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, 1998
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to . ------------
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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
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(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
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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
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(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 1, 1998, was approximately
$54.3 million.
As of December 1, 1998, there were issued and outstanding 4,083,219 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, 1998. (Parts II, III and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended September 30, 1998. (Part III)
1
<PAGE>
PART I
GREEN STREET FINANCIAL CORP (THE "COMPANY") MAY FROM TIME TO TIME MAKE
WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING
THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS; THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS
RESULTING FROM THESE FACTORS.
THE COMPANY CAUTIONS THAT THE LISTED FACTORS ARE NOT EXCLUSIVE. THE
COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT, WHETHER
WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE
COMPANY.
Item 1. Business
General
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").
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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.
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,
--------------------------------------------------------
1998 1997 1996
---------------- --------------- -----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loans:
<S> <C> <C> <C> <C> <C> <C>
Residential 1- to 4-family...... $108,739 80.96% $106,084 80.57% $102,011 80.82%
Residential multi-family........ 7,627 5.68 7,527 5.72 5,579 4.42
Non-residential real estate..... 14,455 10.76 14,172 10.76 15,544 12.31
Construction.................... 2,845 2.12 3,445 2.62 2,948 2.34
Installment account loans....... 649 .48 434 .33 142 0.11
------- ------ ------- ------ ------- ----
134,315 100.00% 131,662 100.00% 126,224 100.00%
======= ====== ======= ====== ======= ======
Less:
Unearned fees and discounts..... 936 965 931
Loans in process................ 1,426 1,496 1,910
Allowance for losses............ 255 255 235
------- -------- -------
2,617 2,176 3,076
------- -------- -------
Total loans receivable, net....... $131,698 $128,946 $123,148
======= ======= =======
</TABLE>
3
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Loan Maturity Tables
The following table sets forth the estimated maturity of the
Association's loan portfolio at September 30, 1998. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totalled approximately $20.7 million for the year
ended September 30, 1998.
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In thousands)
Residential 1- to 4-family.. $ 116 $3,504 $105,119 $108,739
Residential multi-family.... -- 16 7,611 7,627
Non-residential real estate. 36 1,925 12,494 14,455
Construction................ -- -- 2,845 2,845
Installment account loans... 649 -- -- 649
----- ------ ------- -------
$ 801 $5,445 $128,069 $134,315
===== ===== ======= =======
The following table sets forth the dollar amount of all loans due after
September 30, 1999, 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.... $74,538 $34,085 $108,623
Residential multi-family...... 1,209 6,418 7,627
Non-residential real estate... 5,693 8,726 14,419
Construction.................. 2,845 -- 2,845
------ ------ -------
Total....................... $84,285 $49,229 $133,514
====== ====== =======
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, with 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
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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.
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.
5
<PAGE>
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.
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, 1998, the Association had $1.9 million of commitments to cover
originations and $1.4 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, 1998. At September 30, 1998, the Association's largest amount of loans to
one borrower was 53 loans aggregating $1.6 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
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<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
One- to four-family residential.. $ 196 $ 173 $ 310 $ 242 $ 292
Multi-family residential......... -- -- -- 77 --
Non-residential real estate...... -- -- -- -- 113
Construction..................... -- -- -- -- --
Installment account loans........ -- -- -- -- --
------ ------ ------- ------- -------
Total non-performing loans......... 196 173 310 319 405
Real estate owned.................. -- -- 34 -- 38
------ ------ ------- ------- -------
Total non-performing assets........ $ 196 $ 173 $ 344 $ 319 $ 443
===== ===== ====== ====== ======
</TABLE>
Interest income foregone on loans accounted for on a non-accrual basis
under the original terms of such loans was immaterial for the year ended
September 30, 1998. Amounts actually included in the Association's interest
income for non-accrual loans for the year ended September 30, 1998, 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
7
<PAGE>
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, 1998, the
Association had $230,000 of assets classified as substandard.
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.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Association's loan portfolio. Such
evaluation, which includes a review of all loans of which full collectibility of
interest and principal may not be reasonably assured, considers the
Association's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and current economic conditions.
The following table sets forth the allocation of the 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,
-------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ----------------------------- ---------------------------
% 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... $ 105 80.96% $ 93 80.57% $ 85 80.82%
Residential multi-family.......... 46 5.68 47 5.72 29 4.42
Non-residential real estate....... 87 10.76 91 10.76 102 12.31
Construction...................... 17 2.12 24 2.62 19 2.34
Installment loans................. -- .48 -- .33 -- .11
----- ------ ------ ------ ------ ------
Total allowance for loan losses... $ 255 100.00% $ 255 100.00% $ 235 100.00%
===== ====== ===== ====== ===== ======
</TABLE>
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<PAGE>
The following table sets forth information with respect to the
Association's allowance for loan losses at the dates and for the periods
indicated:
Year ended September 30,
-------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Allowance balances (at beginning of period). $ 255 $ 235 $ 225
Provision (credit) for loan losses:
One- to four-family residential........... -- 8 (4)
Multi-family residential.................. -- 18 (3)
Non-residential real estate............... -- (11) 9
Construction.............................. -- 5 8
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 $ 255 $ 235
==== ==== ====
Allowance for loan losses as a percent
of total loans outstanding................ 0.19% 0.19% 0.19%
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, 1998, the market value of the investment securities
that are held-to-maturity was $9.0 million.
At September 30,
----------------------------------------
1998 1997 1996
----------- ----------- --------
(In thousands)
Investment securities:
U.S. Treasury securities.......... $ -- $ -- $ 2,999
U.S. Agency securities............ 9,000 13,500 12,000
------ ------ ------
Total investment securities..... 9,000 13,500 14,999
Interest earning deposits......... 27,818 29,414 33,108
Federal Funds sold................ 1,473 3,118 2,125
Federal Home Loan Bank stock...... 1,145 1,127 1,127
Central Service Corporation stock. -- 44 44
-------- -------- -------
Total............................ $ 39,436 $ 47,203 $ 51,403
====== ====== ======
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<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, 1998.
<TABLE>
<CAPTION>
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. Agency securities...... $ -- -- $6,000 6.65% $3,000 6.38% $ -- -- $ 9,000 6.56%
Interest earning deposits... 27,818 5.55% -- -- -- -- -- -- 27,818 5.55%
Federal Funds sold.......... 1,473 5.59% -- -- -- -- -- -- 1,473 5.59%
Federal Home Loan Bank
stock (1)................ -- -- -- -- -- -- 1,145 7.23% 1,145 7.23%
------------------------- ------ ---- ----- ---- ----- ---- ----- ---- ------ ----
Total..................... $ 29,291 5.55% $6,000 6.65% $3,000 6.38% $1,145 7.23% $39,436 5.83%
====== ==== ===== ==== ===== ==== ===== ==== ====== ====
</TABLE>
(1) Nonmarketable equity security; substantially all required to be maintained
and assumed to mature in periods greater than 10 years.
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<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, 1998, 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, 1998.
Certificates
of Deposits
-----------
Maturity Period (In thousands)
- ---------------
Within three months.......... $ 2,786
Three through six months..... 2,797
Six through twelve months.... 2,550
Over twelve months........... 3,228
-------
$ 11,361
=======
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, 1998, the Association
had no borrowings from the FHLB of Atlanta.
Employees
At September 30, 1998, 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. Set forth below is a brief description of certain laws that
relate to the regulation of the Association. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulation. 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.
12
<PAGE>
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.
