UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 30, 1999
NEWSOUTH BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Virginia 56-1999749
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Commission File Number: 0-22219
1311 Carolina Avenue, Washington, North Carolina 27889
------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(252) 946-4178
--------------
(Registrant's telephone number, including area code)
<PAGE>
Information To Be Included In The Report
Item 7. Financial Statement, Pro Forma Financial Information and Exhibits.
On November 30, 1999, NewSouth Bancorp, Inc. (the "Company") consummated its
acquisition of Green Street Financial Corp ("Green Street"), the holding company
of Home Federal Savings and Loan Association ("Home Federal"), a federally
chartered stock savings and loan association which operated with three offices
located in Fayetteville and Lumberton, North Carolina.
Under the terms of the Agreement and Plan of Merger dated August 9, 1999, the
Company acquired Green Street for a cash price of $59.2 million, representing
$15.25 per share of Green Street common stock. At September 30, 1999, Green
Street had total assets of $160.8 million, deposits of $100.8 million and
stockholders' equity of $58.6 million. This acquisition was accounted for under
the purchase method of accounting. The source of funds for the acquisition was
cash on hand plus funds borrowed from the Federal Home Loan Bank of Atlanta.
Item 7(a). Financial Statements of Business Acquired.
The audited consolidated financial statements of Green Street as of September
30, 1999 and 1998, and for each of the years in the three year period ended
September 30, 1999, 1998 and 1997 are included herein as Exhibit 99.1.
Item 7(b). Pro Forma Financial Information.
Filed as Exhibit 99.2 of this Current Report Form 8-K/A are the required
unaudited pro forma condensed combined statements of financial condition as of
September 30, 1999 and the unaudited pro forma condensed combined statements of
operations for the year ended September 30, 1999. The pro forma data is
presented for comparative purposes only and is not necessarily indicative of the
future financial position or results of operations of the combined company.
The unaudited pro forma condensed combined financial statements give effect to
the acquisition by the Company of Green Street in a transaction accounted for
under the purchase method of accounting. The unaudited pro forma condensed
combined statements of financial condition are based on the individual
statements of condition of the Company and Green Street as of September 30,
1999. The unaudited pro forma condensed combined statements of operations are
based on the individual statements of operations of the Company and Green
Street, and combines the results of operations of the Company and Green Street
for the year ended September 30, 1999 as if the acquisition occurred on October
1, 1998.
The unaudited pro forma condensed combined financial information set forth
herein was prepared for purposes of complying with Regulation S-X of the
Securities and Exchange Commission in connection with the filing of the Form 8-K
of the Company relating to the acquisition of Green Street, since such
acquisition is significant to the financial statements of the Company.
2
<PAGE>
These unaudited pro forma condensed combined financial statements should be read
in conjunction with the audited financial statements of the Company,
incorporated by reference to Item 14 of the Company's Annual Report on Form 10-K
for the year ended September 30, 1999, and the audited financial statements of
Green Street referenced in 7(a) above.
Item 7(c). Exhibits:
Exhibit 23. Consent of McGladrey & Pullen, LLP.
Exhibit 99.1 Audited consolidated financial statements of Green Street
Financial Corp and Subsidiary as of September 30, 1999 and
1998, and for the years ended September 30, 1999, 1998 and
1997.
Exhibit 99.2 Unaudited Pro Forma Condensed Combined Statements of
Financial Condition as of September 30, 1999 and Unaudited
Condensed Combined Statements of Operations for the Year
Ended September 30, 1999.
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 hereunto duly authorized.
NewSouth Bancorp, Inc.
(Registrant)
/s/ William L. Wall
------------------------------
Date: February 10, 2000 William L. Wall
Executive Vice President
Chief Financial Officer
Secretary
(Principal Financial Officer)
/s/ Kristie W. Hawkins
------------------------------
Date: February 10, 2000 Controller
Treasurer
(Principal Accounting Officer)
3
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
NewSouth Bancorp, Inc.
We hereby consent to the inclusion as Exhibit 99.1 in the Form 8-K/A of NewSouth
Bancorp, Inc. dated November 30, 1999, of our report dated October 20, 1999,
with respect to the consolidated statements of financial condition of Green
Street Financial Corp and Subsidiary as of September 30, 1999 and 1998, 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, 1999.
