<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 SEPTEMBER 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 Identification No.)
of incorporation or organization
232 SOUTH MAIN STREET, MOCKSVILLE, NORTH CAROLINA
-------------------------------------------------
(Address of principal executive offices)
(Zip Code)
27028
----------------------------------------------------
(Registrant's telephone number, including area code)
(704) 634-5936
--------------------------------------------------------------------------
(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 NOVEMBER 7, 1997.
- ---------------------
<PAGE>
STONE STREET BANCORP, INC.
INDEX
- --------------------------------------------------------------------------------
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Financial Statements:
Consolidated Statements of Financial Condition -
September 30, 1997 (Unaudited) and December 31, 1996 1-2
Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1997
and 1996 (Unaudited) 3
Consolidated Statement of Stockholders' Equity
for the Nine Months Ended September 30, 1997 (Unaudited) 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1997 and 1996 (Unaudited) 5-6
Notes to Consolidated financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CASH AND DUE FROM BANKS $ 1,572,174 $ 1,318,975
INTEREST-BEARING DEPOSITS 625,247 7,916,034
FEDERAL FUNDS SOLD 1,112,970 569,522
INVESTMENT SECURITIES
Securities held-to-maturity
(market value-September 30,1997-$7,192,836;
December 31, 1996-$ 7,778,450) 7,028,303 7,736,541
Securities available for sale,
at market value 1,852,775 2,722,695
------------ ------------
Total 8,881,078 10,459,236
LOANS RECEIVABLE-Net 89,580,180 82,992,351
FEDERAL HOME LOAN BANK STOCK 741,000 666,900
OFFICE PROPERTIES AND EQUIPMENT-Net 835,260 899,551
ACCRUED INTEREST RECEIVABLE:
Investment securities 142,549 110,103
Loans 303,199 200,318
DEFERRED INCOME TAXES 373,438 376,214
REFUNDABLE INCOME TAXES 123,446 77,102
PREPAID EXPENSES AND OTHER ASSETS 335,859 92,485
CASH SURRENDER VALUE OF LIFE INSURANCE 146,105 127,978
------------ ------------
TOTAL $104,772,505 $105,806,769
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
DEPOSITS:
Savings Accounts $ 9,335,233 $ 8,860,839
Money Market and NOW Accounts 4,178,410 3,931,960
Time, $100,000 and over 5,590,965 5,144,587
Other Time 47,616,324 48,626,880
------------ ------------
Total deposits 66,720,932 66,564,266
ADVANCES FROM FEDERAL HOME LOAN BANK STOCK 5,050,000 -
AMOUNTS PAYABLE UNDER REMITTANCE
SERVICE AGREEMENT 680,684 635,790
ADVANCE PAYMENTS BY BORROWERS FOR
TAXES AND INSURANCE 128,257 36,607
ACCRUED INTEREST PAYABLE 227,269 170,072
CASH DIVIDENDS PAYABLE - 401,511
ACCRUED ESOP CONTRIBUTION 112,500 175,000
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 874,003 456,022
------------ ------------
TOTAL LIABILITIES $ 73,793,645 $ 68,439,268
============ ============
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONT'D)
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
-----------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Common Stock, no par value,
20,000,000 unauthorized;
$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 (1,892,449) (2,198,064)
Nonvested MRP shares (1,517,896) -
Retained Earnings 13,779,305 13,241,270
Unrealized loss on securities
available-for-sale net of
applicable deferred taxes (983) (8,120)
------------ ------------
Total stockholders' equity 30,978,860 37,367,501
------------ ------------
TOTAL $104,772,505 $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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,861,654 $1,672,828 $5,420,121 $4,946,638
Interest on investment:
U. S. Treasury and
Government Agency 69,894 70,253 216,417 190,757
Mortgage backed securities 47,501 51,798 146,558 87,272
Municipal Securities 11,055 12,636 35,808 44,517
Other interest 109,384 278,704 441,141 673,236
---------- ---------- ---------- ----------
Total interest income 2,099,488 2,086,219 6,260,045 5,942,420
---------- ---------- ---------- ----------
COST OF FUNDS:
Interest on time deposits 751,838 775,237 2,251,385 2,455,840
Interest on interest bearing
demand deposits 17,787 18,260 54,854 54,450
Interest on savings deposits 70,512 66,696 200,678 241,364
Interest on FHLB advances 50,200 75 50,200 8,469
---------- ---------- ---------- ----------
Total interest expense 890,337 860,268 2,557,117 2,760,123
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,209,151 1,225,951 3,702,928 3,182,297
PROVISION FOR LOAN
LOSSES 15,000 15,000 45,000 30,000
