<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, 1998
------------------------------------------------
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 of incorporation I.R.S. Employer
or organization) Identification No.)
232 SOUTH MAIN STREET, MOCKSVILLE, NORTH CAROLINA
-------------------------------------------------
(Address of principal executive offices)
(Zip Code)
27028
--------------------------------------
(Registrant's telephone number, including area code)
(336) 751-5936
------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
-----
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. 1,718,152 OF COMMON STOCK AS
-----------------------------
OF NOVEMBER 6, 1998.
- --------------------
<PAGE>
STONE STREET BANCORP, INC.
INDEX
- --------------------------------------------------------------------------------
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Financial Statements:
Consolidated Statements of Financial Condition -
September 30, 1998 (Unaudited) and December 31, 1997 1-2
Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1998
and 1997 (Unaudited) 3
Consolidated Statement of Stockholders' Equity
for the Nine Months Ended September 30, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997 (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, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CASH AND DUE FROM BANKS $ 2,211,445 $ 968,571
INTEREST-BEARING DEPOSITS 2,796,562 2,701,326
FEDERAL FUNDS SOLD 1,283,673 1,034,174
INVESTMENT SECURITIES
Securities held-to-maturity
(market value-September 30, 1998 $2,642,524,
December 31, 1997 $5,939,928) 2,617,688 5,889,605
Securities available for sale,
at market value 10,597,834 1,858,886
------------ ------------
Total 13,215,522 7,748,491
LOANS RECEIVABLE-Net 101,037,774 92,966,627
FEDERAL HOME LOAN BANK STOCK 1,200,000 741,000
OFFICE PROPERTIES AND EQUIPMENT-Net 811,726 823,565
ACCRUED INTEREST RECEIVABLE 543,168 284,291
DEFERRED INCOME TAXES 434,838 412,360
REFUNDABLE INCOME TAXES 265,963 125,460
PREPAID EXPENSES AND OTHER ASSETS 149,587 140,444
CASH SURRENDER VALUE OF LIFE INSURANCE 145,516 145,516
------------ ------------
TOTAL $124,095,774 $108,091,825
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
DEPOSITS:
Savings Accounts $ 9,587,750 $ 9,189,559
Money Market and NOW Accounts 4,583,715 4,704,414
Time, $100,000 and over 6,423,916 4,530,714
Other Time 48,233,629 48,548,135
------------ ------------
Total deposits 68,829,010 66,972,822
ADVANCES FROM FHLB 24,966,667 7,800,000
AMOUNTS PAYABLE UNDER REMITTANCE
SERVICE AGREEMENT 321,013 1,174,961
ADVANCE PAYMENTS BY BORROWERS FOR
TAXES AND INSURANCE 127,276 25,369
ACCRUED INTEREST PAYABLE 248,879 144,485
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 947,385 898,618
------------ ------------
TOTAL LIABILITIES $ 95,440,230 $ 77,016,255
============ ============
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CON'T)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Preferred stock, no par value
5,000,000 shares authorized, no shares
issued and outstanding
Common Stock, no par value,
20,000,000 authorized; September 30, 1998 -
1,898,052 issued and 1,718,152 outstanding;
December 31, 1997 - 1,898,052
issued and outstanding $ 20,610,883 $ 20,610,883
Unearned ESOP shares (1,859,376) (1,947,573)
Unamortized deferred compensation (1,244,734) (1,517,896)
Retained earnings 14,490,706 13,927,634
Unrealized gain on securities
available-for-sale, net (28,067) 2,522
------------ ------------
Total 31,969,412 31,075,570
Less cost of treasury stock (179,900) (3,313,868) -
------------ ------------
Total stockholders' equity 28,655,544 31,075,570
------------ ------------
TOTAL $124,095,774 $108,091,825
============ ============
</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, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $2,121,418 $1,861,654 $6,155,660 $5,420,121
Interest on investments:
U. S. Treasury and
Government Agency 11,760 69,894 84,332 216,417
Mortgage backed securities 82,377 47,501 162,852 146,558
Municipal Securities 8,601 11,055 42,274 35,808
Other interest 136,172 109,384 357,573 441,141
---------- ----------- ---------- ----------
Total interest income 2,360,328 2,099,488 6,802,691 6,260,045
---------- ----------- ---------- ----------
COST OF FUNDS:
Interest on time deposits 771,116 751,838 2,261,889 2,251,385
Interest on interest bearing
demand deposits 18,007 17,787 55,836 54,854
Interest on savings deposits 74,096 70,512 220,384 200,678
Interest on FHLB advances 258,059 50,200 509,253 50,200
---------- ----------- ---------- ----------
Total interest expense 1,121,278 890,337 3,047,362 2,557,117
---------- ----------- ---------- ----------
NET INTEREST INCOME 1,239,050 1,209,151 3,755,329 3,702,928
PROVISION FOR LOAN LOSSES 30,000 15,000 90,000 45,000
---------- ---------- ---------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,209,050 1,194,151 3,665,329 3,657,928
---------- ---------- ---------- -----------
OTHER OPERATING INCOME:
Loan fees and charges 12,971 12,266 39,572 35,712
Other fees and commissions 15,123 19,571 51,430 59,712
Other - net 3,439 4,715 10,036 7,279
