UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
December 31, 1998
---------------------
Commission File Number 001-14070
PIEDMONT BANCORP, INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1936232
-------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
260 South Churton Street, Hillsborough, NC 27278
- ------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (919) 732-2143
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
As of February 1, 1998, 2,605,533 shares of the registrant's common
stock, no par value, were outstanding. The registrant has no other classes of
securities outstanding.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1998
(unaudited) *
(in thousands, except shares)
<S> <C> <C>
Assets
Cash $ 609 $ 823
Interest-bearing deposits in other financial institutions 2,316 1,821
Investment securities:
Available-for-sale 14,768 13,775
Held-to-maturity 3,212 3,250
Loans receivable (net of allowance for loan losses of $1,029 and
$951 at December 31, 1998 and June 30, 1998, respectively) 103,700 106,500
Federal Home Loan Bank stock, at cost 1,152 1,152
Premises and equipment 1,698 1,414
Prepaid expenses and other assets 1,789 1,806
--------- ---------
Total assets $ 129,244 $ 130,541
========= =========
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing 3,155 2,844
Savings, NOW and MMDA 35,546 32,800
Certificates of Deposit 53,199 54,196
--------- ---------
91,900 89,840
Advances from the Federal Home Loan Bank 15,709 18,000
Accrued expenses and other liabilities 941 1,095
--------- ---------
Total liabilities 108,550 108,935
--------- ---------
Stockholders' Equity
Preferred stock, no par value, 5,000,000 shares authorized;
none issued -- --
Common stock, no par value, 20,000,000 shares authorized; 2,615,933 and
2,750,800 shares issued and outstanding at September 30, 1998 and June
30, 1998, respectively 7,813 9,121
Unearned ESOP shares (559) (679)
Unamortized deferred compensation (793) (953)
Unallocated restricted stock (87) (61)
Retained earnings, substantially restricted (note 6) 14,230 14,101
Accumulated other comprehensive income 90 77
--------- ---------
Total stockholders' equity 20,694 21,606
--------- ---------
Total liabilities and stockholders' equity $ 129,244 $ 130,541
========= =========
</TABLE>
* Derived from audited financial statements
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
----------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $2,188 $2,245 $4,487 $4,432
Interest on deposits in other financial institutions 21 14 43 30
Interest and dividends on investment securities:
Taxable 224 208 457 411
Non-taxable 48 49 96 97
------ ------ ------ ------
Total interest income 2,481 2,516 5,083 4,970
------ ------ ------ ------
Interest expense:
Interest on deposits 1,029 992 2,071 1,985
Interest on borrowings 230 301 501 567
------ ------ ------ ------
Total interest expense 1,259 1,293 2,572 2,552
------ ------ ------ ------
Net interest income 1,222 1,223 2,511 2,418
Provision for loan losses 3 24 27 48
------ ------ ------ ------
Net interest income after provision for loan losses 1,219 1,199 2,484 2,370
------ ------ ------ ------
Other income:
Customer service and other fees 53 52 104 104
Mortgage loan servicing fees 1 18 7 39
Gain on sale of investment securities 5 -- 5 6
Lower-of-cost or market adjustment on loans held-for-sale -- 3 -- 36
Gain on sale of loans 23 -- 63 --
Stock and mutual fund commissions 20 -- 44 --
Other 26 23 56 48
------ ------ ------ ------
Total other income 128 96 279 233
------ ------ ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(continued)
Three Months Ended Six Months Ended
December 31, December 31,
----------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Other expenses:
Compensation and fringe benefits (note 5) 473 402 930 825
Data and items processing 69 61 156 116
Deposit insurance premiums 13 13 26 26
Occupancy expense 29 27 55 52
Furniture and equipment expense 46 26 89 51
Professional fees 24 56 67 93
Other 175 145 289 238
------ ------ ------ ------
Total other expenses 829 730 1,612 1,401
------ ------ ------ ------
Income before income tax expense 518 565 1,151 1,202
Income tax expense 181 202 400 425
------ ------ ------ ------
Net income $ 337 $ 363 $ 751 $ 777
====== ====== ====== ======
Net income per share - basic (note 7) $ 0.13 $ 0.13 $ 0.28 $ 0.29
====== ====== ====== ======
Net income per share - diluted (note 7) $ 0.13 $ 0.13 $ 0.28 $ 0.29
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
Unearned Unamortized Unallocated
Shares Common ESOP Deferred Restricted
Outstanding Stock Shares Compensation Stock
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 2,750,800 $ 9,143 $ (933) $ (1,269) $ (21)
Net income -- -- -- -- --
Release of ESOP shares -- (24) 135 -- --
Amortization of unearned compensation -- -- -- 123 --
Forfeiture of restricted stock -- -- -- 136 (136)
Allocation of restricted stock -- (11) -- (95) 106
Tax benefit of dividends on restricted stock -- (7) -- -- --
Cash dividends declared, net of
forfeited dividends on restricted stock -- 32 -- -- --
Change in unrealized holding gains (losses),
net of income taxes -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 2,750,800 $ 9,133 $ (798) $ (1,105) $ (51)
========== ========== ========== ========== ==========
Balance at June 30, 1998 2,750,800 $ 9,121 $ (679) $ (953) $ (61)
Net income -- -- -- -- --
Purchase and retirement of common stock (134,867) (1,291) -- -- --
Release of ESOP shares -- (30) 120 -- --
Amortization of unearned compensation -- -- -- 134 --
Forfeiture of restricted stock -- -- -- 26 (26)
Tax benefit of dividends on restricted stock -- 1 -- -- --
Cash dividends declared, net of
forfeited dividends on restricted stock -- 12 -- -- --
Change in unrealized holding gains (losses),
net of income taxes -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 2,615,933 $ 7,813 $ (559) $ (793) $ (87)
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
(continued)
Accumulated
other Total
Retained comprehensive Stockholders'
Earnings income Equity
---------- ---------- ----------
<S> <C> <C> <C>
Balance at June 30, 1997 $ 13,580 $ (84) $ 20,416
Net income 777 -- 777
Release of ESOP shares -- -- 111
Amortization of unearned compensation -- -- 123
Forfeiture of restricted stock -- -- --
Allocation of restricted stock -- -- --
