided, however, that no
such change, alteration or modification shall materially interfere with the
means of ingress and egress to and from the Leased Premises. Landlord hereby
also reserves the right to designate and redesignate areas for employee parking,
and Tenant agrees to cause all of its personnel to utilize same. Tenant shall
provide to Landlord, and supplement as and when necessary, a list of such
personnel and their vehicles by license plate. Landlord shall have the right to
tow or cause to be towed all such vehicles which do not comply with employee
parking requirements without any liability or responsibility for damage thereto
except in the event of the willful misconduct or gross negligence of Landlord.
21.2 Reimburserrent by Tenant
-----------------------------
During the Initial Term and any extension of Lease, Tenant shall
reimburse Landlord for Tenant's pro rata share of the Common Area maintenance
costs.
The term' "Common Area Maintenance Costs" shall mean all costs and
expense reasonably paid or incurred by Landlord during the Lease term in
managing, equipping, maintaining and operating (including, without limitation,
management oEEice rent or rental value, cleaning, waste disposal, insuring,
landscaping, advertising and promotion, parking area care, administrative costs
including management Eee, lighting and repairing, personal property taxes,
levies and assessments) the Common Area as hereinabove provided.
Tenant's pro rata share of the Common Area Maintenance Costs shall be a
fraction, the numerator of which shall be the total gross leaseable floor
area(expressed-in square feet) of Tenant's Building, which area shall include
the area covered by Tenant's drive-through window facilities but shall not
include Tenant's parking area, and the denominator of which shall be the gross
leasable floor area (expressed in square feet) of all buildings constructed
within the Shopping Center. For each calendar year or part thereof occurring
during the Initial Term or any extensions of this Lease, Landlord shall have the
right to make a good faith estimate of Tenant's share of the Common Area
Maintenance Costs for the upcoming calendar year and upon fifteen (15) days'
written notice to Tenant to require the payment by Tenant of one-twelfth
(1/12th) of such amount on the first (Ist) day of each month during the calendar
year in question. By April I of each calendar year during the Lease term, or as
soon thereafter as practical, Landlord shall furnish to Tenant a statement of
Common Area Maintenance Costs for the prior calendar year, including therein the
calculation of any additional amount owed by Tenant to Lnadlord, which amount
shall be promptly paid by Tenant to Landlord, as additional rent. Any amounts
owed by Landlord to Tenant because of overpayment by Tenant shall be promptly
<PAGE>
refunded as long as Tenant is not in default hereunder. If, for any reason other
than the default of Tenant, this Lease shall terminate on a day other than the
last day of a calendar year, the additional rent payable by Tenant pursuant to
this Section 22.3 shall be prorated on the basis which the number of days from
the commencement of such calendar year to and including such termination date
bears to three hundred sixty-five (365). During any calendar year Landlord may
revise Tenant's Common Area Maintenance Costs which are currently being paid if
it appears to Landlord that the actual Common Area Maintenance Costs will vary
from the anticipated Common Area Maintenance Costs by five percent (5%) or more.
21.3 Rules and Regulations
--------------------------
Tenant agrees that Landlord has the right, at any time and from time to
time, for the general welfare of the Shopping Center and its -occupants, to
impose reasonable rules and regulations of general application governing the
conduct of occupants of the Shopping Center and their use of the Common Areas.
Tenant agrees to comply with any and all such rules and regulations imposed by
Landlord, including, without limitation, those rules and regulations set forth
in Exhibit "'D" .
23. GENERAL PROVISIONS.
- -----------------------
23.1 Notices
------------
Every notice, demand, request, designation, consent, approval or other
document or instrument-required or permitted to be served hereunder shall be in
writing, shall be deemed to have been duly delivered, if sent by mail, on the
third (3rd) day after mailing and shall be hand delivered or sent by certified
or registered United States mail, postage prepaid, return receipt requested,
addressed to the parties hereto as their addresses appear below:
If to Landlord: Zarernba CenterPoint Cornpany
5881 Glenridge Drive, Suite 140
Atlanta, Georgia 30328
Attn: Charles Miller
With a copy to: Zaremba Management Corporation
c/o Zaremba Corporation
14600 Detroit Avenue
Lakewood, Ohio 44107
If to Tenant: Guaranty State Bank
Post Office Box 1731
Durham, North Carolina
Attn: Charles J. Stewart 27702
With a copy to: Tenant's Manager at the Shopping Center
<PAGE>
Either party may change the place for notice, or provide for the
delivery of not more than two (2)copies, by giving the other party at least ten
(10)days' prior written notice to such effect.
23.2 Estoppel Certificates
--------------------------
Each party agrees from time to time upon not less than ten (10) days'
prior notice from the other, to execute, acknowledge and deliver, to the other
party, a statement in writing certifying (i) that this Lease is unmodified and
in full force and effect (or, if there have been modifications, identifying the
s 'ame by the date thereof and specifying the nature thereof) (ii) that to the
knowledge of such party no uncured Event of Default exists hereunder (or, if
such uncured Event of Default does exist, specifying the same); (iii) the dates
to which the Annual Rental and other sums and charges payable hereunder have
been paid; (iv) that such party, to its knowledge, has no claims against the
other party hereunder except for the continuing obligations under this Lease
(or, if such party has any such claims, specifying the same); (v) whether or not
there are then existing any offsets or defenses against the enforcement of any
of the terms, covenants or conditions hereof; and (vi) any other information
reasonably requested by the other party.
23.3 Force Majeure.
-------------------
Notwithstanding that time is of the essence for the performance of each
and every act to be performed by either party hereunder, the time within which
either party hereto shall be required to perform any act under this Lease shall
be extended by a period of time equal to the number of days during which
performance of such act is delayed unavoidably by strikes, lockouts, Acts of
God, governmental restrictions, failure or inability to secure materials or
labor by reason of priority or similar regulation or order of any governmental
or regulatory body, enemy action, civil disturbance, fire, unavoidable
casualties or any other cause beyond the reasonable control of either party
hereto.
23.4 Waivers.
-------------
No delay or omission by either party hereto in exercising any right or power
accruing upon the noncompliance or failure of performance by the other party
hereto under the provisions of this Lease shall impair any such right or power
or be construed to be a waiver thereof. A waiver by either party hereto of any
of the covenants, conditions or agreements hereto to be performed by the other
party shall not be construed as a waiver of any succeeding breach of the same or
any other covenants, agreements, restrictions and conditions hereof.
23.5 Modifications
------------------
Any alteration, change or modification of or to this Lease, in order to
become effective, shall be made by written instrument or endorsement hereon and
in each such instance executed on behalf of the party against whom enforcement
is sought.
<PAGE>
23.6 Applicable Law
-------------------
This Lease shall be governed by, and construed in accordance with, the
laws of the state in which the Leased Land is situated.
23.7 Partial Invalidity
-----------------------
If any term, provision, condition or convenant of this Lease or the
application thereof to any party or circumstances shall, to any extent be held
invalid or unenforceable, the remainder of this Lease, or the application of
such term., provision, condition or covenant to persons or circumstances other
than those as to whom or which it is held invalid or unenforceable, shall not be
affected thereby, provision of this Lease shall be valid and fullest extent
permitted by law.
23.8 Brokerage Commission
-------------------------
Landlord represents and warrants that no real estate broker, agent,
commission salesman, or other person other than Allenton Realty has represented
in the negotiations for and procurment of this Lease and of the Leased Premises,
and that no commissions, fees or compensationof any kind are due and payable in
connection herewith to any real estate broker, agent, commission salesman or
other person (even including the broker or other person or firm excluded above
from the warranting party's warranty of no broker) except if and only as may be
provided in a separate written commission agreement signed simultaneously with
or before this lease by the party against whom the commission or compensation is
charged. Each party agrees to indemnify and hold the other hereunder harmless
from and against any claim for any such commissions, fees or other form of
compensation by any such third party claiming through the indemnifying party,
including, without limitation, any and all claims, causes of action, damages,
costs and expenses (including reasonable attorneys' fees), associated therewith.
23.9 Covenants Running with the Land
------------------------------------
All of the covenants, agreements, conditions and restrictions set forth
in this Lease are intended to be and shall be construed as covenants running
with the land, binding upon, inuring to the benefit of and enforceable by the
parties hereto and their successors and permitted assigns.
23.10 Section Headings.
------------------------
The section headings of this Lease are inserted as a matter of
convenience and reference only and in no way define, limit or describe the scope
or intent of this Lease or in any way affect the terms and provisions hereof.
23.11 Gender
------------
The use herein of (i) the singular number shall be deemed to mean the
plural; (ii) the masculine gender shall be deemed to mean the feminine or
neuter; and (iii) the neuter gender shall be deemed to mean the masculine or
feminine whenever the sense of this Lease so requires.
<PAGE>
23.12 Memorandum of Lease.
---------------------------
A short form or memorandum of this Lease, incorpor- ating this
indenture of Lease by reference, shall be executed, acknowledged and recorded at
the commencement date of the interim Term of this Lease setting forth the
parties hereto, the legal description of the Leased F'remises (including all
rights, privileges and easements appurtenant thereto), the term of this Lease
and the options granted to Tenant hereunder if so requested by Landlord.
23.13 Surrender and Quitclaim at End of Term.
----------------------------------------------
Upon the end of the term of this Lease, as provided herein, or any
extension or renewal thereof, or sooner termination of this Lease pursuant to
any provisions herein or by operation of law, Tenant shall surrender to Landlord
all and singular the Leased Premises, including Tenant's Building and all
improvements constructed upon the Leased Land, and Tenant shall execute,
acknowledge and deliver to Landlord within five (5) days after written demand
from Landlord to Tenant, any quitclaim deed or other document required by any
title company to remove the cloud of this Lease from the Leased Premises.
Should Tenant remain in possession of the Leased Premises after the
expiration or other termination of the term of this Lease and any renewals as
provided herein, it shall be a tenant at will, at a rental equal to twice the
Annual Rental then payable hereunder, and otherwise on the same terms and
conditions as herein provided. Nothing herein shall be construed as constituting
Landlord's consent or approval to any such holdover, nor operate to preclude or
inhibit the exercise by Landlord of all of its rights and remedies hereunder or
available under applicable law to dispossess or evict Tenant. There shall be no
renewal of this Lease by operation of the law.
23.14 Attorneys' Fees
-----------------------
In the event any action is brought by Landlord to recover any rent due
and unpaid hereunder or to recover possession of the Leased Premises, or in the
event any action is brought by Landlord or Tenant, against the other to enforce
or for the breach of any of the terms, covenants or conditions contained in this
Lease, the prevailing party shall be entitled to recover reasonable attorneys'
fees to be fixed by the court, together with costs of suit therein incurred.
23.15 Relationship of Parties.
-------------------------------
The relationship of the parties hereto is that of Landlord and Tenant,
and it is expressly understood and agreed that Landlord shall not in any way nor
for any purpose be deemed a partner of Tenant or a joint venturer with Tenant in
the conduct of Tenant's business or otherwise, and that the provisions of any
agreement between Landlord and Tenant relating to rent are made solely for the
purpose of providing a method whereby rental payments are to be measured and
ascertained.
<PAGE>
23.16 Corporate Authority.
--------------------------
In the event either party to this Lease is a corporation, each
individual executing this Lease on behalf of said corporation represents and
warrants that he or she is duly authorized to execute and deliver this Lease on
behalf of said corporation, in accordance with a duly adopted resolution of the
Board of Directors of said corporation or in accordance with the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
23.17 Consents and Approvals.
------------------------------
Wherever the consent or approval of either party is provided for in
this Lease, such consent or approval shall be given in writing to the requesting
party, and each party agrees to not unreasonably withhold such consent or
approval unless specifically provided to the contrary herein.
23.18 Addendum.
---------------
Amendments to this Lease must be in writing and signed by the parties,
and the same may be attached as addenda to this Lease, and the same when made
and attached shall be deemed incorporated herein and made a part hereof.
23.19 Definitions.
-------------------
The words "mortgage", "trust deed", "deed to secure debt" and "deed of
trust" are used interchangeably, as are the words "mortgagee", "trustee" and
"grantee under deed to secure debt" or "grantee under trust deed". Similarly,
"mortgage" includes security agreements, UCC-1 financing statements and like
security instruments.
23.20 Condition of Tenant's Obligations.
----------------------------------------
Tenant's obligations under this Lease are conditional upon Tenant
securing, pursuant to Section 4.2 above, the approval of the Federal Deposit
insurance Corporation and of The North Carolina Commissioner of Banks
(collectively, the "Authorizations") necessary for the construction of Tenant's
Work and the operation of a branch bank. Tenant shall diligently pursue securing
the Authorizations.
If said condition has not been satisfied within ninety (90) days from
the execution of this Lease, Tenant or Landlord shall have the option to
terminate this Lease at any time thereafter but prior to Tenant's delivery of
written evidence to Landlord that it has waived or satisfied said unsatisfied
condition.
<PAGE>
23.21 Special Stipulations
--------------------------
The provision of the Special Stipulations set forth in Exhibit "F"
attached hereto and by this reference made a part hereof shall, to the extent in
conflict with the terms of this lease, control.
IN
WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and
year above written.
LANDLORD:
ZT-Durham Associates, #1,
a joint venture existing under
the general partnership
laws of North Carolina
By: Durham Retail Associates,
a North Carolina limited
partnership, General Partner
By: Center Point Southern,
Inc., a Georgia corporation
General Partner
By: S/S Charles Miller, President
------------------
Charles Miller
CORPORATE SEAL
<PAGE>
EXHIBIT "A-1"
LEGAL DESCRIPTION OF THE SHOPPING CENTER
----------------------------------------
[SURVEYORS DESCRIPTION OF PROPERTY WITH COORDINATES]
<PAGE>
EXHIBIT "A-2"
LEGAL DESCRIPTION
LEASE AREA REATAIL "E' OUT PARCEL
[SURVEYORS DESCRIPTION OF PROPERTY WITH COORDINATES]
<PAGE>
EXHIBIT "A-3"
SHOPPING CENTER SITE PLAN
[GRAPHIC-MAP]
<PAGE>
EXHIBT "B"
PLANS AND SPECIFICATIONS
------------------------
1. Those certain Drawings preparted for Guaranty State Bank by
Brockwell/Hoke Architects, Inc., Architects and Planners, dated August 5, 1987,
consisting of Sheets C-1; SD-1; A-1 through A-8; S-1 and S-2; E-1 through E-5;
HAC; P-1; and LEF-1 through LEF-6 (including LEF-1a and LEF-2a).
2. Those certain Construction Documents for Guaranty state Bank,
Westgate Shopping Center, Durhan, N.C., prepared by Brockwell/Hoke Architects,
Inc., Architects and Planners, dated August 5, 1987, as amended by Addendum
(No.1) dated August 7, 1987.
<PAGE>
EXHIBIT "C"
[GRAPHIC-MAP]
<PAGE>
EXHIBIT "D"
RULES AND REGULATIONS
---------------------
1. Tenant shall not, (i) conduct or permit any fire, bankruptcy or
auction sale (whether real or fictitious) unless directed by. order of a court
of competent jurisdiction, or conduct or permit any legitimate or fictitious
"Going Out of Business" sale nor represent or advertise that it regularly or
customarily sells merchandise at "manufacturer's," "distributor's" or
"wholesale," "warehouse," or similar prices or other than at "offprice" or at
"retail" prices; (ii) use, or permit to be used, the malls or sidewalks adjacent
to such premises, or any other area outside the premises for solicitation or for
the sale or display of any merchandise or for the distribution of handbills,
fliers or other similar materials, or for any other business, occupation or
undertaking, or for outdoor public meetings, circus or other entertainment
(except for promotional activities in cooperation with the management of the
Shopping Center or an association of merchants within the Shopping Center or for
promotions sponsored by Burger King Corporation); (iii) use or permit to be used
any sound broadcasting or amplifying device which can be heard outside of the
premises (other than devices necessary for drive-through service) or any
flickering lights; or (iv) use or permit to be used any portion of the premises
for any unlawful purpose or use or permit the use of any portion of the premises
as regular living quarters, sleeping apartments or lodging rooms or for the
conduct of any manufacturing business.
2. Tenant shall not obstruct any sidewalks, passages, exists,
entrances, truck ways, loading docks, package pick-up stations, pedestrian
sidewalk and ramps, first 'aid and comfort stations, or stairways of the
Shopping Center. No tenant and no employee or invitee of any tenant shall go
upon the roof of the Shopping Center without notifying the Landlord.
3. Tenant shall not install, maintain or operate or in any common areas
under the control of Tenant any vending machine or video game without Landlord's
prior written consent.
4. Tenant shall store all its trash and garbage in containers within
its premises and/or in the portion of the Common Areas designated by Landlord.
Tenant shall not place in any trash box or receptacle any material which cannot
be disposed of in the ordinary and customary manner of trash and garbage
disposal. All garbage and refuse disposal shall be made in accordance with
directions issued from time to time by Landlord.
