SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934 (No fee required)
For the fiscal year ended September 30, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required) For the transition period
from to
------------ ------------
Commission File No. 0-27620
Green Street Financial Corp
---------------------------
(Name of Small Business Issuer in Its Charter)
North Carolina 56-1951478
- --------------------------------------------- ----------
(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
241 Green Street, Fayetteville, North Carolina 28301-5051
- ---------------------------------------------- ----------
(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (910) 483-3681
---------------
Securities registered under to Section 12(b) of the Exchange Act: None
----
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicated by check mark whether the issuer: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price of the registrant's Common Stock on
December 11, 1996 was approximately $60.2 million.
As of December 2, 1996, there were issued and outstanding 4,298,125 shares
of the registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
September 30, 1996. (Parts I, III and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended September 30, 1996. (Part III)
<PAGE>
PART I
Item 1. Business
- -----------------
Business of the Company
Green Street Financial Corp (the "Company") is a North Carolina
corporation organized in December 1995 at the direction of Home Federal Savings
and Loan Association (the "Association") to acquire all of the capital stock
that the Association issued in its conversion from the mutual to stock form of
ownership (the "Conversion"). On April 3, 1996, the Association completed the
Conversion and became a wholly owned subsidiary of the Company. The Company is a
unitary savings and loan holding company which, under existing laws, generally
is not restricted in the types of business activities in which it may engage
provided that the Association retains a specified amount of its assets in
housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Association, investing the Company's portion of the net proceeds obtained in the
conversion, and lending funds to an employee stock ownership plan formed by the
Association.
Business of the Association
The Association, a federally chartered stock savings bank headquartered
in Fayetteville, North Carolina, was chartered in 1916 under the name Home
Building and Loan Association. The Association is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits have been federally insured by the Savings Association Insurance Fund
("SAIF") and its predecessor, the Federal Savings and Loan Insurance
Corporation, since 1935. The Association is a member of and owns capital stock
in the FHLB of Atlanta, which is one of the 12 regional banks in the FHLB
System.
Competition
The Association's primary market area consists of the Cumberland and
Robeson Counties, North Carolina and the Association is one of many financial
institutions serving its market area. The competition for deposit products comes
from other insured financial institutions such as commercial banks, thrift
institutions and credit unions in the Association's market area. Deposit
competition also includes a number of insurance products sold by local agents
and investment products such as mutual funds and other securities sold by local
and regional brokers. Loan competition varies depending upon market conditions
and comes from other insured financial institutions such as commercial banks,
thrift institutions and credit unions.
Lending Activities
General. The Association's loan portfolio predominantly consists of
mortgage loans secured by one-to-four family residences and to a lesser extent
the Association originates non-residential and multi-family residential real
estate loans, construction loans, and loans secured by savings account. It is
the policy of the Association to remain a portfolio leader.
2
<PAGE>
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of the Association's loan portfolio by the type of loan.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Type of Loans:
<S> <C> <C> <C> <C> <C> <C>
Residential 1- to 4-family..... $102,011 82.84% $ 94,668 80.77% $ 82,880 78.86%
Residential multi-family....... 5,579 4.53 5,577 4.76 5,391 5.13
Non-residential real estate.... 15,544 12.62 16,663 14.22 16,636 15.83
Construction................... 2,948 2.39 2,218 1.89 2,078 1.98
Savings account loans.......... 142 0.12 229 0.20 265 0.25
------- ---- --------- ------ ------- ------
126,224 102.50 119,355 101.84 107,250 102.05
------- ------ ------- ------ ------- ------
Less:
Unearned fees and discounts.... 931 0.76 900 0.77 788 0.75
Loans in process............... 1,910 1.55 1,029 0.88 1,143 1.09
Allowance for losses........... 235 0.19 225 0.19 225 0.21
------- ---- ------- ------ ------- ------
3,076 2.50 2,154 1.84 2,156 2.05
------- ---- ------- ------ ------- ------
Total loans receivable, net...... $123,148 100.00% $117,201 100.00% $105,094 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
Loan Maturity Tables
The following table sets forth the estimated maturity of the
Association's loan portfolio at September 30, 1996. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totalled $18.1 million for the year ended
September 30, 1996. Adjustable-rate mortgage loans are shown as maturing based
on contractual maturities.
<TABLE>
<CAPTION>
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Residential 1- to 4-family....... $225 $2,859 $98,927 $102,011
Residential multi-family......... -- 218 5,361 5,579
Non-residential real estate...... 211 758 14,575 15,544
Construction..................... -- -- 2,948 2,948
Savings account loans............ 142 -- -- 142
--- ----- ------- -------
$578 $3,835 $121,811 $126,224
=== ===== ======= =======
</TABLE>
3
<PAGE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
Residential 1- to 4-family........ $63,231 $38,555 $101,786
Residential multi-family.......... 1,029 4,550 5,579
Non-residential real estate....... 5,693 9,640 15,333
Construction...................... 2,948 -- 2,948
------ ------- -------
Total........................... $72,901 $52,745 $125,646
====== ====== =======
</TABLE>
One- to Four-Family Residential Loans. The Association's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Association's primary market area. The
Association generally originates one- to four-family residential mortgage loans
in amounts up to 80% of the lesser of the appraised value or selling price of
the mortgaged property. With private mortgage insurance obtained for the
borrower, the maximum loan to value ratio is increased to 90%. However, when
lending amounts of over $200,000, the maximum loan to value ratio is reduced to
70%. The maximum loan amount for such loans is handled on a case by case basis.
The Association does not originate loans with initial interest rates which are
deeply discounted ("teaser rates"). Mortgage loans originated and held by the
Association in its portfolio generally include due-on-sale clauses which provide
the Association with the contractual right to deem the loan immediately due and
payable in the event that the borrower transfers ownership of the property
without the Association's consent. The Association originates and retains both
fixed and adjustable-rate mortgage loans. It is the policy of the Association to
remain a portfolio lender.
The Association requires for all adjustable-rate mortgage loans that the
borrower qualify at 2% above the interest rate at loan origination. The
Association's adjustable-rate loans provide for limitations on annual interest
rate adjustments of up to 2% with a maximum adjustment over the term of the loan
of 6%. Adjustable-rate loans typically reprice every year, and provide for terms
of up to 30 years with most loans having terms of between 15 and 30 years. The
Association sets the maximum loan term based on a dollar amount. For example, a
thirty year loan requires an appraised amount of more than $80,000.
The Association offers adjustable-rate loans using a national average
contract interest rate index. Interest rates charged on mortgage loans are
competitively priced based on market conditions and the Association's cost of
funds. The Association typically charges a 1% origination fee. At September 30,
1996, the Association did not service loans for others.
Adjustable-rate mortgage loans decrease the risks associated with
changes in interest rates by more closely reflecting these changes, but involve
other risks because as interest rates increase, the underlying payments by the
borrower increase, thus increasing the potential for default. At the same time,
the marketability of the underlying collateral may be adversely affected by
higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the adjustable-rate mortgage loan documents, thereby potentially
limiting their effectiveness during periods of rising interest rates. These
risks have not had an adverse effect on the Association.
Non-Residential Loans. The non-residential real estate portfolio
consisted primarily of loans secured by commercial real estate and church
property. Loans secured by church real estate, loans secured by rental property
and loans secured by commercial property may be made in amounts up to 70% of the
appraised value. Non-residential lending entails significant additional risks
when compared with
4
<PAGE>
one- to four-family residential lending. For example, non-residential loans
typically involve larger loan balances to single borrowers or groups of related
borrowers, the payment experience on such loans typically is dependent on the
successful operation of the project and these risks can be significantly
impacted by the cash flow of the borrowers and supply and demand conditions in
the market for commercial office, retail and warehouse space.
Multi-Family Residential Loans. The Association makes multi-family
loans, including loans on apartment complexes. These loans have a maximum loan
to value ratio of 70%. Multi-family loans generally provide higher interest
rates than can be obtained from single-family mortgage loans. Multi- family
lending, however, entails significant additional risks when compared with one-
to four-family residential lending. For example, multi-family loans typically
involve larger loan balances to single borrowers or groups of related borrowers,
the payment experience on such loans typically is dependent on the successful
operation of the real estate project, and these risks can be significantly
impacted by supply and demand conditions in the market for multi-family
residential units.
Construction Loans. Construction loans are made on a long term basis and
are classified as construction/permanent loans. Approximately 90% of the
Association's construction loan portfolio are for the construction of
single-family residential property and are made to the individuals who will be
the owners and occupants upon completion of construction. These construction
loans usually require no principal payments during the first 6-12 months, after
which the payments are set at an amount that will amortize over the term of the
permanent loan. The terms, including interest rate, of single family residential
construction loans are the same as those for a loan to purchase or refinance a
previously constructed single family residence. The maximum loan to value ratio
for other construction loans is dependent on the type of property that will be
constructed. The Association also makes construction loans to builders and
construction loans on non-residential properties.
Construction lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. The
Association's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost of construction. If the
estimate of construction cost and the marketability of the property upon
completion of the project prove to be inaccurate, the Association may be
compelled to advance additional funds to complete construction. Furthermore, if
the estimate of value proves to be inaccurate, the Association may be
confronted, at or prior to the maturity of the loan, with a property with a
value that is insufficient to assure full repayment.
Savings Account Loans. Savings account loans are only made when secured
by a savings account in the Association (share loans) and generally have rates
that adjust with the rate on the underlying account and are typically between
two and six percent above the rate on the underlying savings account. Share
loans are offered subject to a 90% loan to collateral value limit.
Loan Approval Authority and Underwriting. All loans of up to $125,000 in
amount must be approved by one or more loan committees. Loans for amounts over
$125,000 must be approved by the Board of Directors of the Association.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is generally ordered, income and certain other
information is verified and, if necessary, additional financial information is
requested. An appraisal of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are obtained from independent fee
appraisers. For real estate loans the Association requires either title
insurance or a title opinion. Borrowers must also obtain fire and casualty
insurance (for loans on property located in a flood zone, flood insurance is
required) prior to the closing
5
<PAGE>
of the loan. For loans where private mortgage insurance is required by the
Association, the borrower must also provide an escrow amount for taxes and fire
insurance.
Loan Commitments. The Association issues written commitments to
prospective borrowers on all approved real estate loans. Generally, the
commitment requires acceptance within 30 days of the date of issuance. At
September 30, 1996, the Association had $1.6 million of commitments to cover
originations and $1.9 million in undisbursed funds for loans in process.
Management believes that virtually all of the Association's commitments will be
funded.
Loans to One Borrower. Regulations limit loans-to-one borrower in an
amount equal to 15% of unimpaired capital and unimpaired surplus of the
Association. The Association is authorized to lend up to an additional 10% of
unimpaired capital and unimpaired surplus if the loan is fully secured by
readily marketable collateral. Savings associations are authorized to make loans
to one borrower, for any purpose, in an amount up to $500,000. The Association's
maximum loan-to-one borrower limit was approximately $6.6 million at September
30, 1996.
At September 30, 1996, the Association's largest amount of loans to one
borrower was 55 loans aggregating $1.9 million. All of the loans to this
borrower are current.
Non-Performing and Problem Assets
Loan Delinquencies. The Association's collection procedures provide that
when a mortgage loan is 30 days past due, a notice of nonpayment is sent. If
payment is still delinquent after 45 days, the customer will receive a letter
and/or telephone call and may receive a visit from a representative of the
Association. If the delinquency continues, similar subsequent efforts are made
to eliminate the delinquency. If the loan continues in a delinquent status for
60 days past due and no repayment plan is in effect, a notice of right to cure
default is mailed to the customer giving 30 additional days to bring the account
current before foreclosure is commenced. At September 30, 1996, loans past due
between 30 and 89 days totalled $4.9 million.
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent
("non-performing loans") or when, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income by the
establishment of a reserve for uncollected interest. Such interest, when
ultimately collected, is credited to income in the period received.
6
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding non-performing loans and real estate owned. As of the dates indicated,
the Association had no loans categorized as troubled debt restructuring within
the meaning of SFAS 15.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
At September 30,
-----------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-performing loans:
<S> <C> <C> <C> <C> <C>
One- to four-family residential.... $ 310 $ 242 $ 292 $ 246 $ 478
Multi-family residential........... -- 77 -- -- --
Non-residential real estate........ -- -- 113 134 118
Construction....................... -- -- -- -- --
Savings account loans.............. -- -- -- -- --
------- ------- ------- ------- -------
Total non-performing loans........... 310 319 405 380 596
Real estate owned.................. 34 -- 38 94 197
------- ------- ------- ------- ------
Total non-performing assets.......... $ 344 $ 319 $ 443 $ 474 $ 793
====== ====== ====== ====== ======
</TABLE>
Interest income foregone on loans accounted for on a non-accrual basis
under the original terms of such loans was immaterial for the year ended
September 30, 1996. Amounts actually included in the Association's interest
income for non-accrual loans for the year ended September 30, 1996 were,
likewise, immaterial.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
7
<PAGE>
At September 30, 1996, the Association had no assets classified as
doubtful or loss but had loans classified as substandard in an amount equal to
$310,000. The Association had no special mention loans at that date.
Foreclosed Real Estate. Real estate acquired by the Association as a
result of foreclosure or by deed in lieu of foreclosure is classified as real
estate owned until it is sold. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of cost
or fair value, minus estimated cost to sell.