Tax benefit of dividends on restricted stock -- -- (7)
Cash dividends declared, net of
forfeited dividends on restricted stock (529) -- (497)
Change in unrealized holding gains (losses),
net of income taxes -- 136 136
---------- ---------- ----------
Balance at December 31, 1997 $ 13,828 $ 52 $ 21,059
========== ========== ==========
Balance at June 30, 1998 $ 14,101 $ 77 $ 21,606
Net income 751 -- 751
Purchase and retirement of common stock -- -- (1,291)
Release of ESOP shares -- -- 90
Amortization of unearned compensation -- -- 134
Forfeiture of restricted stock -- -- --
Tax benefit of dividends on restricted stock -- -- 1
Cash dividends declared, net of
forfeited dividends on restricted stock (622) -- (610)
Change in unrealized holding gains (losses),
net of income taxes -- 13 13
---------- ---------- ----------
Balance at December 31, 1998 $ 14,230 $ 90 $ 20,694
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
December 31,
1998 1997
-------- --------
<S> <C> <C>
Net income $ 751 $ 777
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 78 49
Net amortization (accretion) 109 63
Provision for loan losses 27 48
Net gain on sale of investments and mortgage-backed securities (5) (6)
Gain on sale of loans (63) --
Loss on sale of fixed assets -- 4
Release of ESOP shares 90 111
Compensation earned under MRP 134 123
Net decrease (increase) in mortgage loans held for sale (5,368) --
Increase in other assets (23) (238)
Increase (decrease) in other liabilities (144) 119
-------- --------
Net cash provided (used in) operating activities (4,414) 1,050
-------- --------
Investing activities:
Net (increase) decrease in loans held for investment 8,158 (7,663)
Principal collected on mortgage-backed securities 759 229
Purchases of investment securities classified as available-for-sale (1,997) (1,250)
Purchases of mortgage-backed securities classified as available-for-sale (1,453) (1,532)
Purchases of collateralized mortgage-backed securities classified as available-for-sale (2,037) --
Proceeds of sales of mortgage-backed-securities classified as available-for-sale 501 1,508
Proceeds from investment securities called by issuer 3,280 10
Purchases of Federal Home Loan Bank stock -- (160)
Purchases of premises and equipment (362) (78)
-------- --------
Net cash provided (used in) investing activities 6,849 (8,936)
-------- --------
Financing activities:
Net increase (decrease) in time deposits (997) (260)
Net increase (decrease) in other deposits 3,057 1,771
Proceeds from borrowings 1,780 11,100
Repayments of borrowings (4,071) (6,000)
Purchase and retirement of common stock (1,291) --
Cash dividends paid to shareholders (632) (515)
-------- --------
Net cash provided (used in) financing activities (2,154) 6,096
-------- --------
Increase (decrease) in cash and cash equivalents 281 (1,790)
Cash and cash equivalents at beginning of period 2,644 4,645
-------- --------
Cash and cash equivalents at end of period $ 2,925 $ 2,855
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Six months ended
December 31,
1998 1997
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information: act 2,925
Cash paid during the period for: diff 2
Interest $ 2,569 $ 2,550
======== ========
Income taxes $ 428 $ 430
======== ========
Supplemental disclosure of noncash transactions:
Unrealized gains on available-for-sale securities,
net of deferred taxes of $58 and $33 $ 90 $ 136
======== ========
Dividends declared but unpaid 314 267
======== ========
Transfer from loans receivable to real estate owned -- 522
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
1) Organization and Operations
Piedmont Bancorp, Inc., ("the Parent") is a bank holding company, formed
in December 1995, which owns all of the outstanding common stock of
Hillsborough Savings Bank, Inc. SSB ("the Bank"). The Bank amended and
restated its charter to effect its conversion from a North Carolina
chartered mutual savings bank to a North Carolina chartered stock savings
bank in December 1995. The Bank is primarily engaged in the business of
obtaining deposits and providing loans to the general public. The
principal activity of the Parent is ownership of the Bank.
2) Basis of Presentation
The consolidated financial statements include the accounts of the Parent
and the Bank, together referred to as "the Company". All significant
intercompany transactions and balances are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the
balance sheets and the reported amounts of income and expenses for the
periods presented. Actual results could differ significantly from those
estimates. In management's opinion, the financial information, which is
unaudited, reflects all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the financial
information as of December 31, 1998 and for the three and six month
periods ended December 31, 1998 and December 31, 1997 in conformity with
generally accepted accounting principles. Operating results for the three
and six month periods ended December 31, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending
June 30, 1999.
3) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash and
interest-bearing deposits in other financial institutions with original
maturities of three months or less to be cash equivalents.
4) Comprehensive Income
On July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS
130 establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains, and losses) in a
full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in-capital in the equity section of a statement of
financial position. In accordance with the provisions of SFAS No. 130,
comparative financial statements presented for earlier periods have been
reclassified to reflect the provisions of the statement.
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
4) Comprehensive Income (continued)
Comprehensive income is the change in equity of an enterprise during the
period from transactions and other events and circumstances from nonowner
sources and, accordingly, includes both net income and amounts referred
to as other comprehensive income. The Company's other comprehensive
income for the six months ended December 31, 1998 consisted of unrealized
gains and losses on certain investments in debt securities. Comprehensive
income for the six months ended December 31, 1998 and 1997 amounted to
$764,000 and $913,000, respectively.
