<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 25049
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number 0-21083
SOUTH STREET FINANCIAL CORP.
----------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1973261
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 West South Street
Albemarle, North Carolina 28001
-------------------------------
(Address of principal executive office) (Zip code)
(704) 982-9184
--------------
(Registrant's telephone number)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check X whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and 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 No X
--- ---
As of November 1, 1996 there were issued and outstanding 4,496,500 shares of the
Registrant's common stock, no par value
<PAGE>
SOUTH STREET FINANCIAL CORP.
CONTENTS
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PART I - FINANCIAL INFORMATION Pages
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<S> <C>
Item 1. Financial Statements
Condensed Statements of Financial Condition,
June 30, 1996 (Unaudited) and September 30, 1995 3
Condensed Statements of Income, Three Months and Nine
Months ended June 30, 1996 and 1995 (Unaudited) 4
Condensed Statement of Equity, Nine Months ended
June 30, 1996 (Unaudited) 5
Condensed Statements of Cash Flows, Nine Months ended
June 30, 1996 and 1995 (Unaudited) 6
Notes to Condensed Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
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2
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HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and September 30, 1995
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1996 1995
- ------------------------------------------------------------------------------
(Unaudited) (Note)
<S> <C> <C>
Cash and cash equivalents:
Noninterest-bearing deposits $ 2,915,000 $ 2,872,000
Interest-bearing deposits 14,387,000 8,622,000
Securities held to maturity 5,713,000 4,529,000
Securities available for sale 34,710,000 30,974,000
Federal Home Loan Bank stock 1,346,000 1,346,000
Loans receivable, net 107,738,000 108,597,000
Real estate acquired in settlement
of loans 18,000 135,000
Accrued interest receivable 1,294,000 1,150,000
Office properties and equipment, net 1,231,000 1,294,000
Prepaid expenses and other assets 415,000 239,000
------------------------------------------
$169,767,000 $159,758,000
==========================================
LIABILITIES AND EQUITY
- ------------------------------------------------------------------------------
Liabilities:
Deposits $146,784,000 $137,647,000
Advance payments by borrowers for
taxes and insurance 445,000 97,000
Accounts payable and other
liabilities 1,173,000 1,099,000
Checks outstanding on disbursement
account 438,000 489,000
------------------------------------------
Total liabilities 148,840,000 139,332,000
------------------------------------------
Equity:
Retained earnings, substantially
restricted 20,993,000 20,392,000
Unrealized gain (loss) on
securities available for
sale, net of tax (66,000) 34,000
------------------------------------------
20,927,000 20,426,000
------------------------------------------
$169,767,000 $159,758,000
==========================================
</TABLE>
NOTE: The Condensed Statement of Financial Condition as of
September 30, 1995 has been taken from the audited
financial statements at that date.
See Notes to Condensed Financial Statements.
3
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HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
CONDENSED STATEMENTS OF INCOME
Three Months Ended June 30, 1996 and 1995, and Nine
Months Ended June 30, 1996 and 1995
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<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 2,367,000 $ 2,471,000 $ 7,211,000 $ 7,295,000
Mortgage-backed certificates 110,000 97,000 306,000 301,000
Securities 542,000 400,000 1,480,000 1,135,000
Other interest-bearing deposits 187,000 77,000 560,000 145,000
------------------------------------------------------------------------
3,206,000 3,045,000 9,557,000 8,876,000
Interest expense on deposits 1,926,000 1,634,000 5,757,000 4,166,000
------------------------------------------------------------------------
Net interest income 1,280,000 1,411,000 3,800,000 4,710,000
Provision for loan losses - - 300,000 -
------------------------------------------------------------------------
Net interest income
after provision for
loan losses 1,280,000 1,411,000 3,500,000 4,710,000
------------------------------------------------------------------------
Noninterest income 29,000 29,000 91,000 90,000
------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 465,000 395,000 1,363,000 1,119,000
Net occupancy 71,000 60,000 211,000 175,000
Federal insurance premium 81,000 80,000 236,000 222,000
Data processing 51,000 50,000 157,000 149,000
Other 164,000 137,000 659,000 465,000
------------------------------------------------------------------------
832,000 722,000 2,626,000 2,130,000
------------------------------------------------------------------------
Income before 477,000 718,000 965,000 2,670,000
Income taxes 175,000 317,000 364,000 1,046,000
------------------------------------------------------------------------
Net Income $ 302,000 $ 401,000 $ 601,000 $ 1,624,000
========================================================================
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
CONDENSED STATEMENT OF EQUITY
Nine Months Ended June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Retained
Earnings Unrealized
Substantially Gain (Loss) Total
Restricted on Securities Equity
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<S> <C> <C> <C>
Balance at September 30, 1995 $ 20,392,000 $ 34,000 $ 20,426,000
Net income 601,000 - 601,000
Net change in market value of
securities available for sale - (100,000) (100,000)
-------------------------------------------
Balance at June 30, 1996 $ 20,993,000 $ (66,000) $ 20,927,000
===========================================
</TABLE>
See Notes to Condensed Financial Statements.