Raleigh, North Carolina
February 11, 2000
EXHIBIT 99.1
GREEN STREET FINANCIAL CORP
FINANCIAL REPORT
SEPTEMBER 30, 1999
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
Independent Auditor's Report 1
- --------------------------------------------------------------------------------
Consolidated Financial Statements
Financial condition at September 30, 1999 and 1998 2
Income for years ended September 30, 1999, 1998 and 1997 3
Stockholders' equity for years ended September 30, 1999, 1998 and 1997 4
Cash flows for the years ended September 30, 1999, 1998 and 1997 5 - 6
Notes to the Consolidated Financial Statements 7 - 25
- --------------------------------------------------------------------------------
Common Stock Information 26
- --------------------------------------------------------------------------------
Corporate Information 27
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Green Street Financial Corp
Fayetteville, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Green Street Financial Corp and subsidiary as of September 30, 1999 and 1998,
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, 1999.
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three year period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
October 20, 1999
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
<S> <C> <C>
Interest-bearing $ 29,915,991 $ 27,817,856
Noninterest-bearing 319,480 171,500
Federal funds sold 1,853,000 1,473,000
-----------------------------------
32,088,471 29,462,356
-----------------------------------
Investment securities: (Note 2)
Held to maturity 9,000,000
Nonmarketable equity securities 1,147,500 1,144,700
Loans receivable, net (Note 3) 126,339,849 131,697,916
Accrued interest receivable, investments 7,548 180,301
Real estate acquired in settlement of loans 11,858 34,521
Property and equipment, net (Note 4) 432,681 349,190
Prepaid expenses and other assets (Note 11) 791,150 835,561
-----------------------------------
Total assets $ 160,819,057 $ 172,704,545
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 5) $ 100,832,600 $ 110,459,780
Advance payments by borrowers for taxes and insurance 219,625 208,998
Accrued expenses and other liabilities 663,773 600,722
Dividends payable 504,305 1,102,469
-----------------------------------
Total liabilities 102,220,303 112,371,969
-----------------------------------
Commitments and contingencies (Notes 6, 7, 9, 10, and 16)
Stockholders' Equity (Note 14):
Preferred stock, authorized 1,000,000 shares; none issued
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding 3,879,269 shares (4,083,219 in 1998)
Additional paid-in capital 35,952,234 38,550,912
Note receivable, ESOP (Note 8) (1,690,000) (1,950,000)
Retained earnings, substantially restricted (Note 14) 24,336,520 23,731,664
-----------------------------------
58,598,754 60,332,576
-----------------------------------
$ 160,819,057 $ 172,704,545
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Interest and dividend income:
<S> <C> <C> <C>
Loans $ 9,856,089 $ 10,447,936 $ 10,202,266
Short-term cash investments 1,743,633 1,701,909 1,837,998
Investment securities 167,942 950,780 977,255
--------------------------------------------------
TOTAL INTEREST INCOME 11,767,664 13,100,625 13,017,519
Interest on deposits 4,916,188 5,609,160 5,377,418
--------------------------------------------------
NET INTEREST INCOME 6,851,476 7,491,465 7,640,101
Provision for loan losses (Note 3) 20,000
--------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,851,476 7,491,465 7,620,101
--------------------------------------------------
Noninterest income 109,064 132,400 103,983
--------------------------------------------------
Noninterest expense:
Compensation and benefits (Notes 7, 8, 9 and 10) 1,898,933 2,190,474 2,227,063
Deposit insurance 106,992 116,911 155,132
Occupancy expenses 169,697 157,334 146,610
Advertising 134,054 142,633 161,431
Data processing expense 109,709 89,774 91,234
Other 543,012 431,031 449,702
--------------------------------------------------
2,962,397 3,128,157 3,231,172
--------------------------------------------------
INCOME BEFORE INCOME TAXES 3,998,143 4,495,708 4,492,912
--------------------------------------------------
Income taxes (Note 13):
Current 1,412,423 1,661,750 1,567,265
Deferred 106,000 27,000 149,000
--------------------------------------------------
1,518,423 1,688,750 1,716,265
--------------------------------------------------
NET INCOME $ 2,479,720 $ 2,806,958 $ 2,776,647
==================================================
Basic earnings per share (Note 15) $ 0.66 $ 0.70 $ 0.68
==================================================
Diluted earnings per share (Note 15) $ 0.66 $ 0.69 $ 0.67
==================================================
Dividends paid per share $ 0.50 $ 0.61 $ 0.57
==================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Note
Paid-in Receivable Retained