5) Employee and Director Benefit Plans
The Company has an employee stock ownership plan ("ESOP") whereby an
aggregate number of shares amounting to 211,600 were purchased for future
allocation to employees. Contributions to the ESOP are made by the Bank
on a discretionary basis, and are allocated among ESOP participants on
the basis of relative compensation in the year of allocation. Benefits
will vest in full upon five years of service with credit given for years
of service prior to the conversion. The ESOP was funded by a $40,000 cash
contribution from the Bank in December 1995 and a loan from the Parent in
the amount of $2,690,677. The loan is secured by shares of stock
purchased by the ESOP and is not guaranteed by the Bank. Principal and
interest payments on this loan are funded primarily from discretionary
contributions by the Bank. Dividends, if any, paid on shares held by the
ESOP may also be used to reduce the loan. Dividends on unallocated shares
which are used to repay debt are not reported as dividends in the
consolidated financial statements but rather are recorded as an element
of compensation expense. Dividends on allocated shares are credited to
the accounts of the participants and reported as dividends in the
consolidated financial statements. For the six month periods ended
December 31, 1998 and 1997, ESOP-related compensation expense totaled
$90,000 and $111,000, respectively. For the three month periods ended
December 31, 1998 and 1997, ESOP-related compensation expense totaled
$43,000 and $50,000, respectively. Additionally, in December of 1998 and
1997, 18,448 and 19,918 shares, respectively, were released to individual
participant accounts. At December 31, 1998, a total of 167,285 shares
have been released and allocated to participants under the Plan and
44,315 shares remain unallocated.
The Bank has a management recognition plan ("MRP") which serves as a
means of providing existing directors and employees of the Bank with an
ownership interest in the Company. On August 29, 1996, restricted stock
awards of 105,800 shares were made to 38 directors, officers, and
employees of the Bank. The shares awarded under the MRP were issued from
authorized but unissued shares of common stock at no cost to recipients.
The shares granted vest at a rate of 20% each year on the anniversary of
the initial award of shares so that the shares will be completely vested
at the end of five years. During the first six months of fiscal 1998, one
MRP participant forfeited 1,719 restricted, non-vested shares of the
Company's stock and $12,000 of dividends previously paid to the
participants on those restricted shares. The dividends refunded to the
Bank have been reflected as an addition to common stock. The shares
forfeited during the six months ended December 31, 1998, combined with
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
5) Employee and Director Benefit Plans (continued)
shares previously forfeited, leaves 5,778 restricted shares unallocated
under the MRP. Compensation expense of $134,000 and $123,000 was recorded
during the six month periods ended December 31, 1998 and 1997,
respectively. During the three months ended December 31, 1998 and 1997,
compensation expense was recorded of $71,000 and $56,000, respectively.
6) Regulatory Restrictions
At the time of conversion, the Bank established a liquidation account in
an amount equal to its net worth at June 30, 1995. The liquidation
account will be maintained for the benefit of eligible deposit account
holders who continue to maintain their deposit accounts in the Bank after
conversion. Only in the event of a complete liquidation will each
eligible deposit account holder be entitled to receive a liquidation
distribution from the liquidation account in the amount of the current
adjusted subaccount balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stock.
Dividends paid subsequent to the conversion cannot be paid from this
liquidation account.
The Bank may not declare or pay a cash dividend on or repurchase any of
its common stock if its net worth would thereby be reduced below either
the aggregate amount then required for the liquidation account or the
minimum regulatory capital requirements imposed by federal and state
regulations. In addition, for a period of five years after the
conversion, the Bank will be required, under existing North Carolina
regulations, to obtain prior written approval of the Administrator before
it can declare and pay a cash dividend on its capital stock in an amount
in excess of one-half of the greater of (i) its net income for the most
recent fiscal year, or (ii) the average of its net income after dividends
for the most recent fiscal year and not more than two of the immediately
preceding fiscal years, if applicable. As a result of this limitation,
the Bank cannot pay a dividend without the approval of the Administrator.
Management is not aware of any other trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that
are reasonably likely to have a material effect on the Company's
liquidity, capital resources, or other operations.
7) Earnings per Share
Basic net income per share, or basic EPS, is computed by dividing net
income by the weighted average number of common shares outstanding for
the period. ESOP shares that are unallocated and are not committed to be
released are not included in weighted average shares outstanding. Diluted
EPS reflects the potential dilution that could occur if the Company's
dilutive stock options were exercised. The numerator of the basic EPS
computation is the same as the numerator of the diluted EPS computation
for all periods presented. A reconciliation of the denominators of the
basic and diluted EPS computations is as follows:
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic EPS denominator: weighted average
number of common shares outstanding 2,629,153 2,688,037 2,656,599 2,684,302
Dilutive effect of stock options 103 25,627 5,020 25,867
--------- --------- --------- ---------
Diluted EPS denominator 2,629,256 2,713,664 2,661,619 2,710,169
========= ========= ========= =========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Comparison of Results of Operations for the Six Months Ended December 31, 1998
and 1997
Summary
For the six months ended December 31, 1998, the Company recorded net income of
$751,000, or $0.28 basic and diluted earnings per share, compared to net income
of $777,000, or $0.29 basic and diluted earnings per share for the six months
ended December 31, 1997.