The Association records loans as in-substance foreclosures if the
borrower has little or no equity in the property based upon its documented
current fair value, the Association can only expect repayment of the loan to
come from the sale of the property and if the borrower has effectively abandoned
control of the collateral or has continued to retain control of the collateral
but because of the current financial status of the borrower, it is doubtful the
borrower will be able to repay the loan in the foreseeable future. In-substance
foreclosures are accounted for as real estate acquired through foreclosure,
however, title to the collateral has not been acquired by the Association. There
may be significant other expenses incurred such as legal and other extraordinary
servicing costs involved with in substance foreclosures. The Association had
foreclosed real estate of approximately $34,000 at September 30, 1996.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Association's loan portfolio. Such
evaluation, which includes a review of all loans of which full collectibility of
interest and principal may not be reasonably assured, considers the
Association's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and current economic conditions.
The following table sets forth the allocation of the Association's
allowance for loan losses by loan category and the percent of loans in each
category to total loans receivable at the dates indicated. The portion of the
loan loss allowance allocated to each loan category does not represent the total
available for future losses that may occur within the loan category because the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------
1996 1995 1994
% of Loans in % of Loans in % of Loans in
Amount of Each Category Amount of Each Category Amount of Each Category
Allowance to Total Loans Allowance to Total Loans Allowance to Total Loans
--------- -------------- --------- -------------- --------- --------------
(Dollars in Thousands)
At end of period allocated to:
<S> <C> <C> <C> <C> <C> <C>
Residential one- to four-family $ 85 80.82% $ 89 79.53% $ 87 77.32%
Residential multi-family.... 29 4.42 32 4.67 44 5.03
Non-residential real estate. 102 12.31 93 13.96 84 15.51
Construction................ 19 2.34 11 1.65 10 1.90
Savings account loans....... -- .11 -- .19 -- .24
------ ------ ----- ------ ------ ------
Total allowance for loan losses $ 235 100.00% $ 225 100.00% $ 225 100.00%
===== ====== ==== ====== ==== ======
</TABLE>
8
<PAGE>
The following table sets forth information with respect to the
Association's allowance for loan losses at the dates and for the periods
indicated:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Allowance balances (at beginning of
<S> <C> <C> <C>
period)........................... $ 225 $ 225 $ 206
Provision (credit) for loan losses:
One- to four-family residential... (4) 2 23
Multi-family residential.......... (3) (12) 2
Non-residential real estate....... 9 9 (10)
Construction...................... 8 1 4
Savings account loans............. -- -- --
Net (Charge-offs) recoveries:
One- to four-family............... -- -- --
Multi-family...................... -- -- --
Non-residential real estate....... -- -- --
Construction...................... -- -- --
Savings account loans............. -- -- --
------- -------- --------
Allowance balance (at end of period) $ 235 $ 225 $ 225
======== ======= =======
Allowance for loan losses as a percent
of total loans outstanding........ 0.19% 0.19% 0.21%
</TABLE>
9
<PAGE>
Investment Activities
General. The Association is required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments and has generally maintained
a liquidity portfolio well in excess of regulatory requirements. Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation of
future yield levels, as well as management's projections as to the short-term
demand for funds to be used in the Association's loan origination and other
activities.
Investment Portfolio. The following table sets forth the carrying value
of the Company's and the Association's investment securities, interest earning
deposits, federal funds sold and nonmarketable equity investments at the dates
indicated. At September 30, 1996, the market value of the investment securities
that are held to maturity was $15.0 million.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Investment Securities:
<S> <C> <C> <C>
U.S. Treasury Securities............ $ 2,999 $ 2,993 $ --
U.S. Agency Securities.............. 12,000 -- --
------ ------- -------
Total investment securities....... 14,999 2,993 --
Interest earning deposits........... 33,108 27,472 41,424
Federal Funds sold.................. 2,125 538 1,010
Federal Home Loan Bank stock........ 1,127 1,127 1,127
Central Service Corporation stock... 44 44 44
------- -------- --------
Total.............................. $51,403 $32,174 $43,605
====== ====== ======
</TABLE>
10
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying value and weighted average yields for the Association's
investment securities at September 30, 1996.
<TABLE>
<CAPTION>
As of September 30, 1996
----------------------------------------------------------------------------------------------------------------
After One Through After Five Through
One Year or Less Five Years Ten Years After Ten Years Total
---------------- ---------- --------- --------------- --------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities....... $ 2,999 7.50% $ -- -- % $ -- --% $ -- -- % $ 2,999 7.50%
U.S. Agency
securities....... -- -- 12,000 6.94 -- -- -- -- 12,000 6.94
Interest
earning
deposits......... 33,108 5.80 -- -- -- -- -- -- 33,108 5.80
Federal
Funds Sold....... 2,125 5.66 -- -- -- -- -- -- 2,125 5.66
Federal Home
Loan Bank
stock (1)........ -- -- -- -- -- -- 1,127 7.21 1,127 7.21
Central Service
Corporation
stock(1)......... -- -- -- -- -- -- 44 -- 44 --
------- ----- ------ ----- ----- ---- ------ ---- ------ ----
Total............ $38,232 5.93% $12,000 6.94% $ -- --% $1,171 6.94 % $51,403 6.19%
====== ==== ====== ===== ===== ==== ===== ==== ====== ====
</TABLE>
(1) Nonmarketable equity security; substantially all required to be maintained
and assumed to mature in periods greater than 10 years.
11
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Association's
funds for lending and other investment purposes. The Association derives funds
from amortization and prepayment of loans and, to a much lesser extent,
maturities of investment securities, borrowings, mortgage-backed securities and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Association's primary market area through the offering of a
selection of deposit instruments including regular savings accounts, money
market accounts, and term certificate accounts. The Association also offers IRA
accounts. Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit, and the interest rate, among
other factors. At September 30, 1996, the Association had no brokered accounts.
Certificates of Deposit. The following table indicates the amount of the
Association's certificates of deposit of $100,000 or more by time remaining
until maturity as of September 30, 1996.
Certificates
of Deposits
-----------
Maturity Period (In Thousands)
Within three months..................................... $2,010
Three through six months................................ 3,576
Six through twelve months............................... 1,493
Over twelve months................................. 2,031
-----
$9,110
======
Borrowings
The Association may obtain advances from the FHLB of Atlanta to
supplement its supply of lendable funds. Advances from the FHLB of Atlanta are
typically secured by a pledge of the Association's stock in the FHLB of Atlanta
and a portion of the Association's first mortgage loans and certain other
assets. Each FHLB credit program has its own interest rate, which may be fixed
or variable, and range of maturities. The Association, if the need arises, may
also access the discount window of the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") to supplement its supply of lendable funds and
to meet deposit withdrawal requirements. At September 30, 1996, the Association
had no borrowings from the FHLB of Atlanta.
Subsidiary Activity
The Association is permitted to invest up to 2% of its assets in the
capital stock of, or secured or unsecured loans to, subsidiary corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. As of September 30, 1996,
the Association does not have any subsidiaries. However, the Association does
have an equity investment in Central Service Corporation, a corporation
operating in Greensboro, North Carolina that provides data processing services
for the Association and other savings associations.
12
<PAGE>
Employees
At September 30, 1996 the Association had 28 full-time and three part-
time employees. None of the Association's employees are represented by a
collective bargaining group. The Association believes that its relationship
with its employees is good.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Association. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Association and not for the benefit of stockholders of the
Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Association satisfies the Qualified Thrift Lender ("QTL") test. If the
Company acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Company and any of its subsidiaries (other than the
Association or any other SAIF-insured savings association) would become subject
to restrictions applicable to bank holding companies unless such other
associations each also qualify as a QTL and were acquired in a supervisory
acquisition. See "- Regulation of the Association - Qualified Thrift Lender
Test."
Regulation of the Association
General. As a federally chartered, SAIF-insured savings association, the
Association is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Association is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the
Association and prepares reports for the consideration of the Association's
Board of Directors on any deficiencies that are found in the Association's
operations. The Association's relationship with its depositors and borrowers is
also regulated to a great extent by federal and state law, especially in such
matters as the ownership of savings accounts and the form and content of the
Association's mortgage documents.
The Association must file reports with the OTS and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities
13
<PAGE>
and examination policies, including policies with respect to the classification
of assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Association,
and their operations.
Insurance of Deposit Accounts. The Association's deposit accounts are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). If an institution has no tangible capital, the FDIC has
the authority, should it initiate proceedings to terminate an institution's
deposit insurance, to suspend the insurance of any such institution. However, if
a savings association has positive capital when it includes qualifying
intangible assets, the FDIC cannot suspend deposit insurance unless capital
declines materially, the institution fails to enter into and remain in
compliance with an approved capital plan, or the institution is operating in an
unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The FDIC
may also prohibit an insured depository institution from engaging in any
activity the FDIC determines to pose a serious threat to the SAIF. The
management of the Association is unaware of any practice, condition, or
violation that might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
Under this system, a savings association pays within a range of 23 cents to 31
cents per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates on a semi-annual basis if it determines
that such action is necessary to cause the balance in the SAIF to reach the
designated reserve ratio of 1.25% of SAIF-insured deposits within a reasonable
period of time. The SAIF was substantially underfunded at September 30, 1996. In
addition, the FDIC may impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC. The Association's federal deposit insurance premium expense for the
year ended September 30, 1996 amounted to approximately $334,000. By comparison,
at September 30, 1996, members of the BIF were required to pay substantially
lower, or virtually no, federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Association of
approximately .657% of deposits held on March 31, 1995. The Association recorded
a $792,868 pre-tax expense for this assessment at September 30, 1996, and such
assessment is payable on November 27, 1996. Beginning January 1, 1997, deposit
insurance assessments for SAIF members are expected to be reduced to
approximately .064% of deposits on an annual basis through the end of 1999.
During this same period, BIF members are expected to be assessed approximately
.013% of deposits. Thereafter, assessments for BIF and SAIF members should be
the same and the SAIF and BIF may be merged. It is expected that these
continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
14
<PAGE>
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Association to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
September 30, 1996, the Association was a Tier 1 institution. In the event the
Association's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the
Association's ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.
Qualified Thrift Lender Test. Savings institutions must meet a QTL test.
If the Association maintains an appropriate level of Qualified Thrift
Investments (primarily residential mortgages and related investments, including
certain mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL,
it will continue to enjoy full borrowing privileges from the FHLB of Atlanta.
The required percentage of QTIs is 65% of portfolio assets (defined as all
assets minus intangible assets, property used by the institution in conducting
its business and liquid assets equal to 20% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. As of September 30, 1996, the Association was in compliance
with its QTL requirement with 90.38% of its assets invested in QTIs.
Federal Home Loan Association System. The Association is a member of the
FHLB of Atlanta, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Association is required to purchase and maintain stock
in the FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances
15
<PAGE>
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy the liquidity requirements that are imposed by the OTS.
At September 30, 1996, the Association was in compliance with these Federal
Reserve Board requirements.
Item 2. Properties
- ------------------
The Association operates from its main office, two full service branch
offices and one loan office.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the
Association are periodically involved, such as claims to enforce liens,
condemnation proceedings on properties in which the Association holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the Association's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
Executive Officers of the Company Who Are Not Directors
Name and Title Age(1)
-------------- ------
Allen Lloyd 43
Secretary
Jerry M. Robertson 54
Vice President and Treasurer
- ---------------
(1) As of September 30, 1996.
Allen Lloyd has been the Secretary of the Association since 1983 and has held
the same position with the Company since December 1995.
Jerry Robertson has been Vice President and Treasurer of the Association since
1983 and has held the same position with the Company since December 1995.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
The information contained under the section captioned "Common Stock
Information" on page 40 of the Company's Annual Report to Stockholders for the
fiscal year ended September 30, 1996 (the "Annual Report"), is incorporated
herein by reference.
16
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
The information contained in the section captioned "Green Street
Financial Corp Selected Financial Data" on page 1 of the Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 3 to 13 of the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
The Registrant's financial statements listed under Item 14 are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and " - Biographical Information" in the "Proxy
Statement".
Item 11. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
17
<PAGE>
(c) Management of the Registrant knows of no arrangements, including
any pledge by any person of securities of the Registrant, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of
independent accountants of the Registrant included in the Registrant's Annual
Report to Stockholders for the fiscal year ending September 30, 1996 are
incorporated herein by reference.
Report of Independent Auditors
Consolidated Statements of Financial Condition as of September 30, 1996
and 1995.
Consolidated Statements of Income for the Years Ended September 30,
1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
2. Other than as set forth below, Financial Statement Schedules
for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission ("SEC") are not required under the related
instructions or are inapplicable and therefore have been omitted.
3. Exhibits
The following Exhibits are filed as part of this report:
3(i) Articles of Incorporation of Green Street Financial Corp *
3(ii) Bylaws of Green Street Financial Corp *
10.1 Form of Employment Agreement with H.D. Reaves, Jr., Jerry
Robertson and Allen Lloyd *
10.6 1996 Stock Option Plan **
10.7 Restricted Stock Plan and Trust Agreement **
18
<PAGE>
11 Earnings Per Share Computation
13 Annual Report to Stockholders for the fiscal year ended
September 30, 1996
21 Subsidiaries of the Registrant
27 Financial Data Schedule ***
- ---------------------
* Incorporated by reference to the registration statement on Form S-1
(File No. 33-80485) declared effective by the SEC on February 12, 1996.
** Incorporated by reference to the proxy statement for the special meeting
of stockholders on October 17, 1996 and filed with the SEC on September
6, 1996.
*** Only included in electronic filing.
(b) A Form 8-K was filed on July 2, 1996 in connection with a
declaration of a cash dividend on June 26, 1996
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 as of
December 26, 1996.
