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
For the fiscal year ended September 30, 1997
---------------------
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to .
------------ ------------
Commission File No. 0-27620
GREEN STREET FINANCIAL CORP
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(Exact Name of Registrant as Specified in Its Charter)
North Carolina 56-1951478
- -------------------------------------------------- ---------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
241 Green Street, Fayetteville, North Carolina 28301-5051
- -------------------------------------------------- ---------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (910) 483-3681
---------------
Securities registered under Section 12(b) of the Securities Exchange Act: None
----
Securities registered under Section 12(g) of the Securities Exchange Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
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 and non-voting common equity held
by non-affiliates of the registrant, based on the average bid and asked price of
the registrant's Common Stock on December 4, 1997, was approximately $71.0
million.
As of December 4, 1997, 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, 1997. (Parts II, III and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended September 30, 1997. (Part III)
<PAGE>
PART I
Item 1. Business
- -----------------
General
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.
The Association, a federally chartered stock savings association
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 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.
2
<PAGE>
Lending Activities
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,
---------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ------------------------
Amount Percent Amount Percent Amount Percent
-------- ------- ------ ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loans:
Residential 1- to 4-family $106,084 80.57% $102,011 80.82% $ 94,668 79.32%
Residential multi-family .. 7,527 5.72 5,579 4.42 5,577 4.67
Non-residential real estate 14,172 10.76 15,544 12.31 16,663 13.96
Construction .............. 3,445 2.62 2,948 2.34 2,218 1.85
Installment account loans . 434 .33 142 0.11 229 0.20
-------- ------ -------- ------ -------- ------
131,662 100.00% 126,224 100.00% 119,355 100.00%
======== ====== ======== ====== ======== ======
Less:
Unearned fees and discounts 965 931 900
Loans in process .......... 1,496 1,910 1,029
Allowance for losses ...... 255 235 225
-------- -------- --------
2,176 3,076 2,154
-------- -------- --------
Total loans receivable, net . $128,946 $123,148 $117,201
======== ======== ========
</TABLE>
Loan Maturity Tables
The following table sets forth the estimated maturity of the Association's
loan portfolio at September 30, 1997. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $17.5 million for the year ended September 30, 1997.
Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities.
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In thousands)
Residential 1- to 4-family. $116 $2,932 $103,036 $106,084
Residential multi-family... -- 23 7,504 7,527
Non-residential real estate 8 1,513 12,651 14,172
Construction............... -- -- 3,445 3,445
Installment account loans.. 434 -- -- 434
---- ------ -------- --------
$558 $4,468 $126,636 $131,662
==== ====== ======== ========
3
<PAGE>
The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Residential 1- to 4-family... $68,931 $37,036 $105,967
Residential multi-family..... 1,031 6,496 7,527
Non-residential real estate.. 5,446 8,719 14,165
Construction................. 3,445 -- 3,445
------- ------- --------
Total...................... $78,853 $52,251 $131,104
======= ======= ========
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 $240,000, 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.
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.
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 loan portfolio
consists 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 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.
4
<PAGE>
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. Multifamily 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.
Installment Account Loans. The Association's installment account loans
consist of home equity loans secured by second mortgages on single family loans
in the Association's market area and savings account loans. Home equity loans
generally are limited to 80% of the appraised value of the residence.
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 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.
5
<PAGE>
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, 1997, the Association had $2.1 million of commitments to cover
originations and $1.5 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 $6.8 million at September
30, 1997.
At September 30, 1997, the Association's largest amount of loans to one
borrower was seven loans aggregating $2.4 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.
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.
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.
At September 30,
--------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Non-performing loans:
One- to four-family residential $173 $310 $242 $292 $246
Multi-family residential ...... -- -- 77 -- --
Non-residential real estate ... -- -- -- 113 134
Construction .................. -- -- -- -- --
Installment account loans...... -- -- -- -- --
---- ---- ---- ---- ----
Total non-performing loans ...... 173 310 319 405 380
Real estate owned ............. -- 34 -- 38 94
---- ---- ---- ---- ----
Total non-performing assets ..... $173 $344 $319 $443 $474
==== ==== ==== ==== ====
6
<PAGE>
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, 1997. Amounts actually included in the Association's interest
income for non-accrual loans for the year ended September 30, 1997, 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.
In accordance with its classification of assets policy, the Association
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at September 30, 1997, the
Association had $173,000 of assets classified as substandard loans.
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. 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. No foreclosed real estate was held by the Association at September 30,
1997.
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.
7
<PAGE>
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- --------------------------
% 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)
<S> <C> <C> <C> <C> <C> <C>
Residential one- to four-family. $ 93 80.57% $ 85 80.82% $ 89 79.53%
Residential multi-family ....... 47 5.72 29 4.42 32 4.67
Non-residential real estate .... 91 10.76 102 12.31 93 13.96
Construction ................... 24 2.62 19 2.34 11 1.65
Installment loans .............. -- .33 -- .11 -- .19
---- ------ ---- ------ ---- ------
Total allowance for loan losses. $255 100.00% $235 100.00% $225 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
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,
------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Allowance balances (at beginning of period)...... $ 235 $ 225 $ 225
Provision (credit) for loan losses:
One- to four-family residential ............... 8 (4) 2
Multi-family residential ...................... 18 (3) (12)
Non-residential real estate ................... (11) 9 9
Construction .................................. 5 8 1
Installment loans ............................. -- -- --
Net (charge-offs) recoveries:
One- to four-family ........................... -- -- --
Multi-family .................................. -- -- --
Non-residential real estate ................... -- -- --
Construction .................................. -- -- --
Installment loans ............................. -- -- --
----- ----- -----
Allowance balance (at end of period) ............ $ 255 $ 235 $ 225
===== ===== =====
Allowance for loan losses as a percent
of total loans outstanding .................... 0.19% 0.19% 0.19%
</TABLE>
8
<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, 1997, the market value of the investment securities
that are held-to-maturity was $13.6 million.
At September 30,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Investment securities:
U.S. Treasury securities ........ $13,500 $ 2,999 $ 2,993
U.S. Agency securities .......... -- 12,000 --
------- ------- -------
Total investment securities ... 13,500 14,999 2,993
Interest earning deposits ....... 29,414 33,108 27,472
Federal Funds sold .............. 3,118 2,125 538
Federal Home Loan Bank stock .... 1,127 1,127 1,127
Central Service Corporation stock 44 44 44
------- ------- -------
Total .......................... $47,203 $51,403 $32,174
======= ======= =======
9
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying value and weighted average yields for the Association's
investment securities at September 30, 1997.
<TABLE>
<CAPTION>
As of September 30, 1997
-----------------------------------------------------------------------------------------------------------
After One Through After Five Through
One Year or Less Five Years Ten Years After Ten Years Total
------------------- ------------------- ------------------- ------------------- --------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- --------- ------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities...$ -- --% $10,500 6.89% $3,000 7.07% $ -- --% $13,500 6.93%
U.S. Agency securities..... -- -- -- -- -- -- -- -- -- --
Interest earning deposits 29,414 5.45% -- -- -- -- -- -- 29,414 5.45%
Federal Funds sold......... 3,118 5.32% -- -- -- -- -- -- 3,118 5.32%
Federal Home Loan Bank
stock (1)................. -- -- -- -- -- -- 1,127 7.29% 1,127 7.29%
Central Service Corporation
stock(1)................. -- -- -- -- -- -- 44 44 --
------- ---- ------- ---- ------ ---- ------ ---- ------- ----
Total.................... $32,532 5.44% $10,500 6.89% $3,000 7.07% $1,171 7.29% $47,203 5.91%
======= ==== ======= ==== ====== ==== ====== ==== ======= ====
</TABLE>
- -------------
(1) Nonmarketable equity security; substantially all required to be maintained
and assumed to mature in periods greater than 10 years.
