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, 1999
---------------------
Commission File Number 001-14070
PIEDMONT BANCORP, INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1936232
-------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
260 South Churton Street, Hillsborough, NC 27278
- ------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (919) 732-2143
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
As of February 4, 2000 2,502,700 shares of the registrant's common stock, no par
value, were outstanding. The registrant has no other classes of securities
outstanding.
This Form 10-Q report has 27 pages.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1999 1999
(unaudited) *
Assets (in thousands, except shares)
<S> <C> <C>
Cash $ 2,917 $ 1,706
Interest-bearing deposits in other financial institutions 1,895 1,866
Investment securities:
Available-for-sale 24,400 25,810
Held-to-maturity 3,333 3,362
Loans receivable (net of allowance for loan losses of $1,124 and
$1,054 at December 31, 1999 and June 30, 1999, respectively) 108,552 100,717
Federal Home Loan Bank stock, at cost 1,036 1,036
Premises and equipment 3,225 3,213
Prepaid expenses and other assets 2,756 2,379
----------- -----------
Total assets $ 148,114 $ 140,089
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing 4,180 3,390
Certificates of Deposit 54,393 56,034
----------- -----------
109,480 99,339
Advances from the Federal Home Loan Bank 18,551 20,162
Accrued expenses and other liabilities 1,086 1,027
----------- -----------
Total liabilities 129,117 120,528
----------- -----------
Stockholders' Equity:
Preferred stock, no par value, 5,000,000 shares authorized;
none issued -- --
Common stock, no par value, 20,000,000 shares authorized; 2,502,700 and 2,687,633
shares issued and outstanding at September 30 and June 30, 1999 , respectively 6,745 7,035
Unearned ESOP shares (340) (450)
Unamortized deferred compensation (510) (655)
Unallocated restricted stock (95) (87)
Retained earnings, substantially restricted 13,909 14,081
Accumulated other comprehensive income (loss) (712) (363)
----------- -----------
Total stockholders' equity 18,997 19,561
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity $ 148,114 $ 140,089
=========== ===========
</TABLE>
* Derived from audited financial statements
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended Six months ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 2,230 $ 2,188 $ 4,384 $ 4,487
Interest on deposits in other financial institutions 28 21 42 43
Interest and dividends on investment securities:
Taxable 403 224 802 457
Non-taxable 56 48 112 96
------- ------- ------- -------
Total interest income 2,717 2,481 5,340 5,083
------- ------- ------- -------
Interest expense:
Interest on deposits 1,181 1,029 2,272 2,071
Interest on borrowings 253 230 514 501
------- ------- ------- -------
Total interest expense 1,434 1,259 2,786 2,572
------- ------- ------- -------
Net interest income 1,283 1,222 2,554 2,511
Provision for loan losses 6 3 9 27
------- ------- ------- -------
Net interest income after provision for loan losses 1,277 1,219 2,545 2,484
------- ------- ------- -------
Other income:
Customer service and other fees 59 53 127 104
Mortgage loan servicing fees 35 1 67 7
Gain on sale of investment securities -- 5 8 5
Lower-of-cost or market adjustment on loans held-for-sale (47) -- 24 --
Gain (loss) on sale of loans 13 23 (140) 63
Stock and mutual fund commissions 14 20 28 44
Other 34 26 67 56
------- ------- ------- -------
Total other income 108 128 181 279
------- ------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other expenses:
Compensation and fringe benefits (note 4) 584 473 1,149 930
Data and items processing 126 69 240 156
Deposit insurance premiums 14 13 27 26
Occupancy expense 58 29 114 55
Furniture and equipment expense 70 46 136 89
Professional fees 90 24 113 67
Other 206 175 364 289
------- ------- ------- -------
Total other expenses 1,148 829 2,143 1,612
------- ------- ------- -------
Income before income tax expense 237 518 583 1,151
Income tax expense 73 181 166 400
------- ------- ------- -------
Net income $ 164 $ 337 $ 417 $ 751
======= ======= ======= =======
Net income per share - basic (note 6) $ 0.07 $ 0.13 $ 0.17 $ 0.29
======= ======= ======= =======
Net income per share - diluted (note 6) $ 0.07 $ 0.13 $ 0.17 $ 0.28
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIEDMONT BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
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)
Net income -- -- -- -- --
Other comprehensive income - change in
unrealized holding gains (losses),net of
income taxes
Total comprehensive 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 -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 2,615,933 $ 7,813 $ (559) $ (793) $ (87)
========== ========== ========== ========== ==========
Balance at June 30, 1999 2,532,000 $ 7,035 $ (450) $ (655) $ (87)
Net income -- -- -- -- --
Other comprehensive income - change in
unrealized holding gains (losses),net of
income taxes
Total comprehensive income
Purchase and retirement of common stock (29,300) (259) -- -- --
Release of ESOP shares -- (39) 110 -- --
Amortization of unearned compensation -- -- -- 137 --
Forfeiture of restricted stock -- -- -- 8 (8)
Tax benefit of dividends on restricted stock -- 6 -- -- --
Cash dividends declared, net of
forfeited dividends on restricted stock -- 2 -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 2,502,700 $ 6,745 $ (340) $ (510) $ (95)
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
other Total
Retained comprehensive Stockholders'
Earnings income (loss) Equity
-------- ------------- ------
<S> <C> <C> <C>
Balance at June 30, 1998 $ 14,101 $ 77 $ 21,606
Net income 751 -- 751
Other comprehensive income - change in
unrealized holding gains (losses),net of
income taxes 13 13
----------
Total comprehensive income 764
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)
---------- ---------- ----------
Balance at December 31, 1998 $ 14,230 $ 90 $ 20,694
========== ========== ==========
Balance at June 30, 1999 $ 14,081 $ (363) $ 19,561
Net income 417 -- 417
Other comprehensive income - change in
unrealized holding gains (losses), net of