5. Tenant and Tenant's employees shall park thier cars only in such
portion of the parking area designed for those purposes by the Landlord. Tenant,
from time to time, upon Landlord's request, shall use its best efforts to
furnish Landlord with state automobile license numbers assigned to Tenant's
employees within five (5) days after taking possessionof the premises and shall
thereafter notify the Landlord of any changes within five (5) days after changes
ocur. In the event that the Tenant or its employees fail to park their cars in
designated parking areas as aforesaid, then the Landlord at its option shall
charge the Tenant Ten Dollars ($10.00) per days or partial day per car parked in
any area other than that designated. Landlord agrees to designate employee
parking areas in locations that do not unreasonably interfere with the
availability of customer parking for Tenant's Building.
<PAGE>
6. Landlord may waive any one or more of these Rules and Regulations
for the benefit of any particular tenant or tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in favor
of any other tenant or tenants, nor prevent Landlord from thereafter enforcing
any such Rules and Regulations against any or all of the tenants of the Shopping
Center.
7. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the Shopping
Center.
8. Tenant shall be responsible for the observance of all of the
foregoing rules by Tenant's employees and agents.
9. Trailers or trucks shalll not be permitted to remain parked
overnighht in any area of the Shopping Center, whether loaded, unloaded or
partially loaded. No parking shall be permitted of any trailer, truck or other
vehicle in any area of the Shopping Center at any time for purposes of
advertising or promotion without Landlord's written permission.
Tenant agrees to comply with all reasonable additional and supplemental
rules and regulations upon notice of same from the Landlord.
<PAGE>
EXHIBIT "E"
TOYS 'R US SITE PLAN
[GRAPHIC-MAP]
<PAGE>
EXHIBIT "F"
SPECIAL STIPULATIONS
--------------------
1. Notwithstanding anything to the contrary contained in the Lease,
fixed monthly rental for that portion of the Initial Term that falls in calendar
year 1987 shall partially abate to a rate of One Thousand Two Hundred Fifty and
No/100 Dollars ($1,250.00) per month; to the extent that the calendar year 1987
portion of the Initial Term consists of a partial month, such partially abated
monthly rental shall be prorated on a per them basis.
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item
7 represent average daily balances.
WHO WE ARE
Piedmont Bancorp, Inc. is the holding company for Hillsborough Savings
Bank, Inc. SSB ("HSB"). From its beginning in 1913 out of a small drug store in
Hillsborough, North Carolina, HSB has grown into a full service community bank
that offers a complete line of banking and investment services to individuals,
small businesses and charitable organizations located in Orange, Durham and
surrounding counties. We like to think that HSB provides the best of the old and
the new. We are proud of our eighty-six years of rich history in the historic
town of Hillsborough, North Carolina.
During fiscal year 1999 we added two new financial centers - one at
1406 E. Franklin Street in Chapel Hill and another at 3400 Westgate Drive in
Durham. Both of these locations offer the wide variety of products and services
offered at our location in Hillsborough. In addition, both of the new locations
have full service 24 hour ATMs.
We are continuously at work adding exciting new products and services
for our customers. If you are interested in a specific product and would like
more information please call us at (919) 732-2143 or just stop by. In addition,
you can also reach us at our web site at http://www.HSBeBank.com, email at
[email protected], fax at (919) 732-6001 and 24 hour telephone banking at
(800) 375-8017. For your convenience, a complete list of our banking and
investment services offered is listed below:
Services for individuals:
Checking and deposit products
o A complete range of checking account options designed with you in mind
o A money market account with competitive interest rates
o A complete line of savings, certificate of deposit and IRA products
o ATM card with access to thousands of ATM machines nationwide
o Imaged checks and statements
o Visa or Mastercard Checkcard with access to millions of vendors nation
and world wide.
o Banking by telephone with our Telebancing(TM) center
Loan products
o Mortgage and consumer loans
o Home equity lines of credit
o MasterCard(TM) and Visa(TM) credit cards
Investor services
o We provide full and discount securities brokerage services through a
partnership with UVEST Investment Services, Inc. We also offer free
financial planning for retirement and college. Turn to us for stocks,
mutual funds, annuities, estate planning and life insurance.
Services for Small Businesses and Charitable Organizations
o A complete line of checking and savings accounts
o Working capital, equipment, real estate and Small Business
Administration loans
o Merchant card services
o Incoming and outgoing wiring of funds
<PAGE>
o Imaged checks and statements
o We offer full and discount brokerage services through a partnership
with UVEST Investment Services, Inc. Turn to us for all your small
business investment needs.
Internet Banking and Investment Services (visit our new Web site at
http://www.HSBeBank.com)
o Online Brokerage Services through a partnership with UVEST Investment
Services, Inc. - coming October of 1999.
o Internet Banking with Bill Payment - coming March of 2000.
o Online Consumer and Equity Line Loan Applications
o Online Check Reordering o Credit Reports
o Shareholder information, including a link to our dedicated AMEX Web
site
o Links to many national and local sites of interest
o Special Offers for our online visitors
<PAGE>
<TABLE>
<CAPTION>
Piedmont Bancorp, Inc.
Selected Financial Data
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Interest income $ 10,200 $ 10,217 $ 9,535 $ 9,248 $ 7,811
Interest expense 5,112 5,191 4,603 4,414 3,682
--------- --------- --------- --------- ---------
Net interest income 5,088 5,026 4,932 4,834 4,129
Provision for loan losses 33 96 658 96 120
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 5,055 4,930 4,274 4,738 4,009
Other income 356 606 225 255 336
Other expenses 3,558 2,963 4,716 2,449 2,265
--------- --------- --------- --------- ---------
Income (loss) before income tax expense 1,853 2,573 (217) 2,544 2,080
Income tax expense 653 930 317 849 837
--------- --------- --------- --------- ---------
Net income (loss) $ 1,200 $ 1,643 $ (534) $ 1,695 $ 1,243
========= ========= ========= ========= =========
Net income (loss) per share - basic $ 0.48 $ 0.61 $ (0.20) $ 0.45 n/a
========= ========= ========= ========= =========
Net income (loss) per share - diluted $ 0.46 $ 0.61 $ (0.20) $ 0.45 n/a
========= ========= ========= ========= =========
Selected Year-end Balances:
Total assets $ 140,089 $ 130,541 $ 122,761 $ 128,711 $ 104,013
Loans receivable, net 100,717 106,500 100,173 91,187 84,713
Investments (1) 31,038 18,846 17,973 32,564 15,043
Deposits 99,339 89,840 84,860 73,361 76,745
FHLB Advances 20,162 18,000 16,500 17,250 13,000
Stockholders' equity 19,561 21,606 20,416 37,050 13,646
Average Balance Sheet Data:
Total assets $ 132,022 $ 128,871 $ 123,896 $ 119,252 $ 100,359
Total earning assets 127,467 125,585 120,700 116,010 96,745
Loans receivable, net 105,126 107,510 95,937 87,917 83,326
Investments (1) 21,180 17,013 23,869 27,297 12,633
Deposits 92,013 86,648 78,720 77,221 75,110
Borrowings 18,560 20,119 16,481 13,248 10,628
Stockholders' equity 20,805 21,212 25,893 27,557 12,810
Selected Financial Ratios:
Return on average assets 0.91% 1.27% (0.43)% 1.42% 1.24%
Return on average equity 5.77 7.75 (2.06) 6.15 9.70
Average equity to average assets 15.76 16.46 20.90 23.11 12.76
Interest rate spread (tax equivalent basis) 3.34 3.26 3.13 3.16 3.72
Net interest margin (tax equivalent basis) 4.09 4.10 4.24 4.33 4.29
Dividend payout ratio 104.35 68.85 n/a 48.89 n/a
Cash dividends declared per common share $ 0.48 $ 0.42 $ 7.42 0.22 n/a
</TABLE>
(1) Includes investment securities and interest-bearing deposits.
2
<PAGE>
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<PAGE>
Piedmont Bancorp, Inc.
1999 Annual Report to Shareholders Table of Contents
President's Message.............................................. 5
Management's Discussion and Analysis............................. 7
Independent Auditors' Report..................................... 23
Consolidated Financial Statements................................ 24
Notes to Consolidated Financial Statements....................... 28
Directors, Officers and Office Location.......................... 48
Corporate Information............................................ 48
Capital Stock.................................................... 49
4
<PAGE>
A Message from Your President and Chief Executive Officer:
To Our Stockholders:
For the year ended June 30, 1999, your Company reported net income of
$1,200,000, or $0.46 diluted earnings per share, compared to consolidated net
income of $1,643,000 or $0.61 diluted earnings per share for the year ended June
30, 1998.
Total assets increased 7.3% to $140.1 million at June 30, 1999 compared
to $130.5 million at June 30, 1998. The primary contributor to the growth was an
increase of 71.3% in investment securities to $29.2 million at June 30, 1999
from $17.0 million at June 30, 1998; mitigated by a decrease of 5.4% in loans
receivable to $100.7 million at June 30, 1999 from $106.5 million at June 30,
1998. Funding the majority of the asset growth was (1) a $9.5 million or 10.6%
increase in deposits from June 30, 1998 to June 30, 1999 and (2) a $2.2 million
or 12.0% increase in advances from the Federal Home Loan Bank during the same
period.
Beyond the financial results discussed above and in much more detail
after this letter, your Company and its employees continued implementation of a
number of significant initiatives as we continued to execute the strategic plan
adopted by the Board of Directors in October of 1997.
In July of 1998 your Company implemented its stock repurchase plan.
From July of 1998 to August of 1999 we repurchased 248,100 shares of our stock.
The repurchase plan was one of the primary factors, in conjunction with our
asset growth, of reducing our average equity to assets ratio from 16.46% for the
year ended June 30, 1998 to 15.76% for the year ended June 30, 1999.
In December of 1998 the Bank purchased a long term leasehold interest
in a former bank branch located at 3400 Westgate Drive in Durham that opened as
a full service branch in April of 1999. In February of 1999 the Bank purchased a
former bank branch building located at 1406 East Franklin Street in Chapel Hill
that opened as a full service branch in June of 1999.
In selecting the new branch sites the management team and the Branch
Committee of the Board of Directors looked at over 30 different sites located in
and around our market area, and only locations that passed stringent demographic
and cost criteria were selected. In addition, since both sites had previously
been full service branches we were able to quickly provide community banking
services to new customers in an area that has enjoyed above average growth in
comparison to most markets in the nation and in the Southeast. Both branches
offer the full range of products currently offered at our Hillsborough office,
including a wide variety of checking, savings and certificate of deposit
accounts as well as mortgage and consumer loans. In addition, mutual funds,
stocks and bonds, and financial advice are offered to our new customers through
our wholly owned subsidiary, HSB Investment Services.
Branching within our contiguous market area is a key component of our
strategic plan, and we are pleased to report that both branches have exceeded
our expectations for both loans and deposits. Staffing of the branches was done
with a combination of hand picked internal employees as well as experienced
bankers from other banks.
5
<PAGE>
During fiscal year 1999 we spent a lot of time and effort getting ready
for the Year 2000, and I am happy to report that our mission critical systems
are Y2K ready. By Y2K ready, I mean the Bank has inventoried its hardware,
software and other equipment that could possibly be dependent on dates for
proper operation. We have also tested all of its defined "mission critical"
systems by entering dates past December 31, 1999 with no problems noted, and
developed contingency plans to allow key services to customers to continue in
the event that any Year 2000 problems do occur.
The Company also devoted a lot of time in planning our future internet
activities. We now have a new Web site that can be accessed at
http://www.HSBeBank.com that offers Online Consumer and Equity Line Loan
Applications, Online Check Reordering, Credit reports, shareholder information
(including a link to our dedicated AMEX Web site), links to many national and
local sites of interest, and special offers just for online visitors. In October
of 1999 we will begin offering online brokerage services through a partnership
with UVEST Investment Services, Inc., a leading provider of such services to
financial institutions throughout the Southeast. Lastly, in March of 2000 we
plan to offer internet banking with bill payment to our customers and non
customers. Please visit our Web site and send us an email to offer any
recommendations on how we can improve our internet services.
With the increased number of products that the Bank now offers, the
need for customer relationship management skill has never been greater, and
senior management as well as any employees with customer sales contact have
started an eight week customer service training program. We hope that this
training program will help to reinforce the already strong customer service
reputation that the Bank enjoys in our marketplace.
The deployment of our strategic plan is primarily aimed at one
objective - increasing long-term shareholder value. As a Company that was a
mutual savings bank from 1913 to 1995, and a public company from December 1995
to the present, we understand that our primary focus is on improving our return
to you, and we hope you will be patient while we deploy the capital and the
resources that you have entrusted to us.
Lastly, I would like to thank the board, the management team and the
employees of the Bank that worked very hard during the past year as we opened
our branches in Durham and Chapel Hill. While it was a team effort, there were
many "superstars" that went the extra mile and worked long hours to make the two
branches as successful as they are.
We thank you for your continued support of Piedmont Bancorp, Inc. and
will continue to seek your support and suggestions on how we can provide the
greatest value to both our shareholders and customers.
Sincerely,
/s/D. Tyson Clayton
- -------------------
D. Tyson Clayton
President and Chief Executive Officer
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this discussion and analysis is to provide the reader
with a description of the financial conditions and changes therein and results
of operations of Piedmont Bancorp, Inc. (the "Parent") and its wholly-owned
subsidiary, Hillsborough Savings Bank, Inc., SSB (the "Bank") (collectively
referred to as the "Company"). This discussion and analysis of financial
condition and results of operation should be read in conjunction with the
audited consolidated financial statements and accompanying notes included in
this report and the supplemental financial data appearing throughout this
discussion and analysis.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. Operations are also
affected by non-interest income, such as income from customer service charges,
loan servicing fee income, gains and losses on the sale of loans and
investments, and other sources of income. The Company's principal operating
expenses, aside from interest expense, consist of compensation and fringe
benefits, data processing expenses, occupancy and furniture and equipment
expense, and income taxes.
Performance Overview
The Company ended fiscal year 1999 with net income of $1,200,000 or
$0.48 diluted earnings per share compared to consolidated net income of
$1,643,000 or $0.61 diluted earnings per share for the year ended June 30, 1998.
For the year ended June 30, 1997 the Company had net income before nonrecurring
items of $1,569,000 or $0.61 basic and diluted earnings per share. In the year
ended June 30, 1997 the Company recorded a net loss and basic and diluted loss
per share after nonrecurring items of $534,000 and $0.20, respectively. Earnings
for the year ended June 30, 1997 were adversely impacted by the following
nonrecurring items: (1) $1,496,000 of compensation expense associated with the
release and allocation of approximately 126,000 shares of common stock of the
Company to participants of the Hillsborough Savings Bank, Inc. Employee Stock
Ownership Plan during the quarter ended December 31, 1996, (2) a provision for
loan losses of $597,000 recorded during the quarter ended December 31, 1996 that
resulted primarily from the charge off of approximately $510,000 in unsecured
loans to a single borrower, (3) losses of $106,000 on the sale of investments
that were sold in December of 1996 to fund the special dividend of $7.00 a
share, and (4) a special $487,000 assessment paid in the first quarter of fiscal
1997 to the Federal Deposit Insurance Corporation to recapitalize the Savings
Association Insurance Fund.
Net Interest Income
Net interest income is one of the major determining factors in a
financial institution's performance as it is its principal source of earnings.
Net interest income is impacted by a variety of elements: volume, yield/cost and
relative mix of both interest-earning assets and interest-bearing and
noninterest-bearing sources of funds. Table 1 presents average balance sheets
and a net interest income analysis on a tax-equivalent basis for each of the
years in the three-year period ended June 30, 1999.
<PAGE>
As shown in Table 1, net interest income, on a fully tax-equivalent
basis, amounted to $5.2 million in 1999, $5.2 million in 1998, and $5.1 million
in 1997. Total interest income was $10.3 million in both 1999 and 1998, and $9.7
million in 1997. Total interest expense decreased slightly to $5.1 million in
1999 from $5.2 million in 1998, and was $4.6 million in 1996.
7
<PAGE>
Although total interest income remained relatively unchanged from 1998
to 1999, a shift in interest-earning assets from loans receivable to taxable
investment securities caused a similar shift in interest income between the two
interest-earning assets. The weighted average tax equivalent yield on total
interest-earning assets decreased to 8.10% in 1999 from 8.23% in 1998. The
decline was primarily caused by a decline in the average yield on loans
receivable and taxable investment securities. The weighted average
tax-equivalent yield increased from 8.06% in 1997 to 8.23% in 1998. The increase
was primarily caused by two factors. First, average loans accounted for 85.6% of
the interest-earning assets of the Company in 1998 compared to 79.5% of
interest-earning assets in 1997. The shift in interest-earning assets toward
higher yielding loans accounts for part of the increase in the weighted average
tax-equivalent yield from 1997 to 1998. The second factor that contributed to
the increase was an increase in the average yield on loans receivable from 8.40%
in 1997 to 8.49% in 1998.
