<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission File Number: 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 Identification No.)
incorporation or organization)
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 [X] No ________
As of July 28, 1998 there were issued and outstanding 4,676,720 shares of the
Registrant's common stock, no par value.
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated statements of financial condition at June 30, 1998
(Unaudited) and September 30, 1997 1
Consolidated statements of income for the three months ended
June 30, 1998 and 1997 (Unaudited) 2
Consolidated statements of income for the nine months ended
June 30, 1998 and 1997 (Unaudited) 3
Consolidated statements of cash flows for the nine months
ended June 30, 1998 and 1997 (Unaudited) 4-5
Notes to consolidated financial statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
Item 3. Quantitative and Qualitative disclosures about Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16-17
</TABLE>
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1998 and September 30,1997
<TABLE>
<CAPTION>
JUNE 30, September 30,
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------------------
(Unaudited) (Note)*
<S> <C> <C>
Cash and cash equivalents:
Cash $ 1,037,000 $ 524,000
Noninterest-bearing deposits 2,374,000 1,933,000
Interest-bearing deposits 26,197,000 19,257,000
Federal Funds sold 5,140,000 5,930,000
-----------------------------------------
Total cash and cash equivalents 34,748,000 27,644,000
-----------------------------------------
Investment securities held to maturity, at amortized cost 15,044,000 21,661,000
Investment securities available for sale, at fair value 40,264,000 73,886,000
Federal Home Loan Bank of Atlanta Stock, at cost 1,707,000 2,250,000
Loans receivable, net 107,217,000 111,990,000
Real estate acquired in settlement of loans 42,000 18,000
Accrued interest receivable 1,218,000 1,903,000
Office properties and equipment, net 1,075,000 1,158,000
Other assets 2,358,000 551,000
-----------------------------------------
TOTAL ASSETS $ 203,673,000 $ 241,061,000
=========================================
LIABILITIES AND EQUITY
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits accounts $ 148,249,000 $ 141,755,000
Advance payments by borrowers for taxes and insurance 427,000 131,000
Advances from Federal Home Loan Bank of Atlanta - 35,000,000
Notes payable 18,000,000 -
Other liabilities 2,523,000 2,481,000
-----------------------------------------
TOTAL LIABILITIES 169,199,000 179,367,000
-----------------------------------------
EQUITY:
Preferred stock, no par value: Authorized 5,000,000 shares;
none issued at June 30, 1998 and September 30, 1997 - -
Common stock, no par value: Authorized 20,000,000 shares;
issued 4,676,360 shares June 30, 1998 and 4,496,500
shares at September 30, 1997 - -
Additional paid-in capital 19,041,000 43,684,000
Unallocated ESOP shares (4,133,000) (4,258,000)
Deferred Management Recognition Plan (1,796,000) -
Retained earnings, substantially restricted 21,377,000 22,199,000
Unrealized gain (loss) on securities available for sale, net (15,000) 69,000
of taxes
-----------------------------------------
TOTAL EQUITY 34,474,000 61,694,000
-----------------------------------------
TOTAL LIABILITIES AND EQUITY $ 203,673,000 $ 241,061,000
-----------------------------------------
</TABLE>
*NOTE: The Consolidated Statement of Financial Condition as of September 30,
1997 has been taken from the audited financial statements of South Street
Financial Corp. and Subsidiary at that date.
See Notes to Consolidated Financial Statements.