income taxes (349) (349)
----------
68
Total comprehensive income
Purchase and retirement of common stock -- -- (259)
Release of ESOP shares -- -- 71
Amortization of unearned compensation -- -- 137
Forfeiture of restricted stock -- -- --
Tax benefit of dividends on restricted stock -- -- 6
Cash dividends declared, net of
forfeited dividends on restricted stock (589) -- (587)
---------- ---------- ----------
Balance at December 31, 1999 $ 13,909 $ (712) $ 18,997
========== ========== ==========
</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,
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 417 $ 751
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 117 78
Net amortization 57 109
Provision for loan losses 9 27
Gain on sale of investments and mortgage-backed securities (8) (5)
Net (gain) loss on sale of loans 140 (63)
Release of ESOP shares 71 90
Compensation earned under MRP 137 134
Net decrease (increase) in mortgage loans held for sale 273 (5,368)
Increase in other assets (143) (23)
Increase (decrease) in other liabilities 56 (144)
-------- --------
Net cash provided by (used in) operating activities 1,126 (4,414)
-------- --------
Investing activities:
Net (increase) decrease in loans held for investment (8,289) 8,158
Principal collected on mortgage-backed securities 714 759
Principal collected on collateralized mortgage-backed securities 54 --
Purchases of investment securities classified as available-for-sale (1,926) (1,997)
Purchases of mortgage-backed securities classified as available-for-sale -- (1,453)
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
Proceeds from investment securities called by issuer 2,007 3,280
Purchases of premises and equipment (129) (362)
-------- --------
Net cash provided by (used in) investing activities (7,569) 6,849
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Financing activities:
Net decrease in time deposits (1,641) (997)
Net increase in other deposits 11,782 3,057
Proceeds from borrowings 2,000 1,780
Repayments of borrowings (3,611) (4,071)
Repurchase of no par common stock (259) (1,291)
Cash dividends paid to shareholders (588) (632)
-------- --------
Net cash provided by (used in)financing activities 7,683 (2,154)
-------- --------
Decrease in cash and cash equivalents 1,240 281
Cash and cash equivalents at beginning of period 3,572 2,644
-------- --------
Cash and cash equivalents at end of period $ 4,812 $ 2,925
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,699 $ 2,569
======== ========
Income taxes $ 167 $ 428
======== ========
Supplemental disclosure of noncash transactions:
Unrealized gains (losses) on available-for-sale securities,
net of deferred taxes of $457 and $33 $ (347) $ 13
Dividends declared but unpaid $ 295 $ 314
======== ========
</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, 1999 and for the three and six month
periods ended December 31, 1999 and December 31, 1998 in conformity with
generally accepted accounting principles. Operating results for the three
and six month periods ended December 31, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending
June 30, 2000.
3) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash and
interest-bearing deposits in other financial institutions with original
maturities of three months or less to be cash equivalents.
4) Comprehensive Income
On July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS
130 establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains, and losses) in a
full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statement and (b) display the accumulated
balance of other comprehensive
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
4) Comprehensive Income (continued)
income separately from retained earnings and additional paid-in-capital
in the equity section of a statement of financial position. In accordance
with the provisions of SFAS No. 130, comparative financial statements
presented for earlier periods have been reclassified to reflect the
provisions of the statement.
Comprehensive income is the change in equity of an enterprise during the
period from transactions and other events and circumstances from nonowner
sources and, accordingly, includes both net income and amounts referred
to as other comprehensive income (loss). The Company's other
comprehensive income for the nine months ended March 31, 1999 and 1998
consisted of unrealized gains and losses on certain investments in debt
securities.
5) Employee and Director Benefit Plans
The Company has an employee stock ownership plan ("ESOP") whereby an
aggregate number of shares amounting to 211,600 were purchased for future
allocation to employees. Contributions to the ESOP are made by the Bank
on a discretionary basis, and are allocated among ESOP participants on
the basis of relative compensation in the year of allocation. Benefits
will vest in full upon five years of service with credit given for years
of service prior to the conversion. A $40,000 cash contribution from the
Bank in December 1995 and a loan from the Parent in the amount of
$2,690,677 funded the ESOP. The loan is secured by shares of stock
purchased by the ESOP and is not guaranteed by the Bank. The Bank funds
principal and interest payments on this loan primarily from discretionary
contributions. Dividends, if any, paid on shares held by the ESOP may
also be used to reduce the loan. Dividends on unallocated shares that are
used to repay debt are not reported as dividends in the consolidated
financial statements but rather are recorded as an element of
compensation expense. Dividends on allocated shares are credited to the
accounts of the participants and reported as dividends in the
consolidated financial statements. For the six-month periods ended
December 31, 1999 and 1998, ESOP-related compensation expense totaled
$71,000 and $90,000, respectively. For the six-month periods ended
December 31, 1999 and 1998, ESOP-related compensation expense totaled
$34,000 and $45,000, respectively. Additionally, in December of 1999 and
1998, 16,840 and 18,448 shares, respectively, were released to individual
participant accounts. At December 31, 1999, a total of 184,125 shares
have been released and allocated to participants under the Plan and
27,475 shares remain unallocated.