GREEN STREET FINANCIAL CORP
By: /s/H. D. Reaves, Jr.
H. D. Reaves, Jr.
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of December 26, 1996.
/s/H. D. Reaves, Jr. /s/John C. Pate
- ---------------------------------- ----------------------------------------
H. D. Reaves, Jr. John C. Pate
President, Chief Executive Officer Senior Vice President and Director
and Director (Principal Financial Officer)
(Principal Executive Officer)
/s/Robert O. McCoy, Jr. /s/Jerry Robertson
- ---------------------------------- ----------------------------------------
Robert O. McCoy, Jr. Jerry Robertson
Chairman of the Board and Director Vice President and Treasurer
(Principal Accounting Officer)
/s/Norwood K. Bryan, Jr. /s/Henry G. Hutaff, Sr.
- ---------------------------------- ----------------------------------------
Norwood E. Bryan, Jr. Henry G. Hutaff, Sr.
Director Vice Chairman of the Board and Director
/s/Joseph H. Hollinshed /s/John M. Grantham
- ---------------------------------- ----------------------------------------
Joseph H. Hollinshed John M. Grantham
Director Senior Vice President and Director
/s/Robert G. Ray /s/Henry W. Holt
- ---------------------------------- ----------------------------------------
Robert G. Ray Henry W. Holt
Director Director
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Year Ended
September 30, 1996
Net income for the period from April 3, 1996
to September 30, 1996 (period during which
the Company operated as a public company)......................... $1,142,385
=========
Computation of weighted average shares outstanding:
Total weighted average shares outstanding for the
period from April 3, 1996 to September 30, 1996................... 4,298,125
Less shares owned by the ESOP....................................... (260,000)
Plus shares owned by the ESOP which have been
allocated or committed to be allocated to
participants in accordance with AICPA's
SOP 93-6.......................................................... 13,000
---------
Total weighted average shares outstanding for EPS purposes.......... 4,051,125
=========
Earnings per share.................................................. $ 0.28
==========
GREEN STREET FINANCIAL CORP
1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
- -----------------------------------------------------------------------------------------------------------------
Page
<S> <C>
Selected Financial Data 1
Report to Stockholders 2
Management's Discussion and Analysis 3 - 13
Independent Auditor's Report 14
Consolidated Financial Statements of:
Financial condition at September 30, 1996 and 1995 15
Income for years ended September 30, 1996, 1995 and 1994 16
Stockholders' equity for years ended September 30, 1996, 1995 and 1994 17
Cash flows for the years ended September 30, 1996, 1995 and 1994 18 - 19
Notes to the Consolidated Financial Statements 20 - 39
Corporate Information 40
Common Stock Information 40
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------
Financial Condition Data: (In Thousands, Except per Share Amounts)
<S> <C> <C> <C> <C> <C>
Total assets $ 176,217 $ 151,028 $ 150,077 $ 163,069 $&$ 160,429
Investments securities (1) 51,403 32,174 43,605 51,749 40,777
Loans receivable, net 123,148 117,201 105,094 109,499 117,647
Savings deposits 111,385 127,483 128,334 143,220 142,361
Stockholders' equity (2) 62,180 22,230 20,453 18,643 16,818
Book value per share 14.47 - - - -
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------
Operating Data: (Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 12,583 $ 11,124 $ 10,325 $ 11,351 $ 12,785
Interest expense 6,232 6,119 5,489 6,557 8,375
------------------------------------------------------------
Net interest income 6,351 5,005 4,836 4,794 4,410
Provision for loan losses 10 - 19 52 113
Noninterest income 128 106 145 133 166
Noninterest expense (3) 3,300 2,344 2,117 2,020 2,001
------------------------------------------------------------
Income before income taxes 3,169 2,767 2,845 2,855 2,462
Income tax expense 1,099 990 1,035 1,030 893
------------------------------------------------------------
Net income $ 2,070 1,777 1,810 1,825 1,569
============================================================
Earnings per share (2) (4) $ 0.28 $ - $ - $ - $ -
Dividends per share (5) 0.35 - - - -
Selected Other Data:
Return on average assets 1.22% 1.21% 1.16% 1.12% .98%
Return on average equity 4.93% 8.29% 9.23% 10.24% 9.77%
Interest rate spread 2.50% 2.66% 2.58% 2.48% 2.19%
Net interest margin 3.78% 3.42% 3.11% 2.99% 2.79%
Dividend payout ratio 1.25% - - - -
Average equity to average assets 24.76% 14.57% 12.52% 10.98% 10.04%
Nonperforming loans to total loans (6) .25% .27% .39% .35% .51%
</TABLE>
(1) Includes interest earning deposits, federal funds, and investment
securities
(2) On April 3, 1996, Home Federal Savings and Loan Association converted from
a federally chartered mutual savings association to a federally chartered
stock savings association and became a wholly owned subsidiary of Green
Street Financial Corp
(3) Includes nonrecurring insurance assessment of $792,868 during 1996
(4) Earnings per share is based on earnings from April 3, 1996 to September 30,
1996 divided by the weighted average number of shares outstanding during
that period. See Note 1 to the consolidated financial statements.
(5) Dividends per share is based on dividends paid or declared on total
outstanding shares
(6) Nonperforming loans is comprised of loans delinquent 90 days or more
1
<PAGE>
Report to Stockholders
Effective April 3, 1996, Home Federal Savings & Loan ("Home Federal") converted
from mutual to stock ownership and became the wholly-owned sudsidiary of Green
Street Financial Corp, a holding company which was formed in connection with the
conversion.
As part of the conversion, Green Street Financial Corp issued 4,298,125 shares
of common stock, including shares purchased by the Association's ESOP, to
approximately 1,200 stockholders, all of whom were depositors of Home Federal.
The offering was significantly oversubscribed and the vote of confidence by the
investing community was extremely rewarding.
This first annual report of Green Street Financial Corp reflects the financial
results of the Holding Company and Home Federal on a consolidated basis for the
year ended September 30, 1996. However, the investment of the conversion
proceeds and other Holding Company's operations are reflected only for periods
subsequent to its inception on April 3, 1996. The financial amounts for 1995
represent only the results of Home Federal. Consolidated assets at September 30,
1996 were $176.2 million, an increase of $25.2 million over September 30, 1995.
Earnings for the year ending September 30, 1996 were $2,069,646 and represent an
increase of $292,640 over 1995. Earnings in 1996 were negatively impacted by
federal legislation to recapitalize the Savings Association Insurance Fund
(SAIF) signed into law on September 30, 1996. As a result of this legislation,
Home Federal was assessed a one time charge of $792,868, or $517,985 on an after
tax basis. By recording this SAIF assessment in the fourth quarter of the 1996
fiscal year, future earnings of the Corporation should be enhanced due to
expected lower deposit insurance premiums. Green Street Financial Corp declared
dividends of $1,417,244, or $0.35 per share in the year ending September 30,
1996.
On behalf of the Board of Directors and Employees, I wish to thank you for your
support and confidence. The trust that you have placed in us through your
investment is gratifying, and we pledge our efforts to enhance the value of your
stock through the safe and sound operation of the Corporation.
Sincerely,
/s/H. D. Reaves, Jr.
H. D. Reaves, Jr.
President
2
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
General
Green Street Financial Corp (the "Corporation") was incorporated under the laws
of the State of North Carolina for the purpose of becoming the savings and loan
holding company of Home Federal Savings and Loan (the "Association" or "Home
Federal") in connection with the Association's conversion from a federally
chartered mutual savings and loan association to a federally chartered stock
savings and loan association, pursuant to its Plan of Conversion. The
Corporation was organized in December 1995 to acquire all of the common stock of
Home Federal upon its conversion to stock form. A subscription and community
offering of the Corporation's shares closed on April 3, 1996, at which time the
Corporation acquired all of the shares of the Association and commenced
operations.
In accordance with the Plan of Conversion, the Corporation issued common stock
of $42,981,250 (including $2,600,000 in shares purchased by the ESOP), and
received proceeds of $39,126,861, net of conversion costs. The Corporation
transferred $20,863,430 of the net proceeds to Home Federal for the purchase of
all of the capital stock of the Association.
The Corporation has no operations and conducts no business of its own other than
owning Home Federal, investing its portion of the net proceeds received in the
Conversion, and lending funds to the Employee Stock Ownership Plan (the "ESOP")
which was formed in connection with the Conversion. The principal business of
the Association is accepting deposits from the general public and using those
deposits and other sources of funds to make loans secured by real estate and
other forms of collateral located in the Association's primary market area of
Cumberland and Robeson counties in North Carolina.
Home Federal's results of operations depend primarily on its net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. The Association's
operations are also affected by noninterest income, such as miscellaneous income
from loans, customer deposit account service charges, and other sources of
revenue. The Association's principal operating expenses, aside from interest
expense, consist of compensation and associated benefits, federal deposit
insurance premiums, occupancy costs, advertising, and other general and
administrative expenses.
The following discussion and analysis is intended to assist readers in
understanding the results of operations in 1996, 1995 and 1994, and changes in
financial position for the years ended September 30, 1996 and 1995,
respectively.
3
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Comparison of Financial Condition at September 30, 1996 and 1995
Total consolidated assets increased by $25.2 million during 1996, from $151.0
million at September 30, 1995 to $176.2 million at September 30, 1996. The
increase resulted primarily from the net proceeds received from the
Corporation's stock offering which closed on April 3, 1996 and resulted in a
$39.1 million increase in capital. Of the proceeds received in the Conversion,
approximately $9.5 million was withdrawn from existing deposit accounts.
Investments, including short term interest-earning deposits, federal funds sold,
and U.S. Treasury and agency obligations increased by $19.2 million, primarily
as a result of investing the proceeds received from the stock offering. Funds
generated from operations also provided a source for additional investments.
Loans receivable increased by approximately $5.9 million during 1996 to $123.1
million at September 30, 1996. The markets in which the Association operates
have experienced consistent growth in recent years, and although diversification
of the economic base continues to occur, the local economies remain dependent on
the large military installations situated in the Association's lending markets.
Savings deposits decreased by approximately $16.1 million during 1996 and
totaled $111.4 million at September 30, 1996. Approximately $9.5 million of the
decrease is attributable to the withdrawal of deposits by account holders to
purchase shares of common stock of the Corporation in the Conversion. Due to its
liquidity, as evidenced by the substantial amount of short-term interest earning
deposits invested throughout 1996, the Association elected not to agressively
price certain higher cost certificates of deposit accounts and allowed such
deposits to leave the Association upon renewal. As a result, the Association was
able to lower its cost of funds from 5.48% at September 30, 1995 to 4.95% at
September 30, 1996.
The Corporation had no outstanding borrowings during 1996 or 1995. However, the
Association has borrowing capacity through the Federal Home Loan Bank of
Atlanta.
The Corporation's return on average assets was 1.22% and 1.21%, and its return
on average equity was 4.93% and 8.29%, for 1996 and 1995, respectively. The
return on average assets in 1996 would have been 1.55% had the Association not
been required to expense the special SAIF assessment during 1996. The decline in
the return on average equity from 1995 to 1996 was due primarily to the proceeds
received from the stock offering and resulting increase in equity, and to a
lesser extent, the special SAIF assessment that the Association was required to
expense during 1996. The passage of the "Deposit Insurance Funds Act of 1996"
was undertaken to recapitalize the SAIF insurance fund of the FDIC and required
a one time assessment to the Association of 65.7 basis points of its assessable
deposit base as of March 31, 1995. The expense recorded for this special
assessment amounted to $792,868 (See Note 7 to the consolidated financial
statements).
The Association is required to meet certain capital requirements as established
by the OTS. At September 30, 1996, the Association's capital was significantly
in excess of regulatory capital requirements (See Note 14 to the consolidated
financial statements).
4
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Comparison of Operating Results for 1996, 1995 and 1994
Net Income
Net income for the years ended September 30, 1996, 1995 and 1994 was $2.1
million, $1.8 million and $1.8 million, respectively. Net income in 1996 would
have been approximately $500,000 higher than the earnings reported without the
expense associated with the special assessment that occurred as a result of the
Federal legislation to recapitalize the Savings Association Insurance Fund
(SAIF). Earnings on the invested proceeds from the stock offering had a
significant positive impact on net interest income and net income during 1996.
Net Interest Income
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities outstanding
during the period. See the table on page 9 which details the average balances,
yields and costs of interest earning assets and interest bearing liabilities and
the rate/volume table on page 10 which explains the changes in interest income,
interest expense, and net interest income attributable to changes in volume and
interest rates during 1996, 1995 and 1994.
Net interest income increased by $1,345,722 or 26.9% to $6,350,730 for the year
ended September 30, 1996 from $5,005,008 reported in 1995. Net interest income
amounted to $4,835,827 in 1994. The increase in net interest income during 1996
was attributable to an increase in the average balance of interest earning
assets due to the proceeds received from the stock offering. The average balance
of interest earning assets increased by approximately $21.7 million from 1995 to
1996. The increase in interest earning assets allowed net interest income to
increase even though the Association's net interest rate spread decreased
slightly from 2.66% in 1995 to 2.50% in 1996. Net interest income increased by
$169,181 from 1994 to 1995 primarily due to a $2.2 million increase in the
average balance of net interest earning assets. During 1994, net interest income
increased by approximately $42,000 primarily due to a decline in the
Association's cost of funds on deposits, which more than offset declines in the
yield and average balance of the loans outstanding.
Interest Income
Total interest income increased to $12,582,992 for 1996 from $11,123,601 in
1995, an increase of $1,459,391 or 13.1%. The increase in interest income during
1996 was attributable to a $21.7 million increase in the average balance of
interest earning assets due to the proceeds received from the stock offering.