1
<PAGE>
SOUTHSTREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
INTEREST INCOME:
Loans $ 2,330,000 $ 2,390,000
Mortgage-backed certificates 444,000 569,000
Investment securities 632,000 1,298,000
Other interest-bearing deposits 458,000 107,000
---------------------------------------
Total interest income 3,864,000 4,364,000
Interest expense on deposits and borrowed funds 2,401,000 2,350,000
---------------------------------------
NET INTEREST INCOME 1,463,000 2,014,000
Provision for loan losses - -
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,463,000 2,014,000
---------------------------------------
Noninterest income, net 35,000 27,000
---------------------------------------
NONINTEREST EXPENSES:
Employee Compensation and benefits 796,000 578,000
Occupancy and equipment expense 77,000 87,000
Federal deposit insurance premium 22,000 23,000
Computer services 55,000 52,000
Other 133,000 113,000
---------------------------------------
Total noninterest expenses 1,083,000 853,000
---------------------------------------
INCOME BEFORE INCOME TAXES 415,000 1,188,000
Provision for income taxes 182,000 443,000
---------------------------------------
NET INCOME $ 233,000 $ 745,000
=======================================
Basic earnings per share $ 0.06 $ 0.18
=======================================
Diluted earnings per share 0.06 $ 0.18
=======================================
Dividends declared per share $ 0.10 $ 0.10
=======================================
Average number of Basic shares outstanding $ 4,055,878 $ 4,154,369
=======================================
Average number of Diluted shares outstanding $ 4,055,878 $ 4,154,369
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
SOUTHSTREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
INTEREST INCOME:
Loans $ 7,109,000 $ 7,320,0000
Mortgage-backed certificates 1,427,000 1,287,000
Investment securities 2,613,000 3,349,000
Other interest-bearing deposits 1,051,000 530,000
-------------------------------------------------
Total interest income 12,200,000 12,486,000
Interest expense on deposits and borrowed funds 7,147,000 6,473,000
-------------------------------------------------
NET INTEREST INCOME 5,053,000 6,013,000
Provision for loan losses - -
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,053,000 6,013,000
-------------------------------------------------
Noninterest income, net 119,000 85,000
-------------------------------------------------
NONINTEREST EXPENSES:
Employee compensation and benefits 3,364,000 1,893,000
Occupancy and equipment expense 200,000 226,000
Federal deposit insurance premium 66,000 48,000
Computer services 162,000 163,000
Other 527,000 459,000
-------------------------------------------------
Total noninterest expenses 4,319,000 2,789,000
-------------------------------------------------
INCOME BEFORE INCOME TAXES 853,000 3,309,000
Provision for income taxes 361,000 1,204,000
-------------------------------------------------
NET INCOME $ 492,000 $ 2,105,000
=================================================
Basic earnings per share $ 0.12 $ 0.51
=================================================
Diluted earnings per share $ 0.12 $ 0.51
=================================================
Dividends declared per share $ 0.30 $ 0.28
=================================================
Average number of Basic shares outstanding 4,139,487 4,154,369
=================================================
Average number of Diluted shares outstanding 4,139,487 4,154,369
=================================================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 492,000 $ 2,105,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses - -
Net accretion of premiums and discounts on securities 125,000 (74,000)
Amortization of deferred loan fees (217,000) 49,000
Gain on sale of fixed assets - (4,000)
Provision for depreciation 84,000 89,000
Vested ESOP expense 258,000 -
Vested Management Recognition Plan 1,397,000 -
Deferred Income Taxes - 170,000
(Increase) Decrease in assets:
Accrued interest receivable 685,000 (944,000)
Other assets (1,808,000) 1,243,000
Increase (Decrease) in liabilities:
Other liabilities 42,000 (864,000)
-----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,058,000 1,770,000
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity - (19,307,000)
Purchases of securities available for sale (12,570,000) (57,254,000)
Redemption (Purchase) of FHLB stock 543,000 (904,000)
Proceeds from maturities and recalls of securities available
for sale 46,229,000 7,159,000
Principal collected on securities held to maturity 6,567,000 2,161,000
Loan originations and principal payments on loans, net 4,825,000 (682,000)
Purchase of office properties and equipment (2,000) (56,000)
Proceeds from sale of fixed assets - 30,000
-----------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 45,592,000 (68,853,000)
-----------------------------------------
</TABLE>
(Continued)
4
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 6,494,000 $ (50,851,000)