The Bank has a management recognition plan ("MRP") which serves as a
means of providing existing directors and employees of the Bank with an
ownership interest in the Company. On August 29, 1996, restricted stock
awards of 105,800 shares were made to 38 directors,
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
5) Employee and Director Benefit Plans (continued)
officers, and employees of the Bank. The shares awarded under the MRP
were issued from authorized but unissued shares of common stock at no
cost to recipients. The shares granted vest at a rate of 20% each year on
the anniversary of the initial award of shares so that the shares will be
completely vested at the end of five years. During the first six months
of fiscal 1999, two MRP participants forfeited 902 restricted, non-vested
shares of the Company's stock and $7,010 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, 1999, combined with
shares previously forfeited, leaves 5,778 restricted shares unallocated
under the MRP. Compensation expense of $137,000 and $134,000 was recorded
during the six-month periods ended December 31, 1999 and 1998,
respectively. Compensation expense was recorded of $71,000 during each
three-month period ending December 31, 1999 and 1998.
6) Regulatory Restrictions
At the time of conversion, the Bank established a liquidation account in
an amount equal to its net worth at June 30, 1995. The liquidation
account will be maintained for the benefit of eligible deposit account
holders who continue to maintain their deposit accounts in the Bank after
conversion. Only in the event of a complete liquidation will each
eligible deposit account holder be entitled to receive a liquidation
distribution from the liquidation account in the amount of the current
adjusted subaccount balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stock.
Dividends paid subsequent to the conversion cannot be paid from this
liquidation account.
The Bank may not declare or pay a cash dividend on or repurchase any of
its common stock if its net worth would thereby be reduced below either
the aggregate amount then required for the liquidation account or the
minimum regulatory capital requirements imposed by federal and state
regulations. In addition, for a period of five years after the
conversion, the Bank will be required, under existing North Carolina
regulations, to obtain prior written approval of the Administrator before
it can declare and pay a cash dividend on its capital stock in an amount
in excess of one-half of the greater of (i) its net income for the most
recent fiscal year, or (ii) the average of its net income after dividends
for the most recent fiscal year and not more than two of the immediately
preceding fiscal years, if applicable. As a result of this limitation,
the Bank cannot pay a dividend without the approval of the Administrator.
Management is not aware of any other trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that
are reasonably likely to have a material effect on the Company's
liquidity, capital resources, or other operations.
<PAGE>
PIEDMONT BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
7) Earnings per Share
Basic net income per share, or basic EPS, is computed by dividing net
income by the weighted average number of common shares outstanding for
the period. ESOP shares that are unallocated and are not committed to be
released are not included in weighted average shares outstanding. Diluted
EPS reflects the potential dilution that could occur if the Company's
dilutive stock options were exercised and unvested stock grants were
vested. The numerator of the basic EPS computation is the same as the
numerator of the diluted EPS computation for all periods presented. A
reconciliation of the denominators of the basic and diluted EPS
computations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six months ended
December 31, December 31,
----------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic EPS denominator: weighted average
number of common shares outstanding 2,430,269 2,552,856 2,506,025 2,586,695
Dilutive effect of stock options and
unvested stock grants 43,085 76,297 48,637 74,924
--------- --------- --------- ---------
Diluted EPS denominator 2,473,354 2,629,153 2,554,662 2,661,619
========= ========= ========= =========
</TABLE>
8) Pending Acquisition
On December 27, 1999, National Commerce Bancorporation (Nasdaq: NCBC)
and Piedmont Bancorp, Inc. entered into an agreement whereby NCBC will
acquire Piedmont Bancorp, Inc., the holding company of Hillsborough
Savings Bank, Inc., SSB, through an exchange of stock. The transaction,
expected to close late in the first quarter or early in the second
quarter of 2000, is subject to shareholder and regulatory approval.
Once the transaction is completed, NCBC will operate the Hillsborough
Savings Bank locations as branches of NBC Bank, FSB, its North Carolina
banking subsidiary.
<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, 1999
and 1998
Summary
For the six months ended December 31, 1999, the Company recorded net income of
$417,000, or $0.17 basic and diluted earnings per share, compared to net income
of $751,000, or $0.29 basic and $0.28 diluted earnings per share for the six
months ended December 31, 1998.
Net Interest Income
As shown in the table below, tax-equivalent net interest income increased
$53,000 to $2,624,000 for the six months ended December 31, 1999 from $2,571,000
for the same period in 1998. Net interest income is analyzed on a tax-equivalent
basis to adjust for the nontaxable status of income earned on certain
investments such as municipal bonds.