The decrease in interest expense of $79,000 from 1998 to 1999 was
caused by a decline in the weighted average rate on total interest-bearing
liabilities, mitigated by an increase in deposit accounts from 1998 to 1999. The
increase in interest expense of $588,000 or 12.8% in 1998 was due primarily to
the increased volume of both deposits and FHLB advances to fund loan growth.
Average interest-bearing liabilities increased by $11.2 million or 12.0% in 1998
while the average rate paid on those liabilities increased by four basis points.
The net interest margin (on a tax-equivalent basis) decreased to 4.09%
in 1999 from 4.10% in 1998, and 4.24% in 1997 due to increased funding of
interest-earning asset growth with deposits and FHLB advances in 1999 and 1998
compared to 1997. The payment of the special dividend in December of 1996 had
the effect of decreasing average stockholder's equity $4.7 million or 18.1% to
$21.2 million in 1998 or 16.9% of total interest-earning assets in 1998.
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
NET INTEREST INCOME ANALYSIS - TAX EQUIVALENT
1999 1998 1997
------------------------------ --------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ---- -------- ------- ---- --------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (dollars in thousands)
Interest-earning assets:
Loans receivable (1) $105,126 $ 8,835 8.40% $107,510 $ 9,127 8.49% $ 95,937 $ 8,060 8.40%
Taxable investment securities 15,855 996 6.28 11,469 747 6.51 14,271 959 6.72
Tax-exempt investment securities(2) 4,033 325 8.06 3,937 317 8.05 7,193 542 7.54
Interest-bearing deposits 1,292 82 6.35 1,607 70 4.36 2,405 99 4.12
FHLB common stock 1,161 87 7.49 1,062 78 7.34 894 65 7.27
-------- -------- ---- -------- ------- ---- --------- ------- ----
Total interest-earning assets 127,467 10,325 8.10 125,585 10,339 8.23 120,700 9,725 8.06
Non-interest-earning assets 4,555 3,286 3,196
-------- -------- --------
TOTAL $132,022 $128,871 $123,896
======== ======== ========
Liabilities and retained earnings:
Interest-bearing liabilities:
Deposit accounts $ 88,850 4,056 4.56% $ 84,357 $ 3,991 4.73% $ 76,819 $ 3,615 4.71%
FHLB advances 18,560 1,056 5.69 20,119 1,200 5.96 16,481 988 5.99
-------- -------- ---- -------- ------- ---- --------- ------- ----
Total interest-bearing liabilities 107,410 5,112 4.76 104,476 5,191 4.97 93,300 4,603 4.93
Non-interest-bearing liabilities 3,807 3,183 4,703
Stockholder's equity 20,805 21,212 25,893
--------- -------- --------
TOTAL $ 132,022 $128,871 $123,896
========= ======== ========
Net interest income and
interest rate spread $ 5,213 3.34% $ 5,148 3.26% $ 5,122 3.13%
======= ======= =======
Net interest-earning assets
and net interest margin $ 20,057 4.09% $ 21,109 4.10% $ 27,400 4.24%
========= ======== ========
Ratio of interest-earning assets
to interest-bearing liabilities 118.67% 120.20% 129.37%
</TABLE>
(1) Nonaccrual loans are excluded from the average balance of loans receivable.
(2) Interest earned on tax-exempt investment securities has been adjusted to a
tax-equivalent basis using the applicable combined federal and state rates of
34.00% and 7.50%, respectively, and reduced by the nondeductible portion of
interest expense.
<PAGE>
In summary, the small increase in net interest income from 1998 to 1999
is primarily due to a decrease in the average rate on total interest-bearing
liabilities mitigated by a increase in volume during the same period of time.
The small increase in net interest income from 1997 to 1998 is primarily due to
an increase in the average yield on interest-earning assets mitigated by a
decline in volume during the same period of time. Table 2 shows the effect of
variances in volume and rate on taxable-equivalent interest income, interest
expense, and net interest income. The table shows that increases in net interest
income were primarily due to rate in both 1999 and 1998.
8
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
RATE / VOLUME ANALYSIS
1999 1998
---- ----
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------- ------- ------- ------- ------- ------- ------- -------
(dollars in thousands)
Interest income (tax-equivalent) on:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $ (202) $ (97) $ 7 $ (292) $ 972 $ 85 $ 10 $ 1,067
Taxable investment securities 286 (26) (11) 249 (188) (30) 6 (212)
Tax-exempt investment securities 8 -- -- 8 (245) 37 (17) (225)
Interest-bearing deposits (14) 32 (6) 12 (33) 6 (2) (29)
FHLB common stock 7 2 -- 9 12 1 -- 13
------- ------- ------- ------- ------- ------- ------- -------
Total interest income 85 (89) (10) (14) 518 99 (3) 614
------- ------- ------- ------- ------- ------- ------- -------
Deposit accounts 213 (143) (5) 65 355 19 2 376
FHLB advances (93) (54) 3 (144) 218 (5) (1) 212
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense 120 (197) (2) (79) 573 14 1 588
------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income $ (35) $ 108 $ (8) $ 65 $ (55) $ 85 $ (4) $ 26
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Provisions for Loan Losses
The provision for loan losses is charged to earnings to maintain the
total allowance for loan losses at a level considered adequate to cover loan
losses based on existing loan levels and types of loans outstanding,
nonperforming loans, prior loan loss experience, and general economic
conditions. Provisions for loan losses totaled $33,000 in 1999 compared to
$96,000 in 1998, and $658,000 in 1997. The unusually high provision in 1997
resulted primarily from the reprovision of the allowance for loan losses after
charge offs of approximately $510,000 of loans to a single borrower in December
of 1996. The Company received approximately $85,000 and $63,000 of recoveries
from this single borrower during the years ended June 30, 1999 and 1998,
respectively.
Other Income
Other income decreased to $356,000 in 1999 compared to $606,000 in 1998
and $225,000 in 1997. In 1998 other income included a gain on sale of real
estate owned and gains on sale of loans of $114,000 and $75,000, respectively,
that were not present in 1999 or 1997. Other income included gains realized on
the sale of investments of $5,000 and $6,000 in 1999 and 1998, respectively, and
losses realized on the sale of investment securities of $135,000 in 1997. The
net losses on the sale of investment in 1997 were primarily attributable to
partial liquidation of invested conversion proceeds to facilitate payment of the
special dividend in December 1996. Other income also includes
lower-of-cost-or-market adjustments on loans held-for-sale. In 1999, the Company
recorded $73,000 in lower-of-cost-or-market write-downs resulting from the
rising interest rate environment during the last quarter of that year. In 1998
and 1997, the Bank recognized $36,000 and $4,000, respectively, in
<PAGE>
lower-of-cost-or-market recoveries resulting from the falling interest rate
environment during the two years. The rising interest rate environment during
the last quarter of 1999 also was the primary reason for the loss of $20,000 on
sale of loans compared to the gain of $75,000 on sale of loans in 1998. Mortgage
loan servicing fees were $42,000, $63,000 and $87,000 in 1999, 1998, and 1997,
respectively. The decline in mortgage loan servicing fees from 1997 and 1998 is
attributable to a decline in the Company's average loan servicing portfolio
during this time. The decline in mortgage loan servicing fees from 1998 to 1999
was due to the general decline in market interest rates up until the last
quarter of 1999. Other income was positively affected by the growth in customer
service and other fees of $16,000 or 7.7% to $223,000 in 1999, and $6,000 or
3.0% to $207,000 in 1998 from $201,000 in 1997. This increase is attributable to
increases in the volume of deposit accounts with the Bank and the implementation
of a new deposit-related fee schedule in February of 1998. "Other" other income
increased to $105,000 in 1999 from $98,000 and $68,000 in 1998 and 1997,
respectively. The increase is primarily attributable to the Company's former
branch facility being leased for twelve months in 1999 and 1998 compared to
seven months in 1997.
Other Expenses
Other expenses totaled $3,558,000 in 1999 compared to $2,963,000 and
$4,716,000 in 1998 and 1997, respectively. Two large non-recurring expenses that
occurred in the first and second quarters of fiscal year 1997 were the primary
reason for the significant increase in other expenses in 1997 as compared to
1998 and 1999. First, in 1997, the Company recorded $1,702,000 of compensation
expense related to the Company's employee stock ownership plan ("ESOP"),
primarily associated with the release and allocation of approximately 126,000
shares of common stock of the Parent to participants of the ESOP during the
second quarter of 1997. The special dividend paid on the Parent's stock on
December 6, 1996 and management's decision to use the special dividends paid on
the unallocated shares of the Parent's common stock held by the ESOP to pre-pay
the ESOP loan from the Parent to the ESOP resulted in a significant portion of
that share release, approximately 103,000 shares. As a result, approximately
$1,428,000 of the ESOP-related compensation expense was deemed to be
non-recurring in nature.
The second non-recurring other expense in 1997 was the $487,000
one-time FDIC special assessment for the recapitalization of the SAIF. The
assessment was levied on all depository institutions with SAIF-insured deposits
and amounted to 65.7 basis points on assessable deposits as of March 31, 1995.
The Company's quarterly FDIC premiums have decreased since the recapitalization
of the SAIF.
Without the effect of the non-recurring SAIF assessment and the
non-recurring portion of ESOP-related compensation expense, other expenses would
have totaled $2,801,000 in 1997. Compensation and fringe benefits, excluding
non-recurring items, decreased by $11,000 to 1,713,000 in 1998 from $1,724,000
in 1997. From 1998 to 1999, compensation and fringe benefits increased to
$1,989,000. This increase was primarily attributable to the addition of staff in
the third and fourth quarters of 1999 for two new branches that were opened in
March and June of 1999. The recurring portion of ESOP-related compensation
expense for 1997 totaled $274,000 compared to $209,000 and $165,000 recorded for
1998 and 1999, respectively.
<PAGE>
Data and items processing expenses increased to $396,000 in 1999 from
$256,000 in 1998. The increase was due to the conversion to a new data processor
in February of 1998. The Bank's new processor provides a higher level of service
and technology compared to the Bank's previous processor.
FDIC-insurance premiums declined to $53,000 in 1999 and 1998 from
$71,000 for 1997. Deposit insurance premiums decreased starting with the quarter
ended December 31, 1996. The reduced level of FDIC-insurance premiums is
anticipated to continue into the future.
Occupancy expense increased to $145,000 in 1999 from $114,000 in 1998
due to the opening of two new branches during the fourth quarter of 1999.
Furniture and equipment expense increased to $214,000 in 1999 from $113,000 in
1998 due to higher depreciation expense associated with the purchase and
depreciation of computer equipment at the end of the third quarter of fiscal
1998 and the opening of the two new branches in the last quarter of fiscal 1999.
Professional fees decreased to $117,000 in 1999 from $185,000 in 1998.
The decrease is primarily attributable to fees paid for assistance in developing
a strategic plan and branch feasibility studies for the Company in 1998.
Other "other" expenses increased $115,000 to $644,000 in 1999 from
$529,000 in 1998 due to increases in marketing expenses, office supplies,
postage and forms associated with the two new branches that were opened in 1999.
Other "other" expenses increased $121,000 to $529,000 in 1998 from $408,000 in
1997 due to increases in marketing expenses, employee education associated with
the conversion to a new data center, and office supplies and forms.
Income Tax Expense
The Company recorded income tax expense of $653,000 in 1999, compared
to $930,000 in 1998 and $317,000 in 1996. This resulted in an effective tax rate
of 35.2% and 36.1% in 1999 and 1998, respectively. The 1997 tax expense reflects
the pre-tax loss and the fact that a significant portion of the ESOP-related
compensation expense is not tax-deductible.
10
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
Total assets increased 7.3% to $140.1 million at June 30, 1999 compared
to $130.5 million at June 30, 1998. The primary contributor to the growth was an
increase of 87% in investment securities available-for-sale to $25.8 million at
June 30, 1999 from $13.8 million at June 30, 1998, mitigated by a decline of
5.4% in loans receivable to $100.7 million at June 30, 1999 from $106.5 million
at June 30, 1998. Funding the majority of the investment securities growth was
(1) a $9.5 million or 10.6% increase in deposits from June 30, 1998 to June 30,
1999 and (2) a $2.2 million or 12.0% increase in advances from the Federal Home
Loan Bank during the same period.
<PAGE>
Loans
The Company's primary source of revenue is interest and fee income from
lending activities, consisting primarily of one-to-four family residential
mortgage loans located in its primary market area. The Company also makes loans
secured by improved nonresidential real estate, construction loans, loans
secured by undeveloped real estate, home equity loans, and consumer loans, both
secured and unsecured.
At June 30, 1999, the loan portfolio totaled $100.7 million and
represented 71.9% of total assets. As mentioned above, during 1999 loans
decreased by $5.8 million or 5.4%. Loan originations increased to $55.4 million
in 1999 from $50.0 million in 1998, largely in response to the Company's
continued efforts to expand its loan programs into adjacent counties through
increased marketing. As presented in Table 3, the relative composition of the
loan portfolio continued to change in 1999 from prior years. One-to-four family
loans decreased as a percentage of the portfolio in the current year to 78.20%
from 84.67% in 1998. All other loan types increased as a percentage of the
portfolio from 1998 to 1999. The shift in the loan mix away from one-to-four
family loans is attributable to the Company's strategy of selling all conforming
one-to-four family 30 year loans in the secondary market. Table 3 sets forth the
composition of the loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
TABLE 3
TYPES OF LOANS
June 30,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
Real estate loans: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 1-4 family $ 78,767 78.20% $ 90,175 84.67% $ 77,621 77.48% $ 67,095 73.58% $ 62,379 73.63%
Nonresidential real estate 8,647 8.59 6,795 6.38 6,649 6.64 8,818 9.67 8,623 10.18
Home equity and other
second mortgage 10,854 10.78 10,588 9.94 10,997 10.98 11,616 12.74 11,916 14.07
Construction 8,741 8.68 7,552 7.09 9,638 9.62 5,026 5.51 1,805 2.13
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 107,009 106.25 115,110 108.08 104,905 104.72 92,555 101.50 84,723 100.01
Other installment loans 1,314 1.30 850 0.80 1,061 1.06 1,719 1.89 1,635 1.93
Less:
Unearned fees and discounts 386 0.38 412 0.39 348 0.35 281 0.31 185 0.22
Loans in process 6,166 6.12 8,097 7.60 4,649 4.64 2,198 2.41 945 1.11
Allowance for loan losses 1,054 1.05 951 0.89 796 0.79 608 0.67 515 0.61
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total reductions 7,606 7.55 9,460 8.88 5,793 5.78 3,087 3.39 1,645 1.94
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans, net $100,717 100.00 $106,500 100.00 $100,173 100.00 $ 91,187 100.00 $ 84,713 100.00
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
In order to protect the Company's net interest margin, management has,
as part of its interest rate risk management program, placed an emphasis on
maintaining adjustable rate mortgage loans and home equity lines of credit in
its portfolio. This strategy has resulted in more consistent net interest income
and lower net interest income sensitivity than experienced by most traditional
fixed-rate residential mortgage lenders. In 1999 and 1998 the Company sold
approximately $24.0 million and $10.0 million, respectively, in fixed rate
mortgage loans in the secondary market. In 1997 the Company did not sell any of
its mortgage loan production into the secondary market as sufficient liquidity
and interest rate protection was provided through the investment of conversion
proceeds in shorter term investments. In the future the Company expects to sell
selected current loan production to both provide for sufficient liquidity and
protection of the net interest margin.
11
<PAGE>
The following table sets forth the time to contractual maturity of the
Company's loan portfolio at June 30, 1999. All loans, fixed and floating, are
shown as due in the period of contractual maturity. Demand loans, loans having
no stated maturity and overdrafts are reported as due in one year or less. The
table does not include prepayments or scheduled principal repayments. Amounts in
the table are net of loans in process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
TABLE 4
LOAN MATURITIES
June 30, 1999
--------------------------------------------------------------------------------
Over 1 Over 3 Over 5
One Year Year to Years to Years to Over 10
Or Less 3 Years 5 Years 10 Years Years Total
--------- --------- --------- --------- --------- ---------
Real estate loans: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 family
Fixed $ 3 $ 103 $ 157 $ 2,969 $ 52,399 $ 55,631
Floating 6 166 419 2,895 19,219 22,705
Nonresidential real estate
Fixed -- 161 169 480 2,459 3,269
Floating 88 8 392 2,584 2,280 5,352
Home equity and other second
mortgage
Fixed 76 97 225 265 133 796
Floating 237 1,529 2,323 5,969 -- 10,058
Construction
Fixed -- -- -- -- -- --
Floating 2,421 39 186 -- -- 2,646
--------- --------- --------- --------- --------- ---------
Total real estate loans 2,831 2,103 3,871 15,162 76,490 100,457
Other installment loans:
Fixed 301 549 150 29 87 1,126
Floating 188 -- -- -- -- 188
Less:
Allowance for loan losses (1,054) -- -- -- -- (1,054)
--------- --------- --------- --------- --------- ---------
Total loans, net $ 2,266 $ 2,653 $ 4,020 $ 15,191 $ 76,587 $ 100,717
========= ========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
Asset Quality and Allowance for Loan Losses
The following table sets forth information with respect to
nonperforming assets, including nonaccrual loans and real estate owned, and risk
assets at the dates indicated.