Prior to January 1, 1997, as a member of the SAIF, the Association paid
an insurance premium to the FDIC equal to a minimum of 0.23% of its total
deposits. The FDIC also maintains another insurance fund, the Bank Insurance
Fund ("BIF"), which primarily insures commercial bank deposits. In 1996, the
annual insurance premium for most BIF members was lowered to $2,000. The lower
insurance premiums for BIF members placed SAIF members at a competitive
disadvantage to BIF members.
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. Beginning January 1,
1997, the deposit insurance assessment for SAIF members was reduced to .064% of
deposits on an annual basis through the end of 1999. During this same period,
BIF members will be assessed approximately .013% of deposits. After 1999,
assessments for BIF and SAIF members should be the same. 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 declined by approximately 70%.
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 4% 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, 1998.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Association to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
September 30, 1998, 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
13
<PAGE>
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, 1998, the Association was in compliance
with its QTL requirement with 92.17% 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, 1998, the Association was in compliance with these Federal Reserve
Board requirements.
Executive Officers of the Company Who Are Not Directors
Name and Title Age as of September 30, 1998
-------------- ----------------------------
Allen Lloyd 45
Vice President and Secretary
Jerry L. Robertson 56
Vice President and Treasurer
Anthony Strickland 52
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. Mr. Lloyd was elected
Vice President of the Association and the Company in 1998.
14
<PAGE>
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 and one loan office
located in Fayetteville, North Carolina and one full service branch office
located in Lumberton, North Carolina.
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, 1998 (the "Annual Report"), is incorporated herein by
reference. In addition, there are 4,083,219 shares of Common Stock outstanding
which were held by approximately 2,100 holders on September 30, 1998.
Item 6. Selected Financial Data
The information contained in the section captioned "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" in the Annual Report is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Management's Discussion and Analysis of Financial Condition and Results
of Operations in the Annual Report.
15
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Registrant's financial statements are incorporated by references to
the Annual Report listed under Item 14.
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 1998 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 1998 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 1998
Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the 1998
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 1998 Proxy Statement.
16
<PAGE>
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 statements of financial conditions of Green
Street Financial Corp and subsidiary as of September 30,
1998 and 1997, 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, 1998, 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 Amendment to 1996 Stock Option Plan **
10.7 Amendment to Restricted Stock Plan and Trust **
13 Annual Report to Stockholders for the fiscal year
ended September 30, 1998
21 Subsidiaries of the Registrant (See Item 1 - Business
- General)
23 Consent of McGladrey and Pullen, LLP
27 Financial Data Schedule (electronic filing only)
- ---------------------
* 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 annual meeting of
stockholders on January 28, 1998 and filed with the SEC on December 15,
1997.
(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
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 15, 1998.
/s/ H. D. Reaves, Jr. /s/ John C. Pate
- ---------------------------------- --------------------------------------
H. D. Reaves, Jr. John C. Pate
President, Chief Executive Officer Senior Vice President and Director
and Director (Principal Financial Officer)
(Principal Executive Officer)
/s/ Robert O. McCoy, Jr. /s/ Jerry Robertson
- ---------------------------------- --------------------------------------
Robert O. McCoy, Jr. Jerry Robertson
Chairman of the Board and Director Vice President and Treasurer
(Principal Accounting Officer)
/s/ Norwood E. Bryan, Jr. /s/ Henry G.Hutaff, Jr.
- ---------------------------------- --------------------------------------
Norwood E. Bryan, Jr. Henry G. Hutaff, Sr.
Director Vice Chairman of the Board and Director
/s/ Joseph H. Hollingshed /s/ John H. 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>
GREEN STREET FINANCIAL CORP
1998 ANNUAL REPORT
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA 1
- --------------------------------------------------------------------------------
REPORT TO STOCKHOLDERS 2
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS 3 - 14
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 15
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS 16 - 39
- --------------------------------------------------------------------------------
COMMON STOCK INFORMATION 40
- --------------------------------------------------------------------------------
CORPORATE INFORMATION 41
- --------------------------------------------------------------------------------
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.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------
Financial Condition Data: (Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Total assets $ 172,705 $ 177,962 $ 176,217 $ 151,028 $ 150,077
Investments (1) 39,436 47,203 51,403 32,174 43,605
Loans receivable, net 131,698 128,946 123,148 117,201 105,094
Savings deposits 110,460 112,642 111,385 127,483 128,334
Stockholders' equity (2) 60,333 62,946 62,180 22,230 20,453
Book value per share 14.78 14.64 14.47 -- --
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------
Operating Data: (Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 13,101 $ 13,017 $ 12,583 $ 11,124 $ 10,325
Interest expense 5,609 5,377 6,232 6,119 5,489
----------------------------------------------------------
Net interest income 7,492 7,640 6,351 5,005 4,836
Provision for loan losses 20 10 -- 19
Noninterest income 132 104 128 106 145
Noninterest expense (3) 3,128 3,231 3,300 2,344 2,117
----------------------------------------------------------
Income before income taxes 4,496 4,493 3,169 2,767 2,845
Income tax expense 1,689 1,716 1,099 990 1,035
----------------------------------------------------------
Net income $ 2,807 $ 2,777 $ 2,070 $ 1,777 $ 1,810
==========================================================
Earnings per share, basic (2) $ 0.70 $ 0.68 $ 0.28 $ -- $ --
Earnings per share, diluted (2) 0.69 0.67 0.28 -- --
Dividends per share 0.61 0.57 0.35 -- --
Selected Other Data:
Return on average assets (5) 1.59% 1.58% 1.22% 1.21% 1.16%
Return on average equity (5) 4.48% 4.41% 4.93% 8.29% 9.23%
Interest rate spread (5) 2.47% 2.60% 2.50% 2.66% 2.58%
Net interest margin (5) 4.29% 4.40% 3.78% 3.42% 3.11%
Dividend payout ratio 87.00% 85.00% 125.00% -- --
Average equity to average assets 35.49% 36.00% 24.76% 14.57% 12.52%
Nonperforming loans to total loans (4) 0.15% 0.13% .25% .27% .39%
</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. Earnings per share are not
presented for periods prior to April 3, 1996.
(3) Includes nonrecurring insurance assessment of $792,868 during 1996.
(4) Nonperforming loans is comprised of loans delinquent 90 days or more.
(5) Average balances are derived from month-end balances which are
representative of operations.
1
<PAGE>
GREEN STREET FINANCIAL CORP
- --------------------------------------------------------------------------------
241 Green Street Telephone (910) 483-3681
P.O. Box 1540 FAX (910) 483-5102
Fayetteville, North Carolina 28302
REPORT TO STOCKHOLDERS
We are pleased to present our third Annual Report of Green Street Financial Corp
(the "Corporation"). For the fiscal year ended September 30, 1998, our earnings
of $2.8 million remained relatively constant as compared to our 1997 fiscal
year. Our asset quality continues to remain high and our capital levels well
exceed the regulatory capital requirements. Additionally, cash dividends to
shareholders increased 5.3% or, $.04, to $0.61 per share in fiscal 1998 from
$0.57 per share in fiscal 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.
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 1998, 1997 and 1996, and changes in
financial position for the years ended September 30, 1998 and 1997,
respectively.
3
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Comparison of Financial Condition
Total consolidated assets decreased by $5.3 million during 1998, from $178.0
million at September 30, 1997 to $172.7 million at September 30, 1998. The
decrease resulted primarily from savings deposit losses of $2.1 million and
repurchases of common stock of $3.5 million.
Loans receivable increased by approximately $2.8 million during 1998 to $131.7
million at September 30, 1998. 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.
The Corporation had no outstanding borrowings during 1998 or 1997. However, the
Association has borrowing capacity of approximately $16 million through the
Federal Home Loan Bank of Atlanta.
The Corporation's return of average assets was 1.59% and 1.58%, and its return
on average equity was 4.48% and 4.41% for 1998 and 1997, respectively.
