<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission file number 1-14230
-------
STONE STREET BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1949352
- -------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
232 SOUTH MAIN STREET, MOCKSVILLE, NORTH CAROLINA
--------------------------------------------------
(Address of principal executive offices)
27028
-------------
(Zip Code)
(704) 634-5936
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (2) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 1,898,052 OF COMMON STOCK AS
----------------------------
OF AUGUST 5, 1997.
- ------------------
<PAGE>
STONE STREET BANCORP, INC.
INDEX
PAGE
-----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Financial Statements:
Consolidated Statements of Financial Condition -
June 30, 1997 (Unaudited) and December 31, 1996 1-2
Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1997
and 1996 (Unaudited) 3
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 1997 (Unaudited) 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1997 and 1996 (Unaudited) 5-6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 9
Signatures 10
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997 AND DECEMBER 31, 1996
-----------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CASH AND DUE FROM BANKS $ 3,130,285 $ 1,318,975
INTEREST-BEARING DEPOSITS 3,835,432 7,916,034
FEDERAL FUNDS SOLD 861,830 569,522
INVESTMENT SECURITIES
Securities held-to-maturity
(market value-June 30, 1997-$7,747,554;
December 31, 1996-$ 7,778,450) 7,689,741 7,736,541
Securities available for sale,
at market value 1,849,711 2,722,695
------------ ------------
Total 9,539,452 10,459,236
LOANS RECEIVABLE-Net 86,002,710 82,992,351
FEDERAL HOME LOAN BANK STOCK 741,000 666,900
OFFICE PROPERTIES AND EQUIPMENT-Net 856,632 899,551
ACCRUED INTEREST RECEIVABLE:
Investment securities 136,103 110,103
Loans 181,280 200,318
DEFERRED INCOME TAXES 374,276 376,214
REFUNDABLE INCOME TAXES 193,702 77,102
PREPAID EXPENSES AND OTHER ASSETS 117,729 92,485
CASH SURRENDER VALUE OF LIFE INSURANCE 144,642 127,978
------------ ------------
TOTAL $106,115,073 $105,806,769
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
DEPOSITS:
Savings Accounts $ 9,079,921 $ 8,860,839
Money Market and NOW Accounts 4,120,854 3,931,960
Time, $100,000 and over 7,739,103 5,144,587
Other Time 45,834,464 48,626,880
------------ ------------
Total deposits 66,774,342 66,564,266
AMOUNTS PAYABLE UNDER REMITTANCE
SERVICE AGREEMENT 313,142 635,790
ADVANCE PAYMENTS BY BORROWERS FOR
TAXES AND INSURANCE 102,183 36,607
ACCRUED INTEREST PAYABLE 155,976 170,072
CASH DIVIDENDS PAYABLE - 401,511
RETURN OF CAPITAL DIVIDENDS 7,592,208 -
ACCRUED ESOP CONTRIBUTION 46,422 175,000
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 512,435 456,022
------------ ------------
TOTAL LIABILITIES $ 75,496,708 $ 68,439,268
============ ============
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONT'D)
JUNE 30, 1997 AND DECEMBER 31, 1996
-----------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Common Stock, no par value,
20,000,000 authorized;
1,898,052 issued and outstanding $20,610,883 $26,332,415
Preferred stock, no par value
5,000,000 shares authorized, no shares
issued and outstanding
Unearned ESOP shares (2,077,961) (2,198,064)
Nonvested MRP shares (1,517,896)
Retained Earnings 13,606,480 13,241,270
Unrealized loss on securities
available-for-sale net of
applicable deferred taxes (3,141) (8,120)
------------ ------------
Total stockholders' equity 30,618,365 37,367,501
------------ ------------
TOTAL $106,115,073 $105,806,769
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,803,585 $1,648,718 $3,558,467 $3,273,810
Interest on investment:
U. S. Treasury and
Government Agency 76,292 75,132 146,523 120,504
Mortgage backed securities 47,593 28,321 99,057 35,474
Municipal Securities 12,113 15,279 24,753 31,881
Other interest 110,610 314,453 331,757 394,532
---------- ---------- ---------- ----------
Total interest income 2,050,193 2,081,903 4,160,557 3,856,201
---------- ---------- ---------- ----------
COST OF FUNDS:
Interest on time deposits 756,351 800,288 1,499,547 1,680,603
Interest on interest bearing
demand deposits 19,306 17,663 37,067 36,190