The Association's overall yield on interest earning assets declined slightly
during 1996, from 7.59% in 1995 to 7.48% in 1996. During 1995, interest income
increased by approximately $799,000. Short term market rates, which increased
from 3.62% in 1994 to 5.72% in 1995, had a far greater impact on the increase in
interest income during the period than did changes in the volume of interest
earning assets. Interest income decreased during 1994 by approximately
$1,026,000 and was impacted by both decreases in yields on loans and a decline
in the average balance of loans outstanding.
5
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Interest Expense
Total interest expense increased to $6,232,262 in 1996 from $6,118,593 in 1995,
an increase of $113,669 or 1.9%. The increase in cost of funds on longer term
certificate of deposits more than offset declines in the Association's cost of
funds on passbook and transaction accounts during 1996. The Association's
average balance of deposits increased slightly during 1996 and had an immaterial
impact on the increase in interest expense. Home Federal's cost of funds was
4.98% in 1996 as compared to 4.93% in 1995. During 1995, interest expense
increased by approximately $630,000 due primarily to increases in the
Association's cost of funds, which increased from 4.06% in 1994 to 4.93% in
1995. Interest expense declined by approximately $1,068,000 during 1994 due to a
both a decrease in the balance of average outstanding deposits and a decline in
cost of funds.
Provision For Loan Losses
The Association's provision for loan losses amounted to $10,073, $-0- and
$18,601 for the years ended September 30, 1996, 1995 and 1994, respectively. The
provision, which is charged to operations, and the resulting loan loss
allowances are amounts Home Federal's management believes will be adequate to
absorb losses on existing loans that may become uncollectible. Loans are
charged-off against the allowance when management believes that collectibility
is unlikely. An evaluation to increase the provision and resulting allowances is
based on factors, such as changes in the nature and volume of the loan
portfolio, overall portfolio quality, and current economic conditions.
The Association's level of nonperforming loans, defined as loans past due 90
days or more, are relatively insignificant as percentage of total loans
outstanding and amounted to .25%, .27% and .39% at September 30, 1996, 1995 and
1994, respectively. Home Federal had no loans charged-off during the three year
period ended September 30, 1996.
Noninterest Income
Noninterest income amounted to $127,943, $105,906 and $145,434 in 1996, 1995 and
1994, respectively. Noninterest income consists primarily of service charges and
fees associated with the Association's loan and savings accounts as well as
income from insurance commissions and rental of office space.
Noninterest Expense
Noninterest expense consists primarily of operating expenses for compensation
and associated benefits, occupancy, federal insurance premiums and operating
assessments, advertising costs, and data processing charges as well as expenses
associated with general administration. Noninterest expenses amounted to
$3,300,001, $2,343,505 and $2,117,283 in 1996, 1995 and 1994, respectively.
During 1996, the Association accrued and expensed $792,868 for a special
assessment required to recapitalize the Savings Association Insurance Fund
("SAIF") of the FDIC. Without such charge, noninterest expense for 1996 would
have been $2,507,133, or approximately 7.0% higher than in 1995.
6
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Noninterest Expense (Continued)
Compensation and employee benefits increased by $94,303 during 1996 from
$1,364,132 in 1995 to $1,458,435 in 1996. The primary cause for the increase was
the expense associated with forming the ESOP during 1996. Compensation and
employee benefits increased by $226,647 during 1995 from $1,137,485 in 1994
primarily as a result of discretionary bonuses approved by the Board during
1995. Deposit insurance, excluding the special assessment in 1996, fluctuates
with the level of deposits outstanding during the periods. Occupancy,
advertising and data processing charges did not change significantly during the
three year period ended September 30, 1996. Increases in other general
administrative expense during 1996 were attributable to various costs associated
with operating as a public company. It is expected that noninterest expense will
remain above pre-conversion levels as a result of additional benefit plans and
other costs associated with operating as a public company. Expected reductions
in deposit insurance premiums are anticipated to only partially offset these
expected higher costs.
For the first three quarters of calendar year 1996, SAIF-insured institutions
paid deposit insurance assessment rates of $0.23 to $0.31 per $100 of deposits.
In contrast, institutions insured by the FDIC's Bank Insurance Fund (the "BIF")
that were well capitalized and without any significant supervisory concerns paid
the minimum annual assessment of $2,000, and all other BIF-insured institutions
paid deposit insurance assessment rates of $0.03 to $0.27 per $100 of deposits.
In response to the SAIF/BIF assessment disparity, the Deposit Funds Insurance
Act of 1996 (the "Funds Act") was enacted into law on September 30, 1996.
The Funds Act authorized the FDIC to impose a special assessment on all
institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF. As implemented by the FDIC, institutions with
SAIF-assessable deposits will pay a special assessment, subject to adjustment,
of 65.7 basis points per $100 of the SAIF-assessable deposits held at March 31,
1995. Based on the foregoing, the Corporation charged $792,868 against pretax
earnings for the quarter ended September 30, 1996. The assessment is deductible
in the taxable year paid.
Due to the recapitalization of the SAIF, the FDIC proposed on October 8, 1996 to
reduce the assessment rate for SAIF-assessable deposits for periods beginning on
October 1, 1996. The proposed assessment rates would range from 18 to 27 basis
points per $100 of deposits for the last calendar quarter of 1996 and would
range from -0- to 27 basis points per $100 of deposits for subsequent assessment
periods. However, the Funds Act also provides that the FDIC cannot assess
regular insurance assessments for an insurance fund unless required to maintain
or achieve the designated reserve ratio of 1.25% per $100 of deposits, except
for institutions that are not classified as "well capitalized" or that have
moderately severe or unsatisfactory financial, operational, or compliance
weaknesses as determined by the FDIC. The Association has not been so
classified.
Accordingly, assuming the designated reserve ratio is maintained by the SAIF
after collection of the special assessment, the Association will pay
substantially lower regular SAIF assessments compared to those paid by the
Association in recent years, as long as it maintains its current regulatory
status. Beginning January 1, 1997, the rate of deposit insurance assessed the
Association is expected to decline by approximately 70%.
7
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Noninterest Expense (Continued)
In addition, the Funds Act expanded the assessment base for the payment of
interest on FICO bonds, which were issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation, to include the deposits of both BIF and SAIF insured institutions
beginning January 1, 1997. Until December 31, 1999, or until such earlier date
on which the last savings association ceases to exist, the rate of assessment
for BIF insured deposits will be one-fifth of the rate imposed on
SAIF-assessable deposits. The current estimate of the assessment rate for the
payment of the FICO interest is approximately 1.3 basis points for
BIF-assessable deposits and 6.4 basis points for SAIF-assessable deposits.
The Funds Act also provides for the merger of the BIF and SAIF on January 1,
1999, assuming the prior elimination of the thrift charter. The Secretary of the
Treasury is required to conduct a study of the relevant factors for the
development of a common charter for banks and thrifts and report conclusions and
findings to Congress on or before March 31, 1997.
Income Taxes
The Corporation's effective income tax rate was 34.68%, 35.79% and 36.38% in
1996, 1995 and 1994 respectively. The differences in rates were due to changes
in the components of permanent tax differences.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The assets and liabilities
of the Corporation are primarily monetary in nature and changes in interest
rates have a greater impact on the Corporation's performance than do the effects
of inflation.
Future Reporting Requirements
The FASB has issued SFAS No. 123, Accounting for Stock-Based Compensation which
the Corporation has not been required to adopt as of September 30, 1996. The
Statement, which will be in effect for the Corporation's fiscal year ending
September 30, 1997, will require an accounting for stock based compensation
plans using a fair value based method which measures compensation cost at the
grant date based upon the value of the award, which is then recognized over the
service period, usually the vesting period. The accounting requirements of the
Statement apply to grants or awards entered into in fiscal years that begin
after December 15, 1995. The Statement allows the Corporation to continue to use
APB Opinion No. 25 to measure compensation cost, but requires that the pro forma
effects on net income and earnings per share be disclosed to reflect the
difference between the compensation cost, if any, from applying APB Opinion No.
25 and the related cost measured by the fair value method defined in the
Statement. The Statement will not change the reporting required for the
restricted stock plan, and does not apply to the ESOP plan. In addition, the
Statement is not expected to have a material effect on the Corporation's
consolidated financial statements because management is expected to elect to
continue to use the accounting and reporting permitted by APB Opinion No. 25 as
it relates to the stock option plan.
8
<PAGE>
Average Balances, Interest, Yields and Costs
The following table sets forth certain information relating to the
Corporation's average balance sheets and reflects the average yield on
assets indicated. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for
t from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused a material
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------------------
At September 30, 1996 1996 1995 1994
--------------------- ---------------------------- --------------------------- -----------------------------
Average Average Average
Actual Average Average Yield/ Average Yield/ Average Yield/
Balance Yield/Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ---------- ------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest
earning assets:
Interest-
bearing
deposits $ 35,233 5.79% $ 40,508 $ 2,206 5.45% $ 30,850 $ 1,766 5.72% $ 49,968 $ 1,808 3.62%
Investments,
at cost 16,170 7.07% 6,656 480 7.21% 3,416 249 7.29% 1,171 62 5.29%
Loans receivable 123,148 7.90% 121,024 9,897 8.18% 112,201 9,109 8.12% 104,528 8,455 8.09%
------- ------- ----- ------- ----- ------- -----
Total interest-
earning assets 174,551 7.40% 168,188 $ 12,583 7.48% 146,467 $ 11,124 7.59% 155,667 $ 10,325 6.64%
------ ------ ------
Non-interest-
earning assets 1,666 1,322 701 858
------- ------- ------- -------
Total $ 176,217 $ 169,510 $ 147,168 $ 156,525
========= ========= ========= =========
Liabilities and
retained earnings:
Interest-bearing
liabilities:
Passbook accounts $ 14,680 2.75% $ 20,068 $ 548 2.73% $ 15,870 $ 576 3.63% $ 16,974 $ 499 2.94%
MMDA accounts 13,423 3.98% 14,344 583 4.06% 14,845 622 4.19% 18,088 553 3.06%
Certificates of
deposit 83,251 5.36% 90,779 5,101 5.62% 93,281 4,921 5.28% 100,298 4,437 4.42%
------- ------- ----- ------- ----- ------- -----
Total interest-
bearing liab11ities 111,354 4.95% 125,191 $ 6,232 4.98% 123,996 $ 6,119 4.93% 135,360 $ 5,489 4.06%
------ ------ ------
Non-interest-bearing
liabilities 2,683 2,354 1,727 1,563
Stockholders' Equity 62,180 41,965 21,445 19,602
------ ------ ------ ------
Total $ 176,217 $ 169,510 $ 147,168 $ 156,525
========= ========= ========= =========
Net interest income
and interest
rate spread (1) 2.45% $ 6,351 2.50% $ 5,005 2.66% $ 4,836 2.58%
===== ===== =====
Net yield on
interest-earning
assets (2) 4.24% 3.78% 3.42% 3.11%
Ratio of interest-
earning assets
to interest-
bearing
liabilities 156.75% 134.35% 118.12% 115.00%
</TABLE>
(1) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net yield on interest-earning assets represents net interest income divided
by average interest-earning assets.
9
<PAGE>
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of the Corporation's interest earning
assets and interest bearing liabilities. The table distinguishes between (i)
changes in net interest income attributable to volume (changes in volume
multiplied by the prior period's interest rate), (ii) changes in net interest
income attributable to rate (changes in interest rates multiplied by the prior
period's volume), and (iii) mixed changes (changes in volume multiplied by
changes in rates).
<TABLE>
<CAPTION>
Year ended September 30, Year ended September 30,
1996 vs. 1995 1995 vs. 1994
----------------------------------------- -----------------------------------------
Increase (Decrease) Attributable to Increase (Decrease) Attributable to
----------------------------------------- -----------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
Interest income on:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning deposits $ 553 $ (86) $ (27) $ 440 $ (692) $ 1,052 $ (402) $ (42)
Investments, at cost 236 (3) (2) 231 119 23 45 187
Loans receivable 716 66 6 788 621 31 2 654
------- -------- -------- -------- -------- -------- -------- --------
Total interest income on
interest-earning assets 1,505 (23) (23) 1,459 48 1,106 (355) 799
------- -------- -------- -------- -------- -------- -------- --------
Interest expense on:
Passbook accounts 152 (143) (37) (28) (32) 117 (8) 77
MMDA accounts (21) (19) 1 (39) (99) 205 (37) 69
Certificates of deposit (132) 321 (9) 180 (310) 854 (60) 484
------- -------- -------- -------- -------- -------- -------- --------
Total interest expense on
interest-bearing
liabilities (1) 159 (45) 113 (441) 1,176 (105) 630
------- -------- -------- -------- -------- -------- -------- --------
Increase (decrease) in net
interest income $ 1,506 $ (182) $ 22 $ 1,346 $ 489 $ (70) $ (250) $ 169
======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
10
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Capital Resources and Liquidity
During 1996, Green Street Financial Corp paid a regular quarterly dividend of
$.10 a share on July 19, 1996 and declared a regular quarterly and a special
dividend of $.10 and $.15 a share, respectively, on August 28, 1996 to be paid
on October 25, 1996 to stockholders of record as of October 11, 1996. Although
the Corporation anticipates that it will continue to declare cash dividends on a
regular basis, the Board of Directors will continue to review its policy on the
payment of dividends on an ongoing basis, and such payment will be subject to
future earnings, cash flows, capital needs, and regulatory restrictions.