The Association is required to meet certain capital requirements as established
by the OTS. At September 30, 1998, 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
Net Income
Net income for the years ended September 30, 1998, 1997 and 1996 was $2.8
million, $2.8 million and $2.1 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").
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 1998, 1997 and 1996.
Net interest income decreased by $148,636 or 1.9% for the year ended September
30, 1998 from $7,640,101 reported in 1997. Net interest income amounted to
$6,350,730 in 1996. The decrease in net interest income during 1998 was
attributable to an increase in the cost of savings.
Interest Income
Total interest income increased slightly to $13,100,625 for 1998 from
$13,017,519 in 1997, an increase of $83,016 or 0.6%. The increase during 1998
was attributable to an increase in the average balance of interest earning
assets over the previous year. The increase in interest income during 1997 was
attributable to a $21.7 million increase in the average balance of interest
earning assets due to proceeds received from the stock issuance. The
Association's overall yield on interest earning assets remained approximately
the same from 1996 through 1998.
Interest Expense
Total interest expense increased to $5,609,160 in 1998 from $5,377,418 in 1997,
an increase of $231,742 or 4.3%. Home Federal's average cost of funds was 5.03%
in 1998 compared to 4.91% in 1997. Competition for savings deposits forced the
Association to pay higher rates than in the previous year.
The Association's provision for loan losses amounted to approximately $0,
$20,000 and $10,000 for the years ended September 30, 1998, 1997 and 1996,
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
5
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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. However, there can be no assurance that future
losses will not exceed estimated amounts or that additional provisions for loan
losses will not be required in future periods.
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 .15%, .13% and .25% at September 30, 1998, 1997 and
1996, respectively. Home Federal had no loans charged off during the three year
period ended September 30, 1998.
Noninterest Income
Noninterest income amounted to $132,400, $103,983 and $127,943 in 1998, 1997 and
1996, 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
$3,128,157, $3,231,172 and $3,300,001 in 1998, 1997 and 1996, 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.
Compensation and employee benefits decreased by $36,589 during 1998 from
$2,227,063 in 1997 to $2,190,474 in 1998. Deposit insurance decreased $38,221 in
1998 from 1997 because of the reduction in the rate charged by the FDIC.
Occupancy, advertising and data processing charges did not change significantly
during the three year period ended September 30, 1998. There was a slight
decrease in other general administrative expense during 1998. 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.
Income Taxes
The Corporation's effective income tax rate was 37.56%, 38.20% and 34.68% in
1998, 1997 and 1996, respectively. The differences in rates were due to changes
in the components of permanent tax differences. (See Note 14 to the consolidated
financial statements.)
Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year
6
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
1999, which could cause a system failure or other computer errors, leading to
disruptions in the Association's operation. The Year 2000 date problem is a
reality and the date for completion of this project cannot be changed. The
Association identifies Year 2000 as a challenge in moving into the next decade.
In 1997, the Association developed a three-phase program for Y2K information
systems compliance.
Phase I (Identification)
In this Phase, which was completed in early 1998, the Association
identified those systems with which the Association has its largest
exposure to Y2K issues. The Association performed an inventory of all
services and computer products that involved micro processors in their
operation. The Association identified that their third-party service
bureau was their major provider of financial data processing and the
most vulnerable link to the Y2K event.
Phase II (Development and implementation of action plans)
In this Phase, the Association developed action plans to insure that
the Association is compliant in all areas by late 1998. Financial
software providers have been contacted and new software updates have
been received that are Y2K compliant.
The Association is currently working in this phase.
Phase III (Testing)
The Association is currently scheduled to test PC operation systems,
financial software systems and data processing services provider in
November and December of 1998. This phase will enable the Association
to identify those areas that need further research and testing to
become Y2K compliant. In the financial and information system area, a
number of applications have been identified as being Y2K compliant due
to their recent implementation. The Association's core financial and
reporting systems are not Y2K compliant, but are on schedule to be so
by the end of December.
The Association believes that its expense will be less than $25,000 in making
its core service Y2K compliant due to its contract with its outside service
bureau to provide Y2K compliant services. In addition, the Association is in the
process of updating its computer systems. Capital costs associated with this
upgrade are anticipated to be approximately $150,000. The Association has
reviewed third party relationships and has identified no significant
relationships that will affect its operation. Most relationships are with
consumers and small business operators who stated that they are or will be Y2K
compliant. The Association is currently meeting the time line that the Federal
Financial Institutions Examination Council has mandated and expects that all of
their systems will be verified Year 2000 compliant and will be able to process
without interruption through the next millennium. However, in the event some
unforeseen circumstances arise, the Association has in place a manual posting
system for all of its key financial processing, including loans and deposits.
7
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
No assurance can be given that the Y2K project will be completed successfully by
the Year 2000, in which event the Corporation could incur significant costs. If
the Association's third-party service bureau is unable to resolve the potential
problem in time, the Corporation would likely experience significant data
processing delays, mistakes or failures.
Successful and timely completion of the Y2K project is based on management's
best estimates derived from various assumptions of future events. This includes
the progress and results of the Association's third-party service bureau,
testing plans, and all vendors, suppliers and customers readiness.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The assets and liabilities
of the Corporation are primarily monetary in nature and changes in interest
rates have a greater impact on the Corporation's performance than do the effects
of inflation.
Future Reporting Requirements
The Financial Accounting Standards Board has issued SFAS No. 130, Reporting
Comprehensive Income and SFAS No. 132, Employers' Disclosures About Pensions and
Other Postretirement Benefits, both of which the Association has not been
required to adopt as of September 30, 1998.
SFAS No. 130, Reporting Comprehensive Income, established 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.
SFAS No. 132, Employers' Disclosures About Pensions and Other Postretirement
Benefits, revises employers' disclosures about pension and other postretirement
benefit plans. The Statement does not change the measurement or recognition of
those plans, but standardizes the disclosure requirements for pensions and other
postretirement benefits, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis. The Statement suggests combined formats for presentation of
pension and other postretirement benefit disclosures. It is not expected that
this statement will materially effect the presentation of existing disclosures.
8
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Capital Resources and Liquidity
During 1998, Green Street Financial Corp paid a regular quarterly dividend of
$.11 a share on January 23, 1998 and April 23, 1998, and a regular quarterly
dividend of $.12 a share on July 23, 1998 and declared a regular quarterly and a
special dividend of $.12 and $.15 a share, respectively on September 28, 1998 to
be paid on October 23, 1998 to stockholders of record as of October 13, 1998.
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, 1998, cash and cash equivalents, a
significant source of liquidity, decreased by approximately $3.6 million. Cash
and cash equivalents decreased by $2.4 million during 1997. Cash flow resulting
from internal operating activities provided increases of $2.7 million and $2.6
million in cash during the years ended September 30, 1998 and 1997,
respectively. Deposits decreased by $2.2 million during 1998. For 1998,
financing activities provided sources of funds for asset growth and liquidity.
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. 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 loans
to customers, to maintain liquid investment portfolios, and to meet short term
liquidity requirements. During 1998 and 1997, loans outstanding increased by
$2.8 million and $5.8 million, respectively. During 1998 and 1997, the
Corporation purchased investment securities amounting to $21.0 million and $27.0
million, respectively.