<PAGE>
<TABLE>
<CAPTION>
Six months ended December 31,
---------------------------------------------------------------
1999 1998
----------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Assets: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 1,884 $ 42 4.46 % $ 1,407 $ 43 6.11 %
FHLB common stock 1,036 40 7.72 1,151 44 7.65
Taxable investment securities 24,521 762 6.22 12,893 413 6.41
Tax-exempt investment securities (2) 4,638 182 7.85 3,862 156 8.08
Loans receivable 104,152 4,384 8.42 106,359 4,487 8.44
-------- -------- ---- -------- -------- ----
Total interest-earning assets 136,231 5,410 7.94 125,672 5,143 8.18
---- -------- -------- ----
Non-interest-earning assets 6,564 2,256
-------- --------
Total $142,795 $127,928
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposit accounts 101,266 2,272 4.45 86,942 2,071 4.73
Borrowings 17,787 514 5.78 17,240 501 5.81
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities 119,053 2,786 4.70 104,182 2,572 4.94
---- -------- -------- ----
Non-interest-bearing liabilities 4,418 2,423
Stockholders' equity 19,324 21,323
-------- --------
Total $142,795 $127,928
======== ========
Net interest income and interest rate spread $ 2,624 3.24 % $ 2,571 3.24 %
======== ========
Net interest-earning assets and net interest margin $ 17,178 3.88 % $ 22,201 4.12 %
======== ========
Ratio of interest-earning assets to interest-bearing liabilities 114.43 % 120.63 %
</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 due to a higher level of average net
interest-earning assets offset by a lower average yield during the six months
ended December 31, 1999 compared to the same period last year. The increase in
average interest-earning assets from December 31, 1998 to December 31, 1999 is
due primarily to an increase of $11,628,000 in taxable investment securities
mitigated by a decline in loans receivable of $2,207,000. The increase in
interest-bearing liabilities is primarily due to a $14,324,000 increase in
interest-bearing deposits from December 31, 1998 to December 31, 1999. Interest
rate spread (on a tax-equivalent basis) was 3.24% for the six months ended
December 31, 1999 and 1998. A 24 basis point decline in the average yield on
total interest-earning assets was offset by a 24 basis point decline in the
average rate on total interest-bearing liabilities. Net interest margin
decreased to 3.88% for the six months ended December 31, 1999 from 4.12% for the
three months ended December 31, 1998.
Provision for Loan Losses
The provision for loan losses for the six months ended December 31, 1999 totaled
$9,000 compared to $27,000 for the same period in 1998. 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 $181,000 for the six months ended December 31,
1999 compared to $279,000 for the same period in 1998. The decline is primarily
attributable to a $140,000 loss on sale of loans during the six months ended
December 31, 1999 compared to a $63,000 gain on sale of loans during the same
period in 1998. Offsetting this decline was an increase of $60,000 in mortgage
loan servicing fees due to the general increase in mortgage interest rates
during the six months ended December 31, 1999 as compared to the same period in
1998. An increase of $24,000 in lower-of-cost or market adjustment on loans held
for sale was due to a decrease in the average balance of loans held for sale
from June 30, 1999 to December 31, 1999 that caused a decline in the associated
valuation allowance. Stock and mutual fund commissions declined from $44,000 in
the six months ended December 31, 1998 to $28,000 during the same period in
1999. Customer service and other fees and "other" other income increased $23,000
and $11,000 due to an increase in the number of customers as well as fee
generating products during the six months ended December 31, 1999 as compared to
the same period of time in 1998.
Other Expenses
Other expenses totaled $2,143,000 for the six months ended December 31, 1999
compared to $1,612,000 for the same period in 1998. Compensation expense
increased $219,000 from the six months ended December 31, 1998 to the same
period in 1999. Most of the increase due to additional staffing for the
Company's two Durham and Chapel Hill bank branches that were opened in March and
May of 1999, respectively. Data and items processing expense increased $84,000
for the six months ended December 31, 1999 compared to the same period in 1998
due to additional expenses associated with the Bank's two new branches. Occupany
expense increased $59,000 from the six months ended December 31, 1998 to the
same period in 1999 due to higher occupancy expense associated with the two new
branches noted above. Furniture and equipment expense increased $47,000 from the
six months ended December 31, 1998 to the same period in 1999 due to higher
depreciation expense associated with the two new branches noted above.
<PAGE>
Professional fees increased $46,000 from the six months ended December 31, 1998
to the same period in 1999 due to assistance from professional advisors in
fiscal 1999 for the Company's pending acquisition by National Commerce
Bancorporation that was announced on December 28, 1999. Other "other" expense
increased $75,000 from the six months ended December 31, 1998 to the same period
in 1999 due primarily to increased expenses associated with the Company's new
Durham and Chapel Hill branches.