<TABLE>
<CAPTION>
TABLE 5
SUMMARY OF NONPERFORMING AND RISK ASSETS
June 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total nonaccrual loans $ 973 $ 928 $ 803 $ 758 $ 30
Total restructured loans -- -- -- -- --
-------- -------- -------- -------- --------
Total nonperforming loans 973 928 803 758 30
Real estate owned -- -- -- -- --
-------- -------- -------- -------- --------
Total nonperforming assets $ 973 $ 928 $ 803 $ 758 $ 30
Accruing loans, delinquent 90 days or more -- -- 244 301 571
-------- -------- -------- -------- --------
Total risk assets $ 973 $ 928 $ 1,047 $ 1,059 $ 601
Nonperforming loans to total loans, net 0.97% 0.87% 0.80% 0.83% 0.04%
Nonperforming assets to total assets 0.69 0.71 0.65 0.59 0.03
Risk assets to total assets 0.69 0.71 0.85 0.82 0.58
Allowance for loan losses to:
Total nonperforming assets 1.08x 1.02x 0.99x 0.80x 17.17x
Total risk assets 1.08x 1.02x 0.99x 0.80x 17.17x
Total assets $140,089 $130,541 $122,761 $128,711 $104,013
Total loans, net 100,717 106,500 100,173 91,187 84,713
Allowance for loan losses 1,054 951 796 608 515
</TABLE>
Nonperforming assets increased to $973,000 at June 30, 1999 compared to
$928,000 and $803,000 at June 30, 1998 and 1997, respectively. Nonperforming and
risk assets at June 30, 1999 and 1998 are primarily composed of small loans
secured by residential real estate totaling $832,000 and $858,000, respectively.
The remainder of nonperforming and risk assets at June 30, 1999 and 1998 are
composed of smaller installment and line of credit loans. Management has
reviewed the collateral for nonaccrual loans and believes that collateral values
related to the nonperforming loans exceed the loan balances. Management has
included this review among the factors considered in the evaluation of the
allowance for possible loan losses as discussed below.
At June 30, 1999 and 1998, the recorded investment in loans that are
considered to be impaired under Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") was
$117,000 and $118,000, respectively. There were no impaired loans in non-accrual
<PAGE>
status at June 30, 1999 and 1998. There was no related allowance for credit
losses associated with these loans as determined in accordance with SFAS No.
114. The average recorded investment in impaired loans during the year ended
June 30, 1999 and 1998 was approximately $118,000 and $118,500. The Company
recognized interest income on the impaired loans of approximately $9,400 and
$9,500 during the years ended June 30, 1999 and 1998, respectively.
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio.
The adequacy of the allowance for loan losses and the related provision are
based upon management's evaluation of the risk characteristics of the loan
portfolio under current economic conditions. Among the factors determining the
level of the allowance are loan growth, projected net charge offs, delinquency
trends, the financial condition of borrowers, collateral values, the amount of
nonperforming and past due loans, and current and economic conditions.
Management believes that the allowance for loan losses is adequate. While
management uses all available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. Various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
13
<PAGE>
The provision for loan losses is calculated and charged to earnings to
maintain the total allowance for loan losses at a level considered adequate to
cover probable loan losses inherent in the portfolio based on an analysis of
existing loan levels, types of loans outstanding, nonperforming loans, prior
loan loss experience, industry standards and general economic conditions.
Provisions for loan losses were $33,000 in 1999, compared to $96,000 in 1998,
and $658,000 in 1997. The unusually high provision in 1997 resulted primarily
from the charge off of approximately $510,000 of loans to a single borrower in
December 1996. No further charge offs related to this borrower have occurred or
are anticipated at this time. The Company received approximately $85,000 and
$63,000 of recoveries from this single borrower during 1999 and 1998,
respectively. At this time, management is unaware of any significant potential
problem loans except as noted above or any other concentrations of credit risk
which may exist in the portfolio.
The following tables describe the activity related to the allowance for
loan losses and the allocation of the allowance for loan losses to various
categories of loans for the periods indicated.
<TABLE>
<CAPTION>
TABLE 6
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Year Ended June 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 951 796 $ 608 $ 515 $ 404
Provision for loan losses 33 96 658 96 120
Charge-offs (17) (8) (519) (4) (14)
Recoveries 87 67 49 1 5
------- ------- ------- ------- -------
Balance, end of period $ 1,054 $ 951 $ 796 $ 608 $ 515
======= ======= ======= ======= =======
Allowance as a percentage of loans 1.04% 0.89% 0.79% 0.66% 0.60%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE 7
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
June 30,
--------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Residential 1-4 family $ 548 $ 533 $ 382 $ 256 $ 216
Nonresidential real estate 116 124 233 170 155
Home equity and other second mortgage 126 142 83 97 82
Construction 200 95 54 36 16
------ ------ ------ ------ ------
Total real estate loans 990 894 752 559 469
Other installment loans 64 57 44 49 46
------ ------ ------ ------ ------
Total allowance for loan losses $1,054 $ 951 $ 796 $ 608 $ 515
====== ====== ====== ====== ======
</TABLE>
The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations. Refer to Table 3 for percentages of loans in each category to total
loans.
14
<PAGE>
Investment Securities
Interest and dividend income from investment securities generally
provides the second largest source of income to the Company after interest on
loans. The Company's portfolio of investment securities includes U.S. government
and agency securities, mortgage-backed securities issued by the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association
(FNMA) and the Government National Mortgage Association (GNMA), collateralized
mortgage obligations issued by FNMA and GNMA secured by mortgage-backed
securities guaranteed by FNMA and GNMA, and obligations of states and local
governments.
Investment securities increased $12.2 million to $29.2 million at June
30, 1999 from $17.0 million at June 30, 1998. This increase is attributable to
the reinvestment in investment securities of a portion of the $24 million in
proceeds received during 1999 from the sale of one-to-four family loans.
Approximately 88% of the Company's investment portfolio is classified as
available-for-sale in order to provide flexibility to meet liquidity needs.
Generally securities issued by the state of North Carolina and local
municipalities in North Carolina are the only ones classified by the Company as
held-to-maturity. At June 30, 1999, net unrealized losses of $596,000 were
included in the carrying value of securities classified available-for-sale
compared to net unrealized gains of $126,000 on such securities at June 30,
1998. These net unrealized gains and losses are the result of fluctuations in
market interest rates rather than concerns about the issuers' ability to meet
their obligations.
Table 8 shows maturities of investment securities held by the Company
at June 30, 1999 and the weighted average tax-equivalent yields for each type of
security and maturity. Additional information about the Company's investment
securities as of June 30, 1999 and 1998 is presented in Note 2 of the notes to
the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TABLE 8
INVESTMENT SECURITIES - MATURITY/YIELD SCHEDULE
More than More than
One year or Less 1 Year to 5 Years 5 years to 10 years Over 10 Years
-------------------- ----------------------- -------------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
Available-for-sale: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and agency $ -- -- % $ 6,122 6.23% $ 5,264 6.18% $ -- - %
State and local government (1) -- -- -- -- 783 6.23 1,035 8.52
Mortgage-backed securities (2) -- -- 5,257 6.21 2,355 6.26 4,994 6.43
------- ---- ------- ---- ------- ---- ------- ----
Total available-for-sale $ -- -- $11,379 6.22 $ 8,402 6.21 $ 6,029 6.79
------- ---- ------- ---- ------- ---- ------- ----
Held-to-maturity:
U.S. government and agency $ -- -- % $ -- -- % $ -- -- % $ -- -- %
State and local government (3) 1,166 6.46 597 6.78 862 8.04 737 7.29
Mortgage-backed securities -- -- -- -- -- -- -- --
------- ---- ------- ---- ------- ---- ------- ----
Total held-to-maturity $ 1,166 6.46 $ 597 6.78 $ 862 8.04 $ 737 7.29
------- ---- ------- ---- ------- ---- ------- ----
Total investments,
at carrying value $ 1,166 $11,976 $ 9,264 $ 6,766
======= ======= ======= =======
<CAPTION>
Total
----------------------
Weighted
Carrying Average
Value Yield
------- ----
<S> <C> <C>
Available-for-sale:
U.S. government and agency $11,386 6.21 %
State and local government (1) 1,818 7.53
Mortgage-backed securities (2) 12,606 6.31
------- ----
Total available-for-sale$ $25,810 6.34
------- ----
Held-to-maturity:
U.S. government and agency$ $ -- -- %
State and local government (3) 3,362 7.10
Mortgage-backed securities -- --
------- ----
Total held-to-maturity $ 3,362 7.10
------- ----
Total investments,
at carrying value $29,172
=======
</TABLE>
<PAGE>
(1) Yields are stated on a taxable equivalent basis assuming statutory tax
rates of 34% for federal and 7.50% for state purposes. Book yields without
regard to tax-equivalent adjustments are: six to ten years, 4.68%;over ten
years, 5.63%; total 5.20%.
(2) Mortgage-backed securities are shown at their weighted average expected
life obtained from an outside evaluation of the average remaining life of
each security based on historic prepayment speeds of the underlying
mortgages at June 30, 1999.
(3) Yields are stated on a taxable equivalent basis assuming statutory tax
rates of 34% for federal and 7.50% for state purposes. Book yields without
regard to tax- equivalent adjustments are: one year or less, 4.76%; one to
five years, 4.64%; six to ten years, 4.89%, over ten years, 5.30%; total,
4.89%.
In addition to the investment securities discussed above, the Company
also earns interest on its correspondent bank account at the Federal Home Loan
Bank ("FHLB") of Atlanta and dividends on its FHLB stock. The Bank is required
to maintain, as a condition of membership, an investment in stock of the FHLB of
Atlanta equal to the greater of 1% of its outstanding home loan balances or 5%
of its outstanding advances. No ready market exists for such stock, which is
carried at cost. As of June 30, 1999, the Company's investment in stock of the
FHLB of Atlanta was $1,036,000.
15
<PAGE>
Funding Sources
Deposits are the primary source of the Company's funds for lending and
other investment purposes. The Company attracts both short-term and long-term
deposits from the general public by offering a variety of accounts and rates
including savings accounts, NOW accounts, money market accounts, and fixed
interest rate certificates with varying maturities. General interest rates,
economic conditions, and competitive market conditions significantly influence
deposit inflows and outflows. As competition for deposits has increased both
from larger financial institutions in the Company's local market place and from
mutual funds and other investments, borrowings have provided an additional
source of funding. Borrowed funds provide liquidity and assist the Company in
matching interest rates on its assets and liabilities as interest rates on most
borrowed funds are fixed and therefore more predictable than the rates on
deposits, which are subject to change based upon market conditions and other
factors.
Deposits
Deposits totaled $99.3 million at June 30, 1999 compared to $89.8
million at June 30, 1998, and $84.9 million at June 30, 1997. The following
table sets forth certain information regarding the Company's average savings
deposits for the last three years.
<TABLE>
<CAPTION>
TABLE 9
AVERAGE DEPOSITS
1999 1998 1997
-------------------- -------------------- --------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing checking accounts $ 7,815 0.92% $ 6,930 1.04% $ 6,011 1.48%
Savings and money market deposits 27,511 3.87 23,610 3.68 20,050 3.36
Certificates of deposit 53,524 5.46 53,817 5.67 50,758 5.62
------- ---- ------- ---- ------- ----
Total interest-bearing deposits 88,850 4.56 84,357 4.73 76,819 4.71
Non-interest-bearing deposits 3,163 -- 2,291 -- 1,901 --
------- ---- ------- ---- ------- ----
Total deposits $92,013 4.41 $86,648 4.61 $78,720 4.59
======= ==== ======= ==== ======= ====
</TABLE>
As of June 30, 1999, the Company held $12,237,000 in time certificates
of deposit of $100,000 or more. Maturities of certificates of deposits of
$100,000 or more at June 30, 1999 were as follows: three months or less,
$1,907,000; over three months through six months, $5,635,000; over six months
through twelve months, $2,461,000; over twelve months through twenty-four
months, $1,715,000; and over twenty-four months, $519,000.
<PAGE>
Borrowings
The Company's principal source of long-term borrowings are advances
from the FHLB of Atlanta. As a requirement for membership, the Bank is required
to own capital stock in the FHLB of Atlanta and is authorized to apply for
advances on the security of that stock and a floating lien on its 1-4 family
residential mortgage loans. Each credit program has its own interest rate and
range of maturities. At June 30, 1999, FHLB of Atlanta advances totaled $20.2
million compared to $18.0 million at June 30, 1998. Additional information on
borrowings is provided in Note 7 of the notes to the consolidated financial
statements.
16
<PAGE>
Liquidity and Interest Rate Risk Management
Liquidity is the ability to raise funds or convert assets to cash in
order to meet customer and operating needs. The Company's primary sources of
liquidity are its portfolio of investment securities available-for-sale,
principal and interest payments on loans and mortgage-backed securities,
interest income from investment securities, maturities of investment securities
held-to-maturity, increases in deposits, and advances from the FHLB of Atlanta.
At June 30, 1999, the Bank had $9,838,000 of credit available from the FHLB of
Atlanta 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 has structured its assets and
liabilities in an attempt to protect net interest income from large fluctuations
associated with changes in interest rates. Table 10 shows the amount of
interest-earning assets and interest-bearing liabilities outstanding at June 30,
1999 which are projected to reprice or mature in each of the future time periods
shown. At June 30, 1999, the Company had a cumulative one year
liability-sensitive gap position of $5.9 million or 4.44% of interest-earning
assets. This generally indicates that net interest income would experience
downward pressure in a rising rate environment and would increase in a declining
rate environment, as interest-sensitive liabilities would generally reprice
faster than interest-sensitive assets.
It should be noted that this table reflects the interest-sensitivity of
the balance sheet as of a specific date and is not necessarily indicative of
future results. Because of this and other limitations, management also monitors
interest rate sensitivity through the use of a model which estimates the change
in net portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest sensitivity measures as of
June 30, 1999, management believes that its interest rate risk is at an
acceptable level.
<PAGE>
<TABLE>
<CAPTION>
TABLE 10
INTEREST SENSITIVITY
June 30, 1999
---------------------------------------------------------------------------------
More than More than
3 Months 4 to 12 1 Year to 3 Years to Over
Or Less Months 3 Years 5 Years 5 Years Total
-------- -------- -------- -------- -------- --------
Interest-earning assets: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ 28,306 $ 25,267 $ 21,203 $ 14,338 $ 12,657 $101,771
Interest-bearing deposits 1,866 -- -- -- -- 1,866
Investment securities (1) 2,469 2,126 3,289 8,341 12,947 29,172
FHLB common stock -- -- -- -- 1,036 1,036
-------- -------- -------- -------- -------- --------
Total interest-earning assets $ 32,641 $ 27,393 $ 24,492 $ 22,679 $ 26,640 $133,845
======== ======== ======== ======== ======== ========
Interest-bearing liabilities
Deposits:
Fixed maturity deposits $ 9,331 $ 29,437 $ 16,782 $ 484 $ -- $ 56,034
Savings and money market accounts 3,494 14,717 14,716 3,494 3,494 39,915
-------- -------- -------- -------- -------- --------
Total deposits 12,825 44,154 31,498 3,978 3,494 95,949
FHLB advances 5,305 2,000 3,000 9,000 857 20,162
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 18,130 $ 46,154 $ 34,498 $ 12,978 $ 4,351 $116,111
======== ======== ======== ======== ======== ========
Interest sensitivity gap per period $ 14,511 $(18,761) $(10,006) $ 9,701 $ 22,289 $ 17,734
Cumulative interest sensitivity gap 14,511 (4,250) (14,256) (4,555) 17,734 --
Cumulative gap as a percentage of
total interest-earning assets 10.84% (3.18)% (10.65)% (3.40)% 13.25% 13.25%
Cumulative interest-earning assets as a
percentage of interest-bearing liabilities 180.04% 93.39% 85.57% 95.92% 115.27% 115.27%
</TABLE>
(1) Includes investment and mortgage-backed securities
This table was prepared using the assumptions regarding loan prepayment rates,
loan repricing and deposit decay rates which are used by the Company in making
its gap computations. These assumptions should not be regarded as indicative of
the actual prepayments and withdrawals that may be experienced by the Company.