Net increase in advance payments by borrowers for
taxes and insurance 296,000 337,000
Proceeds received from issuance of common stock
net of stock issuance costs incurred - 43,645,000
Principal receipts for ESOP debt 125,000 165,000
Note receivable originated to ESOP - (4,528,000)
Proceeds from issuance of short-term debt 18,000,000 -
Dividends paid to stockholders (29,461,000) (1,259,000)
(Repayments) proceeds of Federal Home Loan Bank borrowings (35,000,000) 35,000,000
------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (39,546,000) 22,509,000
------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,104,000 (44,574,000)
Cash and cash equivalents:
Beginning 27,644,000 62,135,000
----------------------------------------------
Ending $ 34,748,000 $ 17,561,000
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash and cash equivalents:
Cash and short-term investments:
Cash $ 1,037,000 $ 766,000
Noninterest-bearing 2,374,000 2,065,000
Interest-bearing 26,197,000 8,800,000
Federal Funds Sold 5,140,000 5,930,000
----------------------------------------------
$ 34,748,000 $ 17,561,000
==============================================
Net change in unrealized (gain) loss on securities available for
sale, net of deferred taxes (credits) $ (84,000) $ (131,000)
==============================================
Transfer from loans to real estate acquired in settlement of loans $ 24,000 $ -
==============================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. NATURE OF BUSINESS
Prior to October 2, 1996, Home Savings Bank of Albemarle, Inc., S.S.B. (the
"Bank") operated as a mutual North Carolina-chartered savings bank. On October
2, 1996, the Bank converted from a North Carolina-chartered mutual savings bank
to a North Carolina-chartered savings bank (the "Conversion"). In connection
with the Conversion, all of the issued and outstanding capital stock of the Bank
was acquired by South Street Financial Corp., a North Carolina corporation (the
"Company") which was organized to become the holding company for the Bank. At
that time, the Company had an initial public offering of its common stock, no
par value.
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and the savings bank holding
company laws of North Carolina. The Company's office is located at 155 West
South Street, Albemarle, North Carolina. The Company's activities consist of
investing the proceeds of its initial public offering half of which were
retained at the holding company level, holding the indebtedness outstanding from
the Home Savings Bank of Albemarle, Inc., SSB Employee Stock Ownership Plan (the
"ESOP") and owning the Bank. The Company's principal sources of income are
earnings on its investments and interest payments received from the ESOP with
respect to the ESOP loan. In addition, the Company will receive any dividends
which are declared and paid by the Bank on its capital stock.
The Bank was originally chartered in 1911. It has been a member of the Federal
Home Loan Bank ("FHLB") system since 1954 and its deposits are federally insured
up to allowable limits. The Bank is engaged primarily in the business of
attracting retail deposits from the general public and using such deposits to
make mortgage loans secured by real estate. The Bank makes mortgage loans
secured by residential real property, including one-to-four family residential
real estate loans, home equity line of credit loans and other subordinate lien
loans, loans secured by improved nonresidential real property, loans secured by
undeveloped real property and construction loans. The Bank also makes a limited
number of loans which are not secured by real property, such as loans secured by
savings accounts. The Bank's primary source of revenue is interest income from
its lending activities. The Bank's other major sources of revenue are interest
and dividend income from investments and mortgage backed securities, interest
income from its interest-bearing deposit balances in other depository
institutions and fee income from its lending and deposit activities. The major
expenses of the Bank are interest on deposits and noninterest expenses such as
compensation and fringe benefits, federal deposit insurance premiums, data
processing expenses and branch occupancy and related expenses.
6
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements (except for the
statement of financial condition at September 30, 1997, which is taken from
audited financial statements) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (none of which were other than normal recurring accruals) necessary
for a fair presentation of the financial position and results of operations for
the periods presented have been included. The financial statements of the
Company are presented on a consolidated basis with those of Home Savings Bank.
The results of operations for the three and nine month periods ended June 30,
1998 are not necessarily indicative of the results of operations that may be
expected for the year ended September 30, 1998.