Income Tax Expense
Income tax expense was $166,000 for the six months ended December 31, 1999
resulting in an effective rate of 28.5% compared to $400,000 or 34.8% for the
same period in 1998. The decline in the effective tax rate from 1998 to 1999 was
due to a higher level of interest income from Federal Home Loan Bank agency
investment securities for the six months ended December 31, 1999 as compared to
the same period in 1998. Interest income from Federal Home Loan Bank agency
investment securities is exempt from North Carolina income tax.
<PAGE>
Comparison of Results of Operations for the Three Months Ended December 31, 1999
and 1998
Summary
For the quarter ended December 31, 1999, the Company recorded net income of
$164,000, or $0.07 basic and diluted earnings per share, compared to $417,000,
or $0.13 basic and diluted earnings per share for the same quarter last year.
Net Interest Income
As shown in the table below, there was a $66,000 increase in tax-equivalent net
interest income from the quarter ended December 31, 1998 to the same period in
1999. Net interest income is analyzed on a tax-equivalent basis to adjust for
the nontaxable status of income earned on certain investments such as municipal
bonds.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended December 31,
----------------------------------------------------------------
1999 1998
---------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets: (dollars in thousands)
Interest-earning assets:
Interest-bearing deposits $ 2,268 $ 28 4.94 % $ 1,376 $ 21 6.10 %
FHLB common stock 1,036 20 7.72 1,152 21 7.29
Taxable investment securities 24,552 383 6.24 13,121 203 6.19
Tax-exempt investment securities (2) 4,634 91 7.86 3,860 78 8.08
Loans receivable 106,040 2,230 8.41 104,521 2,188 8.37
-------- -------- ---- -------- -------- ----
Total interest-earning assets 138,530 2,752 7.95 124,030 2,511 8.10
-------- -------- ---- -------- -------- ----
Non-interest-earning assets 6,805 3,898
-------- --------
Total $145,335 $127,928
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposit accounts 103,989 1,181 4.51 87,829 1,029 4.65
Borrowings 17,392 253 5.82 15,459 230 5.95
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities 121,381 1,434 4.74 103,288 1,259 4.89
---- -------- -------- ----
Non-interest-bearing liabilities 4,694 3,639
Stockholders' equity 19,260 21,001
-------- -------
Total $145,335 $127,928
======== ========
Net interest income and interest rate spread $ 1,318 3.21 % $ 1,252 3.21 %
======== ========
Net interest-earning assets and net interest margin $ 17,149 3.83 % $ 20,742 4.06 %
======== ========
Ratio of interest-earning assets to interest-bearing liabilities 114.13 % 120.08 %
</TABLE>
(1) All information presented in this column is annualized with the exception of
the ratio of interest-earning assets to interest bearing liabilities.
(2) Interest earned on tax-exempt investment securities has been adjusted to a
tax-equivalent basis using the applicable federal and state rates of 34% and
7.25%, respectively, and reduced by the nondeductible portion of interest
expense.
<PAGE>
The average yield on total interest earning assets declined 15 basis points from
the three months ended December 31, 1998 to the same period in 1999. Most of the
decline was caused by a greater increase to taxable investment securities as
compared to the increase in loans receivable. Average taxable investment
securities increased $11.4 million and average loans receivable increased $1.5
million from the three months ended December 31, 1998 to the same period in
1999. Most of the decline in the total average yield on interest earning assets
was caused by interest income on taxable investment securities representing a
greater proportion of total interest income in the quarter ended December 31,
1999 as compared to the same period in 1998. The average rate on total interest
bearing liabilities declined 15 basis points from the three months ended
December 31, 1998 to the same three-month period in 1999. A shift from
borrowings to deposits from the three months ended December 31, 1998 to the same
three-month period in 1999, as well as a decline in the average yield/rate on
deposits and borrowings, caused the decline during the same period of time.
Interest rate spread (on a tax-equivalent basis) was 3.21% in each of the
three-month periods ending December 31 in both 1999 and 1998. The net interest
margin decreased to 3.83% from 4.06% during the same period of time.
Provision for Loan Losses
The provision for loan losses for the three months ended December 31, 1999
totaled $6,000 compared to $3,000 for the same period in 1998. 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 $108,000 for the quarter ended December 31, 1999 compared
to $128,000 for the same period in 1998. Increases and decreases in various
income accounts caused the overall decrease in other income. Customer service
and other fees increased $6,000 from the three months ended December 31, 1998 to
the same period in 1999 due to increases in the number of deposit accounts and
related for fee products between the two periods. Mortgage loan servicing fees
increased $34,000 from the three months ended December 31, 1998 to the same
period in 1999 due to slower prepayments on the underlying mortgages in 1999 as
compared to 1998. The Company recorded a negative $47,000 lower-of-cost or
market adjustment on loans held-for-sale during the three-month period ending
December 31, 1999 compared to no adjustment during the same period in 1998. This
was due to a general increase in mortgage interest rates during the three-months
ended December 31, 1999. The Company recorded a $13,000 gain on sale of loans
during the three-month period ended December 31, 1999 compared to $23,000 during
the same period in 1998. The Company collected stock and mutual fund commissions
of $14,000 during the three months ended December 31, 1999 compared to $20,000
during the same period in 1998. Other income increased to $34,000 during the
three months ended December 31, 1999 compared to $26,000 during the same period
in 1998. This was caused by an increase in Bank's number of customers and fee
related services.