Net Interest Income
As shown in the table below, tax-equivalent net interest income increased
$94,000 to $2,571,000 for the six months ended December 31, 1998 from $2,477,000
for the same period in 1997. Net interest income is analyzed on a tax-equivalent
basis to adjust for the nontaxable status of income earned on certain
investments such as municipal bonds.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended December 31,
--------------------------------------
1998
--------------------------------------
Average
Average Yield/
Balance Interest Rate(1)
------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 1,407 $ 43 6.11%
FHLB common stock 1,151 44 7.65
Taxable investment securities 12,893 413 6.41
Tax-exempt investment securities (2) 3,862 156 8.08
Loans receivable 106,359 4,487 8.44
-------- -------- -------
Total interest-earning assets 125,672 5,143 8.18
Non-interest-earning assets 3,764
--------
Total $129,436
========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposit accounts 86,942 2,071 4.73
Borrowings 17,240 501 5.81
-------- -------- -------
Total interest-bearing liabilities 104,182 2,572 4.94
-------- -------
Non-interest-bearing liabilities 3,931
Stockholders' equity 21,323
--------
Total $129,436
========
Net interest income and interest rate spread $ 2,571 3.24%
========
Net interest-earning assets and net interest margin $ 21,490 4.12%
========
Ratio of interest-earning assets to interest-bearing liabilities 120.63%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended December 31,
--------------------------------------
1997
--------------------------------------
Average
Average Yield/
Balance Interest Rate(1)
------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits $ 1,634 $ 30 3.67%
FHLB common stock 991 36 7.27
Taxable investment securities 11,483 375 6.53
Tax-exempt investment securities (2) 3,914 156 7.97
Loans receivable 104,831 4,432 8.46
-------- -------- ------
Total interest-earning assets 122,853 5,029 8.19
Non-interest-earning assets 3,182
--------
Total $126,035
========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposit accounts 83,119 1,985 4.74
Borrowings 18,950 567 5.98
--------
Total interest-bearing liabilities 102,069 2,552 5.00
======== ======
Non-interest-bearing liabilities 3,055
Stockholders' equity 20,911
--------
Total $126,035
========
Net interest income and interest rate spread $ 2,477 3.19%
=======
Net interest-earning assets and net interest margin $ 20,784 4.06%
========
Ratio of interest-earning assets to interest-bearing liabilities 120.36%
</TABLE>
(1) All information presented in this column is annualized with the exception of
the ratio of interest-earning assets to interest bearing liabilities.
(2) Interest earned on tax-exempt investment securities has been adjusted to a
tax-equivalent basis using the applicable federal and state rates of 34% and
7.25%, respectively, and reduced by the nondeductible portion of interest
expense.
<PAGE>
The increase in net interest income is primarily due to a higher level of
interest-earning assets during the six months ended December 31, 1998 as
compared to the same period in 1997. Average taxable investment securities and
average loans receivable increased $1.4 million and $1.5 million, respectively,
over the same six month period last year. The average yield on taxable
investment securities declined 2 basis points while the average yield on loans
receivable declined 12 basis points from the six month period ended December 31,
1997 to the same period in 1998. Interest rate spread (on a tax-equivalent
basis) increased to 3.24% for the six months ended December 31, 1998 from 3.19%
for the same six month period in 1997 primarily due to a decline in the average
yield on total interest bearing liabilities. Net interest margin increased to
4.12% for the six months ended December 31, 1998 from 4.06% for the six months
ended December 31, 1997.
Provision for Loan Losses
The provision for loan losses for the six months ended December 31, 1998 totaled
$27,000 compared to $48,000 for the same period in 1997. The decline between the
two six month periods was based on the Company's favorable charge off experience
over the past eight quarters and the decline in net loans receivable from fiscal
1998 to 1999. The provision for loan losses is based on management's evaluation
of the loan portfolio as discussed under "Financial Condition".
Other Income
Other income totaled $279,000 for the six months ended December 31, 1998
compared to $233,000 for the same period in 1997. Mortgage loan servicing fees
declined $32,000 from the first three months of fiscal 1998 to the same period
in 1999 due to faster prepayments on the underlying mortgages in 1998 as
compared to 1997. During the first six months of fiscal 1998 there was a
positive lower-of-cost or market adjustment of $36,000 that was not present
during the first six months of fiscal 1999. The Company recorded a $63,000 gain
on sale of loans during the first six months of fiscal 1999. There were no such
loan sales during the first six months of fiscal 1998. The Company collected
stock and mutual fund commissions of $44,000 during the first six months of
fiscal 1999. There were no commissions in the first six months of fiscal 1998
since the full service and discount brokerage subsidiary of the Bank did not
begin operations until the quarter ended March 31, 1998.
Other Expenses
Other expenses totaled $1,612,000 for the six months ended December 31, 1998
compared to $1,401,000 for the same period in 1997. Compensation expense
increased $105,000 from the quarter ended December 31, 1997 to the same period
in 1998 due to the hiring of several employees during the middle of the second
quarter as well as others added in the third and fourth quarters of fiscal year
1998. Some of the increase in compensation expense is due to normal cost of
living and merit increases for employees. Data and items processing expense
increased $40,000 for the six months ended December 31, 1998 to the same period
in 1997 due to the Bank's conversion to a new data processor in the third
quarter of fiscal 1998. The Bank's new processor provides a higher level of
service and technology compared to the Bank's previous processor. Furniture and
equipment expense increased $38,000 from the quarter ended December 31, 1997 to
the same period in 1998 due to higher depreciation expense associated with the
purchase of computer equipment in the third quarter of fiscal 1998. Other
"other" expense increased $51,000 from the six months ended December 31, 1997 to
the same period in 1998 due primarily to increases in savings forms, postage,
and checking account expenses in the six months ended December 31, 1998.
Income Tax Expense
Income tax expense was $400,000 for the six months ended December 31, 1998
resulting in an effective rate of 34.75% compared to $425,000 or 35.36% for the
same period in 1997.
<PAGE>
Comparison of Results of Operations for the Three Months Ended December 31, 1998
and 1997
Summary
For the quarter ended December 31, 1998, the Company recorded net income of
$337,000, or $0.13 per share, compared to $363,000, or $0.13 per share for the
same quarter last year.
Net Interest Income
As shown in the table below, there was no change in tax-equivalent net interest
income between the quarter ended December 31, 1998 and the same period in 1997.
Net interest income is analyzed on a tax-equivalent basis to adjust for the
nontaxable status of income earned on certain investments such as municipal
bonds.