The accounting policies of the Company followed are as set forth in Note 1 of
the Notes to Consolidated Financial Statements in the 1997 annual report of the
Company.
NOTE 3. EARNINGS PER SHARE
The Company's basic earnings per share for the three and nine month periods
ended June 30, 1998 and 1997 is based on net income earned divided by the
weighted average number of shares outstanding from the beginning of the three
and nine months period to the end of the three and nine month periods and
diluted earnings per share is adjusted for the conversion, exercise or issuance
of all potential common stock instruments. For purposes of this computation, the
number of shares of common stock purchased by the ESOP which have not been
allocated to participant accounts are not assumed to be outstanding.
Note 4 DIVIDENDS DECLARED
On June 10, 1998, the Board of Directors of South Street Financial Corp.
declared a dividend of $ .10 per share for stockholders of record as of June 25,
1998 and payable on July 9, 1998. In addition, on June 10, 1998, the Board of
Directors of Home Savings declared an upstream dividend of $467,636 to South
Street Financial Corp.
7
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 NOTES PAYABLE AND ADVANCES FROM FEDERAL HOME LOAN BANK
Notes payable at June 30, 1998 consist of the following:
Note payable to Bankers' Bank, interest at 8.00%, due December, 1998
$18,000,000
NOTE 6. STOCK OPTION PLAN AND THE BANK'S MANAGEMENT RECOGNITION PLAN
The Company's stockholders approved the Company's Stock Option Plan and the
Bank's Management Recognition Plan and the Trust (the "MRP") on October 15,
1997. The Stock Option Plan reserves for issuance up to 449,650 stock options
to all officers, directors, and employees at the time of the adoption either in
the form of incentive stock options or non-incentive stock options. The
exercise price of the stock options may not be less than the fair value of the
Company's common stock at date of grant. The options awarded to employees,
which have not yet been granted will vest at the rate of 25% annually beginning
at the date of grant. Options granted to non-employee directors will vest
immediately on the date of grant. As permitted under the generally accepted
accounting principles, grants under the plan will be accounted for following the
provisions of APB Opinion No. 25 and its related interpretations. Accordingly,
no compensation cost will be recognized on the grant date of any options.
The MRP reserved for issuance 179,860 shares of common stock to all officers,
directors, and employees at the time of adoption. The Bank issued shares to
fund the MRP in October of 1997. The restricted common stock under the MRP
vests at the rate of 25% annually beginning at the date of grant.
8
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
This Form 10Q contains certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company and the Bank that are subject to various factors
which could cause actual results to differ materially from those estimates.
Factors which could influence the estimates include changes in general and local
market conditions, legislative and regulatory conditions and an adverse interest
rate environment.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND SEPTEMBER 30, 1997:
Total assets decreased by $37.4 million or 15.5%, to $203.7 million at June 30,
1998 from $241.0 million at September 30, 1997. The decrease in assets was
primarily attributable to a decrease in liquidity and investment securities
which were used for repayment of the advances from Federal Home Loan Bank in the
amount of $35.0 million.
Net loans receivable decreased by $4.8 million or 4.3% to $107.2 million at June
30, 1998 from $111.9 million at September 30, 1997. Investment securities held
to maturity decreased $6.6 million or 30.5%, to $15.0 million at June 30, 1998
from $21.6 million at September 30, 1997. Likewise, investment securities
classified as available for sale decreased $33.6 million or 45.5%, to $40.3
million at June 30, 1998 from $73.8 million at September 30, 1997. The decrease
was primarily due to the repayment of $35 million in borrowing from the FHLB.
The Bank had borrowings of $18.0 million outstanding at the end of the three
month period ended June 30, 1998 and $35.0 million at the end of September 30,
1997. The borrowings of $15.0 million were used to finance the purchase of
investment securities which management has determined will provide a profitable
return as an arbitrage. As of June 30, 1998 the $15.0 million has been repaid.