Capital ESOP Earnings Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1996 $ 41,767,226 $ (2,470,000) $ 22,882,793 $ 62,180,019
Net income 2,776,647 2,776,647
Repayment of ESOP Note 260,000 260,000
ESOP contribution (Note 8) 182,325 182,325
Cash dividends (2,319,996) (2,319,996)
RSP awards in excess of
grant price (Note 9) (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
Repayment of ESOP note 260,000 260,000
ESOP contribution (Note 8) 174,460 174,460
Cash dividends (2,414,738) (2,414,738)
RSP awards in excess of
grant price (Note 9) 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
Net income 2,479,720 2,479,720
Repayment of ESOP note 260,000 260,000
ESOP contribution (Note 8) 75,140 75,140
Cash dividends (1,874,864) (1,874,864)
Redemption of 203,950 shares of
outstanding stock at $13.11 per share (2,673,818) (2,673,818)
------------------------------------------------------------------------
Balance at September 30, 1999 $ 35,952,234 $ (1,690,000) $ 24,336,520 $ 58,598,754
========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net income $ 2,479,720 $ 2,806,958 $ 2,776,647
Adjustments to reconcile net income to net
cash provided by operating activities:
ESOP contribution expense credited to
additional paid-in capital 75,140 174,460 182,325
Tax benefit from RSP awards 52,000
Other 47,737 34,497 32,479
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets 44,411 (63,384) (52,604)
Accrued interest receivable 172,753 42,415 32,850
Increase (decrease) in:
Accrued expenses and other liabilities 63,051 (351,035) 389,775
Accrued special SAIF assessment (792,868)
------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,882,812 2,695,911 2,568,604
------------------------------------------------------
Cash Flows From Investing Activities
Purchase of held to maturity investment securities (21,000,000) (27,000,000)
Purchase of nonmarketable equity securities (2,800) (18,300)
Proceeds from maturity of held to maturity
investment securities 9,000,000 25,500,000 28,500,000
Net decrease (increase) in loans receivable 5,346,209 (2,805,023) (5,807,322)
Proceeds from sale of real estate acquired
in settlement of loans 34,000 14,920 46,779
Purchase of equipment (130,707) (73,276) (13,038)
------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 14,246,702 1,618,321 (4,273,581)
------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
<S> <C> <C> <C>
Net increase (decrease) in deposits $ (9,627,180) $ (2,182,113) $ 1,256,507
Increase (decrease) in advance payments by
borrowers for taxes and insurance 10,627 (41,664) 71,218
Redemption of common stock (2,673,818) (3,545,957)
Principal repayments received on ESOP note 260,000 260,000 260,000
Cash dividends paid (2,473,028) (2,429,782) (2,277,014)
------------------------------------------------------
NET CASH USED IN
FINANCING ACTIVITIES (14,503,399) (7,939,516) (689,289)
------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,626,115 (3,625,284) (2,394,266)
Cash and cash equivalents:
Beginning 29,462,356 33,087,640 35,481,906
------------------------------------------------------
Ending $ 32,088,471 $ 29,462,356 $ 33,087,640
======================================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 4,918,422 $ 5,614,261 $ 5,374,888
======================================================
Income taxes $ 1,470,423 $ 1,997,265 $ 1,349,265
======================================================
Supplemental Disclosure of Noncash Investing
and Financing Activities
Transfer from loans to real estate
acquired in settlement of loans $ 11,858 $ 51,749 $
======================================================
Dividends declared and accrued $ 504,305 $ 1,102,469 $ 1,117,513
======================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<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, 1999, 1998 and 1997 include the accounts of Green Street
Financial Corp and its wholly-owned subsidiary, Home Federal Savings and Loan
Association. 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,
computed by a method which approximates the interest method over their
contractual lives. 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.
<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,
1999 and 1998 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. When interest accrual is discontinued, all unpaid accrued
interest is reversed. 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.
<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: 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. See
Note 15 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, 1999 and 1998, 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.
<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, 1999 and 1998,
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, 1999 and 1998. 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, 1999 and 1998 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.