As a federally chartered savings association, Home Federal must maintain a daily
average balance of liquid assets equal to at least 4% of withdrawable deposits
and short-term borrowings. The Association's liquidity ratio at September 30,
1998, 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, 1998, 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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Portfolio NPV as a % of
Value PV of Assets
------------------------------------------------ --------------------------------
Change in Rates $ Amount $ Change (1) % Change (2) NPV Ratio (3) Change (4)
- ------------------- ------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C>
+400 bp 37,225 (11,611) -24 % 25.34 % -505 bp
+300 bp 40,535 (8,301) -17 % 26.89 % -350 bp
+200 bp 43,794 (5,041) -10 % 28.33 % -205 bp
+100 bp 46,684 (2,152) -4 % 29.55 % -84 bp
0 bp 48,835 - - 30.39 % -
-100 bp 50,381 1,546 +3 % 30.94 +55 bp
-200 bp 52,060 3,225 +7 % 31.52 +114 bp
-300 bp 54,015 5,180 +11 % 32.21 +183 bp
-400 bp 56,138 7,302 +15 % 32.95 +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, 1998, a change in interest rates of a positive 200 basis points
would have resulted in a 205 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, 1998 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, 1998 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, 1998
<TABLE>
<CAPTION>
Expected Maturity Date
Year Ended September 30,
1999 2000 2001 2002 2003 Thereafer Total Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans - fixed:
Balance $ 779,402 $ 230,803 $ 381,274 $ 1,398,392 $ 1,387,075 $80,887,214 $ 85,064,160 $ 87,074,676
Interest rate 10.26% 8.82% 9.69% 9.33% 8.84% 7.92% 7.99% -
Loans - variable:
Balance 49,251,324 - - - - - 49,251,324 49,251,324
Interest rate 6.83% - - - - - 6.83% -
Investments (1):
Balance 29,462,356 - - 3,000,000 3,000,000 3,000,000 38,462,356 38,504,548
Interest rate 5.52% - - 6.92% 6.37% 6.38% 5.76% -
Liabilities:
Deposits (2):
Balance 26,219,249 - - - - - 26,219,249 26,219,249
Interest rate 3.49% - - - - - 3.49% -
Deposits -
certificates:
Balance 63,664,757 8,138,135 8,294,930 4,076,922 65,788 - 84,240,531 84,582,000
Interest rate 5.49% 5.82% 6.01% 6.03% 8.00% - 5.60% -
</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 sheets 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 believes that the use of month-
end balances are representatives of operations.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------------------
At September 30,
1998 1998 1997 1996
------------------ ----------------------------- --------------------------- ----------------------------
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 $ 29,291 5.53% $ 28,704 $ 1,619 5.64% $ 33,447 $ 1,838 5.50% $ 40,508 $ 2,206 5.45%
Investments, at cost 10,145 6.86% 15,277 1,035 6.77% 14,545 977 6.72% 6,656 480 7.21%
Loans receivable 131,698 7.60% 130,788 10,447 7.99% 125,520 10,202 8.13% 121,024 9,897 8.18%
-------- -------- ------- -------- ------- -------- -------
Total interest-earning
assets 171,134 7.66% 174,769 $13,101 7.50% 173,512 $13,017 7.50% 168,188 $12,583 7.48%
------- ------- -------
Non-interest-earning
assets 1,571 1,692 1,628 1,322
-------- -------- -------- --------
Total $172,705 $176,461 $175,140 $169,510
======== ======== ======== ========
Liabilities and
retained earnings:
Interest-bearing
liabilities:
Passbook accounts $ 13,124 3.05% $ 13,254 $ 399 3.01% $ 14,237 $ 432 3.03% $ 20,068 $ 548 2.73%
MMDA accounts 13,095 4.05% 13,699 562 4.10% 14,175 567 4.00% 14,344 583 4.06%
Certificates of
deposit 84,241 5.60% 84,572 4,648 5.50% 81,205 4,378 5.39% 90,779 5,101 5.62%
-------- -------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 110,460 5.11% 111,525 $ 5,609 5.03% 109,617 $ 5,377 4.91% 125,191 $ 6,232 4.98%
------- ------- -------
Non-interest-bearing
liabilities 1,912 2,312 2,476 2,354
Stockholders' Equity 60,333 62,624 63,047 41,965
------- ------- ------- -------
Total $172,705 $176,461 $175,140 $169,510
======== ======== ======== ========
Net interest income and
interest rate
spread (1) 2.55% $ 7,492 2.47% $ 7,640 2.60% $ 6,351 2.50%
======== ======== =======
Net yield on interest-
earning assets (2) 4.38% 4.29% 4.40% 3.78%
Ratio of interest-
earning assets to
interest-bearing
liabilities 154.93% 156.71% 158.29% 134.35%
</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,
1998 vs. 1997 1997 vs. 1996
--------------------------------------- --------------------------------------
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 $ (261) $ 49 $ (7) $ (219) $ (385) $ 20 $ (3) $ (368)
Investments, at cost 49 (8) 0 58 569 (33) (39) 497
Loan receivable 428 (176) (7) 245 368 (60) (2) 305
------- ------- ------- ------- ------- ------- ------- -------
Total interest income on
interest-earning assets 217 (119) (14) 84 552 (73) (45) 434
------- ------- ------- ------- ------- ------- ------- -------
Interest expense on:
Passbook accounts (30) (3) 0 (33) (159) 61 (18) (116)
MMDA accounts (19) 15 (0) (5) (7) (9) 0 (16)
Certificates of deposit 182 85 4 270 (538) (207) 22 (723)
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense on
interest-bearing liabilities 133 96 3 232 (704) (155) 4 (855)
------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in net interest
income $ 84 $ (215) $ (17) $ (148) $ 1,256 $ 82 $ (49) $ 1,289
======= ======= ======= ======= ======= ======= ======= =======
</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, 1998 and 1997
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, 1998.