Interest on savings deposits 64,819 65,082 130,166 174,668
Interest on FHLB advances - 932 - 8,394
---------- ---------- ---------- ----------
Total interest expense 840,476 883,965 1,666,780 1,899,855
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,209,717 1,197,938 2,493,777 1,956,346
PROVISION FOR LOAN
LOSSES 15,000 15,000 30,000 15,000
---------- ---------- ---------- ----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 1,194,717 1,182,938 2,463,777 1,941,346
---------- ---------- ---------- ----------
OTHER OPERATING INCOME:
Loan fees and charges 11,337 12,087 23,446 23,073
Other fees and commissions 21,252 14,194 40,141 26,613
Other - net 19,427 2,811 22,614 5,787
---------- ---------- ---------- ----------
Total other income 52,016 29,092 86,201 55,473
---------- ---------- ---------- ----------
OTHER OPERATING EXPENSES:
Compensation and related benefits 662,671 246,020 948,831 502,774
Insurance 15,181 39,196 35,269 83,088
Occupancy and equipment 50,174 37,754 131,760 138,397
Other 116,493 44,411 179,147 83,004
---------- ---------- ---------- ----------
Total 844,519 367,381 1,295,007 807,263
---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES 402,214 844,649 1,254,971 1,189,556
INCOME TAXES 144,144 305,345 470,910 446,298
---------- ---------- ---------- ----------
NET INCOME $ 258,070 $ 539,304 $ 784,061 $ 743,258
========== ========== ========== =========
NET INCOME PER SHARE $ .14 $ .30 $ .43 $ .41
========== ========== ========== =========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK NOTE NONVESTED UNREALIZED
----------------------- RECEIVABLE MRP RETAINED HOLDING
SHARES AMOUNT ESOP SHARES EARNINGS GAINS(LOSSES) TOTAL
--------- ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 1,825,050 $26,332,415 $(2,198,064) - $13,241,270 $ (8,120) $37,367,501
Net income for six months
ended June 30, 1997 784,061 784,061
MRP shares 73,002 1,870,676 (1,517,896) 352,780
Cash dividends paid (418,851) (418,851)
Return of capital
dividends (7,592,208) (7,592,208)
Payment on ESOP
note receivable 120,103 120,103
Change in unrealized
holding gains (losses),
net of income taxes of
$1,220 4,979 4,979
--------- ----------- ----------- ----------- ----------- ------------ -----------
Balance at June 30, 1997 1,898,052 $20,610,883 $(2,077,961) $(1,517,896) $13,606,480 $ (3,141) $30,618,365
========= =========== =========== =========== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
-----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 784,061 $ 743,258
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 42,919 48,147
Decrease (increase) in accrued interest receivable (6,962) (61,702)
Decrease (increase) in other assets (116,008) (1,976)
Decrease (increase) in refundable income taxes (116,600) 6,734
Increase (decrease) in notes receivable - ESOP 120,103 (1,083,792)
Increase (decrease) in cash dividends payable (401,511) 200,755
Increase (decrease) in accounts payable under
remittance service agreement (322,648) (256,629)
Increase in return of capital dividends 7,592,208
(Increase) decrease in accrued interest payable (14,096) 6,231
Increase (decrease) in accounts payable and
accrued liabilities (72,165) 39,495
(Increase) decrease in deferred income taxes 1,938 (10,988)
----------- -----------
Net cash provided by operating
activities 7,491,239 (370,467)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (3,010,359) (3,573,539)
Purchase of held-to-maturity securities (735,000) (3,452,669)
Proceeds from maturities of held-to-maturity 780,504
Proceeds from sale of available-for-sale maturities 879,259
----------- -----------
Net cash provided by (used in) investing
activities $(2,085,596) $(7,026,208)
----------- -----------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CON'T)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
-----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits $ 210,076 $(4,587,920)
Increase (decrease) in advance payments
by borrowers for taxes and insurance 65,576 71,744
Increase (decrease) in Federal Home Loan Bank Advances - (1,000,000)
Issuance of common stock 352,780 26,131,659
Return of capital dividends (7,592,208)
Cash dividends paid (418,851)
----------- -----------
Net cash provided by financing activities (7,382,627) 20,615,483