NOTE 2. HELD TO MATURITY INVESMENTS 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, 1999 $ $ $ $
================================================================
September 30, 1998 $ 9,000,000 $ 42,192 $ $ 9,042,192
================================================================
</TABLE>
There were no sales of investment securities during 1999, 1998 or 1997.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE
Loans receivable consist of the following:
1999 1998
--------------------------------
Mortgage loans:
Residential one-to-four family $ 106,873,082 $ 108,738,797
Residential multifamily 7,181,352 7,626,892
Nonresidential real estate 11,748,104 14,455,316
Residential construction 2,075,293 2,844,570
Installment loans 900,508 649,909
--------------------------------
128,778,339 134,315,484
--------------------------------
Less:
Allowance for loan losses 254,763 254,763
Unamortized loan fees 835,923 937,250
Undisbursed portion of loans in process 1,347,804 1,425,555
--------------------------------
2,438,490 2,617,568
--------------------------------
$ 126,339,849 $ 131,697,916
================================
Weighted average yield on loans receivable 7.37% 7.99%
================================
The following sets forth information regarding the allowance for loan losses:
1999 1998 1997
------------------------------------------
Balance, beginning $ 254,763 $ 254,763 $ 234,763
Provisions charged to income 20,000
------------------------------------------
Balance, ending $ 254,763 $ 254,763 $ 254,763
==========================================
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, 1999, 1998, and 1997 loans
totaling $179,640, $195,547 and $173,336, 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
$4,641, $4,085 and $2,776 for the years ended September 30, 1999, 1998 and 1997.
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.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE (CONTINUED)
Aggregate loan transactions with related parties for the year ended September 30
were as follows:
1999 1998
-----------------------------------
Beginning balance $ 427,206 $ 431,502
New loans 37,678 23,900
Repayments (46,368) (28,196)
-----------------------------------
Ending balance $ 418,516 $ 427,206
===================================
Maximum balance during the year $ 442,616 $ 451,996
===================================
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
1999 1998
-----------------------------------
Land $ 150,972 $ 150,972
Buildings 736,215 736,215
Furniture and equipment 276,924 323,834
-----------------------------------
1,164,111 1,211,021
Accumulated depreciation (731,430) (861,831)
-----------------------------------
$ 432,681 $ 349,190
===================================
Depreciation expense was $47,216, $30,881 and $36,504 for the years ended
September 30, 1999, 1998 and 1997, respectively.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. DEPOSITS
Deposits consist of the following:
1999 1998
--------------------------------
Passbook accounts, 2.50% (3.00% in 1998) $ 11,789,177 $ 13,095,540
NOW accounts, 2.25% (2.75% in 1998) 98,409 114,151
Super NOW accounts, 3.50% (4.00% in 1998) 118,930 52,881
Money market accounts, 3.50% (4.00% in 1998) 12,556,396 12,927,837
--------------------------------
24,562,912 26,190,409
--------------------------------
Certificates:
3.01% - 5.00% 40,889,027 4,318,545
5.01% - 7.00% 35,014,665 79,496,537
7.01% and above 339,390 425,449
--------------------------------
76,243,082 84,240,531
--------------------------------
Accrued interest on deposits 26,606 28,840
--------------------------------
$ 100,832,600 $ 110,459,780
================================
Weighted average cost of funds 4.67% 5.03%
================================
Certificate accounts are summarized by maturity at September 30, 1999 as
follows:
<TABLE>
<CAPTION>
2000 2001 2002 Thereafter Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.01% - 5.00% $ 38,268,129 $ 1,510,268 $ 399,798 $ 710,832 $ 40,889,027
5.01% - 7.00% 19,037,098 8,804,990 4,819,797 2,352,780 35,014,665
7.01% and above 128,182 38,047 48,529 124,632 339,390
----------------------------------------------------------------------------
$ 57,433,409 $ 10,353,305 $ 5,268,124 $ 3,188,244 $ 76,243,082
============================================================================
</TABLE>
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. DEPOSITS (CONTINUED)
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 $ 1,500,337
4 to 12 months 3,909,117
More than 12 months 2,985,142
-------------------
$ 8,394,596
===================
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. 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 $36,000, $38,000 and $40,000 for 1999, 1998 and 1997,
respectively.