The objective of the Corporation's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities to enhance stockholders' value. More specifically,
liquidity ensures that adequate funds are available to meet deposit withdrawals,
fund loan and capital expenditure commitments, maintain reserve requirements,
pay operating expenses and dividends to stockholders, and other institutional
commitments. Funds are primarily provided through financial resources from
operating activities, expansion of the deposit base, the sale or maturity of
investments, or the ability to raise equity capital.
During the year ended September 30, 1996, cash and cash equivalents, a
significant source of liquidity, increased by approximately $6.8 million. Cash
and cash equivalents decreased by $14.2 million during 1995. Cash flow resulting
from internal operating activities provided increases of $2.5 million and $1.8
million in cash during the years ended September 30, 1996 and 1995,
respectively. Also, financing activities have provided sources of funds for
asset growth and liquidity. For the year ended September 30, 1996, deposits
decreased by $16.1 million but proceeds from the stock offering provided an
additional $39.1 million of cash. The proceeds from the stock offering were used
primarily to fund investment and loan growth as well as enable the Association
to fund deposit outflows. Deposits decreased by approximately $851,000 during
1995. The Association's ability to generate deposits has historically been
sufficient to fund its loan demand and provide for adequate liquidity without
the need to access other forms of credit availability. The recent stock offering
will also enhance the Association's ability to grow, and lessen to some extent
its reliance on its deposit base for financing its operations. In addition, the
Association has a readily available source of credit through its borrowing
capacity at the Federal Home Loan Bank of Atlanta.
Cash provided by operating and financing activities is used to originate new
loans to customers, to maintain liquid investment portfolios, and to meet short
term liquidity requirements. During 1996 and 1995, loans outstanding increased
by $6.2 million and $12.1 million, respectively. During 1996 and 1995, the
Corporation purchased investment securites amounting to $12.0 million and $3.0
million, respectively. There were no other investment securities activities in
1996 or 1995.
As a federally chartered savings association, Home Federal must maintain a daily
average balance of liquid assets equal to at least 5% of withdrawable deposits
and short-term borrowings. The Association's liquidity ratio at September 30,
1996, as computed under OTS regulations, was considerable in excess of such
requirements. Given its excess liquidity and its ability to borrow from the
Federal Home Loan Bank, the Association believes that it will have sufficient
funds available to meet anticipated future loan commitments, unexpected deposit
withdrawals, and other cash requirements.
11
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Asset/Liability Management
Home Federal's asset/liability management, or its management of interest rate
risk, is focused primarily on evaluating and managing the Association's net
interest income given various risk criteria. Factors beyond the Association's
control, such as market interest rates and competition, may also have an impact
on the Association's interest income and interest expense. In the absence of
other factors, the Association's overall yield on interest-earning assets will
increase as will its cost of funds on its interest-bearing liabilities when
market rates increase over an extended period of time. Inversely, the
Association's yields and cost of funds will decrease when market rates decline.
The Association is able to manage these swings to some extent by attempting to
control the maturity or rate adjustments of its interest-earning assets and
interest-bearing liabilities over given periods of time.
In order to encourage savings associations to reduce their interest rate risk,
the OTS adopted a rule incorporating an interest rate risk ("IRR") component
into the risk-based capital rules. However, this rule is not yet in effect. The
IRR component is a dollar amount that will be deducted from total capital for
the purpose of calculating an institution's risk-based capital requirement and
is measured in terms of the sensitivity of its net portfolio value ("NPV") to
changes in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the estimated present value of total assets
("PV") will require the institution to deduct from its capital 50% of that
excess change. The rules provide that the OTS will calculate the IRR component
quarterly for each institution. The following table presents the Association's
NPV at September 30, 1996, as calculated by the OTS, based on quarterly
information voluntarily provided to the OTS by the Association. Certain
assumptions utilized by the OTS in assessing the interest rate risk of savings
associations were employed in preparing the table. These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market
values of certain assets under the various interest rate scenarios. It was also
assumed that delinquency rates will not change as a result of changes in
interest rates although there can be no assurance that this will be the case.
Even if interest rates change in the designated amounts, there can be no
assurance that the Association's assets and liabilities would perform as set
forth below.
As a result, certain shortcomings are inherent in the following NPV table
because the data reflects hypothetical changes in NPV based upon assumptions
used by the OTS to evaluate the Association as well as other institutions.
However, based on the the data below, net interest income should decline with
instantaneous increases in interest rates while net interest income should
increase with instantaneous declines in interest rates. Generally during periods
of increasing interest rates, the Association's interest rate sensitive
liabilities would reprice faster than its interest rate sensitive assets causing
a decline in the Association's interest rate spread and margin. This would
result from an increase in the Association's cost of funds that would not be
immediately offset by an increase in its yield on earning assets. An increase in
the cost of funds without an equivalent increase in the yield on earning assets
would tend to reduce net interest income. In times of decreasing interest rates,
fixed rate assets could increase in value and the lag in repricing of interest
rate sensitive assets could be expected to have a positive effect on the
Association's net interest income.
12
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Asset/Liability Management (Continued)
<TABLE>
<CAPTION>
Net Portfolio Value NPV as a % of PV of Assets
------------------------------------------------- ------------------------------
Change in Rates $ Amount $ Change (1) % Change (2) NPV Ratio (3) Change (4)
- ------------------- ------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
+400 bp 33,846 (12,747) -27% 23.28% -590 bp
+300 bp 37,083 (9,511) -20% 24.89% -429 bp
+200 bp 40,370 (6,223) -13% 26.44% -274 bp
+100 bp 43,595 (2,999) -6% 27.89% -129 bp
0 bp 46,593 - - 29.18% -
- -100 bp 49,046 2,452 +5% 30.19% +100 bp
- -200 bp 50,565 3,972 +9% 30.76% +158 bp
- -300 bp 52,033 5,439 +12% 31.31% +212 bp
- -400 bp 53,865 7,272 +16% 31.99% +281 bp
</TABLE>
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by present value of total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
At September 30, 1996, a change in interest rates of a positive 200 basis points
would have resulted in a 274 basis point decrease in NPV as a percentage of the
present value of the Association's total assets. Utilizing the OTS IRR
measurement described above, at September 30, 1996 the Association would have
been considered by the OTS to have been subject to "above normal" IRR. However
the Association is substantially in excess of its required risk-based capital
requirement at September 30, 1996 and would continue to be so even if the IRR
component rule was implemented by the OTS.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Association's operations,
management has implemented an asset/liability program designed to improve the
Association's interest rate sensitivity. The program emphasizes the origination
of adjustable rate loans, which are held in the portfolio, the investment of
excess cash in short or intermediate term interest earning assets, and the
solicitation of passbook or transaction deposit accounts which are less
sensitive to changes in interest rates and can be repriced rapidly.
13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Green Street Financial Corp
Fayetteville, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Green Street Financial Corp and subsidiary as of September 30, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three year period ended September 30, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Green Street Financial Corp and
subsidiary as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three year period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Corporation
changed its method of accounting for certain investments during the year ended
September 30, 1995.
/s/McGladrey & Pullen, LLP
Raleigh, North Carolina
October 14, 1996, except for Note 18,
as to which the date is October 17, 1996
14
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------------
Cash and short-term cash investments:
<S> <C> <C>
Interest-bearing $ 33,107,849 $ 27,472,071
Noninterest-bearing 249,345 638,210
Federal funds sold 2,124,712 537,769
Investment securities: (Note 3)
Held to maturity; market value, $15,038,913; $3,060,000 in 1995 14,999,179 2,993,438
Nonmarketable equity securities 1,170,889 1,170,889
Loans receivable, net (Note 4) 123,147,779 117,201,293
Accrued interest receivable, investments 255,566 116,911
Real estate acquired in settlement of loans 34,425 -
Property and equipment, net (Note 5) 330,260 352,252
Prepaid expenses and other assets (Note 11) 675,084 533,051
Refundable income taxes - 12,000
Deferred tax assets (Note 13) 122,000 -
---------------------------------
Total assets $ 176,217,088 $ 151,027,884
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 6) $ 111,385,386 $ 127,482,945
Advance payments by borrowers for taxes and insurance 179,444 636,529
Accrued expenses and other liabilities 174,607 139,004
Special SAIF assessment (Note 7) 792,868 -
Dividends payable 1,074,531 -
Deferred compensation (Note 8) 405,233 411,015
Deferred income taxes (Note 13) - 128,000
Income taxes payable 25,000 -
---------------------------------
Total liabilities 114,037,069 128,797,493
---------------------------------
Commitments and contingencies (Note 15)
Stockholders' Equity (Note 14 ):
Preferred stock, authorized 1,000,000 shares; none issued - -
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding 4,298,125 in 1996 - -
Additional paid-in capital 41,767,226 -
Note receivable, ESOP (Note 10) (2,470,000) -
Retained earnings, substantially restricted (Notes 13 and 14) 22,882,793 22,230,391
---------------------------------
62,180,019 22,230,391
---------------------------------
$ 176,217,088 $ 151,027,884
================================
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Interest and dividend income:
<S> <C> <C> <C>
Loans $ 9,897,134 $ 9,108,701 $ 8,455,419
Short-term cash investments 2,206,230 1,766,248 1,807,749
Investment securities 479,628 248,652 61,623
-----------------------------------------------
Total interest income 12,582,992 11,123,601 10,324,791
Interest on deposits (Note 6) 6,232,262 6,118,593 5,488,964
-----------------------------------------------
Net interest income 6,350,730 5,005,008 4,835,827
Provision for loan losses (Note 4) 10,073 - 18,601
-----------------------------------------------
Net interest income after
provision for loan losses 6,340,657 5,005,008 4,817,226
-----------------------------------------------
Noninterest income:
Service charges and fees 52,595 43,119 78,551
Other 75,348 62,787 66,883
-----------------------------------------------
127,943 105,906 145,434
-----------------------------------------------
Noninterest expense:
Compensation and benefits (Notes 8, 9,10 and 11) 1,458,435 1,364,132 1,137,485
Deposit insurance 334,329 336,479 369,505
Special SAIF assessment (Note 7) 792,868 - -
Occupancy expenses 161,807 155,249 148,279
Advertising 137,558 159,632 130,096
Data processing expense 97,384 93,235 95,130
Other 317,620 234,778 236,788
-----------------------------------------------
3,300,001 2,343,505 2,117,283
-----------------------------------------------
Income before income taxes 3,168,599 2,767,409 2,845,377
-----------------------------------------------
Income taxes (credits) (Note 13):
Current 1,348,953 971,403 939,069
Deferred (250,000) 19,000 96,000
-----------------------------------------------
1,098,953 990,403 1,035,069
-----------------------------------------------
Net income $ 2,069,646 $ 1,777,006 $ 1,810,308
-----------------------------------------------
Earnings per share (Note 1) $ 0.28 $ - $ -
-----------------------------------------------
Cash dividends per share $ 0.35 $ - $ -
-----------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Note
Paid-in Receivable Retained
Capital ESOP Earnings Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1993 $ - $ - $ 18,643,077 $ 18,643,077
Net income 1,810,308 1,810,308
-------------------------------------------------------------------
Balance at September 30, 1994 - - 20,453,385 20,453,385
Net income - - 1,777,006 1,777,006
-------------------------------------------------------------------
Balance at September 30, 1995 - - 22,230,391 22,230,391
Net income - - 2,069,646 2,069,646
Net proceeds from issuance of
common stock (Note )
of common stock (Note 14) 39,126,861 - - 39,126,861
Purchase of common stock
by the ESOP (Note 10) 2,600,000 (2,600,000) - -
Repayment of ESOP note - 130,000 - 130,000
ESOP contribution (Note 10) 40,365 - - 40,365
Cash dividends (Note 10) - - (1,417,244) (1,417,244)
-------------------------------------------------------------------
Balance at September 30, 1996 $ 41,767,226 $ (2,470,000) $ 22,882,793 $ 62,180,019
===================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net income $ 2,069,646 $ 1,777,006 $ 1,810,308
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 42,428 42,137 41,499
Accretion of investment discounts (5,741) - -
Net (gain) on disposal of real estate
acquired in settlement of loans (22,104) (1,220) (1,247)
Provision for loan losses 10,073 - 18,601
Provision for loss on real estate acquired
in settlement of loans - - 10,000
ESOP contribution expense credited to
additional paid-in capital 40,365 - -
Increase (decrease) in reserve for
uncollected interest 2,529 (16,975) 1,881
Increase (decrease) in deferred income taxes (250,000) 19,000 96,000
Increase (decrease) in deferred compensation (5,782) 14,222 14,473
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (80,283) (60,427) (87,803)
Refundable income taxes 12,000 (12,000) -
Accrued interest receivable (138,655) (56,911) (18,400)
Increase (decrease) in:
Accrued expenses and other liabilities 35,603 100,674 10,978
Accrued special SAIF assessment 792,868 - -
Income taxes payable 25,000 (12,500) 7,500
-----------------------------------------------
Net cash provided by operating activities 2,527,947 1,793,006 1,903,790
-----------------------------------------------
Cash Flows From Investing Activities
Purchase of held to maturity investment securities (12,000,000) (2,993,438) -
Net (increase) decrease in loans receivable (6,174,422) (12,130,078) 4,297,013
Proceeds from sale of real estate acquired
in settlement of loans 203,013 79,158 134,580
Purchase of property and equipment (20,436) (15,709) (9,593)
-----------------------------------------------
Net cash provided by (used in)
investing activities (17,991,845) (15,060,067) 4,422,000
-----------------------------------------------
</TABLE>
18
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
<S> <C> <C> <C>
Net decrease in deposits $ (16,097,559) $ (850,916) $ (14,885,843)
Decrease in advance payments by borrowers
for taxes and insurance (457,085) (96,688) (44,867)
Net proceeds received from issuance of
common stock 39,126,861 - -
Principal repayments received on ESOP note 130,000 - -
Cash dividends paid (404,463) - -
----------------------------------------------
Net cash provided by (used in)
financing activities 22,297,754 (947,604) (14,930,710)
----------------------------------------------
Net increase (decrease) in cash
and cash equivalents 6,833,856 (14,214,665) (8,604,920)
Cash and cash equivalents:
Beginning 28,648,050 42,862,715 51,467,635
----------------------------------------------
Ending $ 35,481,906 $ 28,648,050 $ 42,862,715
==============================================
Cash and cash equivalents:
Cash and short-term investments:
Interest-bearing $ 33,107,849 $ 27,472,071 $ 41,424,379
Noninterest-bearing 249,345 638,210 428,336
Federal funds sold 2,124,712 537,769 1,010,000
----------------------------------------------
$ 35,481,906 $ 28,648,050 $ 42,862,715
==============================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 6,239,628 $ 6,144,260 $ 5,053,465
==============================================
Income taxes $ 1,147,800 $ 997,000 $ 937,000
==============================================
Supplemental Disclosure of Noncash Investing
and Financing Activities:
Transfer from loans to real estate
acquired in settlement of loans $ 215,334 $ 40,190 $ 86,886
===============================================
Dividends declared and accrued $ 1,012,781 $ - $ -
===============================================
Stock issued in exchange for note receivable
from ESOP $ 2,600,000 $ - $ -
===============================================
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Conversion and organization of holding corporation: On April 3, 1996, pursuant
to a Plan of Conversion which was approved by its members and regulators, Home
Federal Savings and Loan Association ("Home Federal" or the "Association")
converted from a federally chartered mutual savings and loan association to a
federally chartered stock savings and loan association, and became a
wholly-owned subsidiary of Green Street Financial Corp (the "Corporation"). The
Corporation was formed in December 1995 to acquire all of the common stock of
the Association upon its conversion to stock form. The Corporation has no
operations and conducts no business of its own other than owning Home Federal,
investing its portion of the net proceeds received in the Conversion, and
lending funds to the Employee Stock Ownership Plan (the "ESOP") which was formed
in connection with the Conversion.