10
<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, 1997, 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, 1997.
Certificates
of Deposits
------------
Maturity Period (In thousands)
- ---------------
Within three months............................ $2,350
Three through six months....................... 2,692
Six through twelve months...................... 2,798
Over twelve months............................. 2,117
------
$9,957
======
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, 1997, the Association had no
borrowings from the FHLB of Atlanta.
Employees
At September 30, 1997, the Association had 28 full-time and 4 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.
11
<PAGE>
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 and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes.
Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, the Association might have to convert to a different
financial institution charter and be regulated under federal law as a bank,
including being
12
<PAGE>
subject to the more restrictive activity limitations imposed on national banks.
The Association cannot predict the impact of its conversion to, or regulation
as, a bank until the legislation requiring such change is enacted.
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). 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 poses a
serious threat to the SAIF.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund,
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 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 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. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison, at
September 30, 1996, members of the Bank Insurance Fund ("BIF"), predominantly
commercial banks, 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. Beginning
January 1, 1997, deposit insurance assessments for SAIF members were reduced to
approximately .064% of deposits on an annual basis; this rate may continue
through the end of 1999. During this same period, BIF members are expected to be
annually 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. As a result
of these changes, beginning January 1, 1997, the rate of deposit insurance
assessed the Association substantially declined.
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. The Association met these capital standards
at September 30, 1997.
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.
13
<PAGE>
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, 1997, 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, 1997, the Association was in compliance
with its QTL requirement with 88% of its assets invested in QTIs.
Federal Home Loan Bank 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 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, 1997, the Association was in compliance with these Federal Reserve Board
requirements.
14
<PAGE>
Executive Officers of the Company Who Are Not Directors
Name and Title Age as of September 30, 1997
-------------- ----------------------------
Allen Lloyd 44
Secretary
Jerry L. Robertson 55
Vice President and Treasurer
Anthony Strickland 51
Vice President
Allen Lloyd has been the Secretary of the Association since 1983 and has held
the same position with the Company since December 1995.
Jerry L. Robertson has been Vice President and Treasurer of the Association
since 1983 and has held the same position with the Company since December 1995.
Anthony Strickland has been Vice President of the Association since 1982 and has
held the same position with the Company since December 1995. Mr. Strickland
became an executive officer on April 3, 1997.
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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
The information contained under the section captioned "Common Stock
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1997 (the "Annual Report"), is incorporated herein by
reference. In addition, there are 4,298,125 shares of Common Stock outstanding
which were held by approximately 2,450 holders on September 30, 1997.
15
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
The information contained in the section captioned "Green Street Financial
Corp Selected Financial Data" in 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" in the
Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
See pages 11 and 12 of Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Annual Report.
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 1997 Proxy
Statement are incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and Executive
Officer Compensation" in the 1997 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 1997 Proxy
Statement.
16
<PAGE>
(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 1997 Proxy
Statement.
(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
1997 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report.
1. The consolidated balance sheets of Green Street Financial Corp
and subsidiary as of September 30, 1997 and 1996, and the
related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in
the three year period ended September 30, 1997, together with
the related notes and the independent auditors' report of
McGladrey & Pullen, LLP, independent certified public
accountants.
2. Schedules omitted as they are not applicable.
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 **
13 Annual Report to Stockholders for the fiscal year ended
September 30, 1997
21 Subsidiaries of the Registrant (See Item 1 - Business -
General)
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) No reports were filed under cover of Form 8-K during the fourth
quarter.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of
December 18, 1997.
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 requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated as of December 18, 1997.
/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/ 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
EXHIBIT 13
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Page
<S> <C>
Selected Financial Data 1
Report to Stockholders 2
Management's Discussion and Analysis 3 - 14
Independent Auditor's Report 15
Consolidated Financial Statements of:
Financial condition at September 30, 1997 and 1996 16
Income for years ended September 30, 1997, 1996 and 1995 17
Stockholders' equity for years ended September 30, 1997, 1996 and 1995 18
Cash flows for the years ended September 30, 1997, 1996 and 1995 19 - 20
Notes to the Consolidated Financial Statements 21 - 41
Common Stock Information 42
Corporate Information 43
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition Data: (Dollars in Thousands, Except Per Share Amounts)
Total assets $ 177,962 $ 176,217 $ 151,028 $ 150,077 $ 163,069
Investments (1) 47,203 51,403 32,174 43,605 51,749
Loans receivable, net 128,946 123,148 117,201 105,094 109,499
Savings deposits 112,642 111,385 127,483 128,334 143,220
Stockholders' equity (2) 62,946 62,180 22,230 20,453 18,643
Book value per share 14.64 14.47 -- -- --
Years Ended September 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------
Operating Data: (Dollars in Thousands, Except Per Share Amounts)
Interest and dividend income $ 13,017 $ 12,583 $ 11,124 $ 10,325 $ 11,351
Interest expense 5,377 6,232 6,119 5,489 6,557
-----------------------------------------------------------
Net interest income 7,640 6,351 5,005 4,836 4,794
Provision for loan losses 20 10 -- 19 52
Noninterest income 104 128 106 145 133
Noninterest expense (3) 3,231 3,300 2,344 2,117 2,020
-----------------------------------------------------------
Income before income taxes 4,493 3,169 2,767 2,845 2,855
Income tax expense 1,716 1,099 990 1,035 1,030
-----------------------------------------------------------
Net income $ 2,777 $ 2,070 $ 1,777 $ 1,810 $ 1,825
===========================================================
Earnings per share (2) (4) $ 0.67 $ 0.28 $ -- $ -- $ --
Dividends per share (5) 0.57 0.35 -- -- --
Selected Other Data:
Return on average assets 1.58% 1.22% 1.21% 1.16% 1.12%
Return on average equity 4.41% 4.93% 8.29% 9.23% 10.24%
Interest rate spread 2.60% 2.50% 2.66% 2.58% 2.48%
Net interest margin 4.40% 3.78% 3.42% 3.11% 2.99%
Dividend payout ratio 85% 125% -- -- --
Average equity to average assets 36% 24.76% 14.57% 12.52% 10.98%
Nonperforming loans to total loans (6) 0.13% .25% .27% .39% .35%
</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 common stock equivalent 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 subsidiary of Green
Street Financial Corp, a holding company which was formed in connection with the
conversion.
This second 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, 1997. Earnings for the year ended September 30, 1997
were $2.8 million and represent an increase of $.7 million over 1996. Earnings
in 1996 were negatively impacted by federal legislation to recapitalize the
Savings Association Insurance Fund ("SAIF"), signed into law on September 30,
1996. Green Street Financial Corp declared dividends of $2.5 million, or $0.57
per share in the year ended September 30, 1997.