NOTE 7. 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 defined 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.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. 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 is adjusted and
paid quarterly. The note may be prepaid without penalty. During 1999 and 1998
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, 1999 and 1998, the outstanding balance of the
note receivable is $1,690,000 and $1,950,000, 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 $335,140, $434,460 and $442,325 during 1999, 1998 and 1997,
respectively, has been incurred in connection with the ESOP. The expense
includes, in addition to the cash contribution necessary to fund the ESOP,
$75,140, $174,460 and $182,325, 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 1999, 1998 and
1997, respectively. This amount has been credited to paid-in capital.
At September 30, 1999 and 1998, 91,000 and 65,000 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 at
September 30, 1999 and 1998.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. 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. Pursuant to a plan amendment,
effective in March 1999, the remaining vesting period for awards previously
granted to directors under the RSP was extended to six years from the otherwise
existing three years. This will result in a reduction of the cost of the plan
from approximately $512,000 to $286,000 for the years 1999 through 2001, and to
approximately $226,000 for the years 2002 through 2004. In the event of a change
of control of the Company, all shares allocated to the participants in the RSP
will become fully vested (see Note 18). 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, 1999, 1998 and
1997, expense associated with the RSP was approximately $315,000, $552,000 and
$530,000, respectively.
NOTE 10. 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, 1999,
171,924 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 each of the years ended September 30, 1999, 1998 and 1997.
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%.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------
Change in benefit obligation:
<S> <C> <C> <C>
Benefit obligation, beginning $ (1,049,576) $ (1,276,730)
Service cost (67,041) (52,143)
Interest cost (80,489) (77,624)
Actuarial (gain) loss (113,412) 225,330
Benefits paid 131,591
-----------------------------------
Benefit obligation, ending (1,310,518) (1,049,576)
-----------------------------------
Change in plan assets:
Fair value of plan assets, beginning 1,132,452 1,126,648
Actual return on plan assets (42,498) 88,822
Distributions (131,591)
Employer contribution 66,862 48,573
-----------------------------------
Fair value of plan assets, ending 1,156,816 1,132,452
-----------------------------------
Funded status (153,702) 82,876
Unrecognized net gain 387,196 189,348
Unrecognized prior service cost (38,347) (55,919)
Unrecognized net transition asset (12,690) (15,227)
-----------------------------------
Accrued benefit cost $ 182,457 $ 201,078
===================================
1999 1998 1997
------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 67,041 $ 52,143 $ 57,422
Interest cost 80,489 77,624 80,243
Expected return on plan assets (76,041) (88,822) (82,045)
Net amortization and deferral 13,994 (2,190) 9,690
------------------------------------------------------
Net periodic benefit cost $ 85,483 $ 38,755 $ 65,310
======================================================
</TABLE>
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. PENSION PLAN (CONTINUED)
Assumptions used by the Company in the determination of pension plan information
consisted of the following at December 31, 1999, 1998 and 1997:
1999 1998 1997
---------------------------
Discount rate 7.00% 7.00% 8.00%
Rate of increase in compensation levels 4.00% 4.00% 4.00%
Expected long-term rate of return on plan assets 7.50% 7.50% 8.00%
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
financial instruments at September 30, 1999 and 1998. 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>
1999 1998
-----------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-----------------------------------------------------------------------
Financial assets:
Cash and short-term cash
<S> <C> <C> <C> <C>
investments $ 30,235,471 $ 30,235,471 $ 27,989,356 $ 27,989,356
Federal funds sold 1,853,000 1,853,000 1,473,000 1,473,000
Investment securities held to
maturity 9,000,000 9,042,192
Nonmarketable equity securities 1,147,500 1,147,500 1,144,700 1,144,700
Loans receivable 126,339,849 127,606,000 131,697,916 136,326,000
Accrued interest receivable 7,548 7,548 180,301 180,301
Financial liabilities:
Deposits 100,832,600 100,758,870 110,459,780 110,801,249
</TABLE>
NOTE 13. 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 1999, 1998 and 1997
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.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. INCOME TAXES (CONTINUED)
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.