5
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HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
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(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 601,000 $ 1,624,000
Adjustments to reconcile net income to
net cash provided by
operating activities:
Provision for loan losses 300,000 -
Gain on sale of real estate acquired
in settlement of loans (4,000) (3,000)
Provision for depreciation 75,000 66,000
Deferred Income Taxes (249,000) 145,000
(Increase) in assets:
Accrued interest receivable (144,000) (48,000)
Prepaid and other assets (176,000) (62,000)
Increase (Decrease) in liabilities:
Accounts payable and other
liabilities 323,000 (137,000)
Interest payable 26,000 37,000
Checks outstanding on disbursement
accounts (51,000) (331,000)
Other 242,000 (279,000)
--------------------------------
Net cash provided by operating
activities 943,000 1,012,000
--------------------------------
Cash Flows from Investing Activities
Purchases of securities held to
maturity (1,961,000) -
Purchases of securities available for
sale (20,000,000) (5,000,000)
Proceeds from maturities and recalls
of securities available for sale 15,960,000 2,500,000
Principal collected on securities held
to maturity 753,000 527,000
Loan originations and principal
payments on loans, net 559,000 (2,832,000)
Purchase of office properties and
equipment (12,000) (209,000)
Proceeds from sale of foreclosed real
estate 107,000 80,000
--------------------------------
Net cash provided by (used in)
investing activities (4,594,000) (4,934,000)
--------------------------------
Cash Flows from Financing Activities
Net increase in deposits 9,111,000 6,736,000
Net increase (decrease) in advance
payments by borrowers for
taxes and insurance 348,000 (37,000)
--------------------------------
Net cash provided by financing
activities 9,459,000 6,699,000
--------------------------------
Increase in cash and cash
equivalents 5,808,000 2,777,000
Cash and cash equivalents:
Beginning 11,494,000 6,649,000
--------------------------------
Ending $ 17,302,000 $ 9,426,000
================================
Supplemental Disclosures of Non-Cash
Transactions
Transfer of loans to real estate $ 144,000 $ 202,000
acquired in settlement of loans
Loans originated to finance the sale
of real estate acquired in settlement
of loans 163,000 77,000
</TABLE>
6
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HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
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Note 1. Unaudited Financial Statements
The unaudited financial statements furnished reflect all adjustments, consisting
of normal recurring accruals, which are in the opinion of management, necessary
for a fair presentation of the financial position as of June 30, 1996 and the
results of operations and cash flows for the nine months ended June 30, 1996 and
1995. The results for the nine month periods are not necessarily indicative of
the operating results of Home Savings Bank of Albemarle, S.S.B. (the "Bank") for
the entire year.
Note 2. Commitments
Effective September 30, 1996, the Bank incurred a liability as a result of
recapitalization of the Savings Association Insurance Fund as mandated by
Congress. This recapitalization requires a special assessment of 65.7 basis
points for insured deposits as of March 31, 1995. The amount of the liability
to be accrued is approximately $800,000.
Note 3. Plan of Conversion
On July 19, 1996 the Board of Directors of the Bank adopted an Amended and
Restated Plan of Conversion (the "Plan") under which the Bank would convert from
a North Carolina chartered mutual savings bank to a North Carolina chartered
stock savings bank and would become a wholly-owned subsidiary of South Street
Financial Corp., a holding company formed in connection with the conversion (the
"Holding Company"). The Holding Company would issue common stock to be sold in
the conversion and use the net proceeds to purchase the common stock of the
Bank. The Plan has received approval from regulatory authorities and the members
of the Bank at a special meeting of members held on September 17, 1996.
Effective October 2, 1996, the Holding Company sold 4,496,500 shares of common
stock at a price of $10.00 per share for proceeds of $43,738,000, net of
approximately $1,227,000 of offering expenses.
7
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Management's Discussion and Analysis of Recent Developments
Total assets of the Bank increased by $10.0 million from September 30, 1995,
and totaled $169.8 million at June 30, 1996. Net loans receivable decreased by
$859,000 or 0.8% to $107.7 million at June 30, 1996 from $108.6 million at
September 30, 1995, primarily because loan demand declined during 1996 and the
Bank lowered rates on 10- and 15-year loans to become more competitive in the
marketplace to maintain market share. Deposits increased by $9.1 million to
$146.8 million at June 30, 1996 from $137.6 million at September 30, 1995 due to
the Bank offering slightly higher rates than competitors to attract additional
funds. Total investments increased by $9.5 million, or 23.2%, to $50.4 million
outstanding at June 30, 1996 from $40.9 million at September 30, 1995. The Bank
invested the funds generated from deposit inflow primarily into U.S. Government
obligations. The Bank had no borrowings outstanding during or at the end of the
three-month period ended June 30, 1996. Equity increased by $501,000 to $20.9
million at June 30, 1996, which is attributable to the Bank's earnings of
$601,000 offset by unrealized (loss) on securities available for sale, net of
tax, totaling $100,000 during the nine months ended June 30, 1996.