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
/s/McGladrey & Pullen, LLP
Raleigh, North Carolina
October 23, 1998
15
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Interest-bearing $ 27,817,856 $ 29,414,597
Non-interest bearing 171,500 555,043
Federal funds sold 1,473,000 3,118,000
---------------------------------
29,462,356 33,087,640
---------------------------------
Investment securities: (Note 2)
Held to maturity 9,000,000 13,500,000
Nonmarketable equity securities 1,144,700 1,170,889
Loans receivable, net (Note 3) 131,697,916 128,945,951
Accrued interest receivable, investments 180,301 222,716
Real estate acquired in settlement of loans 34,521 -
Property and equipment, net (Note 4) 349,190 306,794
Prepaid expenses and other assets (Note 12) 835,561 727,688
---------------------------------
Total assets $ 172,704,545 $ 177,961,678
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 5) $ 110,459,780 $ 112,641,893
Advance payments by borrowers for taxes and insurance 208,998 250,662
Accrued expenses and other liabilities 600,722 1,005,927
Dividends payable 1,102,469 1,117,513
---------------------------------
Total liabilities 112,371,969 115,015,995
---------------------------------
Commitments and contingencies (Notes 7, 8, 10, 11 and 16)
Stockholders' Equity (Notes 14, 15 and 16):
Preferred stock, authorized 1,000,000 shares; none issued - -
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding 4,083,219 shares (4,298,125 in 1997) - -
Additional paid-in capital 38,550,912 41,816,239
Unearned ESOP shares (Note 9) (1,950,000) (2,210,000)
Retained earnings, substantially restricted (Note 15) 23,731,664 23,339,444
---------------------------------
60,332,576 62,945,683
---------------------------------
$ 172,704,545 $ 177,961,678
=================================
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 10,447,936 $ 10,202,266 $ 9,897,134
Short-term cash investments 1,701,909 1,837,998 2,206,230
Investment securities 950,780 977,255 479,628
--------------------------------------------
Total interest income 13,100,625 13,017,519 12,582,992
Interest on deposits (Note 5) 5,609,160 5,377,418 6,232,262
--------------------------------------------
Net interest income 7,491,465 7,640,101 6,350,730
Provision for loan losses (Note 3) - 20,000 10,073
--------------------------------------------
Net interest income after
provision for loan losses 7,491,465 7,620,101 6,340,657
--------------------------------------------
Noninterest income 132,400 103,983 127,943
--------------------------------------------
Noninterest expense:
Compensation and benefits (Notes 8, 9,10 and 11) 2,190,474 2,227,063 1,458,435
Deposit insurance 116,911 155,132 334,329
Special SAIF assessment (Note 6) - - 792,868
Occupancy expenses 157,334 146,610 161,807
Advertising 142,633 161,431 137,558
Data processing expense 89,774 91,234 97,384
Other 431,031 449,702 317,620
--------------------------------------------
3,128,157 3,231,172 3,300,001
--------------------------------------------
Income before income taxes 4,495,708 4,492,912 3,168,599
--------------------------------------------
Income taxes (credits) (Note 14):
Current 1,661,750 1,567,265 1,348,953
Deferred 27,000 149,000 (250,000)
--------------------------------------------
1,688,750 1,716,265 1,098,953
--------------------------------------------
Net income $ 2,806,958 $ 2,776,647 $ 2,069,646
============================================
Basic earnings per share (Note 16) $ 0.70 $ 0.68 $ 0.28
============================================
Diluted earnings per share (Note 16) $ 0.69 $ 0.67 $ 0.28
============================================
Dividends paid per share $ 0.61 $ 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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additional Unearned
Paid-in ESOP Retained
Capital Shares Earnings Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 $ - $ - $ 22,230,391 $ 22,230,391
Net income - - 2,069,646 2,069,646
Net proceeds from issuance of
common stock (Note 15) 39,126,861 - - 39,126,861
Purchase of common stock
by the ESOP (Note 9) 2,600,000 (2,600,000) - -
ESOP contribution (Note 9) 40,365 130,000 - 170,365
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
ESOP contribution (Note 9) 182,325 260,000 - 442,325
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
Net income - - 2,806,958 2,806,958
ESOP contribution (Note 9) 174,460 260,000 - 434,460
Cash dividends - - (2,414,738) (2,414,738)
RSP awards below
grant price (Note 10 ) 54,170 - - 54,170
Tax benefit from RSP awards 52,000 - - 52,000
Redemption of 214,906 shares of
outstanding stock at $16.50 per share (3,545,957) - - (3,545,957)
-------------------------------------------------------------------
Balance at September 30, 1998 $ 38,550,912 $ (1,950,000) $ 23,731,664 $ 60,332,576
===================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMETNS OF CASH FLOWS
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,806,958 $ 2,776,647 $ 2,069,646
Adjustments to reconcile net income to net
cash provided by operating activities:
ESOP contribution expense credited to
additional paid-in capital 174,460 182,325 40,365
Tax benefit from RSP awards 52,000 - -
Other 34,497 32,479 27,185
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (63,384) (52,604) (68,283)
Accrued interest receivable 42,415 32,850 (138,655)
Increase (decrease) in:
Accrued expenses and other liabilities (351,035) 389,775 (195,179)
Accrued special SAIF assessment - (792,868) 792,868
-------------------------------------------------
Net cash provided by operating activities 2,695,911 2,568,604 2,527,947
-------------------------------------------------
Cash Flows From Investing Activities
Purchase of held to maturity investment securities (21,000,000) (27,000,000) (12,000,000)
Purchase of nonmarketable equity securities (18,300) - -
Proceeds from maturity of held to maturity
investment securities 25,500,000 28,500,000 -
Net increase in loans receivable (2,805,023) (5,807,322) (6,174,422)
Proceeds from sale of real estate acquired
in settlement of loans 14,920 46,779 203,013
Purchase of equipment (73,276) (13,038) (20,436)
-------------------------------------------------
Net cash provided by (used in)
investing activities 1,618,321 (4,273,581) (17,991,845)
-------------------------------------------------
</TABLE>
(Continued)
19
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1997 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net increase (decrease) in deposits $ (2,182,113) $ 1,256,507 $ (16,097,559)
Decrease in advance payments by borrowers
for taxes and insurance (41,664) 71,218 (457,085)
Net proceeds received from issuance of
common stock - - 39,126,861
Redemption of common stock (3,545,957) - -
Principal repayments received on ESOP note 260,000 260,000 130,000
Cash dividends paid (2,429,782) (2,277,014) (404,463)
-------------------------------------------------
Net cash provided by (used in)
financing activities (7,939,516) (689,289) 22,297,754
-------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (3,625,284) (2,394,266) 6,833,856
Cash and cash equivalents:
Beginning 33,087,640 35,481,906 28,648,050
-------------------------------------------------
Ending $ 29,462,356 $ 33,087,640 $ 35,481,906
=================================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 5,614,261 $ 5,374,888 $ 6,239,628
=================================================
Income taxes $ 1,997,265 $ 1,349,265 $ 1,147,800
=================================================
Supplemental Disclosure of Noncash Investing
and Financing Activities
Transfer from loans to real estate
acquired in settlement of loans $ 51,749 $ - $ 215,334
=================================================
Dividends declared and accrued $ 1,102,469 $ 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.
Outlined below are the accounting and reporting policies considered significant
by the Corporation:
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.
Principles of consolidation: The consolidated financial statements for the years
ended September 30, 1998, 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. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents: For purposes of reporting cash flows, cash on hand
and amounts due from depository institutions, interest-bearing deposits, and
federal funds sold are considered to be cash equivalents. At times, deposits are
maintained in correspondent banks in amounts that may be in excess of the FDIC
insurance limit.
Investment securities: Securities classified as held to maturity are those debt
securities the Corporation or the Association 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.
Equity securities, which are nonmarketable, do not require classification and
are carried at cost. Currently there are 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.
21
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Loans receivable: Loans receivable are stated at unpaid principal balances, less
allowances for loan losses, the undisbursed portion of loans in process, and net
deferred loan origination fees and discounts. The loan portfolio consists
principally of long-term conventional loans collateralized by first deeds of
trust on single-family residences, other residential property and nonresidential
property.
Loan origination fees: Loan origination fees, less certain direct costs, are
deferred as an adjustment to yield of the related loans and are amortized 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 an evaluation of potential losses in the 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.
Specific loan loss allowances on impaired loans are recorded if it is doubtful
that all principal and interest due according to the loan terms will be
collected. There are no loans outstanding during the years ended September 30,
1998 and 1997 which are considered to be impaired.
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.
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.
Advance payments by borrowers for taxes and insurance: Certain borrowers are
required to make monthly payments, in addition to principal and interest, in
order to accumulate funds to pay property taxes and insurance premiums.
22
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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 Corporation adopted Statement of Financial Accounting
Standard (SFAS) No. 128, Earnings Per Share. The Statement establishes new
standards for computing and presenting earnings per share, and requires a dual
presentation of basic and diluted earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised. The
Corporation has presented diluted earnings per share due to the dilutive effect
of outstanding stock options. Earnings per share presentations for all prior
periods have been restated to reflect the adoption of SFAS No. 128. See Note 16
for a computation and reconciliation of basic and diluted earnings per share.
Fair value of financial instruments: The estimated 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
financial instruments are not necessarily indicative of the amounts that could
be realized 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, 1998 and 1997, 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 in estimating its fair
value disclosures for financial instruments:
Cash and short term cash investments / federal funds sold / accrued interest
receivable: The carrying amounts reported in the statement of financial
condition for cash and short-term cash investments, for federal funds sold,
and for accrued interest receivable approximates those assets' fair values.
Investment securities: Investment securities consists of US Treasury and
agency obligations and Federal Home Loan Bank 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.