At September 30, 1999 and 1998, 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:
1999 1998
---------------------------------
Deferred tax assets:
Deferred loan fees $ 60,000 $ 74,000
Deferred compensation 144,000 148,000
Deferred RSP compensation 112,000 208,000
Allowance for loan losses 88,000 88,000
Other 9,000 6,000
---------------------------------
Total deferred tax assets 413,000 524,000
---------------------------------
Deferred tax liabilities:
Excess accumulated tax depreciation 32,000 29,000
Federal Home Loan Bank stock basis 96,000 96,000
Excess pension plan contribution 57,000 65,000
Tax bad debt reserves 388,000 388,000
---------------------------------
Total deferred tax liabilities 573,000 578,000
---------------------------------
Net deferred tax assets (liabilities) $ (160,000) $ (54,000)
=================================
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. INCOME TAXES (CONTINUED)
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,
1999, 1998 and 1997:
1999 1998 1997
---------------------------------
Income tax at the federal statutory rate 34.00 % 34.00 % 34.00 %
State income taxes, net of federal benefit 2.87 2.24 1.89
Other 1.10 1.32 2.31
---------------------------------
37.97 % 37.56 % 38.20 %
=================================
NOTE 14. STOCKHOLDERS' EQUITY
Concurrent with its Conversion from a mutual to a stock institution, 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 1999, 1998 and 1997, the Association paid $2,219,823, $2,082,328
and $1,718,574 in dividends to the Corporation, respectively.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. 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, 1999 is shown below:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
REQUIREMENT REQUIREMENT REQUIREMENT
----------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity (GAAP) $ 58,598,754 $ 58,598,754 $ 58,598,754
Equity of Green Street Financial Corp (13,253,616) (13,253,616) (13,253,616)
General loan loss allowance 254,763
----------------------------------------------------
Regulatory capital 45,345,138 45,345,138 45,599,901
Minimum capital requirement 2,205,915 5,882,440 5,963,120
----------------------------------------------------
Excess regulatory capital $ 43,139,223 $ 39,462,698 $ 39,636,781
====================================================
Home Federal's assets at September 30, 1999 $ 147,061,000 $ 147,061,000 $ 74,539,000
Risk-weighted assets at September 30, 1999
Capital as a percentage of assets:
Actual 30.83% 30.83% 61.18%
Required 1.50% 4.00% 8.00%
----------------------------------------------------
Excess 29.33% 26.83% 53.18%
====================================================
</TABLE>
Under the OTS prompt corrective action regulations, a savings association is
considered to be well capitalized if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of core capital to risk-weighted assets is at
least 6.0%, and its ratio of core capital to total average assets is at least
5.0%. The Association meets all of the above requirements and is considered to
be well capitalized under the prompt corrective action regulations.
NOTE 15. EARNINGS PER SHARE
SFAS No. 128 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.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. 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>
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 3,959,572 4,238,604 4,298,125
Less weighted average of unallocated ESOP shares (182,000) (208,000) (234,000)
------------------------------------------
WEIGHTED AVERAGE OUTSTANDING SHARES
USED FOR BASIC EPS 3,777,572 4,030,604 4,064,125
Plus incremental shares from assumed
issuance of stock options 45,592 52,146
------------------------------------------
WEIGHTED AVERAGE OUTSTANDING SHARES
USED FOR DILUTED EPS 3,777,572 4,076,196 4,116,271
==========================================
</TABLE>
NOTE 16. CONCENTRATION OF CREDIT RISK AND OFF-BALANCE-SHEET RISK
The Association originates single-family residential loans generally within its
primary lending areas of Cumberland and Robeson Counties of North Carolina. The
Association's policies require such loans to be made at no greater than 80%
loan-to-value unless private mortgage insurance is obtained. In this instance,
the loan-to-value ratio cannot exceed 90%. The loans are secured by the
underlying properties.
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 $1,269,300 and $1,852,300 at
September 30, 1999 and 1998, respectively, primarily for the origination of
fixed rate loans.