Other Expenses
Other expenses totaled $1,148,000 for the three months ended December 31, 1999
compared to $829,000 for the same period in 1998. Compensation expense increased
$111,000 from the quarter ended December 31, 1998 to the same period in 1999.
Most of the increase is due to additional staffing for the Company's new Durham
and Chapel Hill bank branches during the second quarter of fiscal 1999. Data and
items processing expense increased $59,000 for the three months ended December
31, 1999 compared to the same period in 1998 due to additional expenses
<PAGE>
associated with the Bank's two new branches. Occupany expense increased $29,000
from the three months ended December 31, 1998 to the same period in 1999 due to
higher occupancy expense associated with the two new branches noted above.
Furniture and equipment expense increased $24,000 from the three months ended
December 31, 1998 to the same period in 1999 due to higher depreciation expense
associated with the two new branches noted above. Professional fees increased
$31,000 from the three months ended December 31, 1998 to the same period in 1999
due to assistance from professional advisors in fiscal 1999 for the Company's
pending acquisition by National Commerce Bancorporation that was announced on
December 28, 1999. Other "other" expense increased $31,000 from the six months
ended December 31, 1998 to the same period in 1999 due primarily to increased
expenses associated with the Company's new Durham and Chapel Hill branches.
Income Tax Expense
Income tax expense was $73,000 for the quarter ended December 31, 1999 resulting
in an effective rate of 30.8% compared to $181,000 or 34.9% for the same period
in 1998.
Financial Condition
CHANGES IN FINANCIAL CONDITION
Total assets increased $8.0 million or 5.7% to $148.1 million at December 31,
1999 from $140.1 million at June 30, 1999. Increases in net loans and cash of
$7.9 million and $1.2 million, respectively, were offset by a decrease in
available-for-sale investment securities of $1.4 million from June 30, 1999 to
December 31, 1999. Total liabilities increased $8.6 million to $129.1 million at
December 31, 1999 from $120.5 million at June 30, 1999. An increase of $10.2
million in deposits and a decrease of $1.6 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 2000.
Total stockholders' equity decreased $600,000 to $19.0 million at December 31,
1999 from $19.6 million at June 30, 1999. Under a previously announced stock
repurchase plan, the Company repurchased and retired 29,300 shares of its common
stock during the quarter ended September 30, 1999. The average cost of the
shares repurchased was $8.84 per share for a total cost of $259,000. The Company
has now completed its repurchase plan. The implementation of the share
repurchase plan, cash dividends declared of $589,000 and change in unrealized
holding losses of $349,000 were the primary factors contributing to the decline
in stockholders' equity during the six months ended December 31, 1999.
Mitigating these decreases were net income of $417,000, and release of ESOP
shares and amortization of unearned compensation of $110,000 and $145,000,
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, 1999 and June 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30
1999 1999
---- ----
(in thousands)
<S> <C> <C>
Total nonaccrual loans $ 1,298 $ 973
Total restructured loans -- --
-------- --------
Total nonperforming loans 1,298 973
Real estate owned -- --
-------- --------
Total nonperforming assets 1,298 973
Accruing loans, delinquent 90 days or more -- --
-------- --------
Total risk assets $ 1,298 $ 973
======== ========
Nonperforming loans to total loans 1.20% 0.97%
Nonperforming assets to total assets 0.88% 0.69%
Risk assets to total assets 0.88% 0.69%
Allowance for loan losses to:
Total nonperforming assets 0.87x 1.08x
Total risk assets 0.87x 1.08x
Total assets $148,114 $140,089
Total loans, net 108,552 100,717
Allowance for loan losses 1,124 1,054
</TABLE>
There was a $325,000 increase in nonperforming assets outstanding from June 30,
1999 to December 31, 1999. The majority of the nonperforming assets are loans
secured by single family residences. 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") was $117,000 at both
December 31, 1999 and June 30, 1999. 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, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Three Months Ended Six months ended
December 31, December 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at the beginning of the period $ 1,127 $ 1,005 $ 1,054 $ 951
Provision for loan loss 6 3 9 27
Recoveries 17 29 92 59
Loans charged off (26) (8) (31) (8)
------- ------- ------- -------
Balance at end of period $ 1,124 $ 1,029 $ 1,124 $ 1,029
======= ======= ======= =======
</TABLE>
At December 31, 1999, the allowance for loan losses was 1.03% of total loans,
compared to 1.04% of total loans at June 30, 1999 and 0.98% of total loans at
December 31, 1998.
The levels of the provision and allowance for loan losses are based on
management's ongoing evaluation of the risk characteristics of the loan
portfolio considering current economic conditions, financial condition of
borrowers, growth and composition of the loan portfolio, collateral values, the
relationship of the allowance for loan losses to outstanding loans, the level of
nonperforming loans that have been identified as potential problems, past and
expected loss experience, results of the most recent regulatory examinations,
and other factors deemed relevant by management. Management actively maintains a
current loan watch list and knows of no other loans which are (1) material and
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (2) represent material credits about which management has serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. Based on management's evaluation of the loan portfolio, as described
above, the Company recorded a $6,000 provision for loan losses for the three
months ended December 31, 1999 compared to a $3,000 provision for the same
period in 1998.