Nature of business: The Association is a federally chartered operating savings
and loan association primarily engaged in the business of obtaining deposits and
providing mortgage credit to the general public. The Association's primary
regulator is the Office of Thrift Supervision (OTS) and its deposits are insured
by the Savings Association Insurance Fund ("SAIF") of the FDIC.
Basis of financial statement presentation: The accounting and reporting policies
of the Corporation conform to generally accepted accounting principles and
general practices within the financial services industry. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates.
Outlined below are the accounting and reporting policies considered significant
by the Corporation:
Principles of consolidation: The consolidated financial statements for the year
ended September 30, 1996 include the accounts of Green Street Financial Corp and
its wholly-owned subsidiary, Home Federal Savings and Loan Association. Green
Street Financial Corp was capitalized on April 3, 1996; therefore, the
consolidated financial statements include the operations of the Corporation for
periods subsequent to April 3, 1996. The financial statements for the years
ended September 30, 1995 and 1994 present only the accounts and operations of
Home Federal. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and cash equivalents: For purposes of reporting cash flows, the Corporation
considers cash on hand and amounts due from depository institutions,
interest-bearing deposits, and federal funds sold to be cash equivalents. At
times, the Corporation maintains deposits in correspondent banks in amounts that
may be in excess of the FDIC insurance limit.
Investment securities: The Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 115 Accounting for Certain Investments in Debt and Equity
Securities as of October 1, 1994. At the date of adoption, the Association held
no debt securities. Equity securities, which are nonmarketable, do not require
classification under SFAS No. 115 and continue to be carried at cost. Subsequent
to the adoption of SFAS No. 115, the Association carries its investments in debt
securities at amortized cost pursuant to its classification of such securities.
See Note 2 for a further explanation of the effects of the adoption of SFAS No.
115 on the Corporation's financial statements. Gain or loss on sale of
securities is recognized when realized and is based upon the
specific-identification method.
20
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Loans receivable: Loans receivable are stated at unpaid principal balances, less
allowances for loan losses, the undisbursed portion of loans in process, and net
deferred loan origination fees and discounts. The loan portfolio consists
principally of long-term conventional loans collateralized by first deeds of
trust on single-family residences, other residential property, nonresidential
property and land.
Loan fees and discounts: The Association receives fees for originating and
servicing loans. The Association defers all origination fees less certain direct
costs as an adjustment to yield of the related loans and amortizes such fees
into income, using the interest method, over the economic life of the related
loans, estimated to be twelve years
Allowance for loan losses: Provisions for loan losses are charged to operations
based on the Association's evaluation of potential losses in its loan portfolio.
Losses are charged against the allowance when collectibility is unlikely. The
allowance is an amount that management believes will be adequate to absorb
losses on existing loans that may become uncollectible based upon evaluations of
the collectibility of loans, and prior loan loss experience. The evaluations
take into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrowers' ability to pay. While
management uses the best information available to make evaluations, future
adjustments may be necessary, if economic or other conditions differ
substantially from the assumptions used.
The Association adopted SFAS No. 114 Accounting by Creditors for Impairment of a
Loan which was subsequently amended by SFAS No. 118 Accounting by Creditors for
Impairment of a Loan- Income Recognition and Disclosures during 1996. SFAS No.
114 requires that the Association establish specific loan loss allowances on
impaired loans if it is doubtful that all principal and interest due according
to the loan terms will be collected. The adoption of SFAS No. 114 did not have
an effect on the Association's reporting for impaired loans since the
Association had no loans outstanding during the year ended September 30, 1996
which it considers to be impaired. Therefore, there is no specific SFAS No. 114
allowance for impaired loans at September 30, 1996.
Interest income: The Association adopted SFAS No. 118 during 1996 which requires
the disclosure of the Association's method of accounting for interest income on
impaired loans. The Association does not record interest on loans delinquent 90
days or more, as it establishes reserves for uncollected interest. Such interest
when ultimately collected is credited to income in the period received. The
Association anticipates that it will account for interest on impaired loans in a
similar fashion in the future if and when it has impaired loans.
Property, equipment and depreciation: Property and equipment are stated at cost,
less accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the various classes of assets.
21
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Real estate acquired in settlement of loans: Real estate acquired in settlement
of loans is initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of cost or
fair value, minus estimated cost to sell. Costs relating to the development and
improvement of the property are capitalized, while holding costs of the property
are charged to expense in the period incurred.
Advance payments by borrowers for taxes and insurance: The Association requires
certain borrowers to make monthly payments, in addition to principal and
interest, in order to accumulate funds from which the Association can pay the
borrowers' property taxes and insurance premiums.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Retirement plans: The Association has a defined benefit pension plan covering
substantially all of its employees. The Association's funding policy is to make
annual contributions that are allowable for income tax purposes. The Association
also has an ESOP which covers substantially all of its employees. Contributions
to the plan are based on amounts necessary to fund the amortization requirements
of the ESOP's debt to the Corporation, subject to compensation limitations, and
are expensed based on the AICPA's Statement of Position 93-6, Employers'
Accounting for Employee Stock Ownership Plans.
Earnings per share: The earnings per share computation for 1996 is based on net
income earned from the date of Conversion, April 3, 1996, divided by the
weighted average number of shares outstanding from the date of Conversion to the
end of the 1996 fiscal year. In addition, the ESOP purchased 260,000 shares in
the Conversion with funds borrowed from the Corporation. In accordance with the
AICPA's SOP 93-6, 247,000 of the ESOP's shares which are presently unallocated
were deducted from outstanding shares used in the computation of earnings per
share.
Off-balance-sheet risk and credit risk: The Association is a party to financial
instruments with off-balance-sheet risk such as commitments to extend credit.
Management assesses the risk related to these instruments for potential loss.
The Association lends primarily on one-to-four family residential loans
throughout its primary lending area. This area encompasses the Cumberland and
Robeson counties of North Carolina.
22
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Fair value of financial instruments: The estimated fair values required under
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required to develop the
estimates. Accordingly, the estimates presented in Note 12 for the fair value of
the Corporation's financial instruments are not necessarily indicative of the
amounts the Corporation could realize in a current market exchange. The use of
different market assumptions or estimation methodologies may have a material
effect on the estimated fair value amounts.
The fair value estimates are based on pertinent information available to
management as of September 30, 1996 and 1995, respectively. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates, and therefore, current
estimates of fair value may differ significantly from the amounts presented
herein. The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and short term cash investments / federal funds sold / Accrued
interest receivable: The carrying amounts reported in the statement of
financial condition for cash and short-term cash investments, for federal
funds sold, and for accrued interest receivable approximates those assets'
fair values.
Investment securities: Investment securities consists of US Treasury and
agency obligations, Federal Home Loan Bank stock and Central Service
Corporation stock. The fair values of the US Treasury and agency
obligations are determined based on quoted market values. No ready market
exists for the equity securities, and they have no quoted market value.
For disclosure purposes, such securities are assumed to have a fair value
which is equal to its cost or redemption value.
Loans receivable: The fair value for all loans has been estimated by
discounting the projected future cash flows at September 30, 1996 and
1995, using the rate on those dates at which similar loans would be made
to borrowers with similar credit ratings and for similar maturities or
repricing periods. The discount rate used has been adjusted by an
estimated credit risk factor to approximate the adjustment that would be
applied in the marketplace for any nonperforming loans. Certain prepayment
assumptions have also been made depending upon the original contractual
lives of the loans.
Deposits: The fair value of deposits with no stated maturities, including
transaction accounts and passbook savings accounts is estimated to be
equal to the amount payable on demand as of September 30, 1996 and 1995.
The fair value of certificates of deposit is based upon the discounted
value of future contractual cash flows. The discount rate is estimated
using the rates offered on September 30, 1996 and 1995 for deposits of
similar remaining maturities.
Off-balance-sheet commitments: Because the Association's commitments,
which consist entirely of loan commitments, are either short-term in
nature or subject to immediate repricing, no fair value has been assigned
to these off-balance-sheet items.
23
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Change in Accounting Method
On October 1, 1994, the Association adopted SFAS No. 115 Accounting for Certain
Investments in Debt and Equity Securities. Upon adoption, the Association was
required to report the balances of available for sale securities at their
estimated market values. At October 1, 1994, none of the Association's
investment securities were subject to classification under the standard. All of
the Association's debt instruments which have been purchased subsequent to the
adoption SFAS No. 115 have been classified by the Corporation as held to
maturity because the Corporation has the ability and the intent to do so. The
classification of securities as required by SFAS No 115 and the Corporation's
accounting policies as a result of its adoption are as follows:
Securities held to maturity: Securities classified as held to maturity are those
debt securities the Corporation has both the intent and the ability to hold to
maturity regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premiums or accretion of discounts, computed by a method
which approximates the interest method over their contractual lives.
Securities available for sale: Securities classified as available for sale are
those debt securities that the Corporation intends to hold for an indefinite
period of time but not necessarily to maturity and marketable equity securities
not classified as held for trading. Any decision to sell a security classified
as available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of its securities,
liquidity needs and other similar factors. Securities available for sale are
carried at fair value. Unrealized gains and losses are reported as a separate
component of equity, net of related tax effects. Realized gains and losses are
included in earnings. The Corporation currently has no securities which are
classified as available for sale.
Securities held for trading: Trading securities are held in anticipation of
short-term market gains. Such securities are carried at fair value with realized
and unrealized gains and losses included in earnings. The Corporation currently
has no securities which are classified as trading.
24
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Investment Securities
The amortized cost and estimated market value of investment securities are as
follows at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
----------------------------------------------------------
1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Held to maturity: Costs Gains Losses Value
----------------------------------------------------------
Debt securities:
<S> <C> <C> <C> <C>
US Treasury obligations $ 2,999,179 $ 16,760 $ - $ 3,015,939
US Agency obligations 12,000,000 22,974 - 12,022,974
-----------------------------------------------------------
14,999,179 39,734 - 15,038,913
-----------------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank Stock 1,126,400 - - 1,126,400
Central Service Corporation Stock 44,489 - - 44,489
-----------------------------------------------------------
1,170,889 - - 1,170,889
-----------------------------------------------------------
$ 16,170,068 $ 39,734 $ - $ 16,209,802
===========================================================
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Held to maturity: Costs Gains Losses Value
----------------------------------------------------------
Debt securities:
<S> <C> <C> <C> <C>
US Treasury obligations $ 2,993,438 $ 66,562 $ - $ 3,060,000
----------------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank Stock 1,126,400 - - 1,126,400
Central Service Corporation Stock 44,489 - - 44,489
----------------------------------------------------------
1,170,889 - - 1,170,889
----------------------------------------------------------
$ 4,164,327 $ 66,562 $ - $ 4,230,889
==========================================================
</TABLE>
The Association, as a member of the Federal Home Loan Bank system, is required
to maintain an investment in capital stock of the Federal Home Loan Bank in an
amount equal to the greater of one percent of its outstanding residential
mortgage loans or one-twentieth of its outstanding advances. No ready market
exists for the stock, and it has no quoted market value. For disclosure
purposes, such stock is assumed to have a market value equal to its cost. The
Central Service Corporation stock is also of limited marketability and is
assumed to have a market value equal to its cost.