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. CONCENTRATION OF CREDIT RISK AND OFF-BALANCE-SHEET RISK (CONTINUED)
The Association 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 17. PARENT CORPORATION FINANCIAL DATA
The following is a summary of the condensed financial statements of Green Street
Financial Corp as of and for the year ended September 30, 1999 and 1998:
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C>
Cash and short-term cash investments $ 13,736,408 $ 16,114,829
Accounts receivable, other 21,513 318,667
Investment in Home Federal 45,345,138 45,001,549
------------------------------
$ 59,103,059 $ 61,435,045
==============================
Liabilities and Stockholders' Equity:
Liabilities:
Dividends payable $ 504,305 $ 1,102,469
------------------------------
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized,
issued and outstanding 3,879,269 shares (4,083,219 in 1998)
Additional paid-in capital 59,109,886 61,708,564
Note Receivable - ESOP (1,690,000) (1,950,000)
Retained earnings 1,178,868 574,012
------------------------------
58,598,754 60,332,576
------------------------------
$ 59,103,059 $ 61,435,045
==============================
</TABLE>
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17. PARENT CORPORATION FINANCIAL DATA (CONTINUED)
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1999 1998 1997
- --------------------------------------------------------------------------------
Interest income $ 843,054 $ 1,176,133 $ 1,215,158
Equity in earnings of Home Federal 2,103,271 2,125,499 2,088,235
Administrative expense (269,260) (148,550) (165,124)
Income tax expense (197,345) (346,124) (361,622)
--------------------------------------------
Net income $ 2,479,720 $ 2,806,958 $ 2,776,647
============================================
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17. PARENT CORPORATION FINANCIAL DATA (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income $ 2,479,720 $ 2,806,958 $ 2,776,647
Noncash income items:
Equity in earnings of Home Federal (2,103,271) (2,125,499) (2,088,235)
Change in assets and liabilities:
Increase in accrued interest receivable 25,732
(Increase) decrease in accounts receivable, other 37,154 (131,631) (129,935)
Increase (decrease) in income taxes payable (5,200) 5,200
---------------------------------------------------
Net cash provided by operating activities 413,603 544,628 589,409
---------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from maturity of investments 6,000,000
Purchase of investments (3,000,000)
Upstream dividend from Home Federal 2,219,823 2,082,328 1,718,574
---------------------------------------------------
Net cash provided by
investing activities 2,219,823 2,082,328 4,718,574
---------------------------------------------------
Cash Flows from Financing Activities:
Payments received on note receivable from
ESOP 260,000 260,000 260,000
Payments made on note receivable for ESOP (125,000)
Payment of dividends (2,473,028) (2,429,782) (2,277,014)
Purchase of common stock (2,673,819) (3,545,957)
---------------------------------------------------
Net cash used in
financing activities (5,011,847) (5,715,739) (2,017,014)
---------------------------------------------------
Net increase (decrease) in cash (2,378,421) (3,088,783) 3,290,969
Cash, beginning 16,114,829 19,203,612 15,912,643
---------------------------------------------------
Cash, ending $ 13,736,408 $ 16,114,829 $ 19,203,612
===================================================
Supplemental Disclosure of Noncash
Financing Activities:
Dividends declared and accrued $ 504,305 $ 1,102,469 $ 1,117,513
===================================================
</TABLE>
<PAGE>
GREEN STREET FINANCIAL CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. PENDING TRANSACTION
On August 9, 1999, the Association entered into a definitive merger agreement
with NewSouth Bancorp, Inc. and its banking subsidiary, NewSouth Bank, a North
Carolina chartered commercial bank, headquartered in Washington, North Carolina
(collectively, the "Acquiror"). Under the terms of the Agreement, the Acquiror
will purchase each outstanding common share of the Association for $15.25.
Consummation of the merger is subject to approval by bank regulatory authorities
and the shareholders of the Association. The merger is expected to be completed
in the fourth calender quarter of 1999.
<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, 1997 through
September 30, 1999. 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
------------------------- -------------------------
1999:
<S> <C> <C> <C> <C>
First Quarter $ 0.12 $ $ 15 7/16 $ 11
Second Quarter 0.12 15 11 1/4
Third Quarter 0.13 12 11/16 10 3/4
Fourth Quarter 0.13 14 13/16 11 1/2
1998:
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
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS
Quarter Ended
-----------------------------------------------------
December 31 March 31 June 30 September 30
-----------------------------------------------------
1999:
<S> <C> <C> <C> <C>
Interest income $ 3,098,432 $ 2,956,945 $ 2,871,237 $ 2,841,050
Interest expense 1,346,709 1,225,577 1,178,019 1,165,883
Net interest income 1,751,723 1,731,368 1,693,218 1,675,167
Net income 642,773 670,638 660,637 505,672
Basic earnings per share 0.17 0.18 0.18 0.14
Diluted earnings per share 0.17 0.18 0.18 0.14
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CORPORATE INFORMATION
EXECUTIVE OFFICERS
------------------
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>
Exhibit 99.2
NEWSOUTH BANCORP, INC.