The Company also borrowed $18.0 million to help pay a one time special dividend
of $28.0 million to its stockholders. These funds will be repaid in October
1998. The Bank has guaranteed the repayment of the ESOP's note payable to the
Company which it incurred on October 2, 1996 in order to purchase 359,720 shares
of stock in the Company. The Company's note receivable from the ESOP totaling
$4.1 million, net of $125,000 principal repayment made during the nine months
ended June 30, 1998, is reported as a reduction of stockholders' equity.
Retained earnings decreased by $822,000 to $21.4 million at June 30, 1998, which
is attributable to the Company's dividends paid for the nine-month period ended
June 30, 1998 in the amount of $1.4 million. Additional paid-in capital and
deferred MRP decreased by $26.4 million to $17.2 million at June 30, 1998 from
$43.6 million at September 30, 1997. The decrease was primarily attributable to
a one time special dividend (return of capital) paid on January 8, 1998 in the
amount of $28.0 million.
As a North Carolina chartered stock savings bank, the Bank is required to meet
various capital standards established by federal and state banking agencies. At
June 30, 1998, the Company's stockholders' equity amounted to $34.5 million, or
16.9% of total assets and exceeds all regulatory capital requirements.
9
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND SEPTEMBER 30, 1997:
(CONTINUED)
The Bank's level of nonperforming loans, defined as loans past due 90 days or
more was $427,000 and $510,000 at June 30, 1998 and September 30, 1997,
respectively. During the three-month periods ended June 30, 1998 and 1997, the
Bank's level of nonperforming loans remained consistently low in relation to
prior periods and to total loans outstanding, and the Bank's charge-offs of
loans was minimal. Management determined based on their analysis that no loan
loss provisions were necessary during the first three quarters of fiscal 1998.
10
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1998 AND 1997:
GENERAL. Net income for the three-month and nine-month periods ended June 30,
1998 was $233,000 and $492,000 respectively, or $512,000 and $1.6 million less
than the $745,000 and $2.1 million earned during the same period in 1997. As
discussed below, the decrease in net income was primarily attributable to the
expensing of the cost of the "MRP" shares in the amount of $200,000 for the
three- month period ended June 30, 1998 and in the amount of $1.4 million for
the nine-month period ended June 30, 1998. This expense represents the
immediate vesting of 25% of the MRP shares in October 1997, and nine months
accruals of the next 25% vesting period. The monthly recognition of the MRP
expense over the next three years will be $66,000. Additionally, net interest
income declined by $922,000 for the nine-month period ended June 30, 1998 as
discussed below.
INTEREST INCOME. Interest income decreased by $500,000 from $4.4 million for
the three months ended June 30, 1997 to $3.9 million for the three months ended
June 30, 1998. Interest income decreased by $286,000 from $12.4 million for the
nine months ended June 30, 1997 to $12.1 million for the nine months ended June
30, 1998. The decreases were attributable to the change in the volume of
interest-earning assets outstanding.
INTEREST EXPENSE. Interest expense on deposits and borrowed funds increased by
$51,000 from $2.35 million for the three months ended June 30, 1997 to $2.40
million for the three months ended June 30, 1998. Interest expense on deposits
and borrowed funds increased by $674,000 from $6.47 million for the nine months
ended June 30, 1997 to $7.15 million for the nine months ended June 30, 1998.
The increase was primarily due to an increase in the volume of interest-bearing
deposits and borrowed funds for the nine months ended June 30, 1998 compared to
the same period in 1997. Home Savings prices its deposits to be at or near the
top of the market because of its dependence on the local market for funds
availability. Interest expense incurred from the FHLB advances amounted to
$186,000 for the quarter ended June 30, 1998 compared to $518,000 for the
quarter ended June 30, 1997.
Interest expense incurred from the Bankers' Bank note amounted to $368,000 for
the quarter ended June 30, 1998 compared to none for the quarter ended June 30,
1997.