---------- ---------- ---------- ----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 1,194,151 1,210,951 3,657,928 3,152,297
---------- ---------- ---------- ----------
OTHER OPERATING INCOME:
Loan fees and charges 12,266 14,232 35,712 37,305
Other fees and commissions 19,571 14,313 59,712 40,926
Other - net 4,715 2,872 7,279 8,659
---------- ---------- ---------- ----------
Total other income 36,552 31,417 102,703 86,890
---------- ---------- ---------- ----------
OTHER OPERATING EXPENSES:
Compensation and related
benefits 405,024 214,924 1,353,855 717,698
Insurance 14,366 503,429 49,635 586,517
Occupancy and equipment 65,186 63,941 196,946 202,338
Other 119,516 64,606 278,613 147,610
---------- ---------- ---------- ----------
Total 604,092 846,900 1,879,049 1,654,163
---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES 626,611 395,468 1,881,582 1,585,024
INCOME TAXES 240,257 126,674 711,167 572,972
---------- ---------- ---------- ----------
NET INCOME $ 386,354 $ 268,794 $1,170,415 $1,012,052
========== ========== ========== ==========
NET INCOME PER SHARE $.20 $.15 $.63 $.55
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<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>
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 nine months
ended September 30, 1997 1,170,415 1,170,415
MRP shares 73,002 1,870,676 $(1,517,896) 352,780
Cash dividends paid (632,380) (632,380)
Return of capital
dividends (7,592,208) (7,592,208)
Payment on ESOP
note receivable 305,615 305,615
Change in unrealized
holding gains (losses),
net of income taxes of
$382 7,137 7,137
--------- ----------- ----------- ----------- ----------- -------------- -----------
Balance at
September 30, 1997 1,898,052 $20,610,883 $(1,892,449) $(1,517,896) $13,779,305 $ (983) $30,978,860
========== =========== =========== =========== =========== ============== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,170,415 $ 1,012,052
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 64,291 39,206
Provision for loan loss 45,000 30,000
Decrease (increase) in accrued interest receivable (135,327) (126,926)
Decrease (increase) in other assets (261,501) 107,045
Decrease (increase) in refundable income taxes (46,344) (198,443)
Increase (decrease) in cash dividends payable (401,511) 200,756
Increase (decrease) in accounts payable under
remittance service agreement 44,894 269,463
Increase (decrease) in accrued interest payable 57,197 28,390
Increase (decrease) in accounts payable
and accrued liabilities 355,481 417,709
Decrease (increase) in deferred income taxes 2,776 (7,683)
----------- -----------
Net cash provided by (used in) operating
activities 895,371 1,771,569
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (6,632,829) (5,235,965)
Purchase of held-to-maturity securities - (4,685,008)
Proceeds from sale of available for sale securities 877,057 450,709
Proceeds from maturities of held-to-maturity
securities 708,238 -
Purchase of FHLB stock (74,100) -
----------- -----------
Net cash provided by (used in) investing
activities $(5,121,634) $(9,470,264)
----------- -----------
</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 SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits $ 156,666 $(6,217,794)
Increase (decrease) in advance payments
by borrowers for taxes and insurance 91,650 103,824
Purchase of ESOP shares (2,107,764)
Cash dividends paid (632,380) (401,510)
Increase (decrease) in Federal Home Loan Bank Advances 5,050,000 (1,000,000)
Issuance of common stock - 26,332,414
Return of capital dividends (7,592,208) -
Payment on ESOP note receivable, net 305,615 -
Issuance of vested MRP shares 352,780 -
----------- -----------
Net cash provided by (used in) financing activities (2,267,877) 16,709,170
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (6,494,140) 9,010,475
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 9,804,531 4,898,296
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,310,391 $13,908,771
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the periods for:
Interest $ 2,499,920 $ 2,731,733
=========== ===========
Income taxes $ 757,511 $ 771,415
=========== ===========
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
STONE STREET BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. In the opinion of management, the accompanying financial statements contain
all adjustments necessary to present fairly the consolidated financial
position of Stone Street Bancorp, Inc. as of September 30, 1997 and 1996, and
the results of operations for the nine months ended September 30, 1997 and
1996, and the consolidated cash flows for the nine months ended September 30,
1997 and 1996.