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 1997, 1996 and 1995, and changes in
financial position for the years ended September 30, 1997 and 1996,
respectively.
3
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Comparison of Financial Condition at September 30, 1997 and 1996
Total consolidated assets increased by $1.8 million during 1997, from $176.2
million at September 30, 1996 to $178.0 million at September 30, 1997. The
increase resulted primarily from savings growth of $1.3 million.
Loans receivable increased by approximately $5.8 million during 1997 to $128.9
million at September 30, 1997. 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
substantially dependent on the large military installations situated in the
Association's lending markets.
Savings deposits increased by approximately $1.3 million during 1997 and totaled
$112.6 million at September 30, 1997. The Association increased interest rates
on savings accounts during the year in order to increase deposits.
The Corporation had no outstanding borrowings during 1997 or 1996. However, the
Association has borrowing capacity through the Federal Home Loan Bank of
Atlanta.
The Corporation's return on average assets was 1.58% and 1.22%, and its return
on average equity was 4.41% and 4.93%, for 1997 and 1996, 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 for 1996 and 1997 from 8.29% in 1995, was due
primarily to the substantial increase in equity caused by the infusion of the
stock offering proceeds. 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 6 to the consolidated
financial statements).
The Association is required to meet certain capital requirements as established
by the OTS. At September 30, 1997, the Association's capital was significantly
in excess of regulatory capital requirements (See Note 15 to the consolidated
financial statements).
4
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Comparison of Operating Results for 1997, 1996 and 1995
Net Income
Net income for the years ended September 30, 1997, 1996 and 1995 was $2.8
million, $2.1 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 1997
and 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 13 which details the average balances,
yields and costs of interest earning assets and interest bearing liabilities and
the rate/volume table on page 14 which explains the changes in interest income,
interest expense, and net interest income attributable to changes in volume and
interest rates during 1997, 1996 and 1995.
Net interest income increased by $1,289,371 or 20.3% to $7,640,101 for the year
ended September 30, 1997 from $6,350,730 reported in 1996. Net interest income
amounted to $5,005,008 in 1995. The increase in net interest income during 1997
was attributable to an increase in the average balance of interest earning
assets and a decline in interest paid on deposits. Net interest income increased
by $1,345,722 from 1995 to 1996 primarily due to a $21.7 million increase in the
average balance of interest earning assets as a result of the stock issuance.
Interest Income
Total interest income increased to $13,017,519 for 1997 from $12,582,992 in
1996, an increase of $434,527 or 3.5%. The increase during 1997 was attributable
to an increase in the average balance of interest earning assets over the
previous year. 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 issuance. The Association's overall yield
on interest earning assets increased slightly during 1997, from 7.48% in 1996 to
7.50% in 1997. The Association's overall yield on interest earning assets
declined slightly during 1996, from 7.59% in 1995 to 7.48% in 1996.
5
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Interest Expense
Total interest expense decreased to $5,377,418 in 1997 from $6,232,262 in 1996,
a decrease of $854,844 or 13.7%. The Association's average balance of deposits
decreased substantially in 1997 from 1996 and had a material impact on the
decrease in interest expense. Home Federal's cost of funds was 4.91% in 1997 as
compared to 4.98% in 1996.
Provision For Loan Losses
The Association's provision for loan losses amounted to approximately $20,000,
$10,000 and $-0- for the years ended September 30, 1997, 1996 and 1995,
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, is relatively insignificant as a percentage of total loans
outstanding and amounted to .13%, .25%, and .27% at September 30, 1997, 1996 and
1995, respectively. Home Federal had no loans charged-off during the three-year
period ended September 30, 1997.
Noninterest Income
Noninterest income amounted to $103,983, $127,943 and $105,906 in 1997, 1996 and
1995, 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
$3,231,172, $3,300,001 and $2,343,505 in 1997, 1996 and 1995, respectively.
During 1996, the Association accrued and expensed $792,868 for a special
assessment required to recapitalize the 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 $821,441 during 1997 from
$1,458,435 in 1996 to $2,279,876 in 1997. The primary cause for the increase was
the expense associated with forming the Restricted Stock Plan ("RSP") during
1997. Compensation and employee benefits increased by $94,303 during 1996 from
$1,364,132 in 1995 primarily as a result of forming the ESOP during 1996.
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, 1997. Increases in other general administrative
expense during 1997 and 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 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.
In 1996, the FDIC imposed 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 paid a
special assessment, subject to adjustment. The Corporation charged $792,868
against pretax earnings for the quarter ended September 30, 1996 for this
assessment.
Income Taxes
The Corporation's effective income tax rate was 38.20%, 34.68% and 35.79% in
1997, 1996, and 1995, respectively. The differences in rates were due to changes
in the components of permanent tax differences. (See Note 14 to the consolidated
financial statements.)
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.
7
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Future Reporting Requirements
The Financial Accounting Standards Board has issued SFAS No. 128, Earnings Per
Share and SFAS No. 130, Reporting Comprehensive Income both of which the
Association has not been required to adopt as of September 30, 1997.
SFAS No. 128, Earnings Per Share, which will be in effect for the Association's
quarterly reporting beginning December 31, 1997, establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. The Statement simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, Earnings per Share, and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the diluted
EPS computation. It is not expected that this statement will materially effect
the calculation of the Corporation's earnings per share.
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Statement does not require a specific format for
that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. The Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. It is not expected that this statement will materially
effect the presentation of the Corporation's comprehensive income.
Special Note Regarding Forward-Looking Statements
Statements herein regarding estimated future expense levels and other matters
may constitute forward-looking statements under the federal securities laws.
Such statements are subject to certain risks and uncertainties. Undue reliance
should not be placed on this information. These estimates are based on the
current expectations of management, which may change in the future due to a
large number of potential events, including unanticipated future developments.
8
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Capital Resources and Liquidity
During 1997, Green Street Financial Corp paid a regular quarterly dividend of
$.10 a share on January 22, 1997 and April 23, 1997, a regular quarterly
dividend of $.11 a share on July 23, 1997 and declared a regular quarterly and a
special dividend of $.11 and $.15 a share, respectively, on September 30, 1997
to be paid on October 22, 1997 to stockholders of record as of October 10, 1997.
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 maturity of
investments, or the ability to raise equity capital.
During the year ended September 30, 1997, cash and cash equivalents, a
significant source of liquidity, decreased by approximately $2.4 million. Cash
and cash equivalents increased by $6.8 million during 1996. Cash flow resulting
from internal operating activities provided increases of $2.6 million and $2.5
million in cash during the years ended September 30, 1997 and 1996,
respectively. Deposits increased by $1.3 million during 1997. For 1996,
financing activities 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. 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 1997 and 1996, loans outstanding increased
by $5.8 million and $6.2 million, respectively. During 1997 and 1996, the
Corporation purchased investment securities amounting to $27.0 million and $12.0
million, respectively.
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,
1997, as computed under OTS regulations, was considerably 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.
9
<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, 1997, 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 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.