NET INTEREST INCOME. Net interest income decreased by $551,000 from $2.0
million for the three months ended June 30, 1997 to $1.5 million for the three
months ended June 30, 1998. Net interest income decreased by $960,000 from $6.0
million for the nine months ended June 30, 1997 to $5.0 million for the nine
months ended June 30, 1998. These decreases were results of increases in the
volume of interest-bearing deposits and borrowed funds. The Bank's interest rate
spread decreased primarily because its deposits were more rate sensitive than
its interest earning assets, and borrowings were higher during the three-month
period ended June 30, 1998 as compared to the same period in 1997.
PROVISION FOR LOAN LOSSES. There were no provisions for loan losses charged to
income during the three and nine months ended June 30, 1998. Provisions, which
are charged to operations, and the resulting loan loss allowances are amounts
the Bank's management believes will be adequate to absorb losses on existing
loans that may become uncollectible.
11
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PROVISION FOR LOAN LOSSES. (CONTINUED)
Loans are charged off against the allowance when management believes that
collectibility is unlikely. The decision to increase or decrease the provision
and resulting allowances is based upon an evaluation of both prior loan loss
experience and other factors, such as changes in the nature and volume of the
loan portfolio, overall portfolio quality, and current economic conditions. The
Bank's level of non-performing loans has remained consistently low in relation
to prior periods and total loans outstanding, and the Bank's charge-offs of
loans during either of the three-and nine-month periods ended June 30, 1998 and
1997 was minimal.
At June 30, 1998, the Bank's level of general valuation allowances for loan
losses amounted to $430,000, which management believes is adequate to absorb
potential losses in its loan portfolio.
NONINTEREST INCOME. Noninterest income increased by $8,000 from $27,000 for the
three-month period ended June 30, 1997 to $35,000 for the three-month period
ended June 30, 1998. This increase was attributable to an increase in various
small items during the three months ended June 30, 1998 as compared to the same
period in 1997. Noninterest income increased by $34,000 from $85,000 for the
nine-month period ended June 30, 1997 to $119,000 for the nine-month period
ended June 30, 1998. The increase in noninterest income is principally due to
the gain on sale of investments.
NONINTEREST EXPENSE. Noninterest expense increased by $230,000 from $853,000
for the three-month period ended June 30, 1997 to $1.1 million for the three-
month period ended June 30, 1998 and for the nine-month period ended June 30,
1998, noninterest expense increased by $1.5 million to $4.3 million from $2.8
million for the nine-month period ended June 30, 1997. The increase in
noninterest expense is principally due to an increase in benefits expense
associated with the establishment of an ESOP and the MRP as discussed below.
As a part of the conversion, the Company established an ESOP that acquired a
total of 359,720 shares of the stock offered in the conversion with funds
provided in the form of a loan from the Company. The loan is expected to be
repaid over a fifteen year period with funds provided by the Bank sufficient to
amortize the debt. The expense associated with the ESOP is reported in
accordance with SOP 93-6 "Employers' Accounting for Employee Stock Ownership
Plans."
The MRP reserved for issuance 179,860 shares of common stock to all officers,
directors and employees on the adoption date of October 15, 1997. The Bank
issued shares to fund the MRP in October of 1997. The restricted common stock
under the MRP vests at the rate of 25% annually. The expense recorded in the
nine months ended June 30, 1998 represents the immediate vesting of 25% of MRP
shares and nine months accrual of the next 25% vesting amount.
CAPITAL RESOURCES AND LIQUIDITY:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
12
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-earning deposits. During the nine-month period ended June
30, 1998, cash and cash equivalents, a significant source of liquidity,
increased by approximately $7.1 million. This increase is a direct result of
the Company's proceeds from maturities and sales of securities. Cash flow
resulting from internal operating activities provided for a increase of $1.1
million in cash during the nine-month period ended June 30, 1998. Financing
activities, principally the repayment of FHLB borrowings in the amount of $35.0
million and the payment of a one time special dividend in the amount of $28.0
million provided for a decrease of $39.5 million in cash. Investing activities,
principally proceeds from maturities and sales of securities for $46.2 million
provided an additional $45.6 million.