The accounting policies, followed by the Holding Company are set forth in
Note 1 to the Company's financial statements included in Form 10-K on file
with the Securities and Exchange Commission.
2. The consolidated financial statements include the financial results of Stone
Street Bancorp, Inc. and its wholly-owned subsidiary, Mocksville Savings
Bank, Inc.,SSB.
3. The results of operations for the three and nine month periods ended
September 30, 1997, are not necessarily indicative of the results expected
for the full year.
4. Earnings per share of common stock has been determined based on the weighted
average number of common shares 1,898,052 for the three month period ended
September 30, 1997 and 1,863,173 shares for the nine month period ended
September 30, 1997.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------------------
FINANCIAL CONDITION
For the nine months ended September 30, 1997, total assets decreased from
approximately $105,807,000 to $104,773,000, a $1,034,000 decrease from 1996.
Interest bearing deposits decreased $7,291,000, which helped to fund the return
of capital dividends of $7,592,000 in July, 1997. The Bank paid a $4.00 per
share return of capital dividend to its stockholders. Investment securities
decreased $1,578,158 or 15.1% due to matured investments. Loan balances
increased approximately $6,588,000 since December 31, 1996 with a significant
portion of the loan growth concentrated in construction and loans secured by
commercial real estate. An additional $45,000 was added to the allowance
for loan losses during the nine month period in 1997.
Deposit balances increased $156,666 during the nine month period since
December 31, 1996. The Bank borrowed $5,050,000 from the Federal Home Loan Bank
of Atlanta to help fund its loan growth during the third quarter of 1997.
Stockholder's equity increased by the net income for the nine month period ended
September 30, 1997 of $1,170,415 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 $632,380. A payment of $305,615 was made
on the note receivable under the ESOP Plan resulting in a net increase in equity
for the period. The unrealized loss on available for sale securities was reduced
by $7,137 with an improvement in market values during the nine month period.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1996
Net income for the three months ended September 30, 1997 was $386,354 compared
to $268,794 for the comparable period in 1996. Total interest income increased
$13,269, or less than 1% while total interest expense increased $30,069 or 3.5%
due to the $5,050,000 borrowing from the FHLB during the quarter. Net interest
income decreased $16,800 for the three month period compared to the prior year.
Other operating income increased $5,135 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 decreased from $846,900 in 1996 to $604,092
for the three month period ending September 30, 1997, a decrease of $242,808 or
28.7%. This decrease is a combination of an increase in compensation expense of
$190,100 with the implementation of the Management Recognition Plan approved by
the Stockholders in April, 1997, offset by a $489,063 decrease in insurance
expense. In September, 1996, deposit insurance premiums included a $423,000
charge due to the special one time assessment by the FDIC.