23
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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, 1998 and 1997, 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, 1998 and 1997. 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, 1998 and 1997 for deposits of similar remaining
maturities.
Off-balance-sheet commitments: Commitments, which consist entirely of loan
commitments, are either short-term in nature or subject to immediate
repricing; therefore, no fair value has been assigned to these
off-balance-sheet items.
Future Reporting Requirements: The Financial Accounting Standards Board has
issued SFAS No. 130, Reporting Comprehensive Income and SFAS No. 132,
Employers' Disclosures About Pensions and Other Postretirement Benefits,
both of which the Association has not been required to adopt as of September
30, 1998.
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.
SFAS No. 132, Employers' Disclosures About Pensions and Other Postretirement
Benefits, revises employers' disclosures about pension and other
postretirement benefit plans. The Statement does not change the measurement
or recognition of those plans, but standardizes the disclosure requirements
for pensions and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis. The Statement suggests
combined formats for presentation of pension and other postretirement benefit
disclosures. It is not expected that this statement will materially effect
the presentation of existing disclosures.
24
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Held to Maturity Investment Securities
Held-to-maturity investment securities, which consist of US Agency debt
obligations, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1998 $ 9,000,000 $ 42,192 $ - $ 9,042,192
===========================================================
September 30, 1997 $ 13,500,000 $ 55,316 $ - $ 13,555,316
===========================================================
</TABLE>
The amortized cost and estimated fair value of the held to maturity debt
securities at September 30, 1998 by contractual maturity are as shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
-----------------------------
<S> <C> <C>
Due in one year through five years $ 6,000,000 $ 6,039,378
Due after five years 3,000,000 3,002,814
-----------------------------
$ 9,000,000 $ 9,042,192
=============================
</TABLE>
There were no sales of investment securities during 1998, 1997 or 1996.
Note 3. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Mortgage loans:
Residential one-to-four family $ 108,738,797 $ 106,083,836
Residential multifamily 7,626,892 7,527,305
Nonresidential real estate 14,455,316 14,172,176
Residential construction 2,844,570 3,444,852
Installment loans 649,909 433,583
----------------------------------
134,315,484 131,661,752
----------------------------------
Less:
Allowance for loan losses 254,763 254,763
Unamortized loan fees 937,250 964,726
Undisbursed portion of loans in process 1,425,555 1,496,312
----------------------------------
2,617,568 2,715,801
----------------------------------
$ 131,697,916 $ 128,945,951
==================================
Weighted average yield for the year 7.99% 8.13%
==================================
</TABLE>
25
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable (Continued)
The following sets forth information regarding the allowance for loan losses:
1998 1997 1996
--------------------------------------
Balance, beginning $ 254,763 $ 234,763 $ 224,690
Provisions charged to income - 20,000 10,073
--------------------------------------
Balance, ending $ 254,763 $ 254,763 $ 234,763
======================================
Loans are placed on nonaccrual status when the 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, 1998, 1997, and 1996 loans
totaling $195,547, $173,336, and $309,666, respectively, were contractually
delinquent 90 days or more. Interest income on these loans, which would have
been recognized had the loans been amortized as scheduled, has been decreased by
$4,085, $2,776 and $13,626 for the years ended September 30, 1998, 1997 and
1996.
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 in the ordinary course of
business.
Aggregate loan transactions with related parties for the year ended September 30
were as follows:
1998 1997
------------------------------------
Beginning balance $ 431,502 $ 146,874
New loans 23,900 367,000
Repayments (28,196) (82,372)
------------------------------------
Ending balance $ 427,206 $ 431,502
------------------------------------
Maximum balance during the year $ 451,996 $ 442,668
====================================
26
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Property and Equipment
Property and equipment are summarized as follows:
1998 1997
----------------------------------
Land $ 150,972 $ 150,972
Buildings 736,215 722,506
Furniture and equipment 323,834 264,266
----------------------------------
1,211,021 1,137,744
Accumulated depreciation (861,831) (830,950)
----------------------------------
$ 349,190 $ 306,794
==================================
Depreciation expense was $30,881, $36,504 and $42,428 for the years ended
September 30, 1998, 1997 and 1996, respectively.
Note 5. Deposits
Deposits consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Passbook accounts, 3.00% (3.00% in 1997) $ 13,095,540 $ 12,991,011
NOW accounts, 2.75% (2.75% in 1997) 114,151 132,743
Super NOW accounts, 4.00% (4.00% in 1997) 52,881 107,637
Money market accounts, 4.00% (4.00% in 1997) 12,927,837 13,984,393
----------------------------------
26,190,409 27,215,784
----------------------------------
Certificates:
3.00% and below -- 1,507,374
3.01% - 5.00% 4,318,545 2,310,535
5.01% - 7.00% 79,496,537 80,782,589
7.01% and above 425,449 791,670
----------------------------------
84,240,531 85,392,168
----------------------------------
Accrued interest on deposits 28,840 33,941
----------------------------------
$ 110,459,780 $ 112,641,893
----------------------------------
Weighted average cost of funds for the year 5.03% 4.91%
==================================
</TABLE>
27
<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, 1998 as
follows:
<TABLE>
<CAPTION>
1999 2000 2001 Thereafter Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.00% and below $ - $ - $ - $ - $ -
3.01% - 5.00% 3,384,780 933,765 4,318,545
5.01% - 7.00% 60,227,283 7,000,882 8,259,410 4,008,962 79,496,537
7.01% and above 52,694 203,488 35,520 133,747 425,449
----------------------------------------------------------------------------
$ 63,664,757 $ 8,138,135 $ 8,294,930 $ 4,142,709 $ 84,240,531
============================================================================
</TABLE>
The aggregate amount of certificates of deposit included in the table above with
a balance of $100,000 or more is shown below:
Maturity Amount
- -------------------------------------------------------------------------------
Less than 3 months $ 2,785,520
4 to 12 months 5,346,924
More than 12 months 3,228,381
-----------------
$ 11,360,825
=================
Eligible deposits are insured to $100,000 by the Savings Association Insurance
Fund (SAIF), which is administered by the Federal Deposit Insurance Corporation
(FDIC).
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 of $792,868 was equal to approximately 65.7 basis points of the SAIF
assessable deposit base as of March 31, 1995 and was accrued as of September 30,
1996.
Note 7. Deferred Compensation
A deferred compensation plan exists for 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. Life insurance policies have been purchased, with the
Association named as beneficiary, to fund the benefits. Total expense related to
the Plan was approximately $38,000, $40,000 and $64,000 for 1998, 1997 and 1996,
respectively.
28
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Employment Agreements
Employment agreements exist 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 the proceeds of a loan from the
Corporation.
The Corporation's note receivable is 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 1998 and
1997 the ESOP made principal payments of $260,000, 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, 1998 and 1997, the outstanding balance of the
note receivable is $1,950,000 and $2,210,000, 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 $434,460, $442,325 and $170,365 during 1998, 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,
$174,460, $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 1998, 1997 and
1996, respectively. This amount has been credited to paid-in capital.
29
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Employee Stock Ownership Plan (Continued)
At September 30, 1998 and 1997, 65,000 and 39,000 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 $2.5 million and $4.5
million at September 30, 1998 and 1997, respectively.
Note 10. Restricted Stock Plan
Under the Restricted Stock Plan ("RSP"), 171,925 shares of common stock are
authorized for grant to directors and key employees and vest evenly over a 5
year period, which commenced in October, 1997. Management intends to provide
funds to the restricted stock plan trust fund in order for the trust to acquire
common stock in open market purchases. For the years ended September 30, 1998
and 1997, expense associated with the RSP was approximately $552,000 and
$530,000, respectively.