10
<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 35,123 (13,662) -28 % 23.95 % -607 bp
+300 bp 38,653 (10,131) -21 % 25.65 % -437 bp
+200 bp 42,227 (6,558) -13 % 27.27 % -275 bp
+100 bp 45,693 (3,091) -6 % 28.76 % -126 bp
0 bp 48,784 -- -- 30.02 % --
- -100 bp 50,924 2,140 +4 % 30.82 % + 80 bp
- -200 bp 52,360 3,576 +7 % 31.30 % +128 bp
- -300 bp 54,009 5,225 +11 % 31.85 % +183 bp
- -400 bp 56,125 7,341 +15 % 32.58 % +256 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, 1997, a change in interest rates of a positive 200 basis points
would have resulted in a 275 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, 1997 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, 1997 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.
11
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MARKET RISK ANALYSIS
September 30, 1997
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------------------------------------------------------
Year Ended September 30,
------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans - fixed:
Balance $ 538,865 $ 210,586 $ 500,189 $ 576,298 $1,950,162 $75,656,918 $79,433,018 $79,678,266
Interest rate 10.34% 9.33% 9.01% 9.75% 8.95% 8.43% 8.70% --
Loans - variable:
Balance 51,677,634 551,100 -- -- -- -- 52,228,734 52,228,734
Interest rate 7.24% 7.18% -- -- -- -- 7.20% --
Investments (1):
Balance 33,087,640 -- -- 1,500,000 9,000,000 3,000,000 46,587,640 46,642,956
Interest rate 5.65% -- -- 7.20% 6.84% 7.07% 6.02% --
Liabilities:
Deposits (2):
Balance 27,249,725 -- -- -- -- -- 27,249,725 27,249,725
Interest rate 3.52% -- -- -- -- -- 3.52% --
Deposits - certificates:
Balance 64,154,344 9,818,585 4,312,547 7,039,871 66,821 -- 85,392,168 85,439,000
Interest rate 5.60% 5.94% 5.98% 6.00% 8.00% -- 5.70% --
</TABLE>
(1) Includes deposits, federal funds, and held to maturity investment
securities.
(2) Includes Passbook Accounts, NOW Accounts, Super NOW Accounts, Money Market
Funds and accrued interest.
12
<PAGE>
Average Balances, Interest, Yields and Costs
The following table sets forth certain information relating to the Corporation's
average balance sheet and reflects the average yield on assets and average cost
of liabilities at and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused a material
difference in the information presented.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------------------
At September 30,
1997 1997 1996 1995
------------------ ----------------------------- --------------------------- ----------------------------
Actual Average Average Average Average Average Average Average
Balance Yield\Cost Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------- ------- -------- ---------- ------- -------- ---------- -------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing
deposits $ 32,533 5.65% $ 33,447 $ 1,838 5.50% $ 40,508 $ 2,206 5.45% $ 30,850 $ 1,766 5.72%
Investments, at cost 14,671 6.66% 14,545 977 6.72% 6,656 480 7.21% 3,416 249 7.29%
Loans receivable 128,946 7.91% 125,520 10,202 8.13% 121,024 9,897 8.18% 112,201 9,109 8.12%
-------- -------- ------- -------- ------- -------- -------
Total interest-earning
assets 176,150 7.39% 173,512 $13,017 7.50% 168,188 $12,583 7.48% 146,467 $11,124 7.59%
------- ------- -------
Non-interest-earning
assets 1,812 1,628 1,322 701
-------- -------- -------- --------
Total $177,962 $175,140 $169,510 $147,168
======== ======== ======== ========
Liabilities and
retained earnings:
Interest-bearing
liabilities:
Passbook accounts $ 12,991 3.33% $ 14,237 $ 432 3.03% $ 20,068 $ 548 2.73% $ 15,870 $ 576 3.63%
MMDA accounts 14,225 3.99% 14,175 567 4.00% 14,344 583 4.06% 14,845 622 4.19%
Certificates of
deposit 85,392 5.13% 81,205 4,378 5.39% 90,779 5,101 5.62% 93,281 4,921 5.28%
-------- -------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 112,608 4.77% 109,617 $ 5,377 4.91% 125,191 $ 6,232 4.98% 123,996 $ 6,119 4.93%
------- ------- -------
Non-interest-bearing
liabilities 2,408 2,476 2,354 1,727
Stockholders' Equity 62,946 63,047 41,965 21,445
------- ------- ------- -------
Total $177,962 $175,140 $169,510 $147,168
======== ======== ======== ========
Net interest income and
interest rate
spread (1) 2.61% $ 7,640 2.60% $ 6,351 2.50% $ 5,005 2.66%
======== ======= ========
Net yield on interest-
earning assets (2) 4.34% 4.40% 3.78% 3.42%
Ratio of interest-
earning assets to
interest-bearing
liabilities 156.43% 158.29% 134.35% 118.12%
</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.
13
<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 (1)
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,
1997 vs. 1996 1996 vs. 1995
--------------------------------------- --------------------------------------
Increase (Decrease) Attributable to Increase (Decrease) Attributable to
--------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Interest earning deposits $ (385) $ 20 $ (3) $ (368) $ 553 $ (86) $ (27) $ 440
Investments, at cost 569 (33) (39) 497 236 (3) (2) 231
Loan receivable 368 (60) (2) 305 716 66 6 788
------- ------- ------- ------- ------- ------- ------- -------
Total interest income on
interest-earning assets 552 (73) (45) 434 1,505 (23) (23) 1,459
------- ------- ------- ------- ------- ------- ------- -------
Interest expense on:
Passbook accounts (159) 61 (18) (116) 152 (143) (37) (28)
MMDA accounts (7) (9) 0 (16) (21) (19) 1 (39)
Certificates of deposit (538) (207) 22 (723) (132) 321) (9) 180
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense on
interest-bearing liabilities (704) (155) 4 (855) (1) 159 (45) 113
------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in net interest
income $ 1,256 $ 82 $ (49) $ 1,289 $ 1,506 $ (182) $ 22 $ 1,346
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
[LOGO]
MCGLADREY & PULLEN, LLP
--------------------------------------------
Certified Public Accountants and Consultants
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, 1997 and 1996,
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, 1997.