However, management believes that these assumptions approximate actual
experience.
17
<PAGE>
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
in "Liquidity and Interest Rate Risk Management" above.
Table 11 presents information about the contractual maturities, average
interest rates and estimated fair values of financial instruments considered
market risk sensitive at June 30, 1999.
<TABLE>
<CAPTION>
TABLE 11
MARKET RISK ANALYSIS OF FINANCIAL INSTRUMENTS
Contractual Maturities at June 30, 1999
--------------------------------------------------------------------
Beyond Average Estimated
Five Interest Fair
2000 2001 2002 2003 2004 Years Total Rate (1) Value
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets
Debt securities (2) $ 2,310 $ 2,324 $ 1,954 $ 1,199 $ 7,494 $ 14,487 $ 29,768 6.64% $ 29,198
-------- -------- -------- -------- -------- -------- -------- --------
Loans (3):
Fixed rate 378 323 466 244 330 51,880 53,621 8.20 52,767
Variable rate 2,772 479 1,265 2,026 1,289 40,705 48,536 8.61 49,483
-------- -------- -------- -------- -------- ------ -------- --------
Total $ 5,460 $ 3,126 $ 3,685 $ 3,469 $ 9,113 $107,072 $131,925 8.01 $131,448
======== ======== ======== ======== ======== ======== ======== ========
Financial Liabilities
Savings, NOW and MMDA $ 39,915 $ -- $ -- $ -- $ -- $ -- $ 39,915 3.30 $ 40,986
Fixed rate certificates
of deposit 38,768 14,093 2,689 484 -- -- 56,034 5.46 56,783
Advances from the Federal
Home Loan Bank 7,305 2,000 1,000 9,000 857 -- 20,162 5.69 20,027
-------- -------- -------- -------- -------- -------- -------- ---- --------
Total $ 85,988 $ 16,093 $ 3,689 $ 9,484 $ 857 $ -- $116,111 4.76 $117,796
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
(1) The average interest rate related to debt securities is stated on a fully
taxable basis, assuming a 34% federal income tax rate and applicable state
income tax rate, reduced by the nondeductible portion of interest expense.
(2) Debt securities are reported on the basis of amortized cost.
(3) Nonaccrual loans are included in the balance of loans. The allowance for
loan loss and unearned fees and discounts are excluded.
18
<PAGE>
Capital Resources
Stockholders' equity decreased from $21,606,000 at June 30, 1998 to
$19,561,000 at June 30, 1999. Under a stock repurchase plan adopted by the
Company's Board of Directors in July of 1998, the Company repurchased and
retired 218,800 shares of its common stock during the year ended June 30, 1999.
The average cost of the shares repurchased was $9.32 per share for a total cost
of $2,040,000. The implementation of the share repurchase plan and cash
dividends declared were the primary factors contributing to the decline in
stockholders' equity during the year ended June 30, 1999. Another item
contributing to the decrease in stockholders' equity from June 30, 1998 to June
30, 1999 was an unrealized loss on securities available for sale of $440,000.
Mitigating these decreases was net income of $1,200,000, and release of ESOP
shares and amortization of unearned compensation of $165,000 and $272,000,
respectively.
As a state savings bank holding company, the Parent is regulated by the
Board of Governors of the Federal Reserve Board ("FRB") and is subject to
securities registration and public reporting regulations of the Securities and
Exchange Commission. The Bank is regulated by the FDIC and the Savings
Institutions Division, North Carolina Department of Commerce ("the
Administrator").
The Bank must comply with the capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier I
capital to total risk-weighted assets and total capital to risk-weighted assets
of 4% and 8%, respectively. To be "well-capitalized", the FDIC requires ratios
of Tier I capital to total risk-weighted assets and total capital to
risk-weighted assets of 6% and 10%, respectively. Tier I capital consists of
total stockholders' equity calculated in accordance with generally accepted
accounting principles less intangible assets, and total capital is comprised of
Tier I capital plus certain adjustments, the only one of which applicable to the
Bank is the allowance for loan losses. Risk-weighted assets reflect the Bank's
on- and off-balance sheet exposures after such exposures have been adjusted for
their relative risk levels using formulas set forth in FDIC regulations. The
Bank is also subject to a leverage capital requirement, which calls for a
minimum ratio of Tier I capital (as defined above) to quarterly average total
assets of 3% and a ratio of 5% to be "well-capitalized". The Administrator
requires a net worth equal to at least 5% of assets.
At June 30, 1999 and 1998, the Bank was in compliance with all of the
aforementioned capital requirements of both the FDIC and the Administrator and
is deemed to be "well-capitalized". Refer to note 9 to the consolidated
financial statements for additional discussion of the Bank's capital resources.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying footnotes have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration of changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of the
Company are primarily monetary in nature, and changes in interest rates have a
greater impact on the Company's performance than do the effects of inflation.
<PAGE>
Regulatory Matters
Management is not presently aware of any current recommendation to the
Company by regulatory authorities, which, if they were implemented, would have a
material effect on the Company's liquidity, capital resources, or operations.
19
<PAGE>
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 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.
Since December of 1997 the Board has been apprised of the Company's efforts
at their regular monthly meetings. Employees are informed of the Company's
Year 2000 efforts through 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. A
final Year 2000 mailing will be sent to all customers of the Bank as of
September 30, 1999.
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
<PAGE>
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.
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.
20
<PAGE>
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 June 30, 1999, with follow up testing to
be performed as needed in the remainder of calendar year 1999.
5. Implementation - this phase occurred when the Company's vendors certified
their present systems as Year 2000 compliant. All of the systems the
Company is presently using have been certified as Year 2000 compliant by
the respective vendors. 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 critical processes in the event
they do not process information reliably and accurately after December 31,
1999. This plan was approved by the Bank's Board of Directors in late May
of 1999 and tested by the Company in July of 1999.
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
$24,000 and $2,000 on Year 2000 costs for the years ended June 30, 1999 and
1998, respectively. The Year 2000 costs do not include the time of Bank
personnel related to the Year 2000 issue. 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 $28,000. Funding of the Year 2000
project costs has come from normal operating cash flow, and the expenses
associated with the Year 2000 Issue has and 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 has been addressed prior to the Year
2000. However, notwithstanding the time and effort expended to date by the
Company and its vendors, 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
<PAGE>
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 has been to correct 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, has formalized 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.
21
<PAGE>
Accounting Pronouncements
The Company prepares its consolidated financial statements and related
disclosures in conformity with standards established by, among others, the
Financial Accounting Standards Board (the "FASB"). Because the information
needed by users of financial reports is dynamic, the FASB frequently has new
rules and proposed new rules for companies to apply in reporting their
activities. The following discussion addresses such changes as of June 30, 1999
that will affect the Company's future reporting.
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. Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - and
amendment of FASB No. 133" delayed the effective date of this statement for one
year. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company plans to adopt SFAS 133 in fiscal
year 2001 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.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," establishes accounting and reporting standards for certain mortgage
banking activities. It also conforms the subsequent accounting for securities
retained after the securitization of other types of assets. This statement is
effective for financial statements for fiscal years beginning after December 15,
1998. The Company adopted SFAS 134 in fiscal year 1999 without any impact on its
consolidated financial statements.
Forward Looking Statements
The foregoing discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, actions of government regulators, the level of market interest rates,
and general economic conditions.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Piedmont Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Piedmont Bancor,
Inc. and subsidiary as of June 30, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and comprehensive income and cash
flows for each of the years in the three-year period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Piedmont Bancorp,
Inc. and subsidiary as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/KPMG LLP
-----------
KPMG LLP
Raleigh, North Carolina
July 19, 1999
23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
1999 1998
--------- ---------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash $ 1,706 $ 823
Interest-bearing deposits in other financial institutions 1,866 1,821
Investment securities (note 2):
Available-for-sale (cost: $26,406 in 1999 and
$13,649 in 1998) 25,810 13,775
Held-to-maturity (market value: $3,388 in 1999
and $3,331 in 1998) 3,362 3,250
Loans receivable (net of allowance for loan losses of
$1,054 in 1999 and $951 in 1998) (note 3) 100,717 106,500
Federal Home Loan Bank stock, at cost 1,036 1,152
Premises and equipment (note 4) 3,213 1,414
Prepaid expenses and other assets (note 10) 2,379 1,806
--------- ---------
Total assets $ 140,089 $ 130,541
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 6):
Demand, non-interest bearing 3,390 2,844
Savings, NOW and MMDA 39,915 32,800
Certificates of deposit 56,034 54,196
--------- ---------
99,339 89,840
Advances from the Federal Home Loan Bank (note 7) 20,162 18,000
Accrued expenses and other liabilities 1,027 1,095
--------- ---------
Total liabilities 120,528 108,935
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' Equity (note 9):
Preferred stock, no par value, 5,000,000 shares authorized;
none issued -- --
Common stock, no par value, 20,000,000 shares authorized;
2,532,000 and 2,750,800 shares issued and outstanding as of June 30,
1999 and 1998, respectively 7,035 9,121
Unearned ESOP shares (450) (679)
Unamortized deferred compensation (655) (953)
Unallocated restricted stock (87) (61)
Retained earnings, substantially restricted (note 10) 14,081 14,101
Accumulated other comprehensive income, net (363) 77
--------- ---------
Total stockholders' equity 19,561 21,606
--------- ---------
Commitments and contingencies (note 3)
Total liabilities and stockholders' equity $ 140,089 $ 130,541
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
-------- -------- --------
(dollars in thousands, except per share data)
Interest income:
<S> <C> <C> <C>
Interest on loans $ 8,835 $ 9,127 $ 8,060
Interest on deposits in other financial institutions 82 70 99
Interest and dividends on investment securities:
Taxable 1,083 825 1,024
Non-taxable 200 195 352
-------- -------- --------
Total interest income 10,200 10,217 9,535
-------- -------- --------
Interest expense:
Interest on deposits (note 6) 4,056 3,991 3,615
Interest on borrowings 1,056 1,200 988
-------- -------- --------
Total interest expense 5,112 5,191 4,603
-------- -------- --------
Net interest income 5,088 5,026 4,932
Provision for loan losses (note 3) 33 96 658
-------- -------- --------
Net interest income after provision for loan losses 5,055 4,930 4,274
-------- -------- --------
Other income:
Customer service and other fees 223 207 201
Mortgage loan servicing fees 42 63 87
Gains (losses) on sales of investment securities 5 6 (135)
Lower-of-cost or market adjustment on loans held-for-sale (73) 36 4
Gain on sale of real estate owned -- 114 --
Gain (loss) on sale of loans (20) 75 --
Stock and mutual fund commissions 74 7 --
Other 105 98 68
-------- -------- --------
Total other income 356 606 225
-------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other expenses:
Compensation and fringe benefits (note 8) 1,989 1,713 3,152
SAIF recapitalization assessment (note 6) -- -- 487
Data and items processing 396 256 241
Deposit insurance premiums 53 53 71
Occupancy expense 145 114 113
Furniture and equipment expense 214 113 115
Professional fees 117 185 129
Other 644 529 408
-------- -------- --------
Total other expenses 3,558 2,963 4,716
-------- -------- --------
Income (loss) before income tax expense 1,853 2,573 (217)
Income tax expense (note 10) 653 930 317
-------- -------- --------
Net income (loss) $ 1,200 $ 1,643 $ (534)
======== ======== ========
Net income (loss) per share - basic (note 8) $ 0.48 $ 0.61 $ (0.20)
======== ======== ========
Net income (loss) per share - diluted (note 8) $ 0.46 $ 0.61 $ (0.20)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended June 30, 1999, 1998 and 1997
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) $ -- $ --
Comprehensive loss:
Net loss -- -- -- -- --
Other comprehensive income-unreal-
ized gain on securities available for
sale net of income taxes of $318 -- -- -- -- --
Total comprehensive loss
Issuance of restricted stock 105,800 1,587 -- (1,587) --
Release of ESOP shares -- 83 1,619 -- --
Amortization of unearned
compensation -- -- -- 237 --
Forfeiture of restricted stock
and related dividends -- 107 -- 224 (224)
Allocation of restricted stock -- (60) -- (143) 203
Tax benefit of dividends on
restricted stock -- 261 -- -- --
Cash dividends ($7.42 per share)** -- (18,233) -- -- --
--------- ---------- ---------- --------- --------
Balance at June 30, 1997 2,750,800 9,143 (933) (1,269) (21)
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive income-unreal-
ized gain on securities available for
sale net of income taxes of $104 -- -- -- -- --
Total comprehensive income
Release of ESOP shares -- (45) 254 -- --
Amortization of unearned
compensation -- -- -- 265 --
Forfeiture of restricted stock -- -- -- 146 (146)
Allocation of restricted stock -- (11) -- (95) 106
Tax benefit of dividends on
restricted stock -- (2) -- -- --
Cash dividends declared, net of
forfeited dividends on
restricted stock
($0.42 per share) -- 36 -- -- --
--------- ---------- ---------- --------- --------
Balance at June 30, 1998 2,750,800 9,121 (679) (953) (61)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
other Total
Retained comprehensive Stockholders'
Earnings income Equity
---------- ---------- ----------
<S> <C> <C> <C>
Balance at June 30, 1996 $ 14,783 $ (579) $ 37,050
Comprehensive loss:
Net loss (534) -- (534)
Other comprehensive income-unreal-
ized gain on securities available for
sale net of income taxes of $318 -- 495 495
----------
Total comprehensive loss (39)
Issuance of restricted stock -- -- --
Release of ESOP shares -- -- 1,702
Amortization of unearned
compensation -- -- 237
Forfeiture of restricted stock
and related dividends -- -- 107
Allocation of restricted stock -- -- --
Tax benefit of dividends on
restricted stock -- -- 261
Cash dividends ($7.42 per share)** (669) -- (18,902)
---------- ---------- ----------
Balance at June 30, 1997 13,580 (84) 20,416
Comprehensive income:
Net income 1,643 -- 1,643
Other comprehensive income-unreal-
ized gain on securities available for
sale net of income taxes of $104 -- 161 161
----------
Total comprehensive income 1,804
Release of ESOP shares -- -- 209
Amortization of unearned
compensation -- -- 265
Forfeiture of restricted stock -- -- --
Allocation of restricted stock -- -- --
Tax benefit of dividends on
restricted stock -- -- (2)
Cash dividends declared, net of
forfeited dividends on
restricted stock
($0.42 per share) (1,122) -- (1,086)
---------- ---------- ----------
Balance at June 30, 1998 14,101 77 21,606
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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, 1998 2,750,800 9,121 (679) (953) (61)
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive income-unreal-
ized loss on securities available for
sale net of income tax benefit of $282 -- -- -- -- --
Total comprehensive income
Purchase and retirement of common stock (218,800) (2,040) -- -- --
Release of ESOP shares -- (64) 229 -- --
Amortization of unearned
compensation -- -- -- 272 --
Forfeiture of restricted stock -- -- -- 26 (26)
Tax benefit of dividends on 6
restricted stock -- -- -- -- --
Cash dividends declared, net of
forfeited dividends on
restricted stock
($0.48 per share) -- 12 -- -- --
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1999 2,532,000 $ 7,035 $ (450) $ (655) $ (87)
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
other Total
Retained comprehensive Stockholders'
Earnings income Equity
---------- ---------- ----------
<S> <C> <C> <C>
Balance at June 30, 1998 14,101 77 21,606
Comprehensive income:
Net income 1,200 -- 1,200
Other comprehensive income-unreal-
ized loss on securities available for
sale net of income tax benefit of $282 -- (440) (440)
----------
Total comprehensive income 760
Purchase and retirement of common stock -- -- (2,040)
Release of ESOP shares -- -- 165
Amortization of unearned
compensation --
Forfeiture of restricted stock -- -- --
Tax benefit of dividends on
restricted stock -- -- 6
Cash dividends declared, net of
forfeited dividends on
restricted stock
($0.48 per share) (1,220) -- (1,208)