At June 30, 1996 the Bank's capital, including the equity component of
unrealized (loss), net of tax on certain "available for sale" securities,
amounted to $20.9 million. The Bank's capital as a percentage of assets was
12.3% at June 30, 1996 and was considerably in excess of the regulatory capital
requirement at such date.
The Bank's level of nonperforming loans, defined as loans past due 90 days or
more, has historically been and continues to be low as a percentage of total
loans outstanding. The Bank had $46,000 loans outstanding which were delinquent
more than 90 days at June 30, 1996 compared to $51,000 at June 30, 1995.
Management considers the loan loss allowance of $428,000 to be adequate to
absorb any future losses in the portfolio. As a result, no provisions to
increase the Bank's loan loss allowance were made during the three months ended
June 30, 1996.
Net income for the three months ended June 30, 1996 was $302,000 or $99,000
less than the $401,000 earned during the same quarter in 1995. Net interest
income decreased primarily as a result of a larger interest rate spread in 1995.
Net interest income amounted to $1.28 million for the quarter ended June 30,
1996 as compared with $1.41 million for the same quarter in 1995. The Bank's
interest rate spread for the quarter ended June 30, 1996 was 2.40%, compared to
3.12% for the three months ended June 30, 1995. The Bank's interest rate spread
decreased primarily because the Bank's deposits were more interest rate
sensitive than its interest-earning assets and overall market rates were higher
in the quarter ended June 30, 1996 as compared to the same quarter in 1995.
There were no significant variations in noninterest income between the three-
month periods ended June 30, 1996 and 1995.
Noninterest expense increased $110,000 to $832,000 for the three months ended
June 30, 1996 compared to $722,000 for the same period ended June 30, 1995.
Compensation increased $70,000 for the three months ended June 30, 1996 compared
to the same period ended June 30, 1995, primarily due to salary increases and
funding of retirement plans. Other expenses increased $40,000 as occupancy
increased $11,000 and contributions increased $20,000 during the three-month
period ended June 30, 1996 compared to the same period ended June 30, 1995.
Effective September 30, 1996 the Bank incurred liability as a result of
recapitalization of the Savings Association Insurance Fund as mandated by
Congress. This recapitalization requires a special assessment of 65.7 basis
points for insured deposits as of March 31, 1995. The amount of the liability
is approximately $800,000.
8
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) A Form 8-K was filed on October 17, 1996 which reported the
consummation of the conversion of Home Savings Bank of
Albemarle, S.S.B. from a mutual institution to a stock
institution, the Company's acquisition of the converted
bank's stock and the Company's issuance and sale of
4,496,500 shares of its common stock. (Item 2: Acquisition
or Disposition of Assets). The Company's financial
statements for June 30, 1996 were included in the October
17, 1996 Form 8-K filing.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH STREET FINANCIAL CORP.
Dated: November 1, 1996 By: /s/ Carl M. Hill
---------------------------
Carl M. Hill
President
Dated: November 1, 1996 By: /s/ Christopher F. Cranford
----------------------------
Christopher F. Cranford
Treasurer and Controller
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-START> OCT-01-1995 OCT-01-1994
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 2,915 2,839
<INT-BEARING-DEPOSITS> 14,387 6,587
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 34,710 27,980
<INVESTMENTS-CARRYING> 5,713 4,778
<INVESTMENTS-MARKET> 5,675 4,834
<LOANS> 107,738 109,677
<ALLOWANCE> 428 137
<TOTAL-ASSETS> 169,767 156,105
<DEPOSITS> 146,784 134,085
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 2,056 1,854
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 20,927 20,166
<TOTAL-LIABILITIES-AND-EQUITY> 169,767 156,105
<INTEREST-LOAN> 7,211 7,295
<INTEREST-INVEST> 1,786 1,436
<INTEREST-OTHER> 560 145
<INTEREST-TOTAL> 9,557 8,876
<INTEREST-DEPOSIT> 5,757 4,166
<INTEREST-EXPENSE> 5,757 4,166
<INTEREST-INCOME-NET> 3,800 4,710
<LOAN-LOSSES> 300 0
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 2,626 2,130
<INCOME-PRETAX> 965 2,670
<INCOME-PRE-EXTRAORDINARY> 965 2,670
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 601 1,624
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 7.92 8.17
<LOANS-NON> 46 51
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 137 140
<CHARGE-OFFS> 17 3
<RECOVERIES> 8 0
<ALLOWANCE-CLOSE> 428 137
<ALLOWANCE-DOMESTIC> 294 91
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 134 46
</TABLE>