25
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Investment Securities (Continued)
The amortized cost and estimated fair value of debt securities in the "held to
maturity" category at September 30, 1996 by contractual maturity are as shown
below. The Corporation has no debt securities classified as "available for sale"
at September 30, 1996.
<TABLE>
<CAPTION>
1996
-----------------------------
Estimated
Amortized Market
-----------------------------
Held to maturity:
<S> <C> <C>
Due in less than one year $ 2,999,179 $ 3,015,939
Due in one year through five years 12,000,000 12,022,974
-----------------------------
$ 14,999,179 $ 15,038,913
=============================
</TABLE>
There were no sales of investment securities during 1996, 1995 or 1994.
Note 4. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------------------------------
Mortgage loans:
<S> <C> <C>
Residential one-to-four family $ 102,011,126 $ 94,668,769
Residential multi-family 5,578,541 5,576,825
Nonresidential real estate 15,544,319 16,662,767
Residential construction 2,947,667 2,218,030
Share loans 141,868 229,049
----------------------------------
126,223,521 119,355,440
----------------------------------
Less:
Allowance for loan losses 234,763 224,690
Unamortized loan fees 930,788 899,812
Undisbursed portion of loans in process 1,910,191 1,029,645
----------------------------------
3,075,742 2,154,147
----------------------------------
$ 123,147,779 $ 117,201,293
==================================
</TABLE>
26
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Loans Receivable (Continued)
The following sets forth information regarding the Association's allowance for
loan losses:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 224,690 $ 224,690 $ 206,089
Provisions charged to income 10,073 18,601
Charge-offs - - -
---------------------------------------------------
Balance, ending $ 234,763 $ 224,690 $ 224,690
===================================================
</TABLE>
The Association places loans on nonaccrual status when a loan is contractually
more than 90 days delinquent by establishing reserves for uncollected interest.
When uncollected interest is subsequently received, the reserve is reduced and
the interest is recorded as income. At September 30, 1996, 1995, and 1994 the
Association had loans totaling $309,666, $318,737, and $405,032, respectively,
which were contractually delinquent 90 days or more. Interest income on these
loans, which would have been recognized had the loans amortized as scheduled,
has been decreased by $13,626, $11,098, and $28,073 for the years ended
September 30, 1996, 1995 and 1994.
The Association adopted SFAS No. 114 Accounting by Creditors for Impairment of a
Loan during 1996 which requires that the Association establish specific
allowances on impaired loans. The Association had no loans outstanding during
the year ended September 30, 1996 which it considers to be impaired. Therefore,
there is no specific SFAS No. 114 allowance for impaired loans at September 30,
1996.
During 1996, the Association adopted SFAS No. 118 Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures which requires
disclosure of the Association's method of accounting for interest income on
impaired loans. (See Note 1)
Note 5. Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------
<S> <C> <C>
Land $ 150,972 $ 150,972
Buildings 717,851 700,763
Furniture and equipment 279,560 319,220
----------------------------------
1,148,383 1,170,955
Accumulated depreciation (818,123) (818,703)
----------------------------------
$ 330,260 $ 352,252
==================================
</TABLE>
27
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Deposits
Deposits consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------------------------------
<S> <C> <C>
Passbook accounts, 2.75% (4.00% in 1995) $ 14,679,647 $ 15,024,712
NOW accounts, 2.50% (3.75% in 1995) 132,220 182,876
Super NOW accounts, 4.00% (4.50% in 1995) 127,806 229,160
Money market accounts,4.00% (4.50% in 1995) 13,163,166 13,751,713
----------------------------------
28,102,839 29,188,461
----------------------------------
Certificates:
3.00% and below 1,462,652 2,624,115
3.01% - 5.00% 29,080,510 11,888,492
5.01% - 7.00% 52,301,109 83,350,033
7.01% and above 406,865 393,067
----------------------------------
83,251,136 98,255,707
----------------------------------
Accrued interest on deposits 31,411 38,777
----------------------------------
$ 111,385,386 $ 127,482,945
==================================
Weighted average cost of funds 4.95% 5.48%
==================================
</TABLE>
Certificate accounts are summarized by maturity at September 30, 1996 as
follows:
<TABLE>
<CAPTION>
1997 1998 1999 Thereafter Total
-----------------------------------------------------------------------------
<C> <C> <C> <C> <C>
3.00% and below $ 784,392 $ 543,315 134,945 - $ 1,462,652
3.01% - 5.00% 26,739,881 2,340,629 - - 29,080,510
5.01% - 7.00% 39,889,692 5,564,099 4,221,014 2,626,304 52,301,109
7.01% and above 37,717 75,132 56,055 237,961 406,865
-----------------------------------------------------------------------------
$ 67,451,682 $ 8,523,175 $ 4,412,014 $ 2,864,265 $ 83,251,136
=============================================================================
</TABLE>
The aggregate amount of certificates of deposit included in the table above with
a minimum denomination of $100,000 is shown below:
<TABLE>
<CAPTION>
Maturity Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Less than 3 months $ 2,010,414
4 to 12 months 5,069,320
More than 12 months 2,030,736
------------------
$ 9,110,470
==================
</TABLE>
28
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Deposits (Continued)
Interest expense on deposits for the years ended September 30 1996, 1995, and
1994 is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
NOW and money market accounts $ 583,368 $ 621,667 $ 552,992
Passbook accounts 547,924 576,057 498,489
Certificate accounts 5,100,970 4,920,869 4,437,483
---------------------------------------------------
$ 6,232,262 $ 6,118,593 $ 5,488,964
===================================================
</TABLE>
Note 7. Special SAIF Assessment
On September 30, 1996, the "Deposit Insurance Funds Act of 1996" was signed into
law. The legislation included a special assessment to recapitalize the SAIF
insurance fund up to it statutory goal of 1.25% of insured deposits. The
assessment is equal to approximately 65.7 basis points of the SAIF assessable
deposit base as of March 31, 1995. Although the assessment will be paid during
the three month period ended December 31, 1996, the Association was required to
accrue and expense such cost as of September 30, 1996. In addition, this
assessment can not be deducted for tax purposes until paid. The expense recorded
for the special assessment amounted to $792,868.
Note 8. Deferred Compensation
The Association has a deferred compensation plan for its directors whereby in
return for deferring directors fees for five years, the directors will be paid
specified amounts during a five or ten year period following the date that the
director becomes 65 years of age. The Association has purchased life insurance
policies with the Association named as beneficiary to fund the benefits. Total
expense related to the Plan was approximately $64,000, $43,000 and $55,000 for
1996, 1995 and 1994, respectively.
Note 9. Employment Agreements
During 1996, the Association entered into employment agreements with three key
executive officers to ensure a stable and competent management base. The
agreements provide for a three-year term, but upon each anniversary, the
agreements will automatically extend so that the remaining term shall always be
three years unless the Board of Directors expressly acts to limit the
extensions. The agreements provide for benefits as spelled out in the contract
and cannot be terminated by the Board of Directors, except for cause, without
prejudicing the officer's right to receive vested rights, including
compensation, for the remaining term of the agreements. In the event of a change
in control of the Association and termination of the officers, as defined in the
agreement, the officers will receive a lump sum equal to 2.99 times their
average salary paid during the prior five years.
29
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Employee Stock Ownership Plan
The Association has established an employee stock ownership plan (ESOP) to
benefit substantially all employees. The ESOP originally purchased 260,000
shares of common stock in the Conversion with proceeds received from a loan from
the Corporation.
The Corporation's note receivable is to be repaid based upon one principal
installment of $65,000 on June 30, 1996, nine principal installments of $260,000
on June 30th of each year through June 2005, and one final principal installment
of $195,000 on March 31, 2006. Interest is based upon prime, which will be
adjusted and paid quarterly. The note may be prepaid without penalty. During
September 1996, the ESOP made a principal curtailment of $65,000. The
unallocated shares of stock held by the ESOP are pledged as collateral for the
debt. The ESOP is funded by contributions made by the Association in amounts
sufficient to retire the debt. At September 30, 1996, the outstanding balance of
the note receivable is $2,470,000 and is presented as a reduction of
stockholders' equity.
Shares released as the debt is repaid and earnings from the common stock held by
the ESOP are allocated among participants on the basis of compensation in the
year of allocation. Benefits become 100% vested after five years of credited
service. Forfeitures of nonvested benefits will be reallocated among remaining
participating employees in the same proportion as contributions.
Dividends on unallocated shares may be used by the ESOP to repay the debt to the
Corporation and are not reported as dividends in the financial statements.
Dividends on allocated or committed to be allocated shares are credited to the
accounts of the participants and reported as dividends in the financial
statements.
Expense of $170,365 during 1996 has been incurred in connection with the ESOP.
The expense includes, in addition to the cash contribution necessary to fund the
ESOP, $40,365, which represents the difference between the fair market value of
the shares which have been released or committed to be released to participants,
and the cost of these shares to the ESOP. The Association has credited this
amount to paid-in capital in accordance with the provisions of AICPA Statement
of Position 93-6.
At September 30, 1996, 13,000 shares held by the ESOP have been released or
committed to be released to the plan's participants. The fair value of the
unallocated shares amounted to approximately $3.8 million at September 30, 1996.
30
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Pension Plan
The Association has a defined benefit pension plan covering substantially all of
its employees who qualify under length of service and other requirements. Under
the plan, retirement benefits are based on years of service and average
earnings. The policy is to fund an amount allowable for federal income tax
purposes. The plan assets consist primarily of savings deposits maintained at
the Association and common stock of the Corporation. The following table sets
forth the plan's funded status at September 30, 1996 and 1995 and the amounts
recognized in the consolidated statement of financial condition at September 30,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------------
Actuarial present value of benefit obligation:
<S> <C> <C>
Vested $ (768,452) $ (959,135)
Nonvested (1,259) (6,412)
----------------------------------
Accumulated benefit obligation (769,711) (965,547)
Effect of projected future compensation levels (418,626) (517,111)
----------------------------------
Projected benefit obligation (1,188,337) (1,482,658)
Market value of plan assets 1,032,524 1,183,520
----------------------------------
Projected benefit obligation in excess of plan assets (155,813) (299,138)
Unrecognized net transition assets (20,301) (22,838)
Unrecognized prior service cost (65,239) -
Unrecognized loss 386,509 443,235
----------------------------------
Prepaid pension asset included in other assets $ 145,156 $ 121,259
==================================
</TABLE>
The components of pension costs charged to expense for 1996, 1995 and 1994
consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during period $ 53,280 $ 68,270 $ 54,805
Interest cost on projected benefit obligation 86,620 92,539 74,430
Return on plan assets (69,639) (67,936) (55,912)
Net amortization and deferral 13,754 19,669 12,669
--------------------------------------------------
Net periodic pension cost $ 84,015 $ 112,542 $ 85,992
==================================================
</TABLE>
In determining the projected benefit obligation at September 30, 1996 and 1995,
the weighted average discount rate and expected long-term rate of return on plan
assets was 7%, and 7%, respectively. The assumed rate of increase in future
compensation levels was 4.5% in determining net periodic cost for all periods
presented.
31
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
the Corporation's financial instruments at September 30, 1996 and 1995. See Note
1 for a description of the Corporation's accounting policies and the limitations
of its disclosures in reporting on the fair value of its financial instruments.
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------------
Financial assets:
Cash and short-term cash
<S> <C> <C> <C> <C>
investments $ 33,357,194 $ 33,357,194 $ 28,110,281 $ 28,110,281
Federal funds sold 2,124,712 2,124,712 537,769 537,769
Investment securities held to
maturity 14,999,179 15,038,913 2,993,438 3,060,000
Nonmarketable equity securities 1,170,889 1,170,889 1,170,889 1,170,889
Loans receivable 123,147,779 123,927,553 117,201,293 119,022,000
Accrued interest receivable 255,566 255,566 116,911 116,911
Financial liabilities:
Deposits 111,385,386 111,598,386 127,482,945 127,929,238
</TABLE>
Note 13. Income Taxes
Under the Internal Revenue Code, the Association is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purpose of absorbing losses. Through 1996, the provisions of the Code permitted
the Association to deduct from taxable income an allowance for bad debts based
on 8% of taxable income before such deduction or actual loss experience. The
Association was unable to take a bad debt deduction in 1996, 1995 and 1994 due
to limitations imposed by the Code. In addition, legislation passed in 1996
eliminates the percentage of taxable income method as an option for computing
bad debt deductions in all future years. The Association will still be permitted
to take deductions for bad debts, but will be required to compute such
deductions using an experience method.
The Association will also have to recapture its tax bad debt reserves which have
accumulated since 1987 amounting to approximately $1,078,000 over a six year
period. The tax associated with the recaptured reserves is approximately
$388,000. The recapture is scheduled to begin with the Association's 1997 year,
but can be delayed up to two years if the Association originates a certain level
of residential mortgage loans over the next two years. Deferred income taxes
have been previously established for the taxes associated with the recaptured
reserves and the ultimate payment of the taxes will not result in a charge to
earnings.
32
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Income Taxes (Continued)
Deferred taxes have been provided for certain increases in tax bad debt reserves
subsequent to December 31, 1987 which are in excess of additions to recorded
loan loss allowances. At September 30, 1996, retained earnings contain certain
historical additions to bad debt reserves for income tax purposes of $3,631,000
for which no deferred taxes have been provided, because the Association does not
intend to use these reserves for purposes other than to absorb losses. If
amounts which qualified as bad debt deductions are used for purposes other than
to absorb bad debt losses or adjustments arising from the carryback of net
operating losses, income taxes may be imposed at the then existing rates. The
approximate amount of unrecognized tax liability associated with these
historical additions is $1,307,000. In the future, if the Association does not
meet the income tax requirements necessary to permit the deduction of an
allowance for bad debts, the Association's effective tax rate would be increased
to the maximum percent under existing law.