---------- ----------- ---------- ----------
Total other income 31,533 36,552 101,038 102,703
---------- ----------- ---------- ----------
OTHER OPERATING EXPENSES:
Compensation and related benefits 458,010 405,024 1,425,268 1,353,855
Insurance 6,195 14,366 33,055 49,635
Occupancy and equipment 50,853 65,186 189,585 196,946
Other 36,386 119,516 193,778 278,613
---------- ----------- ---------- ----------
Total 551,444 604,092 1,841,686 1,879,049
---------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES 689,139 626,611 1,924,681 1,881,582
INCOME TAXES 262,847 240,257 734,414 711,167
--------- ----------- ---------- ----------
NET INCOME $426,292 $386,354 $1,190,267 $1,170,415
========= =========== ========== ==========
NET INCOME PER SHARE - BASIC $ .24 $ .20 $ .64 $ .63
========= =========== ========== ==========
NET INCOME PER SHARE - DILUTED $ .24 $ .20 $ .64 $ .63
========= =========== ========== ==========
</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, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unearned Unamortized Unrealized Total
Shares Common Treasury ESOP Deferred Retained Holding Stockholders'
Outstanding Shares Stock Shares Compensation Earnings Gain/Losses Equity
----------- ---------- ---------- ---------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997 1,898,052 $20,610,883 $ 0 $(1,947,573) $(1,517,896) $13,927,634 $ 2,522 $31,075,570
Net income 1,190,267 1,190,267
Cash dividends (627,195) (627,195)
Amortization of unearned
compensation 273,162 273,162
Release on ESOP shares 88,197 88,197
Treasury Stock (179,900) (3,313,868) (3,313,868)
Unrealized gain on
securities available-for
-sale net of applicable
deferred taxes of $20,322 (30,589) (30,589)
----------- ---------- ----------- ----------- ----------- ----------- ---------- -----------
Balance at September 30,
1998 1,718,152 $20,610,883 $(3,313,868) $(1,859,376) $(1,244,734) $14,490,706 $ (28,067) $28,655,544
=========== =========== =========== =========== =========== =========== ========== ===========
</TABLE>
See notes to financial statements.
4
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 1,190,267 $ 1,170,415
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 66,897 64,291
Provision for loan loss 90,000 45,000
Deferred income tax (22,478) 2,776
Compensation earned under the Management
Recognition Plan 273,162 352,780
Decrease (increase) in accrued interest receivable (258,877) (135,327)
Decrease (increase) in other assets (9,143) (261,501)
Decrease (increase) in refundable income taxes (140,503) (46,344)
Increase (decrease) in cash dividends payable (401,511)
Increase (decrease) in accounts payable under
remittance service agreement (853,948) 44,894
Increase (decrease) in accrued interest payable 104,394 57,197
Increase (decrease) in accounts payable and
accrued liabilities 48,767 355,481
------------ -----------
Net cash provided by operating
activities 488,538 1,248,151
------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net increase in loans (8,117,327) (6,632,829)
Purchase of held-to-maturity securities - -
Purchase of available-for-sale securities (8,702,054) -
Proceeds from maturities of held-to-maturity securities 3,160,614 708,238
Proceeds from sale of available-for-sale securities - 877,057
Purchase of FHLB stock (459,000) (74,100)
Purchase of premises and equipment (55,058) -
------------ ------------
Net cash provided by (used in) investing
activities $(14,172,825) $ (5,121,634)
------------ ------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
STONE STREET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CON'T)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits $ 1,856,188 $ 156,666
Increase (decrease) in advance payments
by borrowers for taxes and insurance 101,907 91,650
Increase (decrease) in Federal Home Loan Bank Advances 17,166,667 5,050,000
Payment of ESOP note receivable, net 88,197 305,615
Purchase of treasury stock (3,313,868) -
Return of capital dividends - (7,592,208)
Cash dividends paid (627,195) (632,380)
----------- -----------
Net cash provided by financing activities 15,271,896 (2,620,657)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,587,609 (6,494,140)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 4,704,071 9,804,531
----------- -----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 6,291,680 $ 3,310,391
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the periods for:
Interest $ 2,942,968 $ 2,499,920
=========== ===========
Income taxes $ 874,917 $ 757,511
=========== ===========
</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, 1998 and December
31, 1997, the results of operations for the three months and nine months
ended September 30, 1998 and 1997 and the consolidated cash flows for the
nine months ended September 30, 1998 and 1997.
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., its wholly-owned subsidiary, Mocksville Savings Bank,
Inc., SSB and Stone Street Financial Services, Inc., a subsidiary of the
Bank.
3. The results of operations for the three and nine month periods ended
September 30, 1998, are not necessarily indicative of the results expected
for the full year.