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
October 23, 1997
15
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and short-term cash investments:
Interest-bearing $ 29,414,597 $ 33,107,849
Noninterest-bearing 555,043 249,345
Federal funds sold 3,118,000 2,124,712
Investment securities: (Note 2)
Held to maturity 13,500,000 14,999,179
Nonmarketable equity securities 1,170,889 1,170,889
Loans receivable, net (Note 3) 128,945,951 123,147,779
Accrued interest receivable, investments 222,716 255,566
Real estate acquired in settlement of loans -- 34,425
Property and equipment, net (Note 4) 306,794 330,260
Prepaid expenses and other assets (Note 12) 727,688 675,084
Deferred tax assets (Note 14) -- 122,000
------------------------------
Total assets $ 177,961,678 $ 176,217,088
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 5) $ 112,641,893 $ 111,385,386
Advance payments by borrowers for taxes and insurance 250,662 179,444
Accrued expenses and other liabilities 348,080 174,607
Special SAIF assessment (Note 6) -- 792,868
Dividends payable 1,117,513 1,074,531
Deferred compensation (Note 7) 387,847 405,233
Deferred income taxes (Note 14) 27,000 --
Income taxes payable 243,000 25,000
------------------------------
Total liabilities 115,015,995 114,037,069
------------------------------
Commitments and contingencies (Notes 8, 10, 11 and 16)
Stockholders' Equity (Note 15):
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 shares -- --
Additional paid-in capital 41,816,239 41,767,226
Note receivable, ESOP (Note 9) (2,210,000) (2,470,000)
Retained earnings, substantially restricted (Note 15) 23,339,444 22,882,793
------------------------------
62,945,683 62,180,019
------------------------------
$ 177,961,678 $ 176,217,088
==============================
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Loans $10,202,266 $ 9,897,134 $ 9,108,701
Short-term cash investments 1,837,998 2,206,230 1,766,248
Investment securities 977,255 479,628 248,652
-----------------------------------------
Total interest income 13,017,519 12,582,992 11,123,601
Interest on deposits (Note 5) 5,377,418 6,232,262 6,118,593
-----------------------------------------
Net interest income 7,640,101 6,350,730 5,005,008
Provision for loan losses (Note 3) 20,000 10,073 --
-----------------------------------------
Net interest income after
provision for loan losses 7,620,101 6,340,657 5,005,008
-----------------------------------------
Noninterest income:
Service charges and fees 30,447 52,595 43,119
Other 73,536 75,348 62,787
-----------------------------------------
103,983 127,943 105,906
-----------------------------------------
Noninterest expense:
Compensation and benefits (Notes 8, 9,10 and 11) 2,279,876 1,458,435 1,364,132
Deposit insurance 155,132 334,329 336,479
Special SAIF assessment (Note 6) -- 792,868 --
Occupancy expenses 146,610 161,807 155,249
Advertising 161,431 137,558 159,632
Data processing expense 91,234 97,384 93,235
Other 396,889 317,620 234,778
-----------------------------------------
3,231,172 3,300,001 2,343,505
-----------------------------------------
Income before income taxes 4,492,912 3,168,599 2,767,409
-----------------------------------------
Income taxes (credits) (Note 14):
Current 1,567,265 1,348,953 971,403
Deferred 149,000 (250,000) 19,000
-----------------------------------------
1,716,265 1,098,953 990,403
-----------------------------------------
Net income $ 2,776,647 $ 2,069,646 $ 1,777,006
=========================================
Earnings per share (Note 1) $ 0.67 $ 0.28 $ --
=========================================
Weighted average common and common
equivalent shares outstanding 4,116,271 4,051,125 --
=========================================
Cash dividends per share $ 0.57 $ 0.35 $ --
=========================================
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional Note
Paid-in Receivable Retained
Capital ESOP Earnings Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 common stock (Note 15) 39,126,861 -- -- 39,126,861
Purchase of common stock
by the ESOP (Note 9) 2,600,000 (2,600,000) -- --
Repayment of ESOP note -- 130,000 -- 130,000
ESOP contribution (Note 9) 40,365 -- -- 40,365
Cash dividends -- -- (1,417,244) (1,417,244)
--------------------------------------------------------------
Balance at September 30, 1996 41,767,226 (2,470,000) 22,882,793 62,180,019
Net income -- -- 2,776,647 2,776,647
Repayment of ESOP note -- 260,000 -- 260,000
ESOP contribution (Note 9) 182,325 -- -- 182,325
Cash dividends -- -- (2,319,996) (2,319,996)
RSP awards in excess of
grant price (Note 10 ) (133,312) -- -- (133,312)
--------------------------------------------------------------
Balance at September 30, 1997 $ 41,816,239 $(2,210,000) $ 23,339,444 $ 62,945,683
===============================================================
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,776,647 $ 2,069,646 $ 1,777,006
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 36,504 42,428 42,137
Deferred income taxes 149,000 (250,000) 19,000
Accretion of investment discounts (821) (5,741) --
Net gain on disposal of real estate
acquired in settlement of loans (12,354) (22,104) (1,220)
Provision for loan losses 20,000 10,073 --
ESOP contribution expense credited to
additional paid-in capital 182,325 40,365 --
Increase (decrease) in reserve for
uncollected interest (10,850) 2,529 (16,975)
Increase (decrease) in deferred compensation (17,386) (5,782) 14,222
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (52,604) (80,283) (60,427)
Refundable income taxes -- 12,000 (12,000)
Accrued interest receivable 32,850 (138,655) (56,911)
Increase (decrease) in:
Accrued expenses and other liabilities 40,161 35,603 100,674
Accrued special SAIF assessment (792,868) 792,868 --
Income taxes payable 218,000 25,000 (12,500)
------------------------------------------
Net cash provided by operating activities 2,568,604 2,527,947 1,793,006
------------------------------------------
Cash Flows From Investing Activities
Purchase of held to maturity investment securities (27,000,000) (12,000,000) (2,993,438)
Proceeds from maturity of held to maturity
investment securities 28,500,000 -- --
Net increase in loans receivable (5,807,322) (6,174,422) (12,130,078)
Proceeds from sale of real estate acquired
in settlement of loans 46,779 203,013 79,158
Purchase of equipment (13,038) (20,436) (15,709)
------------------------------------------
Net cash used in investing activities (4,273,581) (17,991,845) (15,060,067)
------------------------------------------
</TABLE>
(Continued)
19
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net increase (decrease) in deposits $ 1,256,507 $(16,097,559) $ (850,916)
Decrease in advance payments by borrowers
for taxes and insurance 71,218 (457,085) (96,688)
Net proceeds received from issuance of
common stock -- 39,126,861 --
Principal repayments received on ESOP note 260,000 130,000 --
Cash dividends paid (2,277,014) (404,463) --
--------------------------------------------
Net cash provided by (used in)
financing activities (689,289) 22,297,754 (947,604)
--------------------------------------------
Net increase (decrease) in cash
and cash equivalents (2,394,266) 6,833,856 (14,214,665)
Cash and cash equivalents:
Beginning 35,481,906 28,648,050 42,862,715
--------------------------------------------
Ending $ 33,087,640 $ 35,481,906 $ 28,648,050
============================================
Cash and cash equivalents:
Cash and short-term investments:
Interest-bearing $ 29,414,597 $ 33,107,849 $ 27,472,071
Noninterest-bearing 555,043 249,345 638,210
Federal funds sold 3,118,000 2,124,712 537,769
--------------------------------------------
$ 33,087,640 $ 35,481,906 $ 28,648,050
============================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 5,374,888 $ 6,239,628 $ 6,144,260
============================================
Income taxes $ 1,349,265 $ 1,147,800 $ 997,000
============================================
Supplemental Disclosure of Noncash Investing
and Financing Activities
Transfer from loans to real estate
acquired in settlement of loans $ -- $ 215,334 $ 40,190
============================================
Dividends declared and accrued $1,117,513 $ 1,074,531 $ --
============================================
Stock issued in exchange for note receivable
from ESOP $ -- $ 2,600,000 $ --
============================================
</TABLE>
See Notes to Consolidated Financial Statements.
20
<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 business is
conducted primarily in Fayetteville, North Carolina in Cumberland County. 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.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting 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 years
ended September 30, 1997 and 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 year ended
September 30, 1995 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.