Note 11. Stock Option Plan
Under a stock option for directors and key employees, 429,812 options with an
exercise price of $14.94 per share were granted in October, 1996. The options
will become exercisable at the rate of 20% annually for five years during such
periods of service and expire after ten years. The exercise price is equal to
the market value of the stock at the date of the grant. At September 30, 1998,
85,962 options were exercisable under the plan. No options have been exercised
or forfeited.
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. 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 net income and basic and diluted earnings per share
would have been approximately $210,000 or $.05 (basic) and $.05 (diluted) per
share for years ended September 30, 1998 and 1997, respectively.
The fair value is estimated at the grant date using the Black-Scholes
option-pricing model with the following assumptions: dividend rate of 3.22%; a
risk-free interest rate of 5.88%; an expected life of 7 years; and price
volatility of 19.1%.
30
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Pension Plan
A defined benefit pension plan is in effect covering substantially all 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. 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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ (854,279) $ (895,418)
Nonvested (2,386) (1,877)
----------------------------------
Accumulated benefit obligation (856,665) (897,295)
Effect of projected future compensation levels (192,911) (379,435)
----------------------------------
Projected benefit obligation (1,049,576) (1,276,730)
Market value of plan assets 1,132,452 1,211,444
----------------------------------
Projected benefit obligation in (over/under) plan assets 82,876 (65,286)
Unrecognized net transition assets (15,227) (17,764)
Unrecognized prior service cost (55,919) (60,579)
Unrecognized loss 189,348 334,889
----------------------------------
Prepaid pension asset included in other assets $ 201,078 $ 191,260
==================================
</TABLE>
The components of pension costs charged to expense for 1998, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during period $ 52,143 $ 57,422 $ 53,280
Interest cost on projected benefit obligation 77,624 80,243 86,620
Return on plan assets (88,822) (82,045) (69,639)
Net amortization and deferral (2,190) 9,690 13,754
--------------------------------------------------
Net periodic pension cost $ 38,755 $ 65,310 $ 84,015
==================================================
</TABLE>
In determining the projected benefit obligation at September 30, 1998, 1997 and
1996, the weighted average discount rate was 7%, 8% and 7% respectively, and
expected long-term rate of return on plan assets was 7.5%, 8% and 7%,
respectively. The assumed rate of increase in future compensation levels was
4.0% in 1998, 4.0% in 1997 and 4.5% in 1996 in determining net periodic cost for
all periods presented.
31
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
financial instruments at September 30, 1998 and 1997. See Note 1 for a
description of accounting policies and the limitations of its disclosures in
reporting on the fair value of its financial instruments.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term cash
investments $ 27,989,356 $ 27,989,356 $ 29,969,640 $ 29,969,640
Federal funds sold 1,473,000 1,473,000 3,118,000 3,118,000
Investment securities held to
maturity 9,000,000 9,042,192 13,500,000 13,555,316
Nonmarketable equity securities 1,144,700 1,144,700 1,170,889 1,170,889
Loans receivable 131,697,916 136,326,000 128,945,951 131,907,000
Accrued interest receivable 180,301 180,301 222,716 222,716
Financial liabilities:
Deposits 110,459,780 110,801,249 112,641,893 112,688,725
</TABLE>
Note 14. Income Taxes
Under the Internal Revenue Code, a special bad debt deduction is allowed related
to additions to tax bad debt reserves established for the purpose of absorbing
losses. Through 1996, the provisions of the Code permitted the deduction of a
provision for bad debts based on 8% of taxable income before such deduction or
actual loss experience. No bad debt deduction was taken in 1998, 1997 and 1996
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. Future deductions will be permitted
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 was delayed until 1999 as a result of the Association originating a
certain level of residential mortgage loans. Deferred income taxes have been
previously established for the taxes associated with the recaptured reserves and
the ultimate payment of the taxes will not result in a charge to earnings.
32
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Income Taxes (Continued)
At September 30, 1998 and 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.
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 74,000 $ 95,000
Deferred compensation 148,000 152,000
Deferred RSP compensation 208,000 208,000
Allowance for loan losses 88,000 88,000
Other 6,000 --
----------------------------------
Total deferred tax assets 524,000 543,000
----------------------------------
Deferred tax liabilities:
Excess accumulated tax depreciation 29,000 25,000
Federal Home Loan Bank stock basis 96,000 96,000
Excess pension plan contribution 65,000 61,000
Tax bad debt reserves 388,000 388,000
----------------------------------
Total deferred tax liabilities 578,000 570,000
----------------------------------
Net deferred tax assets (liabilities) $ (54,000) $ (27,000)
==================================
</TABLE>
Federal income tax expense was different from the amount computed by applying
the federal income tax rate of approximately 34% to income before taxes. The
reasons for the differences were as follows for the years ended September 30,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Income tax at the federal statutory rate 34.00 % 34.00 % 34.00 %
State income taxes, net of federal benefit 2.24 1.89 2.15
Other 1.32 2.31 (1.47)
---------------------------------------------------
37.56 % 38.20 % 34.68 %
===================================================
</TABLE>
33
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Stockholders' Equity
On April 3, 1996, the Corporation 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 the Corporation and the
Association 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, the Association may pay a cash dividend to
the Corporation 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 1998, 1997 and 1996, the Association paid $2,082,328, $1,718,574
and $629,819 in dividends to the Corporation, respectively.
34
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Stockholders' Equity (Continued)
The OTS 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 4.0% of total assets and a risk-based capital
requirement currently set at 8.0% of risk-weighted assets. A summary of the
status of the capital requirements at September 30, 1998 is shown below:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
Requirement Requirement Requirement
--------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity (GAAP) $ 60,332,576 $ 60,332,576 $ 60,332,576
Equity of Green Street Financial Corp (15,071,027) (15,071,027) (15,071,027)
General loan loss allowance - - 254,763
--------------------------------------------------
Regulatory capital 45,261,549 45,261,549 45,516,312
Minimum capital requirement 2,347,966 6,261,242 6,346,880
--------------------------------------------------
Excess regulatory capital $ 42,913,583 $ 39,000,307 $ 39,169,432
--------------------------------------------------
Home Federal's assets at September 30, 1998 $ 156,531,047 $ 156,531,047 $ -
Risk-weighted assets at September 30, 1998 - - 79,336,000
Capital as a percentage of assets:
Actual 28.92% 28.92% 57.37%
Required 1.50% 4.00% 8.00%
--------------------------------------------------
Excess 27.42% 24.92% 49.37%
==================================================
</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. Earnings Per Share
As required, SFAS No. 128 was adopted during the year ended September 30, 1998.
This statement requires dual presentation of basic and diluted earnings per
share (EPS) with a reconciliation of the numerator and denominator of the EPS
computations. Basic per share amounts are based on the weighted average shares
of common stock outstanding. Diluted earnings per share assume the conversion,
exercise or issuance of all potential common stock instruments such as options,
warrants and convertible securities, unless the effect is to reduce a loss or
increase earnings per share. No adjustments were made to net income (numerator)
for all periods presented.
35
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16. Earnings Per Share (Continued)
Accordingly, this presentation has been adopted for all periods presented. The
basic and diluted weighted average shares outstanding for the years ended
September 30 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 4,238,604 4,298,125 4,298,125
Less unallocated ESOP shares (208,000) (234,000) (247,000)
------------------------------------------------
Weighted average outstanding shares
used for basic EPS 4,030,604 4,064,125 4,051,125
Plus incremental shares from assumed
issuance of stock options 45,592 52,146 -
------------------------------------------------
Weighted average outstanding shares
used for diluted EPS 4,076,196 4,116,271 4,051,125
================================================
</TABLE>
The earnings per share computation for 1996 is based on net income earned from
the date of Conversion, April 3, 1996, to the end of the fiscal year.