Deferred income taxes consist of the following :
<TABLE>
<CAPTION>
1996 1995
----------------------------------
Deferred tax assets:
<S> <C> <C>
Deferred loan fees $ 119,000 $ 152,000
Deferred compensation 159,000 161,000
Allowance for loan losses 88,000 74,000
SAIF Assessment 310,000 -
----------------------------------
Total deferred tax assets 676,000 387,000
----------------------------------
Deferred tax liabilities:
Excess accumulated tax depreciation 27,000 29,000
Federal Home Loan Bank stock basis 96,000 97,000
Excess pension plan contribution 43,000 9,000
Tax bad debt reserves 388,000 380,000
----------------------------------
Total deferred tax liabilities 554,000 515,000
----------------------------------
Net deferred tax assets (liabilities) $ 122,000 $ (128,000)
==================================
</TABLE>
Federal income tax expense was different from the amount computed by applying
the federal income tax rate of approximately 34% to income before taxes. The
reasons for the differences were as follows for the years ended September 30,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Income tax at the federal statutory rate 34.00 % 34.00 % 34.00 %
State income taxes, net of federal benefit 2.15 1.63 1.66
Other (1.47) 0.16 0.72
---------------------------------------------------
34.68 % 35.79 % 36.38 %
===================================================
</TABLE>
33
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Stockholders' Equity
On April 3, 1996, Green Street Financial Corp completed and closed its stock
offering. Gross proceeds from the sale of 4,038,125 shares (excluding the
260,000 shares purchased by the ESOP) amounted to $40,381,250 and were reduced
by conversion costs of $1,254,389. The Corporation paid $20,863,430 for all the
common stock of the Association, and retained the remaining net proceeds.
Concurrent with the Conversion, the Association established a liquidation
account in an amount equal to its net worth as reflected in its latest statement
of financial condition used in its final offering circular. The liquidation
account will be maintained for the benefit of eligible deposit account holders
and supplemental eligible deposit account holders who continue to maintain their
deposit accounts in the Association after the Conversion. Only in the event of a
complete liquidation will eligible deposit account holders and supplemental
eligible deposit account holders be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted sub-account balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stockholders.
Subject to applicable law, the Board of Directors of Home Federal and Green
Street Financial Corp may each provide for the payment of dividends. Future
declarations of cash dividends, if any, by the Corporation may depend upon
dividend payments by the Association to the Corporation. Subject to regulations
promulgated by the OTS, the Association will not be permitted to pay dividends
on its common stock if its stockholders' equity would be reduced below the
amount required for the liquidation account or its capital requirement.
In addition, as a Tier I institution, or an institution that meets all of its
fully phased-in capital requirements, Home Federal may pay a cash dividend to
Green Street Financial Corp with notification, but without prior OTS approval,
during a calendar year an amount not to exceed the greater of (i) 100% of the
Association's net income to date during the calendar year plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four quarter
period. During 1996, the Association paid a $629,819 dividend to Green Street
Financial Corp.
Green Street Financial Corp paid a regular quarterly dividend of $.10 a share on
July 19, 1996 to stockholders of record as of July 8, 1996, and declared a
regular quarterly and a special dividend of $.10 and $.15 a share, respectively,
on August 28, 1996 to be paid on October 25, 1996 to stockholders of record as
of October 11, 1996.
The Corporation's Board of Directors has approved a stock repurchase program
which will allow the Corporation to repurchase up to 5% of its outstanding
common stock through April 3, 1997.
34
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Stockholders' Equity (Continued)
The Office of Thrift Supervision promulgates capital regulations which require
the Association to meet three separate capital standards; tangible capital of at
least 1.5% of total assets, core capital of at least 3.0% of total assets and a
risk-based capital requirement currently set at 8.0% of risk-weighted assets. At
September 30, 1996 the Association met and exceeded all of the capital
requirements as shown below:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
Requirement Requirement Requirement
--------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity (GAAP) $ 62,180,019 $ 62,180,019 $ 62,180,019
Equity of Green Street Financial Corp (17,950,944) (17,950,944) (17,950,944)
General loan loss allowance 234,763
--------------------------------------------------
Regulatory capital 44,229,075 44,229,075 44,463,838
Minimum capital requirement 2,358,079 4,716,157 6,012,720
--------------------------------------------------
Excess regulatory capital $ 41,870,996 $ 39,512,918 $ 38,451,118
==================================================
Home Federal 's assets at September 30, 1996 $ 157,205,240 $ 157,205,240
Risk-weighted assets at September 30, 1996 $ 75,159,000
Capital as a percentage of assets:
Actual 28.13 % 28.13 % 59.16 %
Required 1.50 % 3.00 % 8.00 %
--------------------------------------------------
Excess 26.63 % 25.13 % 51.16 %
==================================================
</TABLE>
Under the OTS prompt corrective action regulations, a savings association is
considered to be well capitalized if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of core capital to risk-weighted assets is at
least 6.0%, and its ratio of core capital to total average assets is at least
5.0%. The Association meets all of the above requirements and is considered to
be well capitalized under the prompt corrective action regulations
Note 15. Concentration of Credit Risk and Off-Balance-Sheet Risk
The Association originates single-family residential loans generally within its
primary lending areas of Cumberland and Robeson counties of North Carolina. The
Association's policies require such loans to be made at no greater than 80%
loan-to-value unless private mortgage insurance is obtained. In this instance,
the loan-to-value ratio cannot exceed 90%. The loans are secured by the
underlying properties.
35
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Concentration of Credit Risk and Off-Balance-Sheet Risk (Continued):
The Association is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, which involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contractual amounts of the
instruments reflect the extent of involvement the Association has in the
particular class of financial instruments.
The Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Association uses
the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
In addition to the undisbursed portion of loans in process, the Association had
outstanding loan origination commitments of $1,613,900 and $3,501,750 at
September 30, 1996 and 1995, respectively, primarily for the origination of
fixed rate loans.
The Association evaluates each customer's credit worthiness on a case-by-case
basis. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained if deemed
necessary by the Association upon extension of credit, is based on management's
credit evaluation of the customer. At a minimum, the collateral held is the
underlying real estate.
Note 16. Future Reporting Requirements
The Financial Accounting Standards Board has issued SFAS No. 123, Accounting for
Stock-Based Compensation which the Corporation has not been required to adopt as
of September 30, 1996.
The Statement, which will be in effect for the Corporation's fiscal year ending
September 30, 1997, will require that the Corporation account for stock based
compensation plans using a fair value based method which measures compensation
cost at the grant date based upon the value of the award, which is then
recognized over the service period, usually the vesting period. The accounting
requirements of the Statement apply to grants or awards entered into in fiscal
years that begin after December 15, 1995. The Statement allows entities to
continue to use APB Opinion No. 25 to measure compensation cost, but requires
that the proforma effects on net income and earnings per share be disclosed to
reflect the difference between the compensation cost, if any, from applying APB
Opinion No. 25 and the related cost measured by the fair value method defined in
the Statement. The Statement is not expected to have a material impact on the
Corporation's accounting for stock compensation plans because (i) the Statement
does not apply to the ESOP plan nor will it change the accounting requirements
of the proposed restricted stock plan, and (ii) the Corporation expects to
account for proposed stock option plans using the accounting treatment permitted
under APB Opinion No. 25.
36
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17. Parent Corporation Financial Data
The following is a summary of the condensed financial statements of Green Street
Financial Corp as of and for the year ended September 30, 1996:
Condensed Balance Sheet
September 30, 1996
<TABLE>
<CAPTION>
Assets:
<S> <C>
Cash and short-term cash investments $ 15,912,643
Accounts receivable, other 87,100
Accrued interest receivable 25,732
Investment securities; held to maturity, at cost 3,000,000
Investment in Home Federal 44,229,075
---------------
$ 63,254,550
===============
Liabilities and Stockholders' Equity:
Liabilities:
Dividends Payable $ 1,074,531
---------------
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized, issued
and outstanding 4,298,125 shares -
Additional paid-in capital 64,924,878
Note Receivable - ESOP (2,470,000)
Retained earnings (deficit) (274,859)
---------------
62,180,019
---------------
$ 63,254,550
===============
</TABLE>
Condensed Statement of Income
For the Period From April 3, 1996 to September 30, 1996
<TABLE>
<CAPTION>
<S> <C>
Interest income $ 575,914
Equity in earnings of Home Federal 797,447
Administrative expense (47,376)
Income tax expense (183,600)
---------------
Net income $ 1,142,385
---------------
</TABLE>
37
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17. Parent Corporation Financial Data (Continued)
Condensed Statement of Cash Flows
For the Period From April 3, 1996 to September 30, 1996
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net income $ 1,142,385
Noncash income items:
Equity in earnings of Home Federal (797,447)
Change in assets and liabilities:
Increase in accrued interest receivable (25,732)
Increase in accounts receivable, other (25,350)
---------------
Net cash provided by operating activities 293,856
---------------
Cash Flows from Investing Activities:
Purchase of investments (3,000,000)
Upstream dividend from Home Federal 629,819
Initial investment in Home Federal (20,863,430)
---------------
Net cash used in investing activities (23,233,611)
---------------
Cash Flows from Financing Activities:
Payments received on note receivable from ESOP 130,000
Proceeds received from common stock offering 39,126,861
Payment of dividends (404,463)
---------------
Net cash provided by financing activities 38,852,398
---------------
Net increase in cash 15,912,643
Cash - beginning -
---------------
Cash - ending $ 15,912,643
===============
Supplemental Disclosure of Noncash Financing Activities:
Dividends declared and accrued $ 1,012,781
===============
</TABLE>
38
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 18. Subsequent Event
At a special meeting of stockholders held on October 17, 1996, the stockholders
voted to approve the Corporation's proposed stock option plan and the
Association's restricted stock plan. The stock option plan authorizes the
issuance of up to 429,812 stock options to officers, directors and key employees
either in the form of incentive stock options or non-incentive stock options.
The exercise price of the stock options may not be less than the fair market
value of the Corporation's common stock at date of grant. The restricted stock
plan authorizes up to an additional 171,925 shares of common stock to officers,
directors and key employees. At the present time, the Association intends to
acquire common stock in open market purchases to fund the restricted stock plan.
The stock options and the restricted common stock under the restricted stock
plan vest at the rate of 20% annually, beginning one year from the date of
grant. The plans have been sent to the OTS for non-objection.
39
<PAGE>
CORPORATE INFORMATION
EXECUTIVE OFFICERS:
<TABLE>
<CAPTION>
<S> <C> <C>
H.D. Reaves, Jr. John C. Pate John M. Grantham
President Senior Vice President Senior Vice President
Jerry L. Robertson Allen Lloyd
Vice President/Treasurer Secretary
DIRECTORS:
R.O. McCoy, Jr. Chairman H.D. Reaves, Jr. John C. Pate
Realtor, McLean Real Estate Executive Officer Executive Officer
Norwood E. Bryan, Jr. John M. Grantham Joseph H. Hollinshed
President, Bryan Pontiac-Cadillac Executive Officer Co-owner, Cape Fear Building Supply
Henry Hutaff Henry Holt Robert G. Ray, Esq.
Executive, Coca Cola Bottling Co. President, Holt Oil Co. Partner, Rose, Ray & O'Connor
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Stock Transfer Agent Annual Meeting
American Stock Transfer & Trust Co The 1997 annual meeting of stockholders of
40 Wall Street 46th Floor Green Street Financial Corp will be held at 5:15 pm
New York, New York 10005 on January 29, 1997 at the Corporation's corporate
office at 241 Green Street, Fayetteville, N.C.
Special Legal Counsel
Malizia, Spidi, Sloane & Fisch, P.C.
1301 K Street NW Form 10-K
Washington, DC 20005 A copy of Form 10-K as filed with the Securities and
Exchange Commission will be furnished without
Local Legal Counsel charge to the Corporation's stockholders upon written
Rose, Ray & O'Connor request to Green Street Financial Corp, PO Box 1540,
214 Mason Street Fayetteville, N.C. 28302
Fayetteville, N.C. 28301
Independent Auditors Corporate Office
McGladrey & Pullen, LLP 241 Green Street
2418 Blue Ridge Road Fayetteville, N.C. 28301
Raleigh, N.C. 27605
</TABLE>
Common Stock Information
The Corporation's stock began trading on April 4, 1996. There are 4,298,125
shares of common stock outstanding which were held by approximately 780 holders
of record on September 30, 1996. After including persons or entities who hold
stock in "street" name, the Corporation estimates that it has approximately
1,700 holders. The Corporation's common stock is quoted on the Nasdaq National
Market under the symbol "GSFC." The high and low bids for the common stock for
the quarter ended June 30, 1996 were $13 1/8 and $12, respectively; and for the
quarter ended September 30, 1996, $15 5/8 and $12 3/8, respectively.
On July 19, 1996, the Corporation paid a regular quarterly dividend of $.10 a
share to stockholders of record on July 8, 1996. In addition, a regular
quarterly dividend of $.10 a share and a special dividend of $.15 a share was
declared on August 28, 1996 to stockholders of record as of October 11, 1996 to
be paid on October 25, 1996.
40
EXHIBIT 21
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
Percentage Jurisdiction of
Subsidiaries Owned Incorporation
- ------------ ----- -------------
Home Federal Savings and Loan Association 100.00% United States
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
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0
0
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</TABLE>