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,976,984) 13,218,808
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 9,804,531 4,898,296
----------- -----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 7,827,547 $18,117,104
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the periods for:
Interest $ 1,680,876 $ 1,893,624
=========== ===========
Income taxes $ 587,510 $ 439,584
=========== ===========
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------------------
FINANCIAL CONDITION
For the six months ended June 30, 1997, total assets increased from
approximately $105,807,000 to $106,115,000, a $308,000 increase over
1996. Interest bearing deposits decreased $4,081,000 or 51.55% while
investment securities decreased $920,000 or 8.79%. The cash flow
provided by these assets was used to fund the $3,010,000 or 3.63%
increase in loans during the six month period. The Bank announced a
$4.00 per share return of capital dividend for its stockholders on June
30, 1997, therefore cash balances were maintained high at June 30, 1997
along with interest bearing deposits and federal funds to provide the
cash needed to pay this return of capital on July 11, 1997. The Bank's
liability for the payment of this return of capital was accrued at June
30, 1997 and totaled approximately $7,592,000.
Customer deposits increased $210,000 during the six month period. Cash
dividends on stock accrued at December, 1996 were paid during the first
quarter of 1997 as well as 1997 cash dividends of 11.25 cents per share
paid in March and June of 1997. The Bank's Management Recognition Plan
was approved by the Stockholders in April, 1997 allowing 4% of the
outstanding stock or 73,002 shares to be set aside for this incentive
program. The stock vests at a rate of 20% per year to the employees and
directors with the initial vesting occurring in May, 1997. The total
number of shares outstanding was increased by the 73,002 shares under
the MRP Plan with total shares increased from 1,825,050 to 1,898,052 by
June 30, 1997.
Stockholder's equity increased by the net income for the six month
period ended June 30, 1997 of $784,061 and equity in the vested shares
under the MRP Plan of $352,780 but was decreased by the return of
capital dividend of $7,592,208 and cash dividends paid of $418,851. A
payment of $120,103 was made on the Note Receivable under the ESOP Plan
which also resulted in a net increase in equity for the period. The
unrealized loss on available for sale securities was reduced by $5,000
with an improvement in market values during the six month period.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996
Net income for the three months ended June 30, 1997 was $258,070
compared to $539,304 for the comparable period in 1996. Total interest
income decreased $31,710 or 1.52% while total interest expense
decreased $43,489 or 4.92% due to reduced interest rates paid on
deposits. Net interest income increased $11,779 for the three month
period compared to prior year. Other operating income increased $22,924
due primarily to ATM fees and commissions earned by Stone Street
Financial Services, Inc., a subsidiary of the Bank formed in April,
1997, which offers Discount Brokerage Services to customers. Other
operating expenses increased from $367,381 in 1996 to $844,519 for the
three month period ending June 30, 1997, an increase of $477,138 or
129.88%. This increase is primarily due to a $352,779 increase in
compensation expense recognized by the Bank with the implementation of
the Management Recognition Plan approved by the Stockholder's in April,
1997.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)
-----------------------------------------------------------------------
The compensation expense recognized during the three months ended
June 30,1997 represents 20% vesting in the MRP Plan for 1997 for
employees and directors. Other expenses increased $72,082 or 162.31%
and includes costs associated with expanding customer services through
Stone Street Financial Services Discount Brokerage Program and
improving the Bank's lending procedures and improving loan
documentation policies. Income tax expense decreased $161,201 as a
result of the reduced profitability during the three month period.