Note 17. 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.
The Association is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, which involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contractual amounts of the
instruments reflect the extent of involvement the Association has in the
particular class of financial instruments.
The Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Association uses
the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
In addition to the undisbursed portion of loans in process, the Association had
outstanding loan origination commitments of $1,852,300 and $2,137,000 at
September 30, 1998 and 1997, respectively, primarily for the origination of
fixed rate loans.
36
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17. Concentration of Credit Risk and Off-Balance-Sheet Risk (Continued)
The Association evaluates each customer's credit worthiness on a case-by-case
basis. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained if deemed
necessary by the Association upon extension of credit, is based on management's
credit evaluation of the customer. At a minimum, the collateral held is the
underlying real estate.
Note 18. 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, 1998 and 1997:
Condensed Balance Sheets
September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and short-term cash investments $ 16,114,829 $ 19,203,612
Accounts receivable, other 318,667 217,035
Investment in Home Federal 45,001,549 44,647,749
---------------------------------
$ 61,435,045 $ 64,068,396
=================================
Liabilities and Stockholders' Equity:
Liabilities:
Dividends payable $ 1,102,469 $ 1,117,513
Taxes payable - 5,200
---------------------------------
1,102,469 1,122,713
---------------------------------
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized,
issued and outstanding 4,083,219 shares (4,298,125 in 1997) - -
Additional paid-in capital 61,708,564 64,973,891
Unearned ESOP shares (1,950,000) (2,210,000)
Retained earnings 574,012 181,792
---------------------------------
60,332,576 62,945,683
---------------------------------
$ 61,435,045 $ 64,068,396
=================================
</TABLE>
37
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 18. Parent Corporation Financial Data (Continued)
Condensed Statements of Income
For the Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 1,176,133 $ 1,215,158 $ 575,914
Equity in earnings of Home Federal 2,125,499 2,088,235 797,447
Administrative expense (148,550) (165,124) (47,376)
Income tax expense (346,124) (361,622) (183,600)
--------------------------------------------------
Net income $ 2,806,958 $ 2,776,647 $ 1,142,385
==================================================
</TABLE>
38
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 18. Parent Corporation Financial Data (Continued)
Condensed Statements of Cash Flows
For the Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,806,958 $ 2,776,647 $ 1,142,385
Noncash income items:
Equity in earnings of Home Federal (2,125,499) (2,088,235) (797,447)
Change in assets and liabilities:
Increase in accrued interest receivable - 25,732 (25,732)
(Increase) decrease in accounts receivable other (131,631) (129,935) (25,350)
Increase (decrease) in income taxes payable (5,200) 5,200 -
--------------------------------------------------
Net cash provided by operating activities 544,628 589,409 293,856
--------------------------------------------------
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 2,082,328 1,718,574 629,819
Initial investment in Home Federal - - (20,863,430)
--------------------------------------------------
Net cash provided by (used in)
investing activities 2,082,328 4,718,574 (23,233,611)
--------------------------------------------------
Cash Flows from Financing Activities:
Payments received on note receivable from ESOP 260,000 260,000 130,000
Payment of dividends (2,429,782) (2,277,014) (404,463)
Proceeds received from common stock offering - - 39,126,861
Purchase of common stock (3,545,957) - -
--------------------------------------------------
Net cash provided by (used in)
financing activities (5,715,739) (2,017,014) 38,852,398
--------------------------------------------------
Net increase (decrease) in cash (3,088,783) 3,290,969 15,912,643
Cash, beginning 19,203,612 15,912,643 -
--------------------------------------------------
Cash, ending $ 16,114,829 $ 19,203,612 $ 15,912,643
--------------------------------------------------
Supplemental Disclosure of Noncash
Financing Activities:
Dividends declared and accrued $ 1,102,469 $ 1,117,513 $ 1,074,531
==================================================
</TABLE>
39
<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 October 1, 1996 through
September 30, 1998. 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.
<TABLE>
<CAPTION>
Dividends Stock Price
--------------------------- ---------------------------------
Regular Special High Low
--------------------------- ---------------------------------
1998:
<S> <C> <C> <C> <C>
First Quarter $ 0.11 $ - $ 21 1/8 $ 17 1/4
Second Quarter 0.11 - 19 17
Third Quarter 0.12 - 18 3/4 14 1/2
Fourth Quarter 0.12 0.15 15 11 3/4
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
</TABLE>
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Interest income $ 3,341,542 $ 3,294,109 $ 3,272,764 $ 3,192,210
Interest expense 1,459,877 1,393,714 1,367,282 1,388,287
Net interest income 1,881,665 1,900,395 1,905,482 1,803,923
Net income 689,041 692,409 700,875 724,633
Basic earnings per share 0.17 0.17 0.17 0.19
Diluted earnings per share 0.17 0.17 0.17 0.19
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
Basic earnings per share 0.16 0.17 0.18 0.18
Diluted earnings per share 0.16 0.17 0.18 0.17
</TABLE>
40
<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 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
Executive, Coca-Cola Bottling Co. President, Holt Oil Co. President, Rose, Ray, O'Connor,
Manning & McCauley, PA
STOCK TRANSFER AGENT SPECIAL LEGAL COUNSEL
-------------------- ---------------------
American Stock Transfer & Trust Co. Malizia, Spidi, Sloane & Fisch, PC
40 Wall Street 46th Floor 1301 K Street NW
New York, NY 10005 Washington, DC 20005
LOCAL LEGAL COUNSEL INDEPENDENT AUDITORS
------------------- --------------------
Rose, Ray, O'Connor, McGladrey & Pullen, LLP
Manning & McCauley, PA 2418 Blue Ridge Road
214 Mason Street Raleigh, NC 27605
Fayetteville, NC 28301
CORPORATE OFFICE
241 Green Street
Fayetteville, NC 28301
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
FORM 10-K ANNUAL MEETING
A copy of Form 10-K as filed with the Securities The 1999 annual meeting of stockholders of Green
and Exchange Commission will be furnished Street Financial Corp will be held at 5:15 pm on
without charge to the Corporation's stockholders January 27, 1999 at the Corporation's corporate
upon written request to Green Street Financial office at 241 Green Street, Fayetteville, N.C.
Corp P.O. Box 1540, Fayetteville, N.C. 28302.
</TABLE>
41
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report, dated October 23, 1998, incorporated by reference in this annual report
of Green Street Financial Corp on Form 10-K, into the Corporation's previously
filed Form S- 8 Registration Statement File No. 333-34437.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
December 15, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 172
<INT-BEARING-DEPOSITS> 27,818
<FED-FUNDS-SOLD> 1,473
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 10,145
<INVESTMENTS-MARKET> 10,187
<LOANS> 131,953
<ALLOWANCE> 255
<TOTAL-ASSETS> 172,705
<DEPOSITS> 110,460
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,912
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 60,333
<TOTAL-LIABILITIES-AND-EQUITY> 172,705
<INTEREST-LOAN> 10,448
<INTEREST-INVEST> 1,702
<INTEREST-OTHER> 951
<INTEREST-TOTAL> 13,101
<INTEREST-DEPOSIT> 5,609
<INTEREST-EXPENSE> 5,609
<INTEREST-INCOME-NET> 7,492
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,128
<INCOME-PRETAX> 4,496
<INCOME-PRE-EXTRAORDINARY> 4,496
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,807
<EPS-PRIMARY> .70
<EPS-DILUTED> .69
<YIELD-ACTUAL> 4.37
<LOANS-NON> 196
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 255
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 255
<ALLOWANCE-DOMESTIC> 255
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