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------
1998
-----------------------------------
Average
Average Yield/
Balance Interest Rate(1)
-------- -------- ------
(dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits $ 1,376 $ 21 6.10%
FHLB common stock 1,152 21 7.29
Taxable investment securities 13,121 203 6.19
Tax-exempt investment securities (2) 3,860 78 8.08
Loans receivable 104,521 2,188 8.37
-------- -------- ------
Total interest-earning assets 124,030 2,511 8.10
-------- ------
Non-interest-earning assets 3,898
--------
Total $127,928
========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposit accounts 87,829 1,029 4.65
Borrowings 15,459 230 5.95
-------- -------- ------
Total interest-bearing liabilities 103,288 1,259 4.88
-------- ------
Non-interest-bearing liabilities 3,639
Stockholders' equity 21,001
--------
Total $127,928
----====
Net interest income and interest rate spread $ 1,252 3.22%
========
Net interest-earning assets and net interest margin $ 20,742 4.06%
========
Ratio of interest-earning assets to interest-bearing liabilities 120.08%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------
1998
-----------------------------------
Average
Average Yield/
Balance Interest Rate(1)
-------- -------- ------
(dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits $ 1,678 $ 14 3.34%
FHLB common stock 1,044 19 7.28
Taxable investment securities 11,557 189 6.54
Tax-exempt investment securities (2) 3,929 78 7.94
Loans receivable 106,595 2,245 8.42
-------- -------- ------
Total interest-earning assets 124,803 2,545 8.16
-------- ------
Non-interest-earning assets 3,319
--------
Total $128,122
========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposit accounts 83,562 992 4.71
Borrowings 20,326 301 5.92
-------- -------- ------
Total interest-bearing liabilities 103,888 1,293 4.98
-------- ------
Non-interest-bearing liabilities 3,189
Stockholders' equity 21,045
--------
Total $128,122
========
Net interest income and interest rate spread $ 1,252 3.18%
========
Net interest-earning assets and net interest margin $ 20,915 4.04%
========
Ratio of interest-earning assets to interest-bearing liabilities 120.13%
</TABLE>
(1) All information presented in this column is annualized with the exception of
the ratio of interest-earning assets to interest bearing liabilities.
(2) Interest earned on tax-exempt investment securities has been adjusted to a
tax-equivalent basis using the applicable federal and state rates of 34% and
7.25%, respectively, and reduced by the nondeductible portion of interest
expense.
<PAGE>
The average yield on total interest earning assets declined 6 basis points from
the three months ended December 31, 1997 to the same period in 1998. This
decline was caused by a shift in average interest earning assets from loans
receivable to taxable investment securities. Average loans receivable decreased
$2.1 million and average taxable investment securities increased $1.6 million
from the three months ended December 31, 1997 to the same period in 1998. Some
of the decline in the average yield on total interest earning assets was caused
by 5 and 35 basis point declines in the average yield on loans receivable and
taxable investment securities, respectively, from the three months ended
December 31, 1997 to the same three month period in 1998. The average rate on
total interest bearing liabilities declined 10 basis points from the three
months ended December 31, 1997 to the same three month period in 1998. Most of
this decline was caused by a shift from borrowings to deposits from the three
months ended December 31, 1997 to the same three month period in 1998. Interest
rate spread (on a tax-equivalent basis) increased to 3.22% for the quarter
December 31, 1998 from 3.18% for the same quarter in 1997, while the net
interest margin increased to 4.06% from 4.04% during the same period of time.
Provision for Loan Losses
The provision for loan losses for the three months ended December 31, 1998
totaled $3,000 compared to $24,000 for the same period in 1997. The decline
between the two three month periods was based on the Company's favorable charge
off experience over the past eight quarters and the decline in net loans
receivable from fiscal 1998 to 1999. The provision for loan losses is based on
management's evaluation of the loan portfolio as discussed under "Financial
Condition".
Other Income
Other income totaled $128,000 for the quarter ended December 31, 1998 compared
to $96,000 for the same period in 1996. The overall increase in other income was
caused by increases and decreases in various income accounts. Mortgage loan
servicing fees declined $17,000 from the three months ended December 31, 1997 to
the same period in 1998 due to faster prepayments on the underlying mortgages in
1998 as compared to 1997. Gain on sale of investments increased $5,000 from the
three months ended December 31, 1997 to the same period in 1998 because there
were no sales of investment securities in the three months ended December 31,
1997. The Company recorded a $23,000 gain on sale of loans during the three
months ended December 31, 1998. There were no such loan sales during the three
months ended December 31, 1997. The Company collected stock and mutual fund
commissions of $20,000 during the first three months of fiscal 1999. There were
no commissions in the three months ended December 31, 1997 since the full
service and discount brokerage subsidiary of the Bank did not begin operations
until the quarter ended March 31, 1998.
Other Expenses
Other expenses totaled $829,000 for the three months ended December 31, 1998
compared to $730,000 for the same period in 1997. Compensation expense increased
$71,000 from the quarter ended December 31, 1997 to the same period in 1998 due
to the hiring of several employees during the middle of the second quarter as
well as others added in the third and fourth quarters of fiscal year 1998. Some
of the increase in compensation expense is due to normal cost of living and
merit increases for employees. Data and items processing expense increased
$8,000 from the quarter ended December 31, 1997 to the same period in 1998 due
to the Bank's conversion to a new data processor in the third quarter of fiscal
1998. The Bank's new processor provides a higher level of service and technology
compared to the Bank's previous processor. Furniture and equipment expense
<PAGE>
increased $20,000 from the quarter ended December 31, 1997 to the same period in
1998 due to higher depreciation expense associated with the purchase and
depreciation of computer equipment in the third quarter of fiscal 1998. Other
"other" expense increased $30,000 from the quarter ended December 31, 1997 to
the same period in 1998 due primarily to increases in postage, Directors and
Officers insurance, employee training and checking account expenses in the three
months ended December 31, 1998.
Income Tax Expense
Income tax expense was $181,000 for the quarter ended December 31, 1998
resulting in an effective rate of 34.9% compared to $202,000 or 35.8% for the
same period in 1997.
Financial Condition
CHANGES IN FINANCIAL CONDITION
Total assets decreased $1.3 million or .99% to $129.2 million at December 31,
1998 from $130.5 million at June 30, 1998. A decrease in net loans of $2.8
million, offset in part by increases in investment securities of $955,000 and
interest-bearing deposits in other financial institutions of $495,000,
contributed to the majority of the decrease in assets from June 30, 1998 to
December 31, 1998. Total liabilities decreased $385,000 to $108.6 million at
December 31, 1998 from $108.9 million at June 30, 1998. An increase of $2.1
million in deposits and a decrease of 2.3 million in Advances from the Federal
Home Loan Bank made up the majority of the change in liabilities during the
first six months of fiscal 1999.