---------- ---------- ----------
Balance at June 30, 1999 $ 14,081 $ (363) $ 19,561
========== ========== ==========
</TABLE>
** includes $7.00 special dividend paid on December 6, 1996.
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS For the
years ended June 30, 1999, 1998, and 1997
1999 1998 1997
-------- -------- --------
Operating activities: (dollars in thousands)
<S> <C> <C> <C>
Net income (loss) $ 1,200 $ 1,643 $ (534)
Adjustments to reconcile netincome (loss) to net cash
provided by operating activities:
Depreciation 172 94 93
Net amortization (accretion) 94 119 98
Provision for loan losses 33 96 658
Deferred income taxes -- (5) (163)
Gain on sale of fixed assets -- (2) --
Net (gain) loss on sale of investment and mortgage-backed securities (5) (6) 135
Gain on sale of real estate owned -- (114) --
Loss (gain) on sale of loans 20 (75) --
Release of ESOP shares 165 209 1,702
Compensation earned under MRP 272 265 237
Net decrease in mortgage loans held for sale 513 264 519
Decrease (increase) in other assets (356) (328) 585
Increase (decrease) in other liabilities (48) 53 (40)
-------- -------- --------
Net cash provided by operating activities 2,060 2,213 3,290
-------- -------- --------
Investing activities:
Net decrease (increase) in loans held for investment 5,243 (7,198) (10,230)
Principal collected on mortgage-backed securities 1,427 620 628
Purchases of investment securities classified as available-for-sale (8,748) (2,254) (504)
Purchases of investment securities classified as held-to-maturity (300) (307) --
Purchases of mortgage-backed securities classified as available-for-sale (7,677) (2,517) (1,658)
Purchases of collateralized mortgage obligations (2,524) -- --
Proceeds of sales of investment securities classified as available-for-sale -- -- 13,601
Proceeds from maturities of investment securities -- -- 78
Proceeds from investment securities called by issuer 4,420 380 1,085
Proceeds of sales of mortgage-backed securities classified as available-for-sale 501 1,508 3,847
Redemptions (purchases) of FHLB Stock 116 (232) (57)
Purchases of premises and equipment (1,971) (318) (34)
Proceeds from sale of real estate owned -- 636 --
Proceeds from sale of fixed assets -- 17
-------- -------- --------
Net cash provided (used) by investing activities (9,513) (9,665) 6,756
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Financing activities:
Net increase in time deposits 1,838 4 5,776
Net increase in other deposits 7,661 4,976 5,723
Proceeds from borrowings 7,305 18,000 14,000
Repayments of borrowings (5,143) (16,500) (14,750)
Repurchase of no par common stock 2,040 -- --
Cash dividends paid to shareholders 1,240 (1,029) (18,820)
-------- -------- --------
Net cash provided (used) by financing activities 8,381 5,451 (8,071)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 928 (2,001) 1,975
Cash and cash equivalents at beginning of period 2,644 4,645 2,670
-------- -------- --------
Cash and cash equivalents at end of period $ 3,572 $ 2,644 $ 4,645
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,048 $ 5,217 $ 4,592
======== ======== ========
Income taxes $ 680 $ 977 $ 342
======== ======== ========
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on available-for-sale securities, net of deferred
taxes of $282 for 1999, $104 for 1998 and $318 for 1997 $ (440) $ 161 $ 495
======== ======== ========
Dividends declared but unpaid $ (304) $ (324) $ (267)
======== ======== ========
Transfer of bank premises no longer in use from fixed assets to other
assets at net book value $ -- $ -- $ 60
======== ======== ========
Transfer from loans receivable to real estate owned
assets at net book value $ -- $ 522 $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies
-------------------------------
(a) Organization and Operations
---------------------------
Piedmont Bancorp, Inc., ("the Parent") is a bank holding company, formed in
December 1995, that 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
Conversion"). 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.
(b) Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the Parent and the
Bank, together referred to as "the Company". All significant intercompany
transactions and balances are eliminated in consolidation. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the balance sheets and the reported amounts of
income and expenses for the periods presented. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant changes in the near-term relate to the determination
of the allowance for loan losses.
(c) Investment Securities
---------------------
Management determines the appropriate classification of investment securities at
the time of purchase. Securities are classified as held-to-maturity when the
Company has both the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Securities
not classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of stockholders'
equity. The Company has no trading securities.
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or, in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
<PAGE>
(d) Mortgage Servicing Rights
-------------------------
Mortgage servicing rights ("MSR") are the rights to service mortgage loans for
others which are capitalized and included in "other assets" on the Consolidated
Balance Sheets at the lower of their carrying value or fair value. The carrying
value of mortgage loans originated or purchased is allocated between the
carrying value of the loans and the MSR. Capitalization of the allocated
carrying value of MSR occurs when the underlying loans are sold or securitized.
MSR's are amortized over the estimated period of and in proportion to net
servicing revenues. MSR for loans originated by the Bank prior to 1997 were not
capitalized in accordance with the then current accounting standards.
The Company periodically evaluates MSR for impairment by estimating the fair
value based on a discounted cash flow methodology. This analysis incorporates
current market assumptions, including discount, prepayment and delinquency rates
with net cash flows. The predominant characteristics used as the basis for
stratifying MSR are investor type, product type and interest rate. If the
carrying value of the MSR's exceed the estimated fair value, a valuation
allowance is established. Changes to the valuation allowance are charged against
or credited to mortgage servicing income and fees up to the original carrying
value of the MSR.
(d) Loans Held for Sale
-------------------
Loans held for sale are carried at the lower of cost or fair value in
the aggregate as determined by outstanding commitments from investors or current
investor yield requirements. Gains and losses on loan sales are determined by
the difference between the selling price and the carrying value of the loans
sold.
28
<PAGE>
(1) Significant Accounting Policies, Continued
------------------------------------------
(e) Loans Receivable
----------------
Loans held for investment are carried at their principal amount outstanding, net
of deferred loan origination fees.
Interest on loans is recorded as borrowers' monthly payments become due. Accrual
of interest income on loans (including impaired loans) is suspended when, in
management's judgment, doubts exist as to the collectibility of principal and
interest. Interest received on nonaccrual and impaired loans is generally
applied against principal or may be reported as interest income depending on
management's judgment as to the collectibility of principal. Loans are returned
to accrual status when management determines, based on an evaluation of the
underlying collateral together with the borrower's payment record and financial
condition, that the borrower has the capability and intent to meet the
contractual obligations of the loan agreement.
Loan origination fees and certain direct loan origination costs are deferred and
the net amount amortized as an adjustment of the related loans' yield over the
life of the related loans using a level-yield method. Unamortized net loan fees
or costs on loans sold are recorded as gain or loss on sale in the year of
disposition.
(f) Allowance for Loan Losses
-------------------------
The Company provides for loan losses on the allowance method. Accordingly, all
loan losses are charged to the allowance and all recoveries are credited to it.
Additions to the allowance for loan losses are provided by charges to operating
expense. The provision is based upon management's evaluation of the risk
characteristics of the loan portfolio under current economic conditions and
considers such factors as financial condition of the borrower, collateral
values, growth and composition of the loan portfolio, the relationship of the
allowance for loan losses to outstanding loans, and delinquency trends.
At June 30, 1999, substantially all of the Company's loans were collateralized
by real estate in Orange County, North Carolina and adjacent counties. The
collateral is predominately owner-occupied residential real estate in which the
borrower does not rely on underlying cash flows from the property to satisfy
debt service. The ultimate collectibility of a substantial portion of the loan
portfolio is susceptible to changes in market conditions in the Company's market
area. While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions. Various regulatory agencies, as an integral part of their
examination processes, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examinations.
For all specifically reviewed loans for which it is probable that the Bank will
be unable to collect all amounts due according to the terms of the loan
agreement, the Bank determines fair value either based on discounted cash flows
using the loans' initial interest rate or the fair value of the collateral if
<PAGE>
the loan is collateral dependent. Large groups of smaller balance homogenous
loans that are collectively evaluated for impairment (such as residential
mortgage and consumer installment loans) are excluded from impairment
evaluation, and their allowance for loan losses is calculated in accordance with
the allowance for loan losses policy described above.
(g) Investment in Federal Home Loan Bank Stock
------------------------------------------
As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta (FHLB) in the amount of 1% of its outstanding residential
loans or 5% of its outstanding advances from the FHLB, whichever is greater. At
June 30, 1999, the Bank owned 10,360 shares of the FHLB's $100 par value capital
stock. No ready market exists for such stock, which is carried at cost.
(h) Premises and Equipment
----------------------
Premises and equipment are stated at cost. Provisions for depreciation are
computed principally using the straight-line method and charged to operations
over the estimated useful lives of the assets which range from 5 to 40 years for
office buildings and 3 to 10 years for furniture, fixtures, and equipment and
other improvements.
29
<PAGE>
(1) Significant Accounting Policies, Continued
------------------------------------------
(i) Income Taxes
------------
The provision for income taxes is based on income and expense reported for
financial statement purposes after adjustment for permanent differences such as
tax exempt interest income. Deferred income taxes are provided when there is a
difference between the periods items are reported for financial statement
purposes and when they are reported for tax purposes and are recorded at the
enacted tax rates expected to apply to taxable income in years in which these
temporary differences are expected to be recovered or settled. Subsequent
changes in tax rates will require adjustment to these assets and liabilities.
(j) Retirement Plans
----------------
The Bank has an employee stock ownership plan which covers substantially all of
its employees. Contributions to the plan are determined annually by the Board of
Directors based on employee compensation. The Company records compensation
expense for shares released to employees, as a result of contributions by the
Company or dividends paid on unreleased shares in the employee stock ownership
plan, equal to the fair value of the shares released.
The Bank also has a 401(k) plan that covers all eligible employees. The Bank
matches 50% of employee contributions, with the Bank's contribution limited to
3% of each employee's salary.
(k) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, the Company considers cash and
interest-bearing deposits in other institutions with original maturities of
three months or less to be cash equivalents.
(l) Earnings (Loss) Per Share
-------------------------
In 1998, the Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earnings per share (EPS) data. SFAS No. 128 simplifies
the standards for computing EPS previously found in APB Opinion No. 15 "Earnings
Per Share", and makes them comparable to international EPS standards. Under SFAS
No. 128, basic EPS replaces the former presentation of primary EPS. Also, a dual
presentation of of basic and diluted EPS is required on the face of the income
statement for all entities with complex capital structures, and a reconciliation
must be provided of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. In accordance
with SFAS No. 128, all prior period EPS data has been restated.
30
<PAGE>
(1) Significant Accounting Policies, Continued
------------------------------------------
(m) Comprehensive Income
--------------------
On July 1, 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains (losses) on
securities and is presented in the statements of stockholders' equity and
comprehensive income. The Statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's financial
position or results of operations. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
The Company's other comprehensive income for the years ended June 30, 1999, 1998
and 1997 and accumulated other comprehensive income as of June 30, 1999 and 1998
are comprised solely of unrealized gains and losses on certain investments in
debt securities. Other comprehensive income (loss) for the years ended June 30,
1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during period $ (437) $ 165 $ 414
Less: reclassification adjustment for realized gains (losses), net of tax 3 4 (81)
---------- --------- ---------
Unrealized gains (losses) on securities, net of applicable income taxes $ (440) $ 161 $ 495
========== ========= =========
</TABLE>
(n) Disclosures Regarding Segments
------------------------------
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1999. SFAS No. 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. The Company
adopted SFAS No. 131 without any impact on their consolidated financial
statements as the chief operating decision maker reviews the results of
operations of the Company and its subsidiaries as a single enterprise.
(o) Reclassifications
-----------------
Certain reclassifications have been made for 1998 and 1997 to conform with the
1999 presentation. The reclassifications had no effect on previously reported
net income or stockholders' equity.
31
<PAGE>
(2) Investment Securities
---------------------
The following is a summary of the investment securities portfolios by major
classification:
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------
(dollars in thousands)
Estimated
Amortized Unrealized Unrealized market
cost gains losses value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Securities available for sale:
US government and agency securities $11,696 $ -- $ 310 $11,386
Mortgage-backed securities (1) 12,923 7 324 12,606
State and local governments 1,787 57 26 1,818
------- ------- ------- -------
Total securities available-for-sale $26,406 $ 64 $ 660 $25,810
======= ======= ======= =======
Securities held-to-maturity:
State and local governments $ 3,362 $ 57 $ 31 $ 3,388
======= ======= ======= =======
<CAPTION>
June 30, 1998
-----------------------------------------------
(dollars in thousands)
Estimated
Amortized Unrealized Unrealized market
cost gains losses value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Securities available for sale:
US government and agency securities $ 8,005 $ 26 $ 3 $ 8,028
Mortgage-backed securities 4,668 32 5 4,695
State and local governments 976 76 -- 1,052
------- ------- ------- -------
Total securities available-for-sale $13,649 $ 134 $ 8 $13,775
======= ======= ======= =======
Securities held-to-maturity:
State and local governments $ 3,250 $ 85 $ 4 $ 3,331
======= ======= ======= =======
</TABLE>
(1) At June 30, 1999 and 1998, the Company owned mortgage-backed securities
issued by the Federal Home Loan Mortgage Corporation (FHLMC), the Federal
National Mortgage Association (FNMA) and the Government National Mortgage
Association (GNMA) with an aggregate amortized cost of $10,405,000 and
$4,668,000, respectively, and a market value of $10,162,000 and $4,695,000. In
addition, at June 30, 1999, the Company owned collateralized mortgage
obligations issued by FNMA and GNMA secured by mortgage-backed securities
guaranteed by FNMA and GNMA with an amortized cost of $2,518,000 and a market
value of $2,444,000. The Bank owned no collateralized mortgage obligations as of
June 30, 1998.
32
<PAGE>
(2) Investment Securities, Continued
--------------------------------
The aggregate amortized cost and approximate market value of the
available-for-sale and held-to-maturity securities portfolios at June 30, 1999,
by remaining contractual maturity are as follows:
<TABLE>
<CAPTION>
Securities available-for-sale Securities held-to-maturity
(dollars in thousands)
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
US government and agency securities:
Due in 1 year or less $ -- $ -- $ -- $ --
Due in 1 year through 5 years 6,206 6,122 -- --
Due after 5 through 10 years 5,490 5,264 -- --
Obligations of states and local governments:
Due in 1 year or less -- -- 1,166 1,175
Due 1 year through 5 years -- -- 597 604
Due after 5 through 10 years 811 783 862 890
Due after 10 years 976 1,035 737 719
Mortgage-backed securities 12,923 12,606 -- --
------- ------- ------- -------
Total securities $26,406 $25,810 $ 3,362 $ 3,388
======= ======= ======= =======
</TABLE>
At June 30, 1999 and 1998, investment securities with book values of $7,310,000
and $8,311,000, respectively, were pledged as collateral for public deposits.
Summarized below is the sales activity in investment securities:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Proceeds from sales of available-for-sale securities $ 506 $ 1,508 $ 17,448
Realized gains (5) (6) (55)
Realized losses -- -- 190
-------- -------- --------
Cost of available-for-sale securities sold $ 501 $ 1,502 $ 17,583
======== ======== ========
</TABLE>
33
<PAGE>
(3) Loans Receivable
----------------
<TABLE>
<CAPTION>
June 30,
------------------------
Loans receivable consist of the following: 1999 1998
---- ----
(dollars in thousands)
<S> <C> <C>
Loans secured by first mortgages on real estate:
Mortgage loans held for sale $ 2,264 $ 2,797
Mortgage loans held for investment, primarily one-to-four family 76,503 87,378
Construction loans 8,741 7,552
Commercial and agricultural loans 8,228 6,472
Participation loans purchased 419 323
--------- ---------
96,155 104,522
Home equity lines of credit 10,113 9,879
Other second mortgage loans 741 709
Other installment loans 1,314 850
--------- ---------
108,323 115,960
Undisbursed proceeds on loans in process (6,166) (8,097)
Deferred loan fees (386) (412)
Allowance for loan losses (1,054) (951)
--------- ---------
$ 100,717 $ 106,500
========= =========
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 951 $ 796 $ 608
Provision for loan losses 33 96 658
Loans charged off (17) (8) (519)
Recoveries 87 67 49
------- ------- -------
Balance at end of period $ 1,054 $ 951 $ 796
======= ======= =======
</TABLE>
At June 30, 1999 and 1998, the Company had loans totaling approximately $973,000
and $928,000, respectively, which were in nonaccrual status. There were no loans
that were contractually delinquent for 90 days or more and still accruing at
June 30, 1999 and 1998.
Additional interest income that would have been recorded on nonaccrual loans for
the years ended June 30, 1999, 1998 and 1997 had they performed in accordance
with their original terms throughout each of the periods amounted to
approximately $76,000, $46,000 and $61,000, respectively.
<PAGE>
At June 30, 1999, the Company had fixed rate mortgage loan commitments
outstanding of $1,764,000. Preapproved but unused lines of credit totaled
$11,164,000, and standby letters of credit totaled $21,434 at June 30, 1999. The
Company's exposure to credit losses for commitments to extend credit and standby
letters of credit is the contractual amount of those financial instruments. The
Company uses the same credit policies for making commitments and issuing standby
letters of credit as it does for on-balance sheet financial instruments. Each
customer's creditworthiness is evaluated on an individual basis. The amount and
type of collateral, if deemed necessary by management, is based upon this
evaluation of creditworthiness. Collateral obtained varies but may include
marketable securities, deposits, real estate, investment assets, and property
and equipment. In management's opinion, these commitments, and undisbursed
proceeds on loans in process reflected above, represent no more than normal
lending risk to the Company and will be funded from normal sources of liquidity.