21
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Investment securities: The Association accounts for its investments in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
Accounting for Certain Investments in Debt and Equity Securities. Accordingly,
equity securities, which are nonmarketable, do not require classification under
SFAS No. 115 and continue to be carried at cost. 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. The Corporation currently has no securities which are
classified as available for sale or trading. Gain or loss on sale of securities
is recognized when realized and is based upon the specific-identification
method.
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 and nonresidential
property.
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 follows SFAS No. 114, Accounting by Creditors for Impairment of
a Loan as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures. SFAS No. 114, as amended, 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, 1997 which it considers to be
impaired. Therefore, there is no specific allowance for impaired loans at
September 30, 1997.
Interest income: Interest on loans is recognized over the term of the loans and
is calculated primarily using the simple-interest method on principal amounts
outstanding. Accrual of interest is generally stopped when the loan becomes 90
days past due. Interest on these loans is recognized only when actually paid by
the borrower.
22
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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.
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. At September 30, 1997, the
Association did not hold any such real estate.
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.
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 common and common equivalent shares outstanding from
the date of Conversion to the end of the 1996 fiscal year. Subsequently,
earnings per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding for the year. The
computations exclude shares which are unallocated under the employee stock
ownership plan.
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 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, 1997 and 1996, 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:
23
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair value for remaining loans has been estimated by discounting the
projected future cash flows at September 30, 1997 and 1996, 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, 1997 and 1996. 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, 1997 and 1996 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.
Future Reporting Requirements: The Financial Accounting Standards Board has
issued SFAS No. 128, Earnings Per Share and SFAS No. 130, Reporting
Comprehensive Income both of which the Association has not been required to
adopt as of September 30, 1997.
SFAS No. 128, Earnings per Share, which will be in effect for the Association's
quarterly reporting beginning December 31, 1997, establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. The Statement simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, Earnings per Share, and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the diluted
EPS computation. It is not expected that this statement will materially effect
the calculation of the Corporation's earnings per share.
24
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Statement does not require a specific format for
that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. The Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. It is not expected that this statement will materially
affect the presentation of the Corporation's comprehensive income.
25
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Investment Securities
The amortized cost and estimated market value of investment securities are as
follows at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Debt securities:
US Agency obligations $ 13,500,000 $ 55,316 $ -- $13,555,316
-------------------------------------------------------
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
-------------------------------------------------------
$ 14,670,889 $ 55,316 $ -- $14,726,205
=======================================================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Debt securities:
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>
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.
26
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Investment Securities (Continued)
The amortized cost and estimated fair value of debt securities in the "held to
maturity" category at September 30, 1997 by contractual maturity are as shown
below. The Corporation has no debt securities classified as "available for sale"
at September 30, 1997.
<TABLE>
<CAPTION>
1997
-------------------------
Estimated
Amortized Market
Cost Value
-------------------------
<S> <C> <C>
Held to maturity:
Due in one year through five years $10,500,000 $10,551,566
Due after five years 3,000,000 3,003,750
-------------------------
$13,500,000 $13,555,316
-------------------------
</TABLE>
There were no sales of investment securities during 1997, 1996 or 1995.
Note 3. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Mortgage loans:
Residential one-to-four family $106,083,836 $102,011,126
Residential multifamily 7,527,305 5,578,541
Nonresidential real estate 14,172,176 15,544,319
Residential construction 3,444,852 2,947,667
Installment loans 433,583 141,868
-----------------------------
131,661,752 126,223,521
-----------------------------
Less:
Allowance for loan losses 254,763 234,763
Unamortized loan fees 964,726 930,788
Undisbursed portion of loans in process 1,496,312 1,910,191
-----------------------------
2,715,801 3,075,742
-----------------------------
$128,945,951 $123,147,779
=============================
Weighted average yield on loans receivable 8.13% 8.18%
============================
</TABLE>
27
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable (Continued)
The following sets forth information regarding the Association's allowance for
loan losses:
1997 1996 1995
------------------------------
Balance, beginning $234,763 $224,690 $224,690
Provisions charged to income 20,000 -- 10,073
Charge-offs -- -- --
------------------------------
Balance, ending $254,763 $234,763 $224,690
==============================
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, 1997, 1996, and 1995 the
Association had loans totaling $173,336, $309,666, and $318,737, 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 $2,776, $13,626, and $11,098 for the years ended September
30, 1997, 1996 and 1995.
Officers and directors, including their families and companies of which they are
principal owners, are considered to be related parties. These related parties
were loan customers of, and had other transactions with the Association in the
ordinary course of business.
Aggregate loan transactions with related parties were as follows:
September 30, September 30,
1997 1996
--------------------------
Beginning balance $ 146,874 $ 161,253
New loans 367,000 --
Repayments (82,372) (14,379)
--------------------------
Ending balance $ 431,502 $ 146,874
==========================
Maximum balance during the year $ 442,668 $ 161,253
==========================
28
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 29. Property and Equipment
Property and equipment are summarized as follows:
1997 1996
--------------------------
Land $ 150,972 $ 150,972
Buildings 722,506 717,851
Furniture and equipment 264,266 279,560
--------------------------
1,137,744 1,148,383
Accumulated depreciation (830,950) (818,123)
--------------------------
$ 306,794 $ 330,260
==========================
Depreciation expense was $36,504, $42,428 and $42,137 for the years ended
September 30, 1997, 1996 and 1995, respectively.
Note 29. Deposits
Deposits consist of the following:
1997 1996
-----------------------------
Passbook accounts, 3.00% (2.75% in 1996) $ 12,991,011 $ 14,679,647
NOW accounts, 2.75% (2.50% in 1996) 132,743 132,220
Super NOW accounts, 4.00% (4.00% in 1996) 107,637 127,806
Money market accounts, 4.00% (4.00% in 1996) 13,984,393 13,163,166
-----------------------------
27,215,784 28,102,839
-----------------------------
Certificates:
3.00% and below 1,507,374 1,462,652
3.01% - 5.00% 2,310,535 29,080,510
5.01% - 7.00% 80,782,589 52,301,109
7.01% and above 791,670 406,865
-----------------------------
85,392,168 83,251,136
-----------------------------
Accrued interest on deposits 33,941 31,411
-----------------------------
$112,641,893 $111,385,386
=============================
Weighted average cost of funds 4.91% 4.98%
=============================
29
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Deposits (Continued)
Certificate accounts are summarized by maturity at September 30, 1997 as
follows:
<TABLE>
<CAPTION>
1998 1999 2000 Thereafter Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.00% and below $ 1,062,192 $ 353,819 $ 91,363 $ -- $ 1,507,374
3.01% - 5.00% 2,310,535 -- -- -- 2,310,535
5.01% - 7.00% 60,528,082 9,205,862 4,041,890 7,006,755 80,782,589
7.01% and above 253,535 258,904 179,294 99,937 791,670
-------------------------------------------------------------------
$64,154,344 $ 9,818,585 $ 4,312,547 $ 7,106,692 $85,392,168
===================================================================
</TABLE>
The aggregate amount of certificates of deposit included in the table above with
a minimum denomination of $100,000 is shown below:
Maturity Amount
- -----------------------------------------------------------------
Less than 3 months $ 2,350,191
4 to 12 months 5,490,170
More than 12 months 2,116,545
----------------
$ 9,956,906
================
Note 6. 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 its statutory goal of 1.25% of insured deposits. The
assessment was equal to approximately 65.7 basis points of the SAIF assessable
deposit base as of March 31, 1995. Although the assessment was 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. The expense recorded for
the special assessment amounted to $792,868.