Total stockholders' equity decreased $912,000 to $20.7 million at December 31,
1998 from $21.6 million at June 30, 1998. Under a previously announced stock
repurchase plan, the Company repurchased and retired 134,867 shares of its
common stock during the six months ended December 31, 1998. The average cost of
the shares repurchased was $9.57 per share for a total cost of $1,291,000. The
implementation of the share repurchase plan and cash dividends declared were the
primary factors contributing to the decline in stockholders' equity during the
six months ended December 31, 1998. Mitigating these decreases was net income of
$751,000, and release of ESOP shares, amortization of unearned compensation, and
a change in unrealized holding gains on investment securities of $90,000,
$134,000 and $13,000, respectively.
ASSET QUALITY
Nonperforming Assets and Risk Assets
Nonperforming assets include nonaccrual loans, restructured loans and real
estate owned. The table on the following page presents information on
nonperforming assets and loans contractually past due but still accruing at
December 31, 1998 and June 30, 1998.
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30
1998 1998
-------- ---------
(in thousands)
<S> <C> <C>
Total nonaccrual loans $ 740 $ 928
Total restructured loans -- --
-------- ---------
Total nonperforming loans 740 928
Real estate owned -- --
-------- ---------
Total nonperforming assets 740 928
Accruing loans, delinquent 90 days or more -- --
-------- ---------
Total risk assets $ 740 $ 928
======== ========
Nonperforming loans to total loans 0.71% 0.87%
Nonperforming assets to total assets 0.57% 0.71%
Risk assets to total assets 0.57% 0.71%
Allowance for loan losses to:
Total nonperforming assets 1.39x 1.02x
Total risk assets 1.39x 1.02x
Total assets $129,244 $130,541
Total loans, net 103,700 106,500
Allowance for loan losses 1,029 951
</TABLE>
There were no significant changes in nonperforming assets outstanding from June
30, 1998 to December 31, 1998. Management has reviewed the collateral for
nonperforming assets and believes that collateral values related to the loans
exceeds such balances. The recorded investment in loans that are considered to
be impaired under SFAS No. 114 (Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan") were $118,000 at both
December 31, 1998 and June 30, 1998. There was no related allowance for credit
losses associated with these loans as determined in accordance with SFAS No.
114. Management has included this review among the factors considered in the
evaluation of the allowance for possible loan losses.
<PAGE>
Provision and Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for
the three and six months ended December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at the beginning of period $ 1,005 $ 854 $ 951 $ 796
Provision for loan losses 3 24 27 48
Recoveries 29 5 59 39
Loans charged off (8) (4) (8) (4)
------- ------- ------- -------
Balance at end of period $ 1,029 $ 879 $ 1,029 $ 879
======= ======= ======= =======
</TABLE>
At December 31, 1998, the allowance for loan losses was 0.98% of total loans,
compared to 0.89% of total loans at June 30, 1998 and 0.81% of total loans at
December 31, 1997.
The levels of the provision and allowance for loan losses are based on
management's ongoing evaluation of the risk characteristics of the loan
portfolio considering current economic conditions, financial condition of
borrowers, growth and composition of the loan portfolio, collateral values, the
relationship of the allowance for loan losses to outstanding loans, the level of
nonperforming loans that have been identified as potential problems, past and
expected loss experience, results of the most recent regulatory examinations,
and other factors deemed relevant by management. Management actively maintains a
current loan watch list and knows of no other loans which are (1) material and
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (2) represent material credits about which management has serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. Based on management's evaluation of the loan portfolio, as described
above, the Company recorded a $3,000 provision for loan losses for the three
months ended December 31, 1998 compared to a $24,000 provision for the same
period in 1997. The decline between the two three month periods was based on the
Company's favorable charge off experience over the past eight quarters and the
decline in net loans receivable from fiscal 1998 to 1999.
YEAR 2000 ISSUE
The Company recognizes and is addressing the potentially severe implications of
the "Year 2000 Issue." The "Year 2000 Issue" is a general term used to describe
the various problems that may result from the improper processing of dates and
date-sensitive calculations as the Year 2000 approaches. This issue is caused by
the fact that many of the world's existing computer programs use only two digits
to identify the year in the date field of a program. These programs were
designed and developed without considering the impact of the upcoming change in
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
<PAGE>
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 a
cross-section of the Company's management team and employees, in November of
1997. This Committee is leading the Company's Year 2000 efforts to ensure that
the Company is properly prepared for the Year 2000. The Company's Board of
Directors has approved a plan submitted by the Year 2000 Committee that was
developed in accordance with guidelines set forth by the Federal Financial
Institutions Examination Council. This plan, which is described in further
detail below, has five primary phases related to internal Year 2000 compliance:
1. Awareness - this phase is ongoing and is designed to inform the
Company's Board of Directors (the "Board") and Executive management
("Management"), employees, customers and vendors of the impact of the
Year 2000 Issue. The awareness phase is an ongoing one that is designed
to provide ongoing information about the Year 2000 issue to the Board
of Directors, Management, employees and customers. Since December of
1997 the Board has been apprised of the Company's efforts at their
regular meetings. In addition, all customers were updated with respect
to the Company's Year 2000 efforts through a mailing sent in June of
1998.
2. Assessment - during this phase an inventory was conducted of all known
Company processes that could reasonably be expected to be impacted by
the Year 2000 Issue and their related vendors, if applicable. This
inventory of processes and vendors included not only typical computer
processes such as the Company's transaction applications systems, but
all known processes that could be impacted by micro-chip malfunctions.