Earnings per share decreased from $.30 per share to $.14 per share due
to reduced profitability for the quarter resulting from recognition of
compensation related to employee incentive program.
Six Months Ended June 30, 1997 and 1996
Net income for the six months ended June 30, 1997 was $784,061 compared
to $743,258 in 1996. Interest income increased $304,356 or 7.89% due
primarily to the $7,332,602 increase in loan balances since June, 1996
combined with interest earned on the $26,332,000 of funds brought in
through the stock conversion in 1996. Interest expense decreased from
$1,899,855 in 1996 to $1,666,780 in 1997 a $233,075 or 12.27% decrease
during the comparable six month periods. This decrease is the result of
a $1,672,960 decrease in deposits since June, 1996 combined with lower
rates paid on deposits in 1997. Net interest income after considering a
$15,000 increase in the loan loss provision for the two six month
periods, increased $522,431 or 26.91%. Other operating income increased
$30,728 due to increases in ATM fees and commission income earned by
the Bank's newly formed subsidiary.
Other operating expenses increased from $807,263 to $1,295,007, a
$487,744 or 60.42% increase. The largest increase in operating expenses
occurred in compensation and related benefits which increased $446,057
due to the implementation of employee benefit plans. The compensation
expense related to the Bank's Management Recognition Plan totaled
$352,780 for the six month period with all of this expense recognized
in the three months ended June 30, 1997 when the first year vesting of
20% occurred. The Bank's expense for its contribution to the Employee
Stock Option Plan, the ("ESOP") totaled $91,493 for the six month
period ended June 30, 1997. Other expenses increased $96,143 and
includes costs of implementing new customer programs, automating
documentation processes and improving internal control systems. Income
tax expense increased $24,612 as the Bank's profitability for the six
month period increased in 1997 compared to 1996. Earnings per share
increased from $.41 per share in 1996 to $.43 per share in 1997.
8
<PAGE>
PART II - OTHER INFORMATION
Item 6b. Reports on Form 8-K
A Form 8-K was filed during the Second Quarter of 1997 which declared
that the Board of Directors of Stone Street Bancorp, Inc. declared
dividends totaling $4.00 for each share of the Corporation's issued
and outstanding common stock to stockholders of record on June 30,
1997 which was paid on July 11, 1997.
9
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Holding
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STONE STREET BANCORP, INC.
Date: 8/12/97 By: /s/ J. Charles Dunn
------------------------- -------------------------------------
J. Charles Dunn
President and Chief Executive Officer
Date: 8/12/97 By: /s/ Marjorie D. Foster
------------------------ -------------------------------------
Marjorie D. Foster
Controller
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,130,285
<INT-BEARING-DEPOSITS> 3,835,432
<FED-FUNDS-SOLD> 861,830
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,849,711
<INVESTMENTS-CARRYING> 7,689,741
<INVESTMENTS-MARKET> 7,747,554
<LOANS> 86,002,710
<ALLOWANCE> 540,417
<TOTAL-ASSETS> 106,115,073
<DEPOSITS> 66,774,342
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,722,366
<LONG-TERM> 0
0
0
<COMMON> 20,610,883
<OTHER-SE> 10,007,482
<TOTAL-LIABILITIES-AND-EQUITY> 106,115,073
<INTEREST-LOAN> 3,558,467
<INTEREST-INVEST> 270,333
<INTEREST-OTHER> 331,757
<INTEREST-TOTAL> 4,160,557
<INTEREST-DEPOSIT> 1,666,780
<INTEREST-EXPENSE> 1,666,780
<INTEREST-INCOME-NET> 2,493,777
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,295,007
<INCOME-PRETAX> 1,254,971
<INCOME-PRE-EXTRAORDINARY> 1,254,971
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 784,061
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<YIELD-ACTUAL> 4.98
<LOANS-NON> 0
<LOANS-PAST> 287,425
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 511,489
<CHARGE-OFFS> 1,072
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 540,417
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 540,417
</TABLE>