Other expenses increased $54,910 or 84.99% 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 increased $113,583 as a result of
the improved profitability during the three month period. Earnings per share
increased from $.15 per share to $.20 per share due to the improved
profitability.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CON'T)
-----------------------------------------------------------------------
Nine Months Ended September 30, 1997 and 1996
Net income for the nine months ended September 30, 1997 was $1,170,415 compared
to $1,012,052 in 1996. Interest income increased $317,625 or 5.35% due
primarily to the $6,588,000 increase in loan balances combined with interest
earned on the $26,332,000 of funds generated through the stock conversion in
1996. Interest expense decreased from $2,760,123 in 1996 to $2,557,117 in 1997,
a $203,006 or 7.35% decrease during the comparable nine month period. This
decrease is the result of lower rates paid on deposits in 1997. Net interest
income after considering a $45,000 increase in the loan loss provision for the
comparable nine month periods, increased $505,631 or 16.1%. Other operating
income increased $15,813 due to increases in ATM fees and commission income
earned by the Bank's newly formed subsidiary.
Other operating expenses increased from $1,654,163 to $1,879,049, a $224,886 or
13.60% increase. The largest increase in operating expenses occurred in
compensation and related benefits which increased $636,157 due to the
implementation of employee benefits plans. The compensation expense recognized
during the nine months ended September 30, 1997 was $352,780 and represents 20%
vesting in the MRP Plan for 1997 for employees and directors. The Bank's
expense for its contribution to the Employee Stock Option Plan, the "ESOP",
totaled $157,571 for the nine month period ended September 30,1997. The
increase in compensation and related benefits was offset by the $536,882
decrease in FDIC deposit premiums. In September, 1996 the Bank incurred the
special one time assessment of $423,000. Other expenses increased $131,003 and
includes costs of implementing new customer programs, automating documentation
processes and improving internal control systems. Income tax expense increased
$138,195 as the Bank's profitability for the nine month period increased.
Earnings per share increased from $.55 per share year to date in 1996 to
$.63 per share year to date in 1997.
9
<PAGE>
PART II - OTHER INFORMATION
Item 6b. Reports on Form 8-K
There were no Form 8-K's filed during the Quarter Ended September 30, 1997.
10
<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: November 13, 1997 By: /s/ J.Charles Dunn
--------------------------- -------------------------------------
J.Charles Dunn
President and Chief Executive Officer
Date: November 13, 1997 By: /s/ Marjorie D. Foster
--------------------------- -------------------------------------
Marjorie D. Foster
Controller
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,572,174
<INT-BEARING-DEPOSITS> 625,247
<FED-FUNDS-SOLD> 1,112,970
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,852,775
<INVESTMENTS-CARRYING> 7,028,303
<INVESTMENTS-MARKET> 7,192,836
<LOANS> 89,580,180
<ALLOWANCE> 555,417
<TOTAL-ASSETS> 104,772,505
<DEPOSITS> 66,720,932
<SHORT-TERM> 5,050,000
<LIABILITIES-OTHER> 2,022,713
<LONG-TERM> 0
0
0
<COMMON> 20,610,883
<OTHER-SE> 10,367,977
<TOTAL-LIABILITIES-AND-EQUITY> 104,772,505
<INTEREST-LOAN> 5,420,121
<INTEREST-INVEST> 398,783
<INTEREST-OTHER> 441,141
<INTEREST-TOTAL> 6,260,045
<INTEREST-DEPOSIT> 2,506,917
<INTEREST-EXPENSE> 2,557,117
<INTEREST-INCOME-NET> 3,702,928
<LOAN-LOSSES> 45,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,879,049
<INCOME-PRETAX> 1,881,582
<INCOME-PRE-EXTRAORDINARY> 1,881,582
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,170,415
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
<YIELD-ACTUAL> 4.69
<LOANS-NON> 0
<LOANS-PAST> 241,546
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 511,489
<CHARGE-OFFS> 1,072
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 555,417
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 555,417
</TABLE>