4. Results of operations for the three and nine month periods ended September
30, 1998 and 1997 includes operations for both Mocksville Savings Bank, Inc.,
SSB and the Holding Company, Stone Street Bancorp, Inc. The weighted average
shares outstanding for the quarter ended September 30, 1998 and 1997 were
1,786,254 and 1,898,052, respectively and for the nine months ended September
30, 1998 and 1997 were 1,846,759 and 1,863,173, respectively and was used in
calculating earnings per share for the periods presented.
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, 1998, total assets increased
$16,003,949 or 14.81%. Cash balances, interest bearing deposits and
federal funds increased by $1,587,609 or 33.75% compared to December,
1997. Investment securities increased $5,467,031 or 70.56%. Net loans
increased to $101,037,774, an increase of $8,071,147 or 8.68% over the
December 1997 balance of $92,966,627. Deposits increased $1,856,188
during the nine month period in 1998. Advances from the Federal Home
Loan Bank of Atlanta totaled $24,966,667 at September 30, 1998, an
increase of $17,166,667 over the December, 1997 level. These increased
borrowings were used to fund the $8,071,147 of net loan originations
and the purchase the $9,159,455 of SBA mortgage backed securities
during the nine month period of 1998. Stockholders' equity decreased
$2,420,026 from December, 1997 which is comprised of an increase due to
net income of $1,190,267 during the nine months and reduced by cash
dividends declared and paid of $627,195 during the period, and an
increase of $88,197 due to the release of ESOP shares and $273,162 due
to the amortization of unearned compensation under the Bank's
Management Recognition Plan net of a decrease in equity due to the Bank
acquiring treasury stock of $3,313,868 during the nine months in 1998.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
Net income for the three months ended September 30, 1998 was $426,292
compared to $386,354 for the comparable period in 1997. Total interest
income increased $260,840 or 12.42% while total interest expense
increased $230,941 or 25.94% due to the increased FHLB borrowings
during the nine month period in 1998. Net interest income increased
$29,899 or 2.47% and was further reduced by an increase of $15,000 in
the loan loss provision. Other operating expenses decreased from
$604,092 in 1997 to $551,444 in 1998, a decrease of $52,648 or 8.72%.
Other operating expenses for the three month period is comprised
primarily of compensation and related benefits of $458,010 in 1998
compared to $405,024 in 1997. Income tax expense increased $22,590 due
to the increase in net income during the three month period in 1998
compared to 1997.
Nine Months Ended September 30, 1998 and 1997
Net income for the nine months ended September 30, 1998 was $1,190,267
compared to $1,170,415 in 1997. Interest income increased $542,646 or
8.67% primarily due to the $11,457,594 increase in loan balances and
the $4,334,444 increase in investment balances since September, 1997.
Interest expense increased from $2,557,117 in 1997 to $3,047,362 in
1998, a $490,245 or 19.17%. This increase is a result of increased
deposits of $2,108,078 and the new borrowings from the FHLB of
$19,916,667 since September, 1997. Net interest income during the
comparable nine month periods increased $52,401 but was decreased by
the additional provision for loan losses of $45,000 during the nine
month period in 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D)
-----------------------------------------------------------------------
Other operating expenses in 1998 decreased $37,363 or 1.99% from the
1997 level. The primary component of other operating expenses is
compensation and related benefits which totaled $1,425,268 for the nine
month period in 1998 compared to $1,353,855 for the comparable period
in 1997. Income tax expense remained relatively constant due to the
immaterial change in net income for the nine month comparable periods.
9
<PAGE>
PART II - OTHER INFORMATION
Item 6b. Reports on Form 8-K
There were no Form 8-K's filed during the Third Quarter of 1998
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: 11/13/98 By: /s/ J. Charles Dunn
------------------------- ------------------------------
J. Charles Dunn
President and Chief Executive Officer
Date: 11/13/98 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,211,445
<INT-BEARING-DEPOSITS> 2,796,562
<FED-FUNDS-SOLD> 1,283,673
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,597,834
<INVESTMENTS-CARRYING> 2,617,688
<INVESTMENTS-MARKET> 2,642,524
<LOANS> 101,037,774
<ALLOWANCE> 660,417
<TOTAL-ASSETS> 124,095,774
<DEPOSITS> 68,829,010
<SHORT-TERM> 7,966,667
<LIABILITIES-OTHER> 1,644,553
<LONG-TERM> 17,000,000
0
0
<COMMON> 20,610,883
<OTHER-SE> 8,044,661
<TOTAL-LIABILITIES-AND-EQUITY> 124,095,774
<INTEREST-LOAN> 6,155,660
<INTEREST-INVEST> 289,458
<INTEREST-OTHER> 357,573
<INTEREST-TOTAL> 6,802,691
<INTEREST-DEPOSIT> 2,538,109
<INTEREST-EXPENSE> 3,047,362
<INTEREST-INCOME-NET> 3,755,329
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,841,686
<INCOME-PRETAX> 1,924,681
<INCOME-PRE-EXTRAORDINARY> 1,924,681
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,190,267
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
<YIELD-ACTUAL> 4.46
<LOANS-NON> 0
<LOANS-PAST> 88,227
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 570,417
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 660,417
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 660,417
</TABLE>