As a state chartered stock savings bank, Home Savings must meet certain
liquidity requirements which are established by the Administrator. Home's
liquidity ratio at June 30, 1998, as computed under such regulations, was
considerably in excess of such requirements. Given its excess liquidity and its
ability to borrow from the FHLB of Atlanta, Home Savings believes that it will
have sufficient funds available to meet anticipated future loan commitments,
unexpected deposit withdrawals, or other cash requirements.
The FDIC requires Home Savings to have a minimum leverage ratio of Tier I
Capital (principally consisting of retained earnings and any common
stockholders' equity, less any intangible assets) to all assets of at least 3%,
provided that it receives the highest rating during the examination process.
For institutions that receive less than the highest rating, the Tier I capital
requirement is 1% to 2% above the stated minimum. The FDIC also requires the
Bank to have a ratio of total capital to risk-weighted assets of 8%, of which at
least 4% must be in the form of Tier I capital. The Administrator requires a
net worth equal to at least 5% of total assets. Home Savings complied with all
of the capital requirements of both the FDIC and the Administrator at June 30,
1998.
The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles, 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
Company are primarily monetary in nature and changes in interest rates have a
greater impact on the Company's performance than do the effect of inflation.
YEAR 2000. At the turn of the century, computer-based information systems will
be faced with the problems potentially affecting hardware, software, networks,
processing platforms, as well as customer and vendor interdependencies. The
Company has established a committee and is in the process of assessing the
effect of Year 2000 on the Bank's operating plans and systems. The Company is
developing a plan for identifying, renovating, testing and implementing its
systems for Year 2000 processing and internal control requirements. The cost
for becoming Year 2000 compliant has been estimated to be between $350,000 and
$450,000. Management feels this will not be material to the Company's financial
statements.
13
<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. One of the principal risks for the Bank is interest rate
risk. One of the Bank's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates.
Historically, the Bank has been a mortgage lender so the loan portfolio
continues to have a large number of mortgage loans with maturities that are
considerably longer than for the deposits that fund those loans. Thus, an upward
movement in the market rate of interest would result in the cost of deposits
increasing at a faster rate than the rate on loans. The principal strategy of
the Bank over the past several years has been to emphasize the investment of
excess cash in short or intermediate term interest-earning assets, the
solicitation of transaction deposits accounts which are less sensitive to
changes in interest rates and can be repriced rapidly. The Company has not
experienced any substantial changes in its portfolio risk during the three-month
period ended June 30, 1998. See disclosures in the September 30, 1997 Form 10K.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings at the present
time. From time to time, the Bank is a party to legal proceedings
within the normal course of business wherein it enforces its
security interest in loans made by it, and other matters of a
similar nature.
Item 2. Changes in Securities and Use of Proceeds
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) Exhibits
Exhibit (27) Financial Data Schedule
(b) Reports on Form 8-K
On June 29, 1998, the Company filed a Form 8-K with the SEC
reporting under Item 5. Other Events, the adoption of a stock
repurchase plan by the Company's Board of Directors.
15
<PAGE>
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 August 5, 1998 By: /s/ Carl M. Hill
---------------------------
Carl M. Hill
President and Chief Executive Officer
Dated August 5, 1998 By: /s/ Christopher F. Cranford
---------------------------
Christopher F. Cranford
Treasurer and Controller
16
<PAGE>
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 August 5, 1998 By: /s/ Carl M. Hill
--------------------- ----------------
Carl M. Hill
President and Chief Executive Officer
Dated August 5, 1998 By: /s/Christopher F. Cranford
--------------------- --------------------------
Christopher F. Cranford
Treasurer and Controller
16
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<PERIOD-START> APR-01-1998 APR-01-1997
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