YEAR 2000 ISSUE
The Company recognizes and has addressed 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
<PAGE>
seriously. The Company formed a Year 2000 Committee, which is comprised of the
Company's management team, in November of 1997. Other employees are actively
involved in the Company's Year 2000 efforts on an as needed basis. The Committee
is leading the Company's Year 2000 efforts to ensure that the Company is
properly prepared for the Year 2000. The Company's Board of Directors has
approved a plan submitted by the Year 2000 Committee that was developed in
accordance with guidelines set forth by the Federal Financial Institutions
Examination Council. This plan, which is described in further detail below, has
five primary phases related to internal Year 2000 compliance:
1. Awareness - this phase is ongoing and is designed to inform the
Company's Board of Directors (the "Board") and Executive management
("Management"), employees, customers and vendors of the impact of the
Year 2000 Issue. The awareness phase is an ongoing one that is designed
to provide ongoing information about the Year 2000 issue to the Board
of Directors, Management, employees and customers. Since December of
1997 the Board has been apprised of the Company's efforts at their
regular meetings. Employees are informed of the Company's Year 2000
efforts through monthly scheduled employee meetings. In addition, all
customers were updated with respect to the Company's Year 2000 efforts
through mailings sent in June of 1998 and April of 1999. The Company
has also placed Year 2000 information on the Bank's World Wide Web
site.
2. Assessment - during this phase an inventory was conducted of all known
Company processes that could reasonably be expected to be impacted by
the Year 2000 Issue and their related vendors, if applicable. This
inventory of processes and vendors included not only typical computer
processes such as the Company's transaction applications systems, but
all known processes that could be impacted by micro-chip malfunctions.
These include but are not limited to the Company's alarm system, phone
system, check ordering process, and ATM network. The Company
inventoried all the systems listed above in December of 1997 and
performed an initial assessment of potential risks from either under or
nonperformance arising from incorrect processing and usage of dates
after December 31, 1999. At this time the Company had already made the
decision to convert in February of 1998 to a new computer service
provider for processing all loan, deposit and general ledger
transactions. In conjunction with the conversion, the Company purchased
and installed new computers, printers and related software in January
of 1998. New hardware and software for a local area network was also
purchased and installed in January of 1998. The total cost of the
hardware and software purchased by the Company in fiscal 1998 totaled
$296,000 and was capitalized. Most of the hardware and software
purchased by the Company either is Year 2000 compliant or will be with
minor modifications or upgrades. The assessment phase is complete,
although it is updated periodically as necessary.
<PAGE>
3. Renovation and/or replacement - this phase includes programming code
enhancements, hardware and software upgrades, system replacements,
vendor certification and any other changes necessary to make any
hardware, software and other equipment Year 2000 compliant. The Company
does not perform in-house programming, and thus is dependent on
external vendors to ensure and modify, if needed, the hardware,
software or other services it provides to the Company for Year 2000
compliance. As a result of the assessment performed above, the Company
contacted all third party vendors, requested documentation regarding
their Year 2000 compliance efforts, and analyzed their responses. The
responses from third party vendors generally include an overview of
renovation efforts to their systems that the Company utilizes. In
addition, some third party software vendors have notified the Company
that upgrades of their software was 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 was 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 reviewed the results of this test, and the 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 these tests, and the review
indicated that the system performed reliably and accurately when using
the future dates of February 29, 2000 and March 1, 2000. The testing of
the remainder of the Company's processes was substantially complete as
of March 31, 1999 with follow up testing performed as needed in
calendar year 1999.
5. Implementation - this phase occurs as the Company's vendors certify
their present systems as Year 2000 compliant. This has occurred on all
of the Company's systems, including the Company's core service
provider. The Company has entered dates greater than December 31, 1999
into their systems with no adverse events. The Company has developed a
Business Resumption Contingency plan for processes that do not process
information reliably and accurately after December 31, 1999. This plan
was approved by the Bank's Board of Directors in late May of 1999. The
contingency plans for all systems was complete by the end of the fourth
quarter of fiscal 1999 in accordance with regulatory guidelines.
The Company has also assessed the year 2000 readiness of significant borrowers
and depositors. In the second quarter of 1999 the Company prepared a list of
significant borrowers and depositors. After verbal and/or written inquiries of
these customers, any that the Company had Year 2000 concerns about were
counseled on the Year 2000 issue and urged to take corrective action. Since most
of the Company's loans are to individuals and secured by one to four family
residences this step did not require a significant amount of time or resources.
Excluding the hardware and software purchases noted above, the Company expensed
$6,000 on Year 2000 costs for the quarters ended December 31, 1999 and 1998, and
$12,000 for the six months ended December 31, 1999 and 1998. The Company does
not anticipate any further Year 2000 costs. The Company estimates that its total
Year 2000 expenditures were approximately $36,000. Funding of the Year 2000
project costs came 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 was addressed prior to the Year 2000.