34
<PAGE>
(3) Loans Receivable, Continued
---------------------------
At June 30, 1999 and 1998, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $117,000 and $118,000, respectively. There
were no impaired loans in non-accrual status at June 30, 1999 and 1998. There
was no related allowance for credit losses associated with these loans as
determined in accordance with SFAS No. 114. The average recorded investment in
impaired loans during the years ended June 30, 1999 and 1998 was approximately
$118,000 and $118,500. The Company recognized interest income on the impaired
loans of approximately $9,400 and $9,500 during the years ended June 30, 1999
and 1998, respectively.
The Company serviced loans for others of approximately $37,870,000, $18,256,000,
and $10,913,000 at June 30, 1999, 1998 and 1997, respectively. The June 30, 1999
balance of loans sold with recourse was approximately $285,000. Mortgage
servicing rights were not material for any of the periods presented.
Certain of the Company's mortgage loans are pledged as collateral for advances
from the Federal Home Loan Bank (see note 7).
The Bank makes loans to executive officers and directors of the Company and to
their associates. It is management's opinion that such loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than the normal risk of collectibility. Following is a
reconciliation of loans outstanding to executive officers, directors, and their
associates for the year ending June 30, 1999:
(dollars in thousands)
Balance at June 30, 1998 $ 458
New loans 121
Repayments (32)
------
Balance at June 30, 1999 $ 547
======
(4) Premises and Equipment
----------------------
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------------------ -------------------------------
Accumulated Net book Accumulated Net book
Cost depreciation value Cost depreciation value
---- ------------ ----- ---- ------------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Land and land improvements $1,424 $ 68 $1,356 $ 407 $ 63 $ 344
Office buildings and improvements 1,443 271 1,172 891 246 645
Furniture, fixtures, and equipment 1,441 756 685 1,042 617 425
------ ------ ------ ------ ------ ------
$4,308 $1,095 $3,213 $2,340 $ 926 $1,414
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
(5) Leases
------
The Company leases one of its branches under a noncancelable operating lease
expiring through 2017. The total expense associated with this lease was $21,000
in 1999. Future minimum lease payments on noncancelable operating leases as of
June 30, 1999, consist of the following:
Lease payments
--------------
2000 $ 39,680
2001 39,680
2002 39,680
2003 43,151
2004 45,630
--------
$ 207,821
=========
35
<PAGE>
(6) Deposits
--------
Contractual maturities of time deposits are as follows:
Total
Year Ending June 30 Maturities
------------------- ----------
(dollars in thousands)
1999 $ 38,768
2000 14,093
2001 2,689
2002 484
2003 and thereafter
---------
Total time deposits $ 56,034
=========
Time deposits of $100,000 or more totaled $12,237,000 and $9,556,000 at June 30,
1999 and 1998, respectively.
Interest expense on deposits includes $545,000, $563,000, and $406,000 for the
years ended June 30, 1999, 1998, and 1997, respectively, on time deposits of
$100,000 or more.
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act allowing a special assessment to be levied by the FDIC to recapitalize
the SAIF. The special assessment was based on the level of SAIF deposits a
financial institution had as of March 31, 1995 subject to a 20% reduction for
certain qualifying deposits. The Bank's special assessment in 1997 totaled
$487,000. On December 11, 1996, the FDIC approved a final rule retroactive to
October 1, 1996 which lowered rates on assessments paid to the SAIF.
(7) Advances from the Federal Home Loan Bank
----------------------------------------
Advances from the Federal Home Loan Bank of Atlanta, with weighted average
interest rates, are as follows:
<TABLE>
<CAPTION>
June 30,
1999
-------
(dollars in thousands)
<S> <C>
5.29% due on or before June 30, 2000 $ 7,305
5.15% due on or before June 30, 2001 2,000
5.86% due on or before June 30, 2002 1,000
5.91% due on or before June 30, 2003 9,000
5.68% July 1, 2003 and thereafter 857
-------
$20,162
=======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
1998
(dollars in thousands)
<S> <C>
5.91% due on or before June 30, 1999 $ 5,000
6.14% due on or before June 30, 2000 2,000
5.86% due on or before June 30, 2002 1,000
5.88% July 1, 2003 and thereafter 10,000
-------
$ 18,000
========
</TABLE>
At June 30, 1999, the Bank had additional credit availability from the Federal
Home Loan Bank of $9,838,000.
All advances are secured by stock in the Federal Home Loan Bank and a blanket
floating lien on the Bank's one-to-four family residential mortgage loans.
36
<PAGE>
(8) Employee and Director Benefit Plans
-----------------------------------
401(k) Plan
The Bank sponsors a 401(k) plan that covers all eligible employees. The Bank
matches 50% of employee contributions, with the Bank's contribution limited to
3% of each employee's salary. Matching contributions are funded when accrued.
Matching expense totalled approximately $17,000 in 1999, $15,000 in 1998, and
$18,000 in 1997.
Employee Stock Ownership Plan ("ESOP")
The Bank has an ESOP whereby an aggregate number of shares amounting to 211,600
were purchased for future allocation to employees. Contributions to the ESOP are
made by the Bank on a discretionary basis and are allocated among ESOP
participants on the basis of relative compensation in the year of allocation.
Benefits under the ESOP 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 made by 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
are used by the ESOP to repay the debt to the Parent and are not reported as
dividends in the consolidated financial statements. Dividends on allocated
shares are credited to the accounts of the participants and reported as
dividends in the consolidated financial statements.
On December 31, 1996, the Bank made a $1,710,000 contribution to the ESOP,
representing the normal principal payment due for the year and the application
of dividends on unallocated shares to the principal balance of the loan. This
contribution resulted in the release of 128,919 shares to individual participant
accounts. On December 31, 1997, the Bank made a $212,000 contribution to the
ESOP, representing the normal principal payment due for the year and the
application of dividends on unallocated shares to the principal balance of the
loan. This contribution resulted in the release of 19,918 shares to individual
participant accounts. On December 31, 1998, the Bank made a $207,000
contribution to the ESOP, representing the normal principal payment due for the
year and the application of dividends on unallocated shares to the principal
balance of the loan. This contribution resulted in the release of 18,448 shares
to individual participant accounts. At June 30, 1999, a total of 167,285 shares
have been released and allocated to participants and 44,315 shares remain
unallocated, of which 16,660 shares are committed to be released on December 31,
1999.
Total compensation expense associated with the ESOP for the years ended June 30,
1999, 1998 and 1997 was $165,000, $209,000, and $1,702,000, respectively. At
June 30, 1999, there were 44,315 unallocated ESOP shares with a total fair value
of approximately $382,217.
<PAGE>
Management Recognition Plan ("MRP")
The Bank's MRP was approved by stockholders of the Parent and by the Parent's
and the Bank's Boards of Directors during fiscal year 1997. The MRP serves as a
means of providing existing directors and employees of the Bank with an
ownership interest in the Company. Shares of the Company's common stock awarded
under the MRP vest equally over a five year period. Compensation expense related
to those shares is recognized on a straight-line basis corresponding with the
vesting period. Prior to vesting, each participant granted shares under the MRP
may direct the voting of the shares allocated to the participant and will be
entitled to receive any dividends or other distributions paid on such shares. On
August 29, 1996, 105,800 shares were awarded but unearned to participants under
the MRP. During fiscal year 1997, 14,914 shares were forfeited under the MRP. Of
those shares forfeited, 13,500 were subsequently reallocated to new participants
under the MRP in 1997. During fiscal year 1998, 19,417 shares vested to
participants in the MRP and 11,645 shares were forfeited under the MRP. Of those
shares forfeited, 9,000 were subsequently reallocated to new participants under
the MRP in 1998. During fiscal year 1999, 20,111 shares vested to participants
in the MRP and 1,719 shares were forfeited under the MRP. None of the shares
forfeited were reallocated to new participants under the MRP in 1999. Total
compensation expense associated with the MRP for the years ended June 30, 1999
and 1998 was $272,000 and $265,000, respectively.
37
<PAGE>
(8) Employee and Director Benefit Plans, Continued
----------------------------------------------
Stock Option Plan
The Company adopted a Stock Option Plan which has also been approved by the
stockholders of the Parent and by the Parent's and the Bank's Boards of
Directors. The Stock Option Plan makes available options to purchase 264,500
shares, or 10% of the shares issued in the conversion to employees and
directors. Options granted under the Stock Option Plan have a vesting schedule
which provides that 20% of the options granted vest in the first year, and 20%
will vest on each subsequent anniversary date, so that options would be
completely vested within five years from the date of grant. Options become 100%
vested upon death or disability, if earlier. Unexercised options expire within
ten years from the date of grant.
The Company has elected to follow APB Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock options as permitted under SFAS No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation". In accordance with APB 25, no compensation cost is
recognized by the Company when stock options are granted because the exercise
price of the Company's stock options equals the market price of the underlying
common stock on the date of grant. As required by SFAS 123, disclosures are
presented below for the effect on the net income (loss) and net income (loss)
per share that would result from the use of the fair value based method to
measure compensation cost related to stock option grants. The effects of
applying the provisions of SFAS 123 are not necessarily indicative of future
effects.
<TABLE>
<CAPTION>
Net income 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
As reported $ 1,200,000 $ 1,643,000 $ (534,000)
Pro forma 1,117,000 1,563,000 (569,000)
Net income per share
As reported - basic $ 0.48 $ 0.61 $ (0.20)
Pro forma - basic 0.48 0.58 (0.21)
As reported - diluted 0.46 0.61 (0.20)
Pro forma - diluted 0.43 0.58 (0.21)
</TABLE>
38
<PAGE>
(8) Employee and Director Benefit Plans, Continued
----------------------------------------------
The weighted-average fair value per share of options granted in 1998 and 1997
amounted to $2.45 and $2.74, respectively. There were no options granted in
1999. Fair values were estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
1998 1997
---- ----
Risk-free interest rate 5.77% 6.75%
Dividend yield 4.83 3.90
Volatility 30.00 30.00
Expected life 7 years 7 years
A summary of the Company's stock option activity and related information for the
years ended June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted Weighted
Average Average
Option Exercise Option Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
At June 30, 1997 262,354 $ 9.52 -- $ --
Granted 27,172 10.38 -- --
Became exercisable -- -- 46,268 9.43
Exercised -- -- -- --
Forfeited (32,102) 10.15 (226) 9.25
------- ----- ---- ----
At June 30, 1998 257,424 9.52 46,042 9.43
Granted -- -- -- --
Became exercisable -- -- 50,658 9.53
Exercised -- -- -- --
Forfeited (4,090) 9.25 (818) 9.25
------- ----- ---- ----
At June 30, 1999 253,334 $ 9.53 95,882 $ 9.48
======= ========= ====== ========
</TABLE>
Directors' Deferred Compensation Plan
The Bank has in place two deferred compensation plans for its directors. Under
the first plan directors are to be paid specified amounts during the ten-year
period following the latter of the date that the director becomes 65 years of
age, or five years from adoption of the plan. During 1995, the Bank established
another deferred compensation plan for certain of its directors under which the
directors would be paid specified amounts during the ten-year period following
the latter of the date that the director meets a specified age requirement, or
five years from adoption of the plan. The Bank has purchased life insurance
policies with the Bank named as beneficiary to fund the benefits under both
plans. Total expense related to these plans was approximately $66,000 for 1999,
$84,000 for 1998, and $73,000 for 1997.
<PAGE>
Employment Agreements
The Bank has entered into employment agreements with five executive officers in
order to ensure a stable and competent management base. The agreements provide
for a three-year term, but upon each anniversary, the agreements automatically
extend so that the remaining term shall always be three years. The agreements
provide that the nature of the covered employee's compensation, duties or
benefits cannot be diminished following a change in control of the Company.
These employement agreements are considered contingent liabilities which are not
reflected in the consolidated financial statements.
Severance Plan
In connection with the Conversion, the Bank adopted a Severance Plan for the
benefit of its employees. The Plan provides for severance pay benefits in the
event of a change in control which results in the termination of such employees
or diminished compensation, duties, or benefits within two years of a change in
control. The employees covered would be entitled to a severance benefit of the
greater of (a) the amount equal to two weeks' salary at the existing salary rate
multiplied by the employee's number of complete years of service or (b) the
amount of one month's salary at the employee's salary rate at the time of
termination, subject to a maximum payment equal to two times the employee's
annual salary. This severance plan is considered a contingent liability which is
not reflected in the consolidated financial statements.
39
<PAGE>
(9) Stockholders' Equity
--------------------
Earnings Per Share (EPS)
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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic EPS denominator-Weighted average number of common
shares outstanding 2,515,939 2,686,537 2,665,277
Dilutive share effect arising from stock options and restricted shares 69,624 24,182 --
--------- --------- ---------
Diluted EPS denominator 2,585,563 2,710,719 2,665,277
========= ========= =========
</TABLE>
Common Stock
The Company is authorized to issue 20,000,000 shares of common stock. The common
stock has no par value. As of June 30, 1999 and 1998, there were 2,532,000 and
2,750,800 shares of common stock issued and outstanding, respectively.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred stock. No
shares of preferred stock have been issued or were outstanding at June 30, 1999
or 1998. Such preferred stock may be issued in one or more series with such
rights, preferences, and designations as the Board of Directors of the Parent
may from time to time determine subject to applicable law and regulations. If
and when such shares are issued, holders of such shares may have certain
preferences, powers, and rights (including voting rights) senior to the rights
of the holders of the common stock of the Company. The Board of Directors of the
Parent can (without stockholder approval) issue preferred stock with voting and
conversion rights which could, among other things, adversely affect the voting
power of the holders of the common stock of the Company and assist management in
impeding an unfriendly takeover or attempted change in control of the Company
that some stockholders may consider to be in their best interest but to which
management is opposed. The Company has no current plans to issue preferred
stock.
Capital Adequacy
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 FDIC and the Administrator, Savings Institutions Division, North Carolina
Department of Commerce (the "Administrator").
<PAGE>
The Bank is subject to the capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier 1
capital to total risk-weighted assets and total capital to risk-weighted assets
of 4% and 8%, respectively. Tier 1 capital consists of total shareholders'
equity calculated in accordance with generally accepted accounting principles
less intangible assets, and total capital is comprised of Tier 1 capital plus
certain adjustments, the only one of which applicable to the Bank is the
allowance for possible loan losses. Risk-weighted assets refer to the on- and
off-balance sheet exposures of the Bank adjusted for their relative risk levels
using formulas set forth in FDIC regulations. The Bank is also subject to a FDIC
leverage capital requirement, which calls for a minimum ratio of Tier 1 capital
(as defined above) to quarterly average total assets of 4% and a ratio of 5% to
be "well-capitalized". The Administrator requires a net worth equal to at least
5% of total assets.
As summarized below, at June 30, 1999 and 1998, the Bank was in compliance with
all of the aforementioned capital requirements.
As of June 30, 1999, 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) as set forth in
the following table. There are no events or conditions since the June 30, 1999
that management believes have changed the Bank's category.
40
<PAGE>
(9) Stockholders' Equity (continued)
--------------------------------
<TABLE>
<CAPTION>
Minimum Ratios
--------------
For To Be Well
Capital Amount Ratio Capital Capitalized Under
--------------- -------------- Adequacy Prompt Corrective
1999 1998 1999 1998 Purposes Action Provisions
---- ---- ---- ---- -------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30:
Tier I Capital (to risk-weighted assets): $18,332 $19,949 23.78% 27.12% 4.00% 6.00%
Total Capital - Tier II capital (to risk-
weighted assets): 19,386 20,900 25.15 28.41 10.00
8.00
Leverage - Tier I capital (to average
assets): 18,332 19,949 13.21 14.87 4.00 5.00
</TABLE>
Liquidation Account
At the time of Conversion, the Bank established a liquidation account in an
amount equal to its net worth at June 30, 1995. The liquidation account will be
maintained for the benefit of eligible deposit account holders who continue to
maintain their deposit accounts in the Bank after the Conversion. Only in the
event of a complete liquidation will each eligible deposit account holder be
entitled to receive a liquidation distribtuion from the liquidation account in
the amount of the then current adjusted subaccount balance for deposit accounts
then held before any liquidation distribution may be made to stockholders of the
Parent's common stock. Dividends cannot be paid from this liquidation account.
Dividends
Subject to applicable law, the Boards of Directors of the Bank and the Parent
may each provide for the payment of dividends. Future declarations of cash
dividends, if any, by the Parent may depend upon dividend payments by the Bank
to the Parent. Subject to regulations of the Administrator, the Bank may not
declare or pay a cash dividend on or repurchase any of its common stock if its
stockholders' equity would thereby be reduced below either the aggregate amount
then required for the liquidation account or the minimum 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. The Bank has
obtained the Administrator's approval for each dividend paid by the Bank to the
Parent.