Note 7. 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 $40,000, $64,000, and $43,000 for
1997, 1996 and 1995, respectively.
30
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Employment Agreements
During 1997 and 1996, the Association entered into employment agreements with
four 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, upon approval by the Board of Directors, may extend so that the
remaining term shall be three years. 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.
Note 9. 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
1997 and 1996 the ESOP made principal payments of $260,000 and $130,000,
respectively. 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, 1997 and
1996, the outstanding balance of the note receivable is $2,210,000 and
$2,470,000, respectively, 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 $442,325 and $170,365 during 1997 and 1996, respectively, has been
incurred in connection with the ESOP. The expense includes, in addition to the
cash contribution necessary to fund the ESOP, $182,325 and $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 for 1997 and 1996, respectively. The Association has credited
this amount to paid-in capital.
31
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Employee Stock Ownership Plan (Continued)
At September 30, 1997 and 1996, 39,000 and 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 $4.5 million and $3.8
million at September 30, 1997 and 1996, respectively.
Note 10. Restricted Stock Plan
The Restricted Stock Plan ("RSP") authorizes, and the Association has granted
171,925 shares of common stock to directors and key employees, which will vest
evenly over a 5 year period commencing in October, 1997. At the present time,
the Association intends to provide funds to the restricted stock plan trust fund
in order for the trust to acquire common stock in open market purchases. At
September 30, 1997, there were 34,393 shares awarded pursuant to the restricted
stock plan, which were subsequently vested, resulting in an expense of
approximately $530,000.
Note 11. Stock Option Plan
The Corporation has a Stock Option Plan providing for the grant of 429,812 stock
options to directors and key employees.
A summary of the status of the Stock Option Plan at September 30, 1997 is as
follows:
1997
---------------------
Weighted
Average
Exercise
Options Shares Price
- --------------------------------------------------------------------------------
Outstanding at beginning of year -- $ --
Granted 429,812 14.94
Exercised -- --
Forfeited -- --
----------------------
Outstanding at end of year 429,812 $ 14.94
======================
The options were granted in October, 1996 and become exercisable at the rate of
20% annually for five years during such periods of service as an employee,
director or Director Emeritus. The options expire after ten years. The exercise
price is equal to the market value of the stock at the date of the grant. There
were no exercisable options as of September 30, 1997.
32
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Stock Option Plan (Continued)
Grants of options under the plan are accounted for following Accounting
Principles Board (APB) Opinion No. 25 and related interpretations. Accordingly,
no compensation cost has been recorded. In 1995, the Financial Accounting
Standards Board issued Standard No. 123, which requires disclosures concerning
the fair value of options and encourages accounting recognition for options
using the fair value method. The Association has elected to apply the
disclosure-only provisions of the Statement. However, had compensation cost been
recorded based on the fair value of awards at the grant date ($3.92 per share),
the pro forma impact on the Association's net income and net income per common
share would have been approximately $210,000 or $.05 per share for 1997.
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following assumptions for 1997:
dividend rate of 3.22%; risk-free interest rates of 5.88%; expected lives of 7
years; and price volatility of 19.1%.
Note 12. 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, 1997 and 1996 and the amounts
recognized in the consolidated statement of financial condition at September 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ (895,418) $ (768,452)
Nonvested (1,877) (1,259)
---------------------------
Accumulated benefit obligation (897,295) (769,711)
Effect of projected future compensation levels (379,435) (418,626)
---------------------------
Projected benefit obligation (1,276,730) (1,188,337)
Market value of plan assets 1,211,444 1,032,524
---------------------------
Projected benefit obligation in excess of plan assets (65,286) (155,813)
Unrecognized net transition assets (17,764) (20,301)
Unrecognized prior service cost (60,579) (65,239)
Unrecognized loss 334,889 386,509
---------------------------
Prepaid pension asset included in other assets $ 191,260 $ 145,156
===========================
</TABLE>
33
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Pension Plan (Continued)
The components of pension costs charged to expense for 1997, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during period $ 57,422 $ 53,280 $ 68,270
Interest cost on projected benefit obligation 80,243 86,620 92,539
Return on plan assets (82,045) (69,639) (67,936)
Net amortization and deferral 9,690 13,754 19,669
------------------------------------
Net periodic pension cost $ 65,310 $ 84,015 $ 112,542
====================================
</TABLE>
In determining the projected benefit obligation at September 30, 1997 and 1996,
the weighted average discount rate and expected long-term rate of return on plan
assets was 8%, and 7%, respectively. The assumed rate of increase in future
compensation levels was 4.0% in 1997 and 4.5% in 1996 and 1995 in determining
net periodic cost for all periods presented.
Note 13. 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, 1997 and 1996. 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>
1997 1996
---------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term cash
investments $ 29,969,640 $ 29,969,640 $ 33,357,194 $ 33,357,194
Federal funds sold 3,118,000 3,118,000 2,124,712 2,124,712
Investment securities held to
maturity 13,500,000 13,555,316 14,999,179 15,038,913
Nonmarketable equity securities 1,170,889 1,170,889 1,170,889 1,170,889
Loans receivable 128,945,951 131,907,000 123,147,779 123,927,553
Accrued interest receivable 222,716 222,716 255,566 255,566
Financial liabilities:
Deposits 112,641,893 112,688,725 111,385,386 111,598,386
</TABLE>
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. 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 1997, 1996 and 1995 due
to limitations imposed by the Code. In addition, legislation passed in 1996
eliminated 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 was scheduled to begin with the Association's 1997 tax
year, but can be delayed for 1998 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.
At September 30, 1997, 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.
35
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Income Taxes (Continued)
Deferred income taxes consist of the following:
1997 1996
-------------------
Deferred tax assets:
Deferred loan fees $ 95,000 $119,000
Deferred compensation 152,000 159,000
Deferred RSP compensation 208,000 --
Allowance for loan losses 88,000 88,000
SAIF Assessment -- 310,000
-------------------
Total deferred tax assets 543,000 676,000
-------------------
Deferred tax liabilities:
Excess accumulated tax depreciation 25,000 27,000
Federal Home Loan Bank stock basis 96,000 96,000
Excess pension plan contribution 61,000 43,000
Tax bad debt reserves 388,000 388,000
-------------------
Total deferred tax liabilities 570,000 554,000
-------------------
Net deferred tax assets (liabilities) $(27,000) $122,000
===================
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,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Income tax at the federal statutory rate 34.00 % 34.00 % 34.00 %
State income taxes, net of federal benefit 1.89 2.15 1.63
Other 2.31 (1.47) 0.16
---------------------------------
38.20 % 34.68 % 35.79 %
=================================
</TABLE>
36
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. 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 Office of Thrift Supervisor ("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 1997 and 1996, the Association paid $1,718,574 and $629,819 in
dividends to Green Street Financial Corp, respectively.
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 4, 1998.