These include but are not limited to the Company's alarm system, phone
system, check ordering process, and ATM network. The Company
inventoried all the systems listed above in December of 1997 and
performed an initial assessment of potential risks from either under or
nonperformance arising from incorrect processing and usage of dates
after December 31, 1999. At this time the Company had already made the
decision to convert in February of 1998 to a new computer service
provider for processing all loan, deposit and general ledger
transactions. In conjunction with the conversion, the Company purchased
and installed new computers, printers and related software in January
of 1998. New hardware and software for a local area network was also
purchased and installed in January of 1998. The total cost of the
hardware and software purchased by the Company in fiscal 1998 totaled
$296,000 and was capitalized. Most of the hardware and software
purchased by the Company either is Year 2000 compliant or will be with
minor modifications or upgrades. The assessment phase is complete,
although it is updated periodically as necessary.
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
<PAGE>
their Year 2000 compliance efforts, and analyzed their responses. The
responses from third party vendors generally include an overview of
renovation efforts to their systems that the Company utilizes. In
addition, some third party software vendors have notified the Company
that upgrades of their software will be necessary to ensure reliable
and accurate Year 2000 processing. One third party computer vendor (the
"primary service provider") processes, either directly, or indirectly
through other computer vendors, all loan, deposit and general ledger
transactions. The primary service provider has notified the Company
that the renovation and replacement of their systems is complete and
has been tested for Year 2000 compliance.
4. Testing - The next phase for the Company under the plan is to complete
a comprehensive testing of all known processes. As noted in the
renovation and/or replacement phase above, the Company's primary
service provider has already tested their system for Year 2000
compliance. The next step, which is currently in process, is to test
the Company's network and core service provider software applications
and hardware. A first test of the company's core service provider
software applications and hardware was performed on September 20, 1998
using a future date of January 3, 2000. The Company has reviewed the
results of this test, and this review indicated that the system
performed reliably and accurately when using the future date of January
3, 2000. The Company plans to perform follow up tests with its core
service provider in the third and fourth quarters of fiscal 1999 using
future dates of February 29, 2000 and March 1, 2000. Based upon the
results of this test the Company may or may not perform additional
testing with its core service provider. The testing of the remainder of
the Company's processes was substantially complete as of December 31,
1998 with follow up testing to be performed as needed in calendar year
1999.
5. Implementation - this phase will occur when Year 2000 processing
commences. 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 significant part of the
implementation phase will occur after December 31, 1999. The Company is
in the process of developing contingency plans for processes that do
not process information reliably and accurately after December 31,
1999. The contingency plans for all systems should be substantially
complete by the end of the fourth quarter of fiscal 1999 in accordance
with regulatory guidelines.
The Company is also in the process of assessing 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 has Year 2000
concerns about will be counseled on the Year 2000 issue and urged to take
corrective action. Since the majority of the Company's loans are to individuals
and secured by one to four family residences this step is not expected to
require a significant amount of time or resources.
Excluding the hardware and software purchases noted above, the Company expensed
$6,000 on Year 2000 costs for the quarter ended December 31, 1998, and $12,000
for the six months ended December 31, 1998. There were no Year 2000 costs for
the quarter and six months ended December 31, 1997. Based on an analysis of
<PAGE>
projected expenses performed in the second quarter of fiscal 1999, the total
cost of the Year 2000 project is currently estimated at $50,000. Funding of the
Year 2000 project costs will come from normal operating cash flow, however the
expenses associated with the Year 2000 Issue will directly reduce otherwise
reported net income for the Company.
Management of the Company believes that the potential effects on the Company's
internal operations of the Year 2000 Issue can and will be addressed prior to
the Year 2000. However, if required modifications or conversions are not made or
are not completed on a timely basis prior to the Year 2000, the Year 2000 Issue
could disrupt normal business operations. The most reasonably likely worst case
Year 2000 scenarios foreseeable at this time would include the Company
temporarily not being able to process, in some combination, various types of
customer transactions. This could affect the ability of the Company to, among
other things, originate new loans, post loan payments, accept deposits or allow
immediate withdrawals, and, depending on the amount of time such a scenario
lasted, could have a material adverse effect on the Company. Because of the
serious implications of these scenarios, the primary emphasis of the Company's
Year 2000 efforts is to correct, with complete replacement if necessary, any
systems or processes whose Year 2000 test results are not satisfactory prior to
the Year 2000. Nevertheless, should one of the most reasonably likely worst case
scenarios occur in the Year 2000, the Company, as noted above, is in the process
of formalizing a contingency plan that would allow for limited transactions,
including the ability to make certain deposit withdrawals, until the Year 2000
problems are fixed. The costs of the Year 2000 project and the date on which the
Company plans to complete Year 2000 compliance are based on management's best
estimates, which were derived using numerous assumptions of future events such
as the availability of certain resources (including internal and external
resources), third party vendor plans and other factors. However, there can be no
guarantee that these estimates will be achieved at the cost disclosed or within
the timeframe indicated, and actual results could differ materially from these
plans. Factors that might affect the timely and efficient completion of the
Company's Year 2000 project include, but are not limited to, vendors' abilities
to adequately correct or convert software and the effect on the Company's
ability to test its systems, the availability and cost of personnel trained in
the Year 2000 area, the ability to identify and correct all relevant computer
programs and similar uncertainties.
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Liquidity is the ability to raise funds or convert assets to cash in order to
meet customer and operating needs. The Company's primary sources of liquidity
are its portfolio of investment securities available-for-sale, principal and
interest payments on loans and mortgage-backed securities, interest income from
investment securities, maturities of investment securities held-to-maturity,
increases in deposits, and advances from the FHLB of Atlanta. At December 31,
1998, the Bank had $14.3 million of credit available from the FHLB which would
be collateralized by a blanket lien on qualifying loans secured by first
mortgages on 1-4 family residences. Additional amounts may be made available
under this blanket floating lien or by using investment securities as
collateral. Management believes that it will have sufficient funds available to
meet its anticipated future loan commitments as well as other liquidity needs.