41
<PAGE>
(10) Income Taxes
------------
The components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------
(dollars in thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal $ 559 $ 805 $ 419
State 53 130 61
----- ----- -----
612 935 480
----- ----- -----
Deferred:
Federal 32 (4) (136)
State 9 (1) (27)
----- ----- -----
41 (5) (163)
----- ----- -----
$ 653 $ 930 $ 317
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax (liabilities) are shown below:
<TABLE>
<CAPTION>
June 30
----------------
1999 1998
(dollars in thousands)
<S> <C> <C>
Allowance for loan losses $ 175 $ 219
Unrealized holding losses on securities available-for-sale 233 --
Deferred compensation 199 184
Management recognition plan 151 115
Capital loss carryforward -- 4
Other 48 20
----- -----
Gross deferred tax assets 806 542
Accelerated depreciation (63) (47)
FHLB stock dividends (57) (79)
Deferred loan origination fees (88) (43)
Unrealized holding gains on securities available-for-sale -- (49)
Mortgage servicing rights (63) (24)
Other (1) (8)
----- -----
Gross deferred tax liabilities (272) (250)
----- -----
Net deferred tax asset $ 534 $ 292
===== =====
</TABLE>
<PAGE>
The Company has no valuation allowance at June 30, 1999 or 1998 because it has
sufficient taxable income in the carry back period to support the realizability
of the net deferred tax asset.
42
<PAGE>
(10) Income Taxes (continued)
------------------------
The reconciliation of income taxes (benefit) at statutory tax rates to income
tax expense reported in the statements of income follows:
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Income taxes at the statutory federal tax rate $ 630 $ 875 $ (74)
State income taxes less federal benefit 41 85 23
Nondeductible ESOP compensation -- -- 518
Tax exempt interest (57) (55) (104)
Other 39 25 (46)
----- ----- -----
Total tax expense $ 653 $ 930 $ 317
===== ===== =====
</TABLE>
Retained earnings at June 30, 1999 includes approximately $2,777,000 for which
no provision for federal income tax has been made. This amount represents
allocations of income to bad debt deductions for tax purposes only. Reduction of
such amount for purposes other than tax bad debt losses could create taxable
income in certain remote instances, which will be subject to the then current
corporate income tax rate. Payment of dividends by the Bank out of this bad debt
allocation would create taxable income equal to approximately 164% of the
dividend for the Bank.
43
<PAGE>
(11) Quarterly Financial Data (Unaudited)
------------------------------------
Summarized unaudited quarterly financial data for the year ended June 30, 1999
is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Operating Summary: (dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income $ 2,602 $ 2,481 $ 2,541 $ 2,576
Interest expense 1,313 1,259 1,255 1,285
--------- --------- --------- ---------
Net interest income 1,289 1,222 1,286 1,291
Provision for loan losses 24 3 3 3
--------- --------- --------- ---------
Net interest income after provision for loan losses 1,265 1,219 1,283 1,288
Other income 151 128 90 (13)
Other expenses 783 829 859 1,087
--------- --------- --------- ---------
Income before income tax expense 633 518 514 188
Income taxes 219 181 178 75
--------- --------- --------- ---------
Net income $ 414 $ 337 $ 336 $ 113
========= ========= ========= =========
Per Share Data:
Earnings-basic 0.15 0.14 0.14 0.05
Earnings-diluted 0.15 0.13 0.13 0.05
Cash dividends declared 0.12 0.12 0.12 0.12
Dividend payout 80% 92% 92% 240%
Book value per share 7.90 7.91 7.92 7.73
Selected Average Balances:
Assets $ 130,943 $ 127,928 $ 132,111 $ 137,107
Investment securities 19,116 19,509 21,406 29,324
Loans 108,196 104,521 105,822 101,964
Interest-bearing deposits 83,167 84,992 88,695 92,626
FHLB advances 19,022 15,459 19,571 20,188
Stockholders' equity 21,645 20,995 20,556 20,017
</TABLE>
<PAGE>
Summarized unaudited quarterly financial data for the year ended June 30, 1998
is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Operating Summary: (dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income $ 2,454 $ 2,515 $ 2,599 $ 2,649
Interest expense 1,259 1,293 1,302 1,337
-------- -------- -------- --------
Net interest income 1,195 1,222 1,297 1,312
Provision for loan losses 24 24 24 24
-------- -------- -------- --------
Net interest income after provision for loan losses 1,171 1,198 1,273 1,288
Other income 137 97 207 165
Other expenses 671 730 786 776
-------- -------- -------- --------
Income before income tax expense 637 565 694 677
Income taxes 223 202 247 258
-------- -------- -------- --------
Net income $ 414 $ 363 $ 447 $ 419
======== ======== ======== ========
Per Share Data:
Earnings-basic 0.15 0.13 0.17 0.16
Earnings-diluted 0.15 0.13 0.16 0.15
Cash dividends declared 0.10 0.10 0.10 0.12
Dividend payout 67% 77% 63% 80%
Book value per share 7.56 7.66 7.77 7.85
Selected Average Balances:
Assets $123,947 $128,122 $130,796 $132,621
Investment securities 17,836 18,208 18,141 18,111
Loans 102,242 106,595 109,161 111,220
Interest-bearing deposits 82,229 83,562 85,330 85,780
Advances 17,574 20,326 21,126 21,451
Stockholders' equity 20,777 21,045 21,370 21,657
</TABLE>
44
<PAGE>
(12) Parent Company Financial Data
-----------------------------
Condensed financial information for Piedmont Bancorp, Inc. (Parent Company) is
as follows:
<TABLE>
<CAPTION>
June 30,
--------
1999 1998
------- -------
Condensed Balance Sheet (dollars in thousands)
Assets:
<S> <C> <C>
Cash on deposit with bank subsidiary $ 988 $ 750
Investment in bank subsidiary 18,531 20,794
Other 346 393
------- -------
Total assets $19,865 $21,937
======= =======
Liabilities and stockholders' equity:
Accrued taxes, expenses and other liabilities 304 331
Stockholders' equity 19,561 21,606
------- -------
Total liabilities and stockholders' equity $19,865 $21,937
======= =======
<CAPTION>
June 30,
--------
1999 1998 1997
------- ------- -------
Condensed Statement of Income (dollars in thousands)
<S> <C> <C> <C>
Dividends from bank subsidiary $ 1,243 $ 1,155 $ 8,050
Interest income from bank subsidiary 39 27 153
Interest on loan from bank subsidiary ESOP 62 79 172
Interest on investment securities -- -- 88
------- ------- -------
Total income 1,344 1,261 8,463
Interest on short-term borrowing -- -- 41
Loss on sale of investment securities -- -- 81
Operating expenses 80 70 84
------- ------- -------
Income before income taxes 1,264 1,191 8,257
Income tax expense 8 15 47
------- ------- -------
Income before equity in undistributed net income of subsidiary 1,256 1,176 8,210
Equity in undistributed net income (loss) of bank subsidiary (56) 467 (8,744)
------- ------- -------
Net income (loss) $ 1,200 $ 1,643 $ (534)
======= ======= =======
</TABLE>
45
<PAGE>
(12) Parent Company Financial Data, Continued
----------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
---- ---- ----
Condensed Statement of Cash Flows (dollars in thousands) <C> <C> <C>
<S>
Cash flows from operating activities: $ 1,200 $ 1,643 $ (534)
Net income (loss)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Undistributed loss (earnings) of bank subsidiary 56 (467) 8,744
Loss on sale of available-for-sale securities -- -- 81
Payments on ESOP loan receivable from bank subsidiary 207 213 1,709
Increase in other assets 47 (27) (132)
(7) (2) (105)
Decrease in other liabilities -------- -------- --------
Net cash provided by operating activities 1,503 1,360 9,763
-------- -------- --------
Cash flows from investing activities: -- -- 5,543
Proceeds from sale of available-for-sale securities -------- -------- --------
-- -- 5,543
Net cash provided by investing activities -------- -------- --------
Cash flows from financing activities: (1,265) (1,096) (20,435)
Cash dividends paid to stockholders -------- -------- --------
(1,265) (1,096) (20,435)
Net cash used by financing activities -------- -------- --------
Net increase (decrease) in cash and cash equivalents 238 264 (5,129)
750 486 5,615
Cash and cash equivalents at beginning of year -------- -------- --------
$ 988 $ 750 $ 486
Cash and cash equivalents at end of year ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes 1 24 160
======== ======== ========
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on securities available for sale $ -- $ -- $ 138
net of deferred taxes of $88 in 1997 ======== ======== ========
Unrealized gains on bank subsidiary's securities available-for-sale
net of deferred taxes of $282 in 1999, $104 in 1998 $ (440) $ 161 $ 357
and $230 in 1997 ======== ======== ========
$ (304) $ (324) $ (267)
Dividends declared but unpaid ======== ======== ========
</TABLE>
<PAGE>
(13) Fair Value of Financial Instruments
-----------------------------------
Fair value estimates are made by management at a specific point in time, based
on relevant information about the financial instrument and the market. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument nor are protential taxes and other expenses that would be incurred in
an actual sale considered. Fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions and/or the methodology used could significantly affect the
estimates disclosed. Similarly, the fair values disclosed could vary
significantly from amounts realized in actual transactions.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.
46
<PAGE>
(13) Fair Value of Financial Instruments, Continued
----------------------------------------------
The following table presents the carrying values and estimated fair values of
the Company's financial instruments at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Estimated Fair Carrying Estimated Fair
Value Value Value Value
----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest bearing deposits $ 3,572 $ 3,572 $ 2,644 $ 2,644
Investment securities:
Available-for-sale 25,810 25,810 13,775 13,775
Held-to-maturity 3,362 3,388 3,250 3,331
Net loans 100,717 102,250 106,500 105,840
Federal Home Loan Bank Stock 1,036 1,036 1,152 1,152
Financial liabilities:
Deposits 99,339 101,159 89,840 88,937
Federal Home Loan Bank advances 20,162 20,027 18,000 17,940
</TABLE>
The estimated fair values of net loans and deposits are based on cash flows
discounted at market interest rates. The carrying values of other financial
instruments, including various receivables and payables, approximate fair value.
At June 30, 1999, the Company had outstanding standby letters of credit and
commitments to extend credit. These off-balance sheet financial instruments are
generally exercisable at the market rate prevailing at the date the underlying
transaction will be complete, and, therefore, they are deemed to have no current
fair market value. Refer to note 3.
47
<PAGE>
BOARD OF DIRECTORS
M. Marion Clark, Chairman of the Board
Retired President, Hillsborough Savings Bank, Inc., SSB
Robert B. Nichols, Jr. D. Tyson Clayton
Vice Chairman of the Board President and Chief Executive Officer
Retired Farmer of Company and Bank
Peggy S. Walker James P. Ray
Secretary of Company Owner and Operator
Executive Vice President of Bank Occoneechee Golf Club, Inc.
William L. Rogers Donald W. Pope
Farmer Owner, Pope's Tire Service
Alfred L. Carr Everett H. Kennedy
Retired Merchant Retired Realtor
EXECUTIVE OFFICERS
D. Tyson Clayton Peggy S. Walker
President and Chief Executive Officer Secretary of Company
of Company and Bank Executive Vice President of Bank
Thomas W. Wayne Ted R. Laws
Treasurer of Company Vice President of
Vice President and Chief Financial Officer of Bank Company and Bank
Danny C. Lloyd
Vice President of Company and Bank
- --------------------------------------------------------------------------------
<PAGE>
CORPORATE OFFICE INDEPENDENT CERTIFIED
PIEDMONT BANCORP, INC. PUBLIC ACCOUNTANTS
260 South Churton Street KPMG LLP
Hillsborough, NC 27278-2507 Suite 1200, 150 Fayetteville Street Mall
Phone: (919) 732-2143 Raleigh, NC 27601
Fax: (919) 732-6001
web address: http://www.HSBeBank.com
Email: [email protected]
FORM 10-K
A copy of the the Company's annual
STOCK TRANSFER AGENT report on Form 10-K including the
Registrar and Transfer Company financial statements and financial
Commerce Drive statement schedules as filed with the
Cranford, New Jersey 07016-3572 Securities and Exchange Commis-
Phone: (800) 346-6084 Press "1" sion pursuant to Rule 13a-1 of the
Securities and Exchange Act of
1933 will be furnished without
charge to stockholders upon
SPECIAL LEGAL COUNSEL written request to:
Brooks, Pierce, McLendon, Humphrey
and Leonard, LLP D. Tyson Clayton
Post Office Box 26000 260 South Churton Street
Greensboro, North Carolina 27420 Hillsborough, NC 27278-2507
ANNUAL MEETING
The 1999 Annual Meeting of stockholders of Piedmont Bancorp, Inc. will be held
at 6:30 p.m. on November 18, 1999 at the Corporate Office, 260 South Churton
Street, Hillsborough North Carolina.
<PAGE>
CAPITAL STOCK
The Parent's common stock is traded on the American Stock Exchange under the
symbol "PDB". As of June 30, 1999, there were 2,532,000 shares outstanding and
667 shareholders of record, not including the number of persons or entities
whose stock is held in nominee or street name through various brokerage firms or
banks. Payment of dividends by the Bank subsidiary to the Parent is subject to
various restrictions. Under applicable banking regulations, the Bank may not
declare a cash dividend if the effect thereof would be to reduce its net worth
to an amount less than the minimum required by federal and state banking
regulations. In addition, for a period of five years after the consummation of
the Bank's stock conversion, which occurred on December 7, 1995, the Bank will
be required to obtain prior written approval from the Administrator of the
Savings Institutions Division, North Carolina Department of Commerce, before it
can declare a cash dividend in an amount in excess of one-half the greater of
(i) its net income for the most recent fiscal year or (ii) the average of its
net income after dividends for the most recent fiscal year and not more than two
of the immediately preceding fiscal years, as applicable. As a result of this
limitation, the Bank cannot pay a dividend without the approval of the
Administrator. The Bank has obtained the Administrator's approval for each
dividend paid by the Bank to the Parent.
<TABLE>
<CAPTION>
Quarterly Common Stock Performance and Dividends Declared
For the Year Ended June 30, 1999
Stock Price Dividends Declared, Per Share
-------------------- -----------------------------
High Low
---- ---
<S> <C> <C> <C>
First quarter ended September 30 10 1/8 9 1/4 $ 0.12
Second quarter ended December 31 9 3/4 8 7/8 0.12
Third quarter ended March 31 9 1/4 8 1/2 0.12
Fourth quarter ended June 30 9 8 1/16 0.12
<CAPTION>
Quarterly Common Stock Performance and Dividends Declared
For the Year Ended June 30, 1998
Stock Price Dividends Declared, Per Share
-------------------- -----------------------------
High Low
---- ---
<S> <C> <C> <C>
First quarter ended September 30 11 1/8 10 1/8 $ 0.10
Second quarter ended December 31 11 5/8 10 3/8 0.10
Third quarter ended March 31 11 3/8 10 5/8 0.10
Fourth quarter ended June 30 10 9/16 9 1/2 0.12
49
</TABLE>
Exhibit 23
Consent of Independent Auditors
-------------------------------
The Board of Directors
Piedmont Bancorp, Inc.
We consent to incorporation by reference in the registration statement on Form
S-8 of Piedmont Bancorp, Inc. of our report dated July 19, 1999, relating to the
consolidated balance sheets of Piedmont Bancorp, Inc. as of June 30, 1999 and
1998 and the related consolidated statements of income, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended June 30, 1999, which is incorporated by reference in the June 30,
1999 annual report on Form 10-K of Piedmont Bancorp, Inc.
/s/KPMG LLP
-----------
KPMG LLP
Raleigh, North Carolina
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,706
<INT-BEARING-DEPOSITS> 1,866
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,810
<INVESTMENTS-CARRYING> 3,362
<INVESTMENTS-MARKET> 3,388
<LOANS> 100,717
<ALLOWANCE> 1,054
<TOTAL-ASSETS> 140,089
<DEPOSITS> 99,339
<SHORT-TERM> 20,162
<LIABILITIES-OTHER> 1,027
<LONG-TERM> 0
0
0
<COMMON> 5,843
<OTHER-SE> 13,718
<TOTAL-LIABILITIES-AND-EQUITY> 140,089
<INTEREST-LOAN> 8,835
<INTEREST-INVEST> 1,283
<INTEREST-OTHER> 82
<INTEREST-TOTAL> 10,200
<INTEREST-DEPOSIT> 4,056
<INTEREST-EXPENSE> 5,112
<INTEREST-INCOME-NET> 5,088
<LOAN-LOSSES> 33
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 3,558
<INCOME-PRETAX> 1,853
<INCOME-PRE-EXTRAORDINARY> 1,853
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,200
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 4.09
<LOANS-NON> 973
<LOANS-PAST> 973
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 973
<ALLOWANCE-OPEN> 951
<CHARGE-OFFS> 17
<RECOVERIES> 87
<ALLOWANCE-CLOSE> 1,054
<ALLOWANCE-DOMESTIC> 1,054
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