However, if required modifications or conversions are not made or were not
completed on a timely basis prior to the Year 2000, the Year 2000 Issue could
have disrupted normal business operations. The most reasonably likely worst case
Year 2000 scenarios foreseeable at this time included the Company temporarily
not being able to process, in some combination, various types of customer
transactions. This could have affected 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 was to correct, with complete replacement if necessary, any
systems or processes whose Year 2000 test results were not satisfactory prior to
the Year 2000. Nevertheless, should one of the most reasonably likely worst case
scenarios have occurred in the Year 2000, the Company, as noted above, had a
contingency plan that allowed for limited transactions, including the ability to
make certain deposit withdrawals, until the Year 2000 problems were fixed. The
costs of the Year 2000 project on which the Company plans to complete Year 2000
compliance were 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. 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.
The Company noted no adverse Year 2000 related effects on customer service or
data processing in the weeks prior to December 31, 1999, and has noted no
adverse effects since December 31, 1999 to the date of the filing of this
report.
<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 December 31,
1999, the Bank had $11.4 million of credit available from the FHLB that would be
collateralized by a blanket lien on qualifying loans secured by first mortgages
on 1-4 family residences. Additional amounts may be made available under this
blanket floating lien or by using investment securities as collateral.
Management believes that it will have sufficient funds available to meet its
anticipated future loan commitments as well as other liquidity needs.
Interest rate risk is the sensitivity of interest income and interest expense to
changes in interest rates. Management structures the Company's assets and
liabilities in an attempt to protect net interest income from large fluctuations
associated with changes in interest rates. At December 31, 1999, the Company had
a cumulative one-year liability-sensitive gap position of $15.1 million or
10.85% of interest-earning assets. A liability-sensitive gap position generally
indicates that net interest income would increase in a declining rate
environment and decrease in a rising rate environment. The Company had a
cumulative one year liability-sensitive gap position of $5.9 million or 4.44% of
interest-earning assets at June 30, 1999. 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, 1999, management believes that its interest rate risk is at an
acceptable level.
<PAGE>
CAPITAL RESOURCES
The Parent is regulated by the Board of Governors of the Federal Reserve System
("FRB") and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the Administrator,
Savings Institutions Division, North Carolina Department of Commerce, (the
"Administrator"). The Bank is subject to the capital requirements of the FDIC
and the Administrator. The FDIC requires the Bank to maintain minimum ratios of
Tier I capital to total risk-weighted assets and total capital to risk-weighted
assets of 4% and 8%, respectively. Tier I capital consists of total
stockholders' equity calculated in accordance with generally accepted accounting
principles less intangible assets, and total capital is comprised of Tier I
capital plus certain adjustments, the only one applicable to the Bank is the
allowance for possible loan losses. Risk-weighted assets refer to the on- and
off-balance sheet exposures of the Bank adjusted for their relative risk levels
using formulas set forth in FDIC regulations. The Bank is also subject to a FDIC
leverage capital requirement, which calls for a minimum ratio of Tier I capital
(as defined above) to quarterly average total assets of 3% and a ratio of 5% to
be "well-capitalized". The Administrator requires a net worth equal to at least
5% of total assets. At September 30, 1999, the Bank was in compliance with all
of the aforementioned capital requirements.
As of December 31, 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). There are no
events or conditions since December 31, 1999 that management believes have
changed the Bank's category.
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.
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,
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.
<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, 1999.
<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 14, 2000 By: /s/ D. Tyson Clayton
-------------------
President and Chief Executive Officer
Date: February 14, 2000 By: /s/ Thomas W. Wayne
------------------
Vice President and principal
financial officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-END> DEC-31-1999 DEC-30-1999
<CASH> 2,917 0
<INT-BEARING-DEPOSITS> 1,895 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 24,400 0
<INVESTMENTS-CARRYING> 3,333 0
<INVESTMENTS-MARKET> 3,331 0
<LOANS> 108,552 0
<ALLOWANCE> 1,124 0
<TOTAL-ASSETS> 148,114 0
<DEPOSITS> 109,480 0
<SHORT-TERM> 18,551 0
<LIABILITIES-OTHER> 1,086 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 6,745 0
<OTHER-SE> 12,252 0
<TOTAL-LIABILITIES-AND-EQUITY> 148,114 0
<INTEREST-LOAN> 2,230 4,384
<INTEREST-INVEST> 459 914
<INTEREST-OTHER> 28 42
<INTEREST-TOTAL> 2,717 5,340
<INTEREST-DEPOSIT> 1,181 2,272
<INTEREST-EXPENSE> 1,434 2,786
<INTEREST-INCOME-NET> 1,283 2,554
<LOAN-LOSSES> 6 9
<SECURITIES-GAINS> 0 8
<EXPENSE-OTHER> 1,148 2,143
<INCOME-PRETAX> 237 583
<INCOME-PRE-EXTRAORDINARY> 237 583
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 164 417
<EPS-BASIC> 0.13 0.29
<EPS-DILUTED> 0.13 0.13
<YIELD-ACTUAL> 3.83 4.06
<LOANS-NON> 740 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,127 0
<CHARGE-OFFS> 26 31
<RECOVERIES> 17 92
<ALLOWANCE-CLOSE> 1,124 1,124
<ALLOWANCE-DOMESTIC> 1,124 1,124
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