37
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. 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, 1997 the Association met and exceeded all of the capital
requirements as shown below:
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
Requirement Requirement Requirement
--------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity (GAAP) $ 62,945,683 $ 62,945,683 $ 62,945,683
Equity of Green Street Financial Corp (18,297,934) (18,297,934) (18,297,934)
General loan loss allowance -- -- 254,763
--------------------------------------------------
Regulatory capital 44,647,749 44,647,749 44,902,512
Minimum capital requirement 2,380,065 4,760,131 6,300,815
--------------------------------------------------
Excess regulatory capital $ 42,267,684 $ 39,887,618 $ 38,601,697
=================================================
Home Federal's assets at September 30, 1997 $ 158,671,031 $ 158,671,031 $ --
Risk-weighted assets at September 30, 1997 -- -- 78,760,186
Capital as a percentage of assets:
Actual 28.14% 28.14% 57.01%
Required 1.50% 3.00% 8.00%
--------------------------------------------------
Excess 26.64% 25.14% 49.01%
==================================================
</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 16. 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.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16. 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 $2,137,000 and $1,613,900 at
September 30, 1997 and 1996, 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.
39
<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, 1997 and 1996:
Condensed Balance Sheets
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Assets:
Cash and short-term cash investments $ 19,203,612 $ 15,912,643
Accounts receivable, other 217,035 87,100
Accrued interest receivable -- 25,732
Investment securities; held to maturity, at cost -- 3,000,000
Investment in Home Federal 44,647,749 44,229,075
----------------------------
$ 64,068,396 $ 63,254,550
============================
Liabilities and Stockholders' Equity:
Liabilities:
Dividends payable $ 1,117,513 $ 1,074,531
Taxes payable 5,200 --
----------------------------
1,122,713 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 64,973,891 64,924,878
Note Receivable - ESOP (2,210,000) (2,470,000)
Retained earnings (deficit) 181,792 (274,859)
----------------------------
62,945,683 62,180,019
----------------------------
$ 64,068,396 $ 63,254,550
============================
</TABLE>
Condensed Statements of Income
For the Year Ended September 30, 1997 and the Period
From April 3, 1996 to September 30, 1996
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Interest income $ 1,215,158 $ 575,914
Equity in earnings of Home Federal 2,088,235 797,447
Administrative expense (165,124) (47,376)
Income tax expense (361,622) (183,600)
-----------------------------
Net income $ 2,776,647 $ 1,142,385
=============================
</TABLE>
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17. Parent Corporation Financial Data (Continued)
Condensed Statements of Cash Flows
For the Year Ended September 30, 1997 and the Period
From April 3, 1996 to September 30, 1996
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,776,647 $ 1,142,385
Noncash income items:
Equity in earnings of Home Federal (2,088,235) (797,447)
Change in assets and liabilities:
Increase (decrease) in accrued interest receivable 25,732 (25,732)
Increase in accounts receivable, other (129,935) (25,350)
Increase in income taxes payable 5,200 --
-----------------------------
Net cash provided by operating activities 589,409 293,856
-----------------------------
Cash Flows from Investing Activities:
Proceeds from maturity of investments 6,000,000 --
Purchase of investments (3,000,000) (3,000,000)
Upstream dividend from Home Federal 1,718,574 629,819
Initial investment in Home Federal -- (20,863,430)
-----------------------------
Net cash provided by (used in) investing activities 4,718,574 (23,233,611)
-----------------------------
Cash Flows from Financing Activities:
Payments received on note receivable from ESOP 260,000 130,000
Proceeds received from common stock offering -- 39,126,861
Payment of dividends (2,277,014) (404,463)
-----------------------------
Net cash provided by (used in) financing activities (2,017,014) 38,852,398
-----------------------------
Net increase in cash 3,290,969 15,912,643
Cash, beginning 15,912,643 --
-----------------------------
Cash, ending $ 19,203,612 $ 15,912,643
=============================
Supplemental Disclosure of Noncash Financing Activities:
Dividends declared and accrued $ 1,117,513 $ 1,074,531
============================
</TABLE>
41
<PAGE>
COMMON STOCK INFORMATION
The table below reflects the stock trading and dividend payment frequency of the
Corporation for each quarter completed in the period April 3, 1996 through June
30, 1997. The Corporation's common stock is quoted on the Nasdaq National Market
under the symbol "GSFC". For further information regarding the Corporation's
dividend policy, please refer to Note 15 of the Notes to Consolidated Financial
Statements. Stock price reflects bid prices between broker-dealers, prior to any
markups, markdowns or commissions.
Dividends Stock Price
-------------------- -------------------------
Regular Special High Low
--------------------------------------------------
1997:
First Quarter $ 0.10 $ -- $ 16 1/8 $ 14 3/4
Second Quarter 0.10 -- 19 15 1/4
Third Quarter 0.11 -- 18 1/8 17
Fourth Quarter 0.11 0.15 21 1/4 17 1/8
1996:
Third Quarter $ 0.10 $ -- $ 13 1/8 12
Fourth Quarter 0.10 0.15 15 5/8 12 3/8
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Interest income $ 3,255,678 $ 3,204,976 $ 3,247,834 $ 3,309,031
Interest expense 1,368,773 1,311,896 1,315,246 1,381,503
Net interest income 1,886,905 1,893,080 1,932,588 1,927,528
Net income 639,991 685,887 728,044 722,725
Earnings per common share 0.16 0.17 0.17 0.17
1996:
Interest income $ 2,960,299 $ 3,023,700 $ 3,332,159 $ 3,266,834
Interest expense 1,734,447 1,701,529 1,430,706 1,365,580
Net interest income 1,225,852 1,322,171 1,901,453 1,901,254
Net income 427,983 499,278 792,401 349,984
Earnings per common
share (1) N/A N/A 0.19 0.09
</TABLE>
(1) Earnings per share are not applicable for periods prior to April 3, 1996,
the date of conversion of Home Federal Savings and Loan Association from a
federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association and when it became a
wholly-owned subsidiary of Green Street Financial Corp.
42
<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 Anthony R. Strickland Allen Lloyd
Vice President/Treasurer Vice President 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 Co. 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. President, Rose, Ray & O'Connor P.A.
Stock Transfer Agent Annual Meeting
American Stock Transfer & Trust Co. The 1998 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 28, 1998 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
Washington, DC 20005 Form 10-K
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 P.A. 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>
43
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 555
<INT-BEARING-DEPOSITS> 29,415
<FED-FUNDS-SOLD> 3,118
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 14,671
<INVESTMENTS-MARKET> 14,726
<LOANS> 131,662
<ALLOWANCE> 255
<TOTAL-ASSETS> 177,962
<DEPOSITS> 112,642
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,374
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 41,816
<TOTAL-LIABILITIES-AND-EQUITY> 177,962
<INTEREST-LOAN> 10,202
<INTEREST-INVEST> 2,815
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,017
<INTEREST-DEPOSIT> 5,377
<INTEREST-EXPENSE> 5,377
<INTEREST-INCOME-NET> 7,640
<LOAN-LOSSES> 20
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,231
<INCOME-PRETAX> 4,493
<INCOME-PRE-EXTRAORDINARY> 2,777
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,777
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<YIELD-ACTUAL> 4.40
<LOANS-NON> 173
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 235
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 255
<ALLOWANCE-DOMESTIC> 255
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