Item 7 (b). Pro Forma Financial Information
I. Unaudited Pro Forma Condensed Combined Statements of Financial Condition as
of September 30, 1999
<TABLE>
<CAPTION>
Pro Forma
Acquisition
Adjustments
Assets NewSouth Green Street (Note 1) Combined
-------- ------------ -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and securities $ 12,434 $ 32,088 $ (29,000)(a) $ 15,522
Mortgage backed
securities 56,326 -- 56,326
Loans receivable 212,054 126,340 (250)(c) 338,144
Premises and
equipment 3,576 433 822 (d) 4,831
FHLB stock 1,460 1,148 2,608
Real estate owned 591 12 603
Accrued interest
receivable 2,022 7 2,029
Goodwill -- -- 692 (e) 692
Prepaid expenses and
other assets 3,842 791 (704)(e) 3,929
---------- ---------- ---------- ----------
Total assets $ 292,305 $ 160,819 $ (28,440) $ 424,684
========== ========== ========== ==========
Liabilities and Stockholders' Equity
Liabilities
Deposits $ 234,618 $ 100,833 $ $ 335,451
Borrowed money 1,318 -- 59,159 (a) 31,477
(29,000)(a)
Accrued expenses and
other liabilities 7,606 1,387 8,993
---------- ---------- ---------- ----------
Total liabilities 243,542 102,220 30,159 375,921
Stockholders' equity 48,763 58,599 (58,599)(b) 48,763
---------- ---------- ---------- ----------
Total liabilities and
Stockholders' equity $ 292,305 $ 160,819 $ (28,440) $ 424,684
========== ========== ========== ==========
</TABLE>
Note 1. The unaudited pro forma condensed combined statements of financial
condition have been prepared to reflect the acquisition of Green Street
Fianancial Corp. by NewSouth Bancorp, Inc. for an aggregate price of $59.2
million, representing $15.25 per share of Green Street common stock.
a. Funds borrowed from the Federal Home Loan Bank of Atlanta, net of
repayments.
b. The elimination of the stockholders' equity of Green Street.
c. Record provision for loan losses.
d. Adjust premises and equipment of Green Street to estimated fair value.
e. Record net merger expenses and goodwill (excess of acquisition cost
over the fair value of net assets acquired).
<PAGE>
Exhibit 99.2
NEWSOUTH BANCORP, INC.
Item 7 (b). Pro Forma Financial Information
II. Unaudited Pro Forma Condensed Combined Statements of Operations for the
Year Ended September 30, 1999
<TABLE>
<CAPTION>
Pro Forma
Acquisition
Adjustments
NewSouth Green Street (Note 1) Combined
-------- ------------ -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $ 23,129 $ 11,767 $ (1,595)(b) $ 33,301
Interest expense 9,979 4,916 1,800 (a) 16,695
---------- ---------- ---------- ----------
13,150 6,851 (3,395) 16,606
Provision for loan
losses 120 - 250 (c) 370
---------- ---------- ---------- ----------
Net interest income 13,030 6,851 (3,645) 16,236
Other income 2,874 109 2,983
Other expenses 10,255 2,962 13,217
Goodwill amortization - - 69 (d) 69
---------- ---------- ---------- ----------
Income before
income taxes 5,649 3,998 (3,714) 5,933
Income taxes 2,453 1,518 (1,422)(e) 2,549
---------- ---------- ---------- ----------
Net income $ 3,196 $ 2,480 $ (2,292) $ 3,384
========== ========== ========== ==========
Diluted earnings per share $ 0.91 $ 0.96
========== ==========
Weighted average shares 3,530,811 3,530,811
========== ==========
</TABLE>
Note 1. The unaudited pro forma condensed combined statements of operations have
been prepared to reflect the acquisition of Green Street Fianancial Corp. by
NewSouth Bancorp, Inc. Pro forma adjustments are made to reflect:
a. Interest expense on funds borrowed from the Federal Home Loan Bank of
Atlanta ($30.0 million at 6.0%).
b. Reduction in interest on overnight funds used to repay borrowings
($29.0 million at 5.5%).
c. Increased provision necessary to maintain adequate loan loss reserve
from riskier portfolio.
d. Amortization of goodwill on a straight-line basis over 10 years.
e. Reduction in income taxes relating to foregoing adjustments, excluding
goodwill, (39% effective rate).