<PAGE>
Interest rate risk is the sensitivity of interest income and interest expense to
changes in interest rates. Management structures the Company's assets and
liabilities in an attempt to protect net interest income from large fluctuations
associated with changes in interest rates. At December 31, 1998, the Company had
a cumulative one year liability-sensitive gap position of $18.7 million or
14.95% of interest-earning assets. An asset-sensitive gap position generally
indicates that net interest income would decrease in a declining rate
environment and increase in a rising rate environment. The Company had a
cumulative one year liability-sensitive gap position of $11.8 million or 7.09%
of interest-earning assets at June 30, 1998. The Company will continue to
actively manage its balance sheet in order protect net interest income from
changes in interest rates.
It should be noted that these measures reflect the interest-sensitivity of the
balance sheet as of a specific date and are not necessarily indicative of future
results. Because of this and other limitations, management also monitors
interest rate sensitivity through the use of a model which estimates the change
in net portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest sensitivity measures as of
December 31, 1998, management believes that its interest rate risk is at an
acceptable level.
CAPITAL RESOURCES
The Parent is regulated by the Board of Governors of the Federal Reserve System
("FRB") and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the Administrator,
Savings Institutions Division, North Carolina Department of Commerce, (the
"Administrator"). The Bank is subject to the capital requirements of the FDIC
and the Administrator. The FDIC requires the Bank to maintain minimum ratios of
Tier I capital to total risk-weighted assets and total capital to risk-weighted
assets of 4% and 8%, respectively. Tier I capital consists of total
stockholders' equity calculated in accordance with generally accepted accounting
principles less intangible assets, and total capital is comprised of Tier I
capital plus certain adjustments, the only one applicable to the Bank is the
allowance for possible loan losses. Risk-weighted assets refer to the on- and
off-balance sheet exposures of the Bank adjusted for their relative risk levels
using formulas set forth in FDIC regulations. The Bank is also subject to a FDIC
leverage capital requirement, which calls for a minimum ratio of Tier I capital
(as defined above) to quarterly average total assets of 3% and a ratio of 5% to
be "well-capitalized". The Administrator requires a net worth equal to at least
5% of total assets. At December 31, 1998, the Bank was in compliance with all of
the aforementioned capital requirements.
As of December 31, 1998, the Bank was considered "well-capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"well-capitalized", the Bank must meet minimum ratios for total risk-based, and
Tier I leverage (the ratio of Tier I capital to average assets) of 10% and 5%,
respectively. There have been no events or conditions that management believes
have changed the Bank's category.
<PAGE>
CURRENT ACCOUNTING ISSUES
The Company prepares its consolidated financial statements and related
disclosures in conformity with standards established by, among others, the
Financial Accounting Standards Board (the "FASB"). Because the information
needed by users of financial reports is dynamic, the FASB frequently has new
rules and proposed new rules for companies to apply in reporting their
activities. The following discussion addresses such changes as of December 31,
1998 that will affect the Company's future reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for the way that public businesses
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1997 and in the initial
year of application, comparative information for earlier years is to be
restated. The Company plans to adopt SFAS 131 in fiscal year 1999 without any
significant impact on its consolidated financial statements because the Company
operates as one segment.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 ("SFAS 132"), "Employers Disclosures about Pensions and Other
Postretirement Benefits". This statement standardizes the disclosure
requirements of pensions and other postretirement benefits. This statement does
not change any measurement or recognition provisions, and thus will not
materially impact the Company. This statement is effective for fiscal years
beginning after December 15, 1997. The Company plans to adopt SFAS 132 in fiscal
year 1999 without any significant impact on its consolidated financial
statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The Company
plans to adopt SFAS 133 in fiscal year 2000 without any impact on its
consolidated financial statements as the Company does not have any derivative
financial instruments and is not involved in any hedging activities.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in
market price and interest rates. This risk of loss can be reflected in
diminished current market values and/or reduced potential net interest income in
future periods.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. The structure of the Company's loan
and deposit portfolios is such that a significant decline in interest rates may
adversely impact net market values and net interest income. The Company does not
maintain a trading account nor is the Company subject to currency exchange risk
or commodity price risk. Interest rate risk is monitored as part of the
Company's asset/liability management function, which is discussed above in Item
2 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Liquidity and Interest Rate Risk Management".
Management does not believe there has been any significant change in the overall
analysis of financial instruments considered market risk sensitive, as measured
by the factors of contractual maturities, average interest rates and estimated
fair values, since the analysis prepared and presented in conjunction with the
Form 10-K Annual report for the fiscal year ended June 30, 1998.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized
Date: February 9, 1998 By: /s/ D. Tyson Clayton
--------------------
President
Date: February 9, 1998 By: /s/ Thomas W. Wayne
-------------------
Vice President and principal
financial officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 609 0
<INT-BEARING-DEPOSITS> 2316 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 14768 0
<INVESTMENTS-CARRYING> 3212 0
<INVESTMENTS-MARKET> 3331 0
<LOANS> 103700 0
<ALLOWANCE> 1029 0
<TOTAL-ASSETS> 129244 0
<DEPOSITS> 91900 0
<SHORT-TERM> 15709 0
<LIABILITIES-OTHER> 941 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 7813 0
<OTHER-SE> 12881 0
<TOTAL-LIABILITIES-AND-EQUITY> 129244 0
<INTEREST-LOAN> 2188 4487
<INTEREST-INVEST> 272 553
<INTEREST-OTHER> 21 43
<INTEREST-TOTAL> 2481 5063
<INTEREST-DEPOSIT> 1029 2071
<INTEREST-EXPENSE> 1259 2572
<INTEREST-INCOME-NET> 1222 2511
<LOAN-LOSSES> 3 27
<SECURITIES-GAINS> 5 5
<EXPENSE-OTHER> 829 1612
<INCOME-PRETAX> 518 1151
<INCOME-PRE-EXTRAORDINARY> 518 1151
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 337 751
<EPS-PRIMARY> 0.13 0.28
<EPS-DILUTED> 0.13 0.28
<YIELD-ACTUAL> 4.06 4.12
<LOANS-NON> 740 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1005 0
<CHARGE-OFFS> 29 59
<RECOVERIES> 8 8
<ALLOWANCE-CLOSE> 1029 1029
<ALLOWANCE-DOMESTIC> 1029 1029
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